Peter Oswaid Scales and Another v. William H H Wong and Another

CACV000020/1983

Injunctions - ex parte application - affidavit not yet sworn but read, and oral evidence taken - Mareva and Anton Piller orders made - ex parte application for discharge - notice given to Plaintiffs, who appeared - judge who made orders no longer available - second judge admitted (1) affidavit not in precise terms of draft affidavit read to first judge and (2) solicitor's note of oral evidence - application to discharge dismissed - appeal - contrary to finding of judge Plaintiff had failed to disclose material facts - however, non-disclosure not deliberate - quaere whether judge should have exercised discretion to dismiss application on ground of non-disclosure - Plaintiffs' counsel stating that essence of case was commercial fraud - fraud not alleged in writ - quaere whether allegation of fraud should have been entertained - evidence of risk of disposal of property and of destruction of evidence insufficient to justify order made - injunctions discharged.

BETWEEN

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Coram: Sir Alan Huggins, V. P. & Barker, J. A.

Dates of hearing: 9, 10 & 11 February 1983

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JUDGMENT

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Sir Alan Huggins, V.-P. :

1. Ex parte application was made for Mareva and Anton Pillar orders and the matter came before Mr. Vice-President Leonard, who, we are told, (although this does not appear, as it should, from the formal order drawn up) was sitting as an additional Judge of the High Court. The learned Vice-President granted injunctions and made other orders, it being a term that they should remain in force "until after the hearing of an inter partes summons returnable on Friday, 11th February at 9.30 a.m.". It must be mentioned that there was before the Vice-President a draft affidavit in support of the application and he properly insisted on hearing oral evidence before making his order.

2. When the order was served upon the Defendants they applied ex parte, with notice to the Plaintiffs, for its immediate discharge. The Vice-President was no longer sitting as a Judge of the High Court and that matter came before Mr. Justice Power. By this time an affidavit had been sworn by the 1st Plaintiff but was not in the identical form of the draft which had been read to the Vice-President. Nothing turns upon that. The application to discharge was supported by an affidavit of the 1st Defendant, and the Plaintiffs sought to rely not only on the 1st Plaintiff's affidavit but also upon what was said to be a note made by the Plaintiffs' solicitors of the oral evidence given before the Vice-President. The judge allowed the note to be used in spite of objection by counsel for the Defendants, who further submitted that the note did not really add anything to the evidence contained in the affidavit. It does not appear what view the judge took of this further submission. He declined to discharge the Vice-President's order and the Defendants now appeal to this court against that decision. We agreed to an abridgement of the time prescribed by 0.59 r.5 to allow the appeal to proceed without delay. We also gave leave to Mr. Keene to address us on behalf of the Plaintiffs.

3. As I understood him, Mr. Change invited us to treat the proceedings before us as an original ex prate application for discharge and he cited In re Clark v Forbes Stuart (Themes Street) Ltd. (Intended Action) (1964) 1 W.L.R. 836. I think the difference between that case and the present is that under the Limitation Act 1963 there was no discretion to refuse leave to bring an action notwithstanding that the period of limitation had expired once it was proved prima facie that the material facts relating to the cause of action were, or included, facts of a decisive character which were at all times outside the knowledge (actual or constructive) of the plaintiff until a specified date. Any leave granted was without prejudice to the right of the defendants in the action itself to say that the prima facie view was wrong on the facts or on the law. The application was therefore concerned with the question, of law whether there was a prima facie case that the requirements of the Act had been fulfilled. The issue before the Court of Appeal was precisely the same as that before the judge. That is not the position here. This was an application for equitable relief and the Vice-President had a discretion whether to grant it or not. Mr. Justice Power rightly said that no appeal lay to him against the Vice-President's exercise of his discretion.

