EMPEROR SECURITIES LTD v. NAVIN KUMAR AGGARWAL AND OTHERS

HCA 1167/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1167 OF 2011

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DECISION

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1.  This is an application for summary judgment by the Plaintiff against the 2^nd to 9^th-named Defendants. Default judgment has already been obtained by the Plaintiff against the 1^st-named Defendant on 23 September 2011.

Background

2.  The Plaintiff is a wholly-owned subsidiary of Emperor Capital Group Ltd which has been listed on the main board of the Hong Kong Stock Exchange since April 2007.  Part of the business carried on by the Plaintiff is a licensed moneylender.

3.  The Defendants, trading as K & L Gates (“the Firm”), were the Hong Kong office of K & L Gates LLP.  K & L Gates LLP comprises approximately 1,800 lawyers in 38 offices around the world.  It is reputed to be the 9^th largest law firm in the United States and the 11^th largest law firm worldwide.

4.  The 1^st-named Defendant, Navin Aggarwal (“Aggarwal”), was the former head of the Firm’s corporate finance team in Hong Kong, whose practice involved mergers and acquisitions, regulatory compliance and securities work. 

5.  The 2^nd-named Defendant resigned as a partner of the Firm on 13 June 2011.

6.  It is the Plaintiff’s case that Aggarwal approached the Plaintiff with new business opportunity in December 2008.  According to Aggarwal, one of his clients from the Mainland or with Mainland connections was interested in exploring the acquisition of a listed shell company in Hong Kong.  In order to show earnest to the target company and that his client was not simply a man of straw, Aggarwal requested the Plaintiff to extend a short-term loan to his client which was to be kept in the Firm’s client account.  For such transaction, the Firm executed an “escrow agreement” whereby the Firm agreed to be an “escrow agent” holding the money upon the instruction of the Plaintiff.

7.  The Plaintiff continued to extend such kind of loans to a few clients introduced by Aggarwal.  During the period between January 2009 and June 2011, the Plaintiff had entered into 42 short-term loan transactions with 4 different borrowers.  Accordingly, 42 escrow agreements were made with the Firm together with the respective borrowers.  For each transaction, the borrower also signed a loan agreement and an assignment of deposit, the latter of which requiring the borrower to assign all the rights, title and interest in the escrow sum to the Plaintiff.  To reduce the Plaintiff’s risk, the term of the loan would not normally exceed one month before it became due for repayment.

8.  The subject matters of this action are the last two escrow agreements (“the Escrow Agreements”) of those 42 transactions, dated 19 May 2011 and 8 June 2011 respectively.

9.  Each of the Escrow Agreements contains, inter alia, the following terms:

(i) the Plaintiff and the borrower jointly appoint the Firm as their escrow agent in respect of a sum of money paid by the Plaintiff into the Firm’s client account which is known as the “escrow sum”;

(ii) the escrow sum and the client account shall act as security for a loan in the same amount outstanding from the borrower to the Plaintiff;

(iii) upon receipt of a written notice of transfer from the Plaintiff, the Firm shall within 3 business days effect such transfer and comply with the instructions contained in such notice;

(iv) where the loan has become due and payable and in any event not later than a certain repayment date, the Firm shall apply the escrow sum towards repayment of the loan to the Plaintiff; and

(v) the Firm undertakes that: (a) it would not dispose of or deal with the escrow sum unless in accordance with the terms of the agreement; (b) it would take all steps which may be necessary or expedient to preserve and protect the Plaintiff’s interest in the escrow sum; and (c) it would not do anything which would prejudice the value of the escrow sum.

10.  For the first three transactions, the escrow agreements were executed by Aggarwal purportedly on behalf of the Firm.  It is the Plaintiff’s case that from the fourth of the 42 transactions onwards, the escrow agreements had been co-signed by one other partner of the Firm apart from Aggarwal.

11.  For these 42 transactions, the Plaintiff deposited substantial amounts of money in the Firm’s client account.  After each deposit, certain amounts of money were paid out of the Firm’s client account to the Plaintiff as interest or “documentation fees” for the loan.  The amounts of interest and fees varied from each loan but the interest could be as high as 57% per annum.  After a certain period of time, the escrow sum would be returned from the Firm’s client account to the Plaintiff.

