Aktieselskabet Dansk Skibsfinansiering v. Wheelock Marden & Co. Ltd. and Others
Read the full judgment text of on BabelCite. was delivered on 17 November 1994.
1. These interlocutory appeals and cross-appeals were first called on in July this year before a division of this Court in which I sat with Liu J. By our judgment delivered on the 13th of that month, we disposed of so much of Civil Appeals Nos 24 and 25 of 1994 as pertained to conspiracy and misrepresentation. Everything else was adjourned, in the hope that the same would come before the same two judges but without any requirement to that effect.
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CACV000025A/1994 1994, Nos 24, 25, 36, 37 & 104 H E A D N O T E If done with due regard to the rules of pleading, it is permissible to plead that a person was a de facto and/or "shadow" director of a company at the same time. 1994, Nos 24, 25, 36, 37 & 104 IN THE COURT OF APPEAL _______________
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________________ Coram: Bokhary, J.A. and Mayo, J. Dates of hearing: 8, 9, 10 and 11 November 1994 Date of judgment: 17 November 1994 ________________ J U D G M E N T ________________ Bokhary, J.A.: INTRODUCTION 1. These interlocutory appeals and cross-appeals were first called on in July this year before a division of this Court in which I sat with Liu J. By our judgment delivered on the 13th of that month, we disposed of so much of Civil Appeals Nos 24 and 25 of 1994 as pertained to conspiracy and misrepresentation. Everything else was adjourned, in the hope that the same would come before the same two judges but without any requirement to that effect. 2. The background to this matter is outlined in our judgment of July 13, 1994. But to save anyone reading this judgment having to turn to that one, I will repeat that outline, which is as follows. 3. ADS, which is how we refer to the plaintiff corporation, is a Danish financial institution which made loans to two Hong Kong companies to enable each of them each to purchase a bulk carrier to be built at the same Danish shipyard. 4. A vital feature of the complex arrangements entered into was that the loans were guaranteed by the borrowers' common parent, Wheelock Maritime International Ltd, a Hong Kong listed company which, through its many subsidiaries, owned and operated a sizeable merchant fleet. 5. In the result, the vessels were delivered, but the borrowers defaulted, while Wheelock Maritime became insolvent, went into liquidation and left its guarantees unhonoured. 6. Left out of pocket to the tune of about $542 million including interest to date, ADS started two actions: one by originating summons in 1988 and the other by writ in 1989. Those actions have been consolidated. ADS has delivered a consolidated statement of claim. That pleading has been amended. It shows that the persons sued by ADS are a company and a number of individuals. The company is Wheelock Marden & Co. Ltd, a Hong Kong listed company and conglomerate, which had been Wheelock Maritime's general manager, secretary and parent. Additionally, as we shall see, there is an issue, on the pleadings as they presently stand, of whether Wheelock Marden had also been a de facto director of Wheelock Maritime. 7. Of the 11 individuals sued, only nine remain. That is because: Mr Hussey who had been the 8th defendant has died; and the consolidated action has been discontinued as against Mr Ying who had been the 11th defendant. 8. The individual defendants had all been directors of Wheelock Maritime at the material time. The 2nd to 7th defendants were also directors of Wheelock Marden at the same time. 9. By our judgment of July 13,1994, reversing a refusal by Barnett J, we ordered the striking out of: (1) the whole of the conspiracy plea; and (ii) the plea in misrepresentation save as against the two defendants facing that plea who did not seek to strike it out, namely Mr Brothers, the alleged author, and Wheelock Marden, who is said to be vicariously liable for Mr Brothers's alleged misrepresentations. 10. That leaves these pleas in the Amended Consolidated Statement of Claim: (i) fraudulent trading against all the remaining defendants; and (ii) misrepresentation against Mr Brothers and Wheelock Marden. 11. As to fraudulent trading, ADS pleads that the guaranteed indebtedness was incurred and allowed to continue when, as it did not know but the defendants knew or ought to have known, Wheelock Maritime was insolvent, or at least had no reasonable prospect of honouring its guarantees. 12. As to the misrepresentation plea, what is left is as follows. Mr Brothers and vicariously Wheelock Marden induced it to enter into the arrangements under which the loans were made and the vessels were delivered. They so induced it by misrepresenting that Wheelock Maritime's financial position was far stronger than it really was: doing so fraudulently; failing that, recklessly; or, at the very least, without reasonable grounds. 13. Conspiracy has gone. THE REMAINING APPEALS AND CROSS-APPEALS 14. In order of the relative importance ascribed to them by the parties, the remaining appeals and cross-appeals are as follows:-
15. We agreed to hear the remaining appeals and cross-appeals in that order of priority: first (1) on its own; secondly (2) and (3) together; thirdly (4) and (5) together; and finally (6) and (7) together. 16. On this occasion: Mr Bunting represents Wheelock Marden, which was represented by Mr Heslop and Mr Scott in July; and Mr Kotewall leads Mr Chua instead of Mr Barma for the individual defendants. Mr Cullen and Mr Smith who represented ADS in July still represent it now. As on the earlier occasion, we have been greatly assisted by all counsel and are most grateful to them. DE FACTO DIRECTORSHIP: Appeal (No.104) by Wheelock Marden 17. The question of de facto directorship arises in the context of the question of fraudulent trading. Fraudulent trading: section 275 18. ADS's case in fraudulent trading is based on section 275 of the Companies Ordinance, Cap.32. 19. Until that section was amended on August 31, 1984, subsection (1) thereof read:-
And it included a subsection (5) which read:-
20. As a result of the amendment of section 275 on August 31, 1984, subsection (1) thereof reads:-
And subsection (5) thereof has been deleted. 21. ADS's contention is that even for the period before August 31, 1984, a person could be liable under section 275 even if not a director whether de jure, de facto or "shadow". Wheelock Marden contends to the contrary. 22. Originally, ADS's case was that even if Wheelock Marