NICOLAS PAPPADIS AND ANOTHER v. CHAN SHING SHEUNG BARRY AND OTHERS

Headnote

In allowing appeal of company director against findings of contempt held:

(1) There were basically two ways in which a company director could be commited for contempt arising from the failure of his company to comply with an order of the court namely O 45 and as an aider and abetter. In the statement filed in support of the application under O 51 r 1(2), an applicant had to specify the basis of the application, and subject to amendment was confined to the ground so stated.

(2) Observations upon the making of ex parte orders.

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J U D G M E N T

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Hunter, JA:

1. This appeal is brought against three findings of contempt made by LAO on 4th January 1988 in contempt proceedings, arising out of an action brought by the applicants in the contempt proceedings, and the plaintiffs in the action, against a company knowns as Hong Kong Lotus Scientific Development Limited (the company). The three respondents to the contempt proceedings were all officers in that company. The contempt proceedings failed against the first two respondents and succeeded against the third. It is that respondent, who is described as the president and a director of the company, who now appeals to this court.

2. The three findings of contempt were these:

3. First, this respondent was found knowingly to have defied an order made by Macdougall J on 28th September 1988 ordering disclosure of assets by the company, by withholding himself, or assisting the company to withhold inform in an affirmation sworn by him on 30th September, about the company's bank accounts.

4. The second finding related to the same act. It was a finding of contempt as a director in failing to disclose fully those assets in his affirmation.

5. The third finding which was as a director again, arose by reason of the company's disobedience of an order made by de Basto J on 18th September 1988 restraining dealing in a parcel of 3 million shares in-a joint venture known as Everbright Lotus CPT Manufacturing Limited. The penalties imposed by the learned judge in respect of those findings were in respect to the first, 14 days' imprisonment; in respect to the second, 5 days' imprisonment concurrent; and in respect of the third, in effect, a fine of HK$20,000 or in default 3 days' further imprisonment consecutive. It is against those findings that this appeal was brought.

6. This ease, I regret to say, seems to me to show part of what might be called the unacceptable face of Hong Kong litigation. Too many plaintiffs, who have what they of course regard as good claims, adopt what I can only describe as Pearl Harbour tactics. They set out to do the maximum possible damage to their opponents before declaring war by issuing a writ. The method is to apply ex parte for a far reaching order calculated to cause maximum embarrassment. These applications tend to come before busy duty judges, and I fear can be too readily granted. Thus this case started with an order which in my belief should never have been sought or granted.

7. Then armed with his order, the plaintiff tends to move to exploit his position. If, as can readily happen, the defendant is caught off balance, he may, in a state of shock, anger or confusion, blunder and fail precisely to comply with the order. Very often one quickly reaches stage two, which is contempt proceedings brought by the plaintiff in exploitation of his order. By this time the original order has acquired a life of its own. The realities and merits of the underlying dispute can be overlooked or submerged. The parties launch upon what can become a very long and expensive side show, where the issues are not money, as in the action, but much more serious, personal freedom. That unhappily has been the course of this case to date. We are now at the last stage in this side show.

8. The story starts on 27th July 1988, when the male plaintiff resigned as managing director of the company. He then was minded personally to sue the company, and also to bring an action in the name of the second plaintiff which had a consultancy agreement with company. Both plaintiffs claimed that substantial sums of money were owing to them. Steps were taken to make an ex parte application for a Mareva injunction. That was supported by an affirmation made by the first plaintiff. His main complaint was "the defendant is not paying its debt as they fall due". The allegation was one of either near insolvency or at least of a liquidity problem. The main part of the affirmation says: "From information I obtained whilst I was managing director/general manager of the defendant until I resigned on 27th July, it is within my knowledge that the only substantial asset of the defendant is its shares in a joint venture company called Lotus Everbright CPT Manufacturing Limited". He then goes on to refer to publicity about negotiations for a sale of those shares and goes on "As its shareholding in the joint venture company is the only substantial asset of the defendant, the second plaintiff and myself are concerned that in view of the lack of proper management "(and I emphasise those words) "of the defendant's business as aforesaid, if the defendant is not restrained from disposing of its shares in the joint venture company, any judgment which the second plaintiff and myself may obtain in these proceedings will not be satisfied at the end of the day".