12.  The problem arose with the last two transactions, and the Firm did not return to the Plaintiff the respective escrow sums of $25,000,000 and $15,000,000 under the Escrow Agreements of the last two transactions.  It seems that Aggarwal had misappropriated substantial amount of money in the Firm’s client account to finance his gambling activities.

13.  Aggarwal was arrested by the police on 9 June 2011.  Aggarwal subsequently resigned as a partner of the Firm on 11 June 2011.  He was charged on 24 June 2011 with 3 counts of theft and 3 counts of forgery in relation to the allegation that he had stolen money from the Firm’s client account.  I understand from the parties that the investigation of the criminal case is still going on and it is not certain when the trial of the criminal proceedings will take place.

14.  The Plaintiff is not the only party who has deposited substantial amounts of money in the Firm’s client account pursuant to these escrow agreements.  I am given to understand that 16 legal actions have been commenced against the Firm for failing to return the sums under these so-called “escrow agreements”.

Defence of the Firm

15.  According to the affirmations filed on behalf of the 2^nd to 9^th-named Defendants, the Firm is committed to refunding genuine clients of the Firm who have suffered real losses as a result of the criminal acts committed by Aggarwal and in respect of which the genuine client concerned is entirely blameless and innocent.  However, the 2^nd to 9^th-named Defendants contend that each and every escrow agreement that Aggarwal purported to execute on behalf of the Firm in favour of the Plaintiff, including the two Escrow Agreements which are the subject matters of the present action, was a sham, which was never intended to take effect in accordance with its written terms.  It therefore follows that each and every one of the purported escrow agreements did not constitute a valid appointment of the Firm as an escrow agent and the Firm did not thereby agree to act as such escrow agent.

16.  Furthermore, the business carried on by the Firm is the provision of legal services.  It is no part of the business of the Firm to provide stand-alone escrow services which are not incidental to the provision of legal services.  In such circumstances, neither Aggarwal, nor any of the purported co-signatories, had authority, whether actual, apparent or ostensible, to enter into those escrow agreements on behalf of the Firm. Consequently, the 2^nd to 9^th-named Defendants are not liable to the Plaintiff under the Partnership Ordinance (Cap 38) because the acts of Aggarwal in connection with the escrow agreements were not for the purpose of the business of the partnership, and the sums received into the Firm’s client account were not received in the course of its business.

17.  I will deal with these defences in turn.

The unusual features of the escrow arrangements

18.  According to the Plaintiff, the escrow agreements were part of the arrangements for the provision of short-term loans to Aggarwal’s clients.  However, the structure of the loans is most peculiar. The Plaintiff apparently agreed to advance funds to the borrowers, but those funds were never in fact made available to the borrowers.  Instead they were paid into the Firm’s client account, allegedly pursuant to an escrow agreement in the case of each loan, where they were earmarked for repayment of the loans.

19.  Each transaction consisted of 3 documents: the escrow agreement, the loan agreement and the assignment of deposit.  I agree with the observation of Mr Sussex SC, counsel for the 3^rd to 9^th-named Defendants, that the 3 documents simply did not sit together.  According to the loan agreements signed by the borrowers, the Plaintiff would transfer the loans to the Firm’s client account which would be made available for drawdown by the borrowers.  However, according to the escrow agreements, the Firm could not part or deal with the escrow sums and the same would be repaid to the Plaintiff at a subsequent date.  In other words, contrary to the terms of the loan agreements and the assignments of deposit, the loans were never made available to the borrowers.

20.  The loans were paid by the Plaintiff into the Firm’s client account.  As compared with other commercial loans, the risk of such loans was quite minimal as the loans were, in substance, only deposits paid into the client account of a solicitors’ firm.  What was so extraordinary was that someone was prepared to pay substantial sums of interest, which could be as high as 57% per annum, and associated charges for the provision of such kind of loans.

21.  The Plaintiff claims that it was a high-risk business of lending money to Mainland investors unknown to the Plaintiff. However, according to the terms of the escrow agreements, the loans would be locked up with the Firm and could not be used for any purpose other than the repayment of the loans.