4. There were three grounds upon which it was open to Mr. Justice Power to discharge the Vice-President's order: (1) that there had been a material non-disclosure of evidence, (2) that either on the facts or on the law the Vice-President ought not to have made the order, and (3) that, on the evidence available at the date of the application to discharge, it was not just that the order should continue in force. Although not strictly an appeal against the order of the Vice-President the second ground of application did involve a reconsideration of the evidence upon which the order had been made. The third ground differed from the first in that any new evidence might not be such that it ought to have been disclosed by the Plaintiffs.

The Evidence

5. It is necessary to summarise briefly what the Plaintiffs relied upon as justifying the orders made. All the parties were engaged in the business of stock-brooking, the 2nd Plaintiff and the 2nd Defendant being controlled by, respectively, the lst Plaintiff and the lst Defendant.  In October 1982 the 1st Plaintiff and the lst Defendant entered into an agreement under which the 2nd Plaintiff would deposit shares with the 2nd Defendant in return for "cash facilities up to 100% of the market value of those shares". As the shares were already deposited with banks as security for overdraft facilities granted to the 2nd Plaintiff, they could not be handed over to the 2nd Defendant unless shares or cash were deposited in their place, otherwise the 2nd Plaintiff's overdraft facilities would be reduced. Accordingly it was agreed that the 2nd Defendant would deposit cash with the banks in proportion to, and simultaneous with, such share withdrawals. To implement these agreements a representative of the 2nd Defendant was admitted to the 2nd Plaintiff's offices, and the employees of the 2nd Plaintiff were instructed by the 1st Plaintiff to carry out any instructions given by the 1st Defendant or that representative. On the instructions of the representative the 2nd Plaintiff opened "two internal drawing accounts" with the 2nd Defendant. Shares were then withdrawn from banks and sold. Although the lst Plaintiff's affidavit states that these withdrawals were "without any corresponding deposits of cash" I understand that the real allegation is that there were deposits of cash but that the cash came not from the Defendants but from the two internal drawing accounts of the 2nd Defendant. Those accounts then showed an indebtedness by the Defendants to the 2nd Plaintiff. The shares deposited with the 2nd Defendant included some which were the property of the 1st Defendant's clients and, when the clients asked for their shares, the 2nd Plaintiff requested the 2nd Defendant to replace them. The 2nd Defendant did so by employing the 2nd Plaintiff as brokers and instructing it to purchase equivalent shares on the market. The 2nd Plaintiff did so with its own moneys and the Defendants did not meet the cost in cash but merely made book entries in the 2nd Plaintiff's accounts. Although that is how the matter was described by the 1st Plaintiff, it seems obvious that the entries could not have been by the 2nd Defendant, although they may possibly have been made by the 2nd Plaintiff's employees on the instructions of the lst Defendant or the representative. Then it was said that the representative "operated" one of the 2nd Plaintiff's accounts "on behalf of" the 2nd Defendant to purchase and sell shares. Again, the truth can at most have been that the 2nd Plaintiff's employees operated the account on the instructions of the representative.

6. On this evidence it was alleged not only that the Defendants were indebted to the Plaintiffs for the value of all the Plaintiffs' shares and also liable in damages for loss resulting from breach of the contract between the 1st Plaintiff and the 1st Defendant, but that they were guilty of fraud: accordingly there was both a risk that they would dispose of their property and that they would destroy evidence.