9. Two thing seem to me to stand out from those assertions. First it seems a plain attempt by an unsecured alleged, claimant creditor to obtain security or priority in relation to the debts of a company, which is at its best suffering from serious liquidity problems. I need hardly say that it is not the function of a Mavera to do that. Secondly the fact that the company is insolvent or nearly insolvent ought in my belief to cause red lights to flash before a judge who is asked to grant a "Mareva because almost certainly this is a cover for priority. Where you are also told that the company has grave liquidity problems and one big asset, to tie up that big asset may cause graver damage to a company which may only be able to trade by reason of the money it can borrow against the security of that asset.

10. On that evidence the first order of 18th September was made. It reads in these terms:

dealing with its assets within the jurisdiction of this Court including and in particular:"(1) that the Defendant be restrained until further order in the, meantime from doing whether by its directors, servants or agents or any of them or otherwise howsoever the following or acts or any of them that is to say removing from the jurisdiction of this Court or otherwise disposing of or

(i) any monies in any accounts at Nanyang Commercial Bank Limited or any other bank within the jurisdiction at which the Defendant hold accounts whether in its own name or as nominees and without prejudice to the foregoing pledging, charging or otherwise parting with title to or possession of such assets;

(ii) the shareholding in EVERBRIGHT LOTUS CPT MANUFACTURING LIMITED whose registered office is situate at Lot 1992, D.D. 121, Tong Yan San Tsuen, Yuen Long, New Territories;

(A) Save that the Defendant is at liberty to expend a sum not exceeding HK$100,000.00 per month for its ordinary and proper business expenses ...

(B) That the Defendant may expend a sum not exceeding HK$200,000.00 on legal advice and representation...

(2) that the Defendant do forthwith disclose (my emphasis) :

(a) the full value of its assets within the jurisdiction identifying with full paticularity the nature of all such assets and their whereabouts and whether the same be held of its own name or by nominees or otherwise on its behalf and the sums standing in such account;

(b) all documents relating to negotiations with China Everbright Holding Company Limited in connection with a proposed sale of 50% shareholding in Everbright Lotus CPT Manufacturing Limited; (I should say that that company had been named as the potential buyer. The basis of the right to entitlement to those documents escapes me)

such disclosures to be verified by affidavit to be made by its proper officer and served on the Plaintiffs' Solicitors within 2 days of service of this Order or notice thereof being given.

And the Defendant is to be at liberty to move, to discharge or very this Order upon giving to the Plaintiff 3 days notice of intention to do so".

As I have said, I do not believe that this is an order which should either have been sought or made. First I have the gravest doubts whether there was any case for a Mareva injunction here at all, when the allegation was not dissipation but mis-management.

11. Secondly you have the position of a company in grave liquidity problems with only one substantial asset.

12. Thirdly there being only one alleged substantial asset, I can see no justification for an all assets Mareva.

13. Fourthly, I cannot see the justification for a discovery order. This plaintiff was a former managing director who might have been expected, and thereafter was shown to know a great deal about the assets of the company, and who was saying that there was only one substantial asset.

14. Fifth, and this is the real problem in this case, there was no semblance of justification that I can see for the making of an ex parte positive order for discovery. Anton Piller situations apart, the occasions when the making of that sort of order ex paste is justified are, in my belief, very few indeed. If a court is minded to order discovery, the simple and proper remedy is to grant the restrictive Mareva for a short return date, then the application for discovery can be considered. The great advantage of the short return date is that the matter is dealt with inter pastes, and the court can consider precisely whether discovery is justified, and if so what. It might for example avoid the generality and ambiguity of the order for discovery made in this case.

15. This was an order for discovery forthwith of value, verified within two days on affirmation. Serious question to my mind arise as to what the real meaning of that order is. One view is that it covers everything, including the paper clips in the office. That would be grotesque with that timing. The only way, I am minded to think, of making sense out of an order of that generality in this context, is to construe it as relating only to material assets, relevant assets, substantial assets, assets which are relevant in the context of execution, dissipation and Mareva injunctions. That was the view which the defendant in this case seemed to come to but not the trial judge.