22.  There were also some other unusual features about these transactions.  Investigation carried out by the Firm shows that no retainer letter had ever been sent to the Plaintiff by the Firm, and the Plaintiff had never been invoiced by the Firm or paid any fees to the Firm. There was also no file references showing that the Plaintiff was a client of the Firm.

23.  In view of such extraordinary features of the arrangements, one would certainly ask the following questions: (i) what was the true purpose of these loans? (b) why would someone be prepared to pay so much interests for such kind of loans of which the borrowers were not able to drawdown from the Firm’s client account?

24.  There are a few speculations about the true purpose of the arrangements.  The first one is that there was no real borrower and such kind of arrangements were to enable Aggarwal to obtain personal loans to finance his gambling activities.

25.  The second speculation is that the whole scheme was to enable the clients of Aggarwal to pretend that the funds sitting in the Firm’s client account were the funds required for the acquisition of listed shell companies, when in fact they were not.  This might amount to a common law fraud, and the Plaintiff, who knew or should have known about such purpose of the arrangements, might be a party to the fraud.

26.  The third speculation is that the whole arrangement was a money laundering exercise.  Hugh amounts of money were involved in these transactions, and the Plaintiff also received extraordinary interests and associated charges from the provision of what in substance deposits in the client account of a solicitors’ firm.  Taking into account such unusual features, one simply cannot rule out the possibility of a money laundering exercise.

27.  At this stage, I must emphasise that these are all speculations without any substantive proof, in particular the speculation about the money laundering exercise.  However, it is extraordinary to say the least that the Plaintiff conducted over HK$ 1 billion worth of business on the strength of the word of one person, Aggarwal.  There is also no suggestion that the Plaintiff had ever met anybody representing the alleged borrowers other than Aggarwal.  Based on the evidence available at this stage, such kind of arrangements look like anything but genuine commercial transactions.  The peculiar and the extraordinary features of the loan arrangements certainly cry out for an investigation.  There are also triable issues as to the knowledge on the part of the Plaintiff about the true purpose of the loans and whether the Plaintiff had been involved in Aggarwal’s fraud.

28.  Further, the Plaintiff was never a client of the Firm in its records.  It is quite arguable that it was not part of the ordinary business of  the Firm to provide stand-alone escrow services which were not incidental to the provision of legal services.  In such circumstances, Aggarwal or whoever signed the escrow agreements might not have the authority to enter into such arrangements on behalf of the Firm.

29.  As all these issues need to be canvassed at the trial, the court cannot simply grant summary judgment in favour of the Plaintiff at this stage.

The application for summary judgment by Top Point Ltd in respect of similar escrow arrangements

30.  As mentioned above, there are other parties who have instituted legal proceedings against the Firm relating to these escrow agreements, and one of them is one Top Point Ltd (“Top Point”).  In the action by Top Point, HCA No. 1088 of 2011, Top Point also applied for summary judgment against the Firm which was heard by L Chan DHCJ on 6 December 2011.  The learned judge granted unconditional leave to the Firm to defend the claim.

31.  In his decision handed down on 8 December 2011, L Chan DHCJ said the following:

51.      I agree with submissions of leading counsel for the plaintiff.  For the purpose of this application, I think whether [the Plaintiff’s predecessor in title] had been involved with Aggarwal’s fraud is an issue to be canvassed at the trial.  This has been pointed out by Mr Tso in his affidavits.

52.       At this stage, and on the evidence available, the terms of the escrow agreement as disclosed in the agreement and the fees payable as referred to in the emails made the escrow arrangements look too good to be bona fide.  I would, however, make haste to say that this is still the early stage of the proceedings and my observation is made only for the disposal of this application.

53.       Regarding section 7 of the Partnership Ordinance, it all depends on whether the so-called stand-alone escrow arrangements made between Aggarwal and [the Plaintiff’s predecessor in title] can or cannot be said to be part of the defendant’s usual business.  This is hotly disputed by Mr Tso, who says in effect that such arrangements were not, or could not be, for fund proof.  In the light of my observation above, this matter should also be tried.