The Pleading Point

7. Here I must interpose a consideration of a point which has been mentioned repeatedly in the course of the argument. It is a well established rule of practice that a party who wishes to allege fraud must plead it expressly. The writ in the Plaintiffs' action bore a general endorsement which did not indicate that fraud was alleged (and, of course, no statement of claim has yet been filed). It is contended on behalf of the Defendants that it was, therefore, not open to the Plaintiffs to lead evidence of fraud, either by oral testimony or by affidavit, and that both the learned Vice-President and Mr. Justice Power were wrong to have allowed such evidence to be given. Mr. Keene sought to meet this argument in various ways. First he suggested that it was not necessary to allege fraud in a generally endorsed writ, that fraud could be alleged in a statement of claim although the writ contained no such allegation and that, equally, it was legitimate in interlocutory proceedings before a statement of claim had been filed to allege fraud although the writ contained no such allegation. He emphasised that he had made it abundantly clear to the Vice-President and to Mr. Justice Power that the essence of the Plaintiffs' claim to interlocutory relief was commercial fraud: therefore, these being ex parte proceedings, no prejudice could have resulted, even if there were a technical defect in the writ. In any event, he submitted, a serious dispute between the parties should not be decided upon such a technical issue and he applied, if it were necessary, for leave to amend the writ. Although no authority has been cited to us, I am persuaded that any allegation of fraud ought to be made at the outset and that fraud may not be alleged in a statement of claim unless it has first been alleged in the writ. A defendant might well decide not to enter an appearance in an action where fraud was not alleged, although he would strenuously resist the claim if it were based upon an allegation of fraud. In my view there was substance in the technical objection now taken, but, for my part, I would give leave to amend, because I think it is clear that the Plaintiffs were intending to allege fraud from the beginning and that the defect in the writ has caused no prejudice to the Defendants.

Non-disclosure

8. Mr. Justice Power decided (1) that there was no failure to disclose material facts and (2) "that nothing like deception was being practised on the court". The second of these conclusions would appear to suggest that the first was, more particularly, a conclusion that there was a failure to disclose facts but that those facts were not material, for no question of deception could have arisen unless one assumes a finding of non-disclosure. That this was the view taken by the judge is confirmed by his statement that some of the matters alleged by the Defendants to have been withheld would have done no more than amplify matters already raised in the 1st Plaintiff's affidavit.

9. Mr. Ching has relied upon two facts which, he says, ought to have been disclosed: (a) that the 1st Defendant had been given, in pursuance of the contract, a letter of authority in the widest terms, which permitted him to dispose of all the 2nd Plaintiff's shares in any way whatsoever in his sole discretion, and (b) that the 1st Defendant had commenced an action against a company which, rather than the lst Plaintiff personally, was (the 1st Defendant alleged) the second party to the agreement of October 1982. Mr. Justice Power held that the second of these facts was not material because the bringing of the action was no more than evidence of a material fact which had been disclosed, namely that disputes had arisen between the parties to the agreement both as to alleged breaches of contract and as to determination of the contractual relationship. I think he was justified in the view that he took. What, it is contended, was not made clear to the Vice-President was that the Defendants had claimed that the wide powers granted pursuant to the agreement entitled them to do all the things of which the Plaintiffs now complained, so that conduct which might at first sight appear to involve such a big interference with the Plaintiffs' property as to be suggestive of fraud might nevertheless be entirely proper. Here, again, Mr. Justice Power took the view that the extent of the authority granted did not constitute a fact which did more than amplify matters which were contained in the Plaintiffs' evidence. In all the circumstances I take a different view. The jurisdictions which had been invoked by the Plaintiffs were very powerful ones and a real risk of disposal of property and/or destruction of evidence had to be shown. Only if a likelihood of fraud was established could that real risk fairly be inferred: this was not a case where the balance of convenience could be a deciding factor. Evidence which might tend to support a claim by the Defendants that they honestly believed they were entitled to do what they had done would reduce the likelihood of fraud and, consequently, tend to destroy the basis for an inference that there was a real risk of disposal of property or destruction of evidence. I think there was a material non-disclosure.

10. Mr. Justice Power's finding that nothing like deception was being practised on the court by non-disclosure is undermined by his view that the non-disclosure was not material. Nevertheless I am not satisfied that the non-disclosure was deliberate and with intent to deceive. It is therefore within the discretion of the court whether the order should be discharged on the ground of non-disclosure. I prefer to deal with the application to discharge on the strength or weakness of the evidence which was before Mr. Justice Power.