16. There are in the decision in Z v A-Z [1982] 1 QB 558, two observations in the judgment of Kerr LJ which I fear are all too often overlooked. They were overlooked in this case. The first warning that Kerr LJ gives at p 585 is to plaintiffs who, almost as a matter of course, apply for Marevas, in order to obtain security in: advance for any judgment which they may obtain, whereas its real effect is to exert pressure on the defendant to settle the action.

17. The second warning is to be found on p 588 where he says that at the ex parte stage:

"It is the duty of the plaintiff and his legal advisers to do the following:

(i) To consider carefully whether an application for a Mareva injunction is justified, ...

(ii) If so, to consider very carefully what should be the extent of the injunction in order to safeguard the plaintiff's prima facie justified claim ..."

18. I recognise that we are here in the context of contempt and enforcement. Save possibly in two respects, one the construction of the order itself, and two in relation to penalty, what I have said may appear irrelevant. The principle is that unless the order of the court is bad on its face, it must be enforced however critical a subsequent court may be of the making of the order. I made these observations only, I hope, to induce practitioners to look more carefully at their drafts before applying for such orders, and to encourage duty judges, before whom amongst many other things these applications come, to look with much greater circumspection at what they are being invited to do. I am convinced that if hid that had happened in this case, this whole saga which I am about to describe would never have started.

19. After the order was made, there was a paper application for an extention of time, which was assented to, and then another further application. The matter came before Macdougall J as he then was, on 28th September on an application to vary or discharge, which failed. He then made a fresh discovery order in identical terms, within two days of the making of the order, by an unfortunate slip, not within two days of service. So the time limit expired On 30th September, the same day that the company could first be served.

20. On that date this respondent made the affirmation of which complaint is made. On the evidence the document was settled by his then solicitors, upon information supplied by the company's chief accountant. The affirmation recites the terms of the order for assets discovery, which standing alone are very difficult to follow unless you read into it the earlier parts of that long order. He then disclosed the assets under three heads: first the shareholding with values and some particulars of abortive sale negotiations; secondly real property and the extent to which it was charged; thirdly what were called "other valuable assets" of the defendant. But there was no reference to bank accounts.

21. Stage two was reached shortly. By an affirmation sworn on 7th October the plaintiff sought liberty to apply for an order for committal. In his supporting affirmation the first plaintiff disclosed a long list of property of the company which he said had not been disclosed. This reveals his detailed knowledge of the affairs of the company. But in fact all but one of those complaints failed.

22. The statement in support of the application for leave filed as required by O 52 r 1(2) said :

"The Respondents are officers of H.K. Lotus Scientific Development Ltd. which is in breach of the Order of the Honourable Mr. Justice Macdougall... of which the Respondents had notice, and the Respondents have failed to cause the said H.K. Lotus Scientific Development to disclose".

23. There was later an amended Notice of Motion which followed the same pattern.

24. It is convenient here to point out, as the judge did with complete accuracy in the court below, that there are two basic routes by which a director of a company may be committed. The first is under O 45. The second is as a person who, in convenient language, aids and abets; a person who himself is guilty of defying a court order with full knowledge of its terms. In this case the basis of the first finding of contempt against this respondent was aiding and abetting. The basis of the second finding was as a director and under O 45.

25. O 45 r5(l) reads :

"Where -

(a) a person required by a judgment or order to do an act within a time specified in the judgment or order refuses or neglects to do it within that time or, ....

(b) a person disobeys a judgment or order requiring him to abstain from doing an act

then, subject to the provisions of these rules, the judgment or order may be enforced by one or more of the following means, that is to say:-

(ii) where that person is a body corporate, with the leave of the Court, a writ of sequestration against the property of any director or other officer of the body;

(iii) an order of committal against that person or, where that person is a body corporate, against any such officer".

So if the order is against a body corporate, it may be enforced against the property or person of a director.  But that is subject to the qualification in O 45 r 7(3):

"An order requiring a body corporate to do or obstrain from doing an act shall not be enforced as mentioned in rule 5(1)(ii) or (iii) unless -

(a) a copy of the order has also been served personally on the officer against whose property leave is sought to issue a writ of sequestration or against whom an order of committal is sought; and

(b) in the case of an order requiring the body corporate to do an act the copy has been so served before the expiration of the time within which the body was required to do the act".