54.       There are also the questions of whether Aggarwal in fact had no authority to act for the defendant in entering into these apparently unusual escrow arrangements and whether [the Plaintiff’s predecessor in title was] aware of the lack of authority in Aggarwal.

            … … …

56.       Regarding the fact that these transactions took place over a period of 2½ years and involved many persons in the defendant, this again is a matter to be canvassed at the trial.  I do note that Mr Michael Chan has already said in his affidavit that he was not aware of the fraud and had relied on Mr Aggarwal.  Discovery by the defendant may show the identities of other people who were involved in the processing of these arrangements and remittances.  It may be necessary to canvass the extent of their knowledge, if any, in Aggarwal’s fraud.

57.       For the application of section 12 of the Partnership Ordinance, it again depends on whether Aggarwal was acting in the ordinary course of business of the defendant in effecting these escrow arrangements.

58.       Finally, on the un-pleaded claim of money had and received, I think there is the need to find out at the trial whether the money was paid to the defendant in the defendant’s own right, or rather were loaned to Aggarwal be being channelled into the defendant’s client account to cover up the deficit created by Aggarwal’s wrong doing.”

32.  I agree entirely with the observations made by L Chan DHCJ in the Top Point case.  As the facts in that case are very similar to those before us and both cases involve the same kind of escrow arrangements, there should also be a trial here to canvass the matters raised by the learned judge in his decision.

The co-signing of the escrow agreements by the other partners and the steps taken by the Plaintiff to protect its interest under the escrow arrangements

33.  Mr. Chan, counsel for the Plaintiff, submits that the Top Point case should be distinguished by reason of the following features in the present case.  Firstly and more importantly, starting from the fourth transaction onwards, the escrow agreements had been co-signed by one other partner together with Aggarwal: 21 agreements allegedly co-signed by Mr Michael Chan (the 3^rd-named Defendant), 15 agreements allegedly co-signed by Mr Clifford Ng (the 2^nd-named Defendant), 1 agreement allegedly co-signed by Mr Lo Kai Ping (the 4^th-named Defendant) and 3 agreements allegedly co-signed by 3 unknown partners.  If the Plaintiff was involved in some kind of fraudulent scheme with Aggarwal, to minimise the risk of the scheme being discovered, they should not have asked the other partners to co-sign the escrow agreements.

34.  Secondly, the Plaintiff had taken certain measures to protect its interest under the escrow arrangements.  The correspondence between the parties indicates that the Plaintiff had made a request for it to be included as a joint-signatory of the Firm’s client account.  The Plaintiff had also made a request for the bank statements of the client account. Further, on or about 6 May 2009, two of the Plaintiff’s staff paid a due diligence visit to the Firm to meet at least one more partner of the Firm apart from Aggarwal and to know more about the Firm.  In respect of the due diligence investigation about the background of the borrowers, the Plaintiff had obtained from Aggarwal the corporate documents of the 4 borrower companies under the said 42 transactions.  According to Mr Chan, these measures negate any suggestion that the Plaintiff was involved in some kind of fraudulent scheme with Aggarwal.

35.  Thirdly, there was no counterparty in the escrow arrangements in the Top Point case, whereas in the present case, there were actual borrowers who signed the loan agreements and the assignments of deposit in the escrow arrangements which supports the genuineness of the transactions.

36.  In respect of the signatures on the escrow agreements, both Mr Michael Chan and Mr Clifford Ng deny any knowledge of the escrow arrangements. Mr Clifford Ng positively disputes that three of the purported signatures belonged to him.  On the other hand, Mr Michael Chan claims that he does not remember signing the escrow agreements but the signatures in some of such documents look similar to his own signature.  Both Mr Clifford Ng and Mr Michael Chan testify that, in the course of the daily work, Aggarwal had asked them to sign some documents of which he claimed were for some legitimate client transactions.  As Aggarwal was an experienced corporate lawyer, they simply trusted Aggarwal and signed on these documents without ascertaining the details of their contents.

