International Standard Resources Holdings Limited (Formerly Known As New Smart Energy Group Ltd v. K&L Gates (A Firm of Solicitors)

HCA 1115/2011 & HCA 1116/2011 & HCA 1117/2011
(Consolidated)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1115 OF 2011

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1116 OF 2011

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1117 OF 2011

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Date of Written Submissions on Costs: 30 August 2016

Date of Decision on Costs: 22 March 2017

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DECISION ON COSTS

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1.These are applications for the amendment of the Statements of the Claim in the Consolidated Action. In the hearing on 16 August 2016, I granted leave to the Plaintiffs to re-amend the Statements of Claim as per the drafts canvassed and agreed by the parties. This is now my decision on the costs of the applications.

2.This case is part of a massive fraud committed by a solicitor misappropriating the moneys in various client accounts up to the total amount of about $8 billion.  The solicitor responsible, Mr Navin Kumar Aggarwal (“Aggarwal”), had stolen the moneys and lost them through gambling in various casinos in Macau.  92 “clients” were involved in the fraud and they brought various claims against the solicitors’ firm, the Defendant, seeking to recover the moneys misappropriated by Aggarwal.  The present Consolidated Action is one of such litigations.

3.There are 3 separate actions in this Consolidated Action.  Despite the order for consolidation, the actions remain separate actions and the parties filed their own pleadings in each action.  Technically, these are separate actions which are to be heard together.

4.The Plaintiffs are seeking to re-amend the Statements of Claim in the Consolidated Action.  The proposed amendments in the 3 separate actions are the same and so the issues are identical.

5.The Plaintiffs’ claims are based on, inter alia, breach of the terms of the escrow agreements, breach of trust and fiduciary duty, unjust enrichment and negligence and breach of solicitors’ duties.

6.There is a common feature for these frauds committed by Aggarwal.   The “clients” would deposit the funds in the Defendant’s client accounts pursuant to certain escrow agreements, under which the Defendant or Aggarwal agreed to hold the sums in escrow in return for payment of “interests” to these “clients”.  Eventually, Aggarwal managed to transfer these funds in the client accounts to another ledger account (“the RIM Account”) of a dormant company, RIM China Company Limited.   These funds were subsequently transferred out from the RIM Account to other entities, and through this modus operandi, Aggarwal was able to misappropriate the funds of the various “clients”.   

7.In the proposed amendments, the Plaintiffs refer to the transactions involving the other “clients” relating to the deposit of the escrow sums (“the Other Transactions”).  The Defendant argues that these amendments are confusing because such pleas would lead to a chain of inquiry as to what in fact happened in the Other Transactions.  It would virtually mean that the discovery would extend to cover all the documents involved in the Other Transactions, with the possible result that all litigations brought by the other “clients” would have to be heard together which would be a complete nightmare. Apart from the fact that there are a lot of parties involved in these claims, the issues and the facts in each case may be different.  It is therefore impossible for all these actions to be heard together.

8.I share the concern of the Defendant.  In response, Mr Mok SC, counsel for the Plaintiffs in the hearing, tried to ease such concern by providing further clarifications about the basis of the Plaintiffs’ claims.

9.In formulating their claims, Mr Mok now confirms that, insofar as the Plaintiffs are referring to the Other Transactions, they are only relying on the following facts and allegations:

(i) a massive fund of $8 billion had been misappropriated from the Defendant’s client accounts;

(ii) Aggarwal was involved in these frauds and he was the one who asked the different “clients” to deposit their funds in the Defendant’s client accounts;

(iii) all the frauds involved the following modus operandi:  Aggarwal was able to channelled all these funds deposited by the various “clients” from the client accounts to the RIM Account, and from that account he was able to transfer the funds out to different entities, through which he was able to misappropriate the funds deposited by these “clients”.

10.The Plaintiffs are not alleging that the Defendant was in breach of duties to the other “clients”.  They are not concerned with the exact relationship between the Defendant and the other “clients” and the details of the Other Transactions.   Insofar as the Plaintiffs are relying on the Other Transactions, the Plaintiffs are alleging that the fraudulent scheme involved the same modus operandi in respect of how the funds were channelled into the RIM Account which were subsequently transferred out to the other entities.  The Plaintiffs are querying as to how Aggarwal was able to give instructions to the accounting staff of the Defendant to transfer substantial funds from the client accounts to the RIM Account and how the funds were subsequently transferred out.  If the Defendant had a proper system for managing and monitoring the client accounts, this should not have happened.  In other words, the Plaintiffs are only relying on the modus operandi as to how the funds of the Other Transactions were transferred out of the client accounts.

11.With these clarifications, the parties were able to reach a consensus in the hearing as to the scope of the amendments.  The amendments had been revised to reflect the extent to which the Plaintiffs are relying on the Other Transactions to establish their claims, and the parties did not require the court to give a ruling on the amendment applications. Despite that, I feel obliged to give a brief account about what happened in the hearing so that the Plaintiffs would not deviate from the formulated claims as mentioned above.