So you can enforce orders against directors direct so long as you serve them with a copy of the order at the appropriate time, and I may add with the appropriate penal notice. This is subject to the qualification in sub-rule 7(7) that the court may dispense with service of a copy of an order under this rule if it thinks it just to do so.

26. The second finding of contempt against this respondent was as a director. It was common ground that he had never been served at any appropriate time with this order of Macdougall J. Therefore the application was founded upon an application that service should be dispensed with under O 45 r 7(7). Unless that was done the application had to fail. By some very unfortunate oversight this seems to have been overlooked.  In the course of his judgment, the judge expressly declined to dispense with service. This contempt is not referred to in his written judgment. When he came to pronounce his rulings immediately after his judgment was read, this particular contempt crept in. One has to say straight away that the finding simply cannot stand, having regard to the judge's proper refusal to exercise his dispensing power. So it must be set aside.

27. The second basis upon which a director can be committed for contempt is under this overall description of aiding and abetting as this court held in the case of Cartier International B.V. and others v Kaybee International Ltd [1985] HKLR 127. There is a very big difference between these two approaches. Under 0 45 no moral blame or necessarily knowledge, need be shown in the director. It is sufficient to show that the order was made against the company and served upon him. Then it is the director's personal obligation to ensure that that order is complied with. When you are dealing with aiding and abetting the situation is quite different What has to be shown is personal misconduct on the part of the director. The point was conveniently made by Eveleigh LJ in his judgment in the case of Z v A-Z on p 578:

"It is true that his conduct may very often be seen as possessing a dual charactor of contempt of court by himself and aiding and abetting the contempt by another, but the conduct will always amount to contempt of court by himself. It will be conduct which knowingly interferes with the administration of justice by causing the order of the court to be thwarted".

28. What this respondent said about these bank accounts in an affirmation he made on 27th October was this. He set out details of some 13 bank accounts. The substantial ones were massively overdrawn. Those which appeared to have even a modest balance were mostly charged to secure other commercial facilities. The only account, which as far as I can see, had any free balance was the account with the Commercial Bank Nanyang Ltd, the one actually named in the order. This had the sum of HK$7,400 in it which was a very small part of what the company was allowed in any one month to spend. What he said was this :

"I did not disclose these accounts because the credit balances were so small that I regarded them as being of no significance. My former solicitors did not advise me in terms that all the accounts of the company should be disclosed, however small the credit balances, and had I been so advised I would have disclosed these accounts".

I have already indicated that an order in these terms could in my view reasonably be read in precisely the way this gentleman read it. I will say no more about that, because it was not the basis of the judge's conclusions.

29. The challenge to his findings is twofold. First it is said that this respondent was never charged with contempt in the form of aiding and abetting. Secondly it is said that the judge's findings were not justified on the conduct of the case and the evidence before him.

30. I have already referred to the statement which was originally filed, and to the amended Notice of Motion, and drawn attention to the words "fail to cause" in those documents. They were plainly directed to an O 45 r 5 situation. There is no suggestion anywhere of knowing defiance : no suggestion of aiding and abetting, in contrast to the third contempt which was overtly charged in the aiding and abetting form. The judge noticed this, but concluded that it did not matter and that it was no impediment to a finding a contempt upon that basis.

31. I must express my disagreement with that conclusion. These are important documents. If they can be sidestepped in that way they are really of no value to anyone. Their value has recently be spelt out in a decision in the Court of Appeal in England in Chiltern District Council v Keane.[1985] 1 WLR 619 where Sir John Donaldson MR at p 622 in relation to a statement delivered under this rule says :

"It has been said in many cases that what is required is that the person alleged to be in contempt shall know, with sufficient particularity to enable him to defend himself, what exactly he is said to have done or omitted to do which constitutes a contempt of court".

This statement told him exactly what it was alleged that he omitted to do "failing to cause". There is not a word about knowing defiance or aiding and abetting. This objection seems to me to be well-founded.

32. Secondly it said that the finding was not justified on the conduct of case. The first point to notice here is how the case was put in the court below. It was summarised in one sentence in the transcript by Mr Graham, counsel for the plaintiffs, p 522

"I suggest to you that you have been negligent in the extreme in making disclosure of the assets of Hong Kong Lotus?"