37.  I acknowledge the force of Mr Chan’s arguments. If the Plaintiff and Aggarwal were involved in some kind of unlawful or fraudulent transactions, they should not have asked the other partners to co-sign the escrow agreements.  Despite that, taking into account the dubious and extraordinary features of the escrow arrangements, there has to be a trial for the court to investigate the genuineness of these arrangements.  In fact, Aggarwal has now been investigated for various criminal activities including forgery of documents.  In such circumstances, the escrow agreements might not have been co-signed by the other partners as alleged by the Plaintiff.  Even if any of the relevant signatures of the alleged co-signatories is genuine, one cannot rule out the possibility that Aggarwal had duped one or more of his partners into signing the escrow agreements with the view to cloak the transactions with some kind of authority.  In any event, the issue about the co-signatories, together with other unusual features of the transactions, should be properly investigated at the trial.

38.  The same observation can be made about the other measures allegedly taken by the Plaintiff to protect its interest under the escrow arrangements.  According to the evidence available at this stage, there is no suggestion that the Plaintiff had ever met anybody representing the alleged borrowers other than Aggarwal himself.  There is also no suggestion that the Plaintiff had carried out any investigation about the background of the alleged borrowers or whether a listed shell company was in fact acquired by any of the alleged borrowers.  In view of the number of the transactions and the high rates of interest charged for these loans, it was quite extraordinary that the Plaintiff had not carried out any investigation in this regard.  In such circumstances, whether these borrowers actually existed is a matter which should be investigated at the trial.

39.  Further, Aggarwal is still subject to criminal investigation at this stage.  The extent of his criminal activities and the parties involved in such activities are yet to be ascertained.  There are also parallel proceedings by other parties involved in similar escrow arrangements against the Firm.  There bound to be investigations in these legal actions, and further documents may be disclosed which may shed light on the issues involved in the present case.  In my judgment, it is simply unsafe for the court to grant summary judgment in favour of the Plaintiff at this stage and there are valid reasons for the present dispute to be resolved by a proper trial.

40.  I must emphasise that the aforesaid are only preliminary observations made by the court at the early stage of the proceedings for the purpose of the disposal of the present application.  The merits of the claim have to be properly determined at the trial of this action.

Request for partial judgment for the Plaintiff

41.  According to the Plaintiff, the amount remitted by the Plaintiff into the Firm’s client account exceeds the amount remitted back to the Plaintiff by a sum of $1,554,423.12.  Mr. Chan claims that such figure is actually less than the figure calculated by the Firm.  Hence, even if the court does not grant summary judgment for the Plaintiff in the whole sum of $40,000,000, the court should at least give partial judgment for the said sum of $1,554,423.12.

42.  In my judgment, it is not appropriate for the court to do so.  Firstly, as the 2^nd to 9^th-named Defendants dispute the Plaintiff’s calculation, there is a triable issue about the calculation of the figures.  Secondly, the evidence shows that, apart from the return of the escrow sums, substantial amounts of interests and “documentation fees” had been paid to the Plaintiff from the Firm’s client account.  As mentioned above, it is possible that there was no real borrower and the sums paid to the Plaintiff were actually money belonging to the other clients of the Firm.  In such case, the Firm may be entitled to recover by way of counterclaim for the money misapplied from its client account.  Again this matter should be canvassed at the trial.

Conclusion

43.  Based on the aforesaid, I cannot grant summary judgment in favour of the Plaintiff.  Neither is this an appropriate case for the granting of conditional leave to defend as the defence of the 2^nd to 9^th-named Defendants is not shadowy at all.  Further, at the time of the issue of the O 14 summons on 2 September 2011, the Plaintiff would not have been able to know that the 2^nd to 9^th-named Defendants were relying upon a contention which would entitle them to unconditional leave to defend.  In particular, the defence was only revealed in the affirmations filed after the issue of the summons.  Hence, I do not consider it an appropriate case for the dismissal of the summons.

44.  By reason of the aforesaid, I grant the 2^nd to 9^th-named Defendants unconditional leave to defend the Plaintiff’s claim with a costs order nisi that the costs of the application be in the cause.  The order nisi shall be made absolute 14 days after the date of the handing down of this Decision.