12.I then deal with the costs of the amendment summonses.  The parties made their submissions on paper.

13.There were 2 hearings for the amendment applications: the first one on 17 December 2105 and the second one on 16 August 2016.

14.At the first hearing, the Plaintiffs put forth 2 sets of re-amendments marked green and blue.  However, after certain exchanges between counsel and the bench, even the Plaintiffs conceded that there were problems with the proposed amendments, and so the hearing was adjourned to enable the Plaintiffs to supply further revised drafts for consideration by the Defendant.  As it is the duty of the Plaintiffs to formulate their claims properly, I take the view that they should be held responsible for that adjournment.  I therefore order that the costs of that hearing be to the Defendant with certificate for counsel.

15.There were then some exchanges of correspondence between the parties before the second hearing on 16 August 2016.  It has all along been the Defendant’s concern, as indicated in the various letters by its solicitors, that the proposed amendments were problematic as they would bring in in issue all the Other Transactions involving the other “clients”, and as a result the Plaintiffs would have reasons to require the Defendant to disclose all the documents relating to the Other Transactions, making it very difficult for the Defendant to conduct the defence of the present case.

16.Some of the examples can be found in the following paragraphs of the draft Re-Amended Statement of Claim in HCA 1115/2011 submitted to the court before the second hearing:

(i) in paragraph 14(d), it was alleged that two other clients had never authorised Aggarwal or the Defendant to transfer any of their moneys held by the Defendant to the RIM Account;

(ii) in paragraph 14(e), it was alleged that Aggarwal made false representations to the 92 “clients”;

(iii) in paragraph 18, it was alleged that the underlying transactions involving the 92 “clients” were similar; and

(iv) in paragraph 41 (f)(ii), it was alleged that the transfer of the moneys deposited by the 92 “clients” out of the client accounts was in breach of paragraph 18 of the mandatory requirements set out in Practice Direction P.

17.By making these references, the Defendant may have to deal with the issue as to whether it was in breach of its duties owed to the other “clients”.   According to the Defendant, it was not the case that all the 92 “clients” were victims of the fraud.  For some of these transactions, the Defendant claims that these “clients” were also involved in the fraud and so the Defendant was not in breach of any duties owed to them.  The amendments would virtually mean that the Defendant may have to deal with the details and the propriety of each transaction which is totally confusing and embarrassing.

18.As mentioned above, the Defendant’s concern is a legitimate one.  It was therefore reasonable for the Defendant to oppose the amendments unless such concern was addressed.  In the second hearing, Mr Mok finally acknowledged such concern and agreed to make further revisions to the drafts.  If the Plaintiffs had addressed such concern earlier, both hearings could have been avoided.

19.Generally, the party asking for an amendment of his pleading would have to bear the costs of and occasioned by the amendment. On some occasions, the court is prepared to deal with costs of the substantive hearing separately if the party opposing the amendment fails in his objection. However, since I take the view that it was reasonable for the Defendant to oppose the amendments pending the further clarifications and revisions to the drafts, the costs of the second hearing should also flow from the amendment applications and as a result the Plaintiffs should bear those costs as well.

20.In opposing the Defendant’s request for them to pay for the costs of the second hearing, the Plaintiffs submit that: (i) most of the amendments proposed by the Plaintiffs had in fact been approved in the second hearing, in particular those relating to the claims for unjust enrichment; and (ii) the Defendant had not made any attempt to resolve or narrow the dispute between the parties before the second hearing.  Further, the Plaintiffs argue that both hearings have assisted the future conduct of the present Consolidated Action and the other related proceedings, and so the costs of both hearings should at least be costs in the cause.

21.I disagree.  The Defendant had specified its concern clearly in the correspondence.  The Plaintiffs finally acknowledged such concern by agreeing to make further revisions to the drafts in the second hearing.  I also take the view that the reference to the Other Transactions had all along been the main dispute between the parties, and the other amendments, for example those relating to the claims for unjust enrichment, were less contentious as compared with the amendments relating to the reference to the Other Transactions.  I doubt whether we need a separate hearing if the dispute was only related to these less contentious amendments.  Finally, the court would still have to hold separate CMC to case-manage the progress of the different actions, and so one cannot over-exaggerate the effect of the amendment applications.

22.For the above reasons, I order that the costs of the amendment summonses and the costs of and occasioned by the amendments, including the costs of both hearings, be to the Defendant in any event with certificate for counsel.  I appreciate that the Plaintiffs may have some genuine difficulty in formulating their claims and so there is no reason for the costs to be taxed and paid forthwith.

Written submissions by Mr David Fong, instructed by Lau, Kwong & Hung, for the Plaintiffs in the Consolidated Action

Written submissions by Robertsons for the Defendant in the Consolidated Action