"I disagree"

This was underlined by a submission which the Judge recorded in his judgment and rejected. He said :

"There is no substance in the contention that aiding and abetting could arise from mere inertia".

33. That had been the argument in the court below. For my part I cannot see how it is right for a court to make a finding of knowing defiance, against a person who has been charged in that way.

34. Secondly it is said that there was no basis on the evidence. There seems to be a greet deal of force in that too. There were a number of features in the case which negatived knowing defiance. The document was settled by solicitors and it was accepted that they tendered no advice on the meaning of this difficult order. The order was itself ill drawn and could readily be misread, as I have indicated. The information all came from, the accountant. The judge accepted that at the time this was done in the lea of the order of September 28th, the company was in turmoil. The effect of the order was only explained to the deponent by the solicitors, and plainly not precisely explained. The information itself is no value. The details of the bank accounts advanced the case not one iota. It indicates how easily, when these orders are made, commonsense and relevance go out of the window. This deponent had nothing whatever to conceal. There was no advantage in concealing large overdrafts. When the point was taken, there was instant and full disclosure.

35. Judge appears to have come to this finding by two steps.

36. First he says :

"I cannot accept that as a seasoned businessman this respondent could have failed to appreciate bank accounts with substantial or negligible balances, charged or unincumbranced, as forming an important part of his company's assets?

With half of that I would agree. If they were substantial and uncharged, of course they were significant. But the company's assets here seem to me to be quite insignificant. From that step he then draws the inference of deliberately withholding information. For my part I cannot see that that is a well-founded inference. So as far as this contempt is  concerned, it seems tome that both the finding and the penalty must be set aside.

37. The final contempt arose from dealings in the joint venture share certificates in breach of de Basto J's order of 8th September. The matter here is a little more Complex. The total parcel of joint venture shares was apparently HK$5m. It was HK$3m, which the Hong Kong Bank the company's principal bankers obviously had their eyes upon. The company was very heavily indebted to the bank. Before any order was made, the bank was pressing the company in relation to these shares. As I have said there had been negotiations for a sale. On 5th September a Mr Bussey, a credit controller of the Bank, wrote this:

"We have today been advised that the discussions between yourselves and Wardley Ltd concerning a possible sale of your company have been terminated. Please immediately call the undersigned ... to arrange for the simple deposit of your shares in the joint venture company as previously discussed".

I have to say that the correspondence which follows, which repeats phrases like "safe custody" and "simple deposit", may have been clear to the author as a banker, but it is not necessarily clear to the recipient as a layman. My understanding of the ordinary position is that when a banker talks about simple deposit, he has his eyes on, securing a banker's lien, which is indistinguishable for all ordinary purposes from a pledge. Whether that was the meaning conveyed to the recipients of these letters is a totally different matter.

38. That letter was followed by one of 9th September from the bank to the company :

"We regret that, due to the unsatisfactory conduct of your accounts in our books, we are unable to continue making banking facilities available to you".

They proceeded to call in overdrafts which seem to amount to over HK$2.5m; and terminate facilities on sums due on bills receivable of over HK$4m; and import documentary credits of HK$6.5m. The impact on the company need not to be spelt out. Then came a further request on 13th September :

"As requested during our conversation of even date, please ensure that we receive, as a matter of the utmost urgency, written documentary evidence of the sale of your joint venture shares to China Everbright, failing which you should immediately arrange the simple deposit of your shares with us".

39. This respondent was therefore under pressure from three sources. He was aware that clause 7 in the joint venture prohibited him from making any pledge of these shares to anybody. He was aware of the terms of the court order, and that he should not dispose of, pledge or dealt with the shares. He was determined, so he said, not to pledge. He went to the bank on 19th September in answer to their request and was invited then to hand over the share certificate against a document which I am bound to say is of considerable ambiguity.

40. It starts off innocently enough :

"We acknowledge receipt of the following share certificates which will be held in safe custody on your behalf. .....

The sting is in the tail :

We undertake to release the said share certificates to your lawyer on your instructions and against his written undertaking to a) release them only against full payment and to b) remit to us on completion of any sale a sum sufficient to fully secure your outstandings in our books as that date".

The respondent in evidence said that he only signed that document notwithstanding his worry about that sting in the tail, on an assurance that this did not constitute a pledge.