The Inference of Risk of Disposal of Property and Destruction of Evidence

11. I have already indicated that in my view no inference of risk such as could justify the order made could properly be drawn unless there was a likelihood of fraud. There can be little doubt that the transactions revealed by the evidence were such as might well lead to suspicion of the possibility of fraud. After some initial hesitation I have come to the conclusion, however, that on all the evidence the possibility does not reach the degree of likelihood which alone would justify the inference of risk necessary to support the order.

12. For that reason I agreed with Mr. Justice Barker's very strongly held view that the appeal should be allowed and the order discharged.

Barker, J. A. :

13. I agree. that the appeal must be allowed and the orders, discharged. However, out of deference to the arguments which have been advanced before us, I add a few observations of my own.

Fraud

14. Mr. Vice-President Leonard allowed argument to be addressed to him on issues of fraud even though fraud was not alleged in the writ nor was it expressly averred in the 1st Plaintiff's affidavit. In my judgment he was wrong so to do.

15. It was argued by Counsel for the Plaintiffs (a) that it was not necessary to allege fraud in a generally endorsed writ and that this could be done subsequently in the statement of Claim and (b) that it was implicit from the 1st Plaintiff's affidavit that fraud was hexing alleged. I reject both of those arguments.. Thesiger, L. J. in Davy v. Garrett^(l) said at 489:

"In the Common Law Courts no :rule was more clearly settled than that fraud must be distinctly alleged and as distinctly proved and that it was not allowable to leave fraud to be inferred from the facts."

16. True it is that a generally endorsed writ is not a pleading stricto sensu. Nevertheless, in my judgment, if fraud is to be raised in the action, such a writ must contain an express allegation to that effect. Moreover, any affidavit in support of an application for an injunction must contain express allegation of fraud. To do otherwise is to do just that which Thesiger, L.J. in Davy's ⁽¹⁾case (supra) said was not allowable.

17. Towards the end of his argument Counsel for the Plaintiffs sought leave to amend the writ to allege fraud. The granting of such leave is, of course, a matter for the discretion of the Court, and for my part I would not have been disposed to allow the amendment. However, the matter became academic, since I was of the view that in any event the Plaintiffs had got nowhere establishing a prima facie case of fraud.

Non-disclosure

18. Mr. Justice Power decided that there was no failure to disclose material facts. I respectfully disagree. What was being urged on Mr. Vice-President Leonard was that the 1st Defendant was indulging in wrongful dealings with the 2nd Plaintiff's shares. Yet he was not shown a letter, signed by the 1st Plaintiff, giving to the 1st Defendant (at least on one construction of the letter) the widest possible authority to dispose of all such shares at his sole discretion. This letter was, in my judgment, highly germane and material to the granting or otherwise of the injunctions sought.

19. Mr. Justice Power also held that nothing like deception was being practised on the Court.' In Lazard Brothers and Company v. The Midland Bank Limited ⁽²⁾ it was held that the Court may in its discretion set aside an order made ex parte on an application supported by an affidavit which is, in fact, though not intentionally, misleading. I would apply the same principle to material non-disclosure.

20. Even if it is accepted that the material non-disclosure (as I hold there was) was not intentional or perpetrated with a view to deceive the Court, nevertheless there is a discretion to discharge the injunctions on the ground of non-disclosure, and for my part I would exercise my discretion in favour of the Defendants.

The Inference of Risk of Disposal of Property and Destruction of Evidence

21. Once the allegation of fraud was removed from the case, there were in my judgment no facts from which the Court could or should have drawn the inference that there was a real risk that property would be disposed of or evidence destroyed.

(1)     (1877) 7 Ch. D. 473

(1)     (1877) 7 Ch. D. 473

(2)     (1933) AC 289

24th February 1983.

Representation:

C. Ching, Q.C. & P. Chan (Liu, Chan & Lam) for Defendants/Appellants.

D. Keane, Q.C. & A. Smith (Robertson, Double & Boase) for Plaintiffs/Respondents.