41. On 28th September Macdougall J ordered the lodgment of this share certificate in court with the Registrar. There are two unusual aspects of that. One is that it was plainly based upon incorrect instructions given at the time by the chief accountant to counsel appearing for the company. Secondly it is an very unusual order, in the absence of any proprietary claim to the shares, because it gives a creditor plaintiff a protection greater than his normal entitlement under a Mareva injunction. The last stage in the story was that the Bank, having first asserted that the document of 19th September created a pledge, then did a U-turn, and released the shares, which were duly lodged with the Registrar on 11th November

42. I think it is important to put this alleged contempt in its context. First this was an action where a creditor was claiming money. I am quite unable to see how, at his request, any court could have restrained the bona fide dealing by this company with its assets, by pledging its principal asset to its banker, to secure the continuation of the credit facility which alone enabled this company to continue trading at all, and avoid being totally insolvent. If you put the joint venture agreement on one side, and test the claims of the plaintiff alone, then if this matter had been fully disclosed to the court, as it should have been, I am unable to see how the plaintiff could have stopped a pledge of these shares being made. There would be no justification at all. That is the first point. The second is that no harm at all was done because the Bank released the share certificates and the plaintiff is now better off than he would otherwise have been.

43. The judge's conclusions were these. He acquitted this respondent of the knowingly aiding and abetting and any misconduct. He convicted the company because he said it should have taken proper legal advice on the meaning of that last condition, and that the company had no excuse for what it did. The company's act was contumacious, which I take to be that it was deliberate. Qua director, this respondent was liable under O 45, because in this case, there being in fact no service of the order upon him, the judge dispensed with service. There is no technical flaw in that approach, but there are two things which trouble me. The first is the finding of contempt itself. Here the Judge reached two conclusions. First he said that "effective pledging or charging had not been proved" so that he was finding that the document of 19th September did riot constitute a pledge or charge. Equally he said that he could not accept this respondent's explanation that they understood "a deliver of shares to be retained on those terms as a simple deposit". Ergo he said that there was dealing with the shares but not a pledge.

44. For my part, I cannot understand this; it seems to me to be a distinction without a difference. I can see no possible half way house, when dealing Faith a bank, between a simple deposit, for safe custody only, and the next stage with is a deposit or pledge creating a banker's lien. There is no difference between "delivery on those terms" and pledge. As I see it the judge must have accepted, when he came to the conclusion that no pledge or charge was proved that the first part of this letter prevailed. He could reach that conclusion easily. The terms of the letter were contradictory. The first part read in its context, with the repeated prior use of the phrase "simple deposit" might well be sufficient to convince the layman that this was simply safe custody. The conditions which follow to my mind point exclusively to pledge. The evidence was that this respondent accepted these terms upon the assurance from the bank official, who was himself aware of the terms of de Basto J's order, that there was no pledge. So the judge in deciding which of these terms was to prevail, could very readily have come to the conclusion that the terra which prevailed was that which was in line with the misrepresentation, he must have accepted, and also in line with the bank's acceptance thereafter that no pledge was in fact created and it was simple deposit.

45. It seems to me necessarily to follow that all that happened here was a simple deposit, and that there was no charge and no dealing. Having come to that conclusion, this court decided that this finding of contempt could not stand, notwithstanding the absence of any claim for such relief in the notice of appeal.

46. It may be that in the end it makes no great difference. I have said enough to show that this was the finest point of law upon which different lawyers could have taken different views. it might be described as not being contempt "territory" at all. Even if it was a contempt it was a contempt of the most artificial and technical nature which did not start to justify the penalty of imprisonment which the judge imposed.

47. For those reasons in my judgment both the finding of contempt and the penalty under the third head must beset aside.

48. At this point, I was going to say that that raised questions about the binding effect of the notice of appeal having regard to the swingeing order for costs the judge made. This has been somewhat, overtaken by the events of this morning, when counsel has appeared for the first time on behalf of the respondents to the appeal, and we have had further discussions on the vexed question of the order for costs. We will hear submissions in that regard.

Fuad, V.-P.:

49. I agree with the judgment just delivered by my lord Hunter JA and with the order he proposes.

Power, JA :

50. I also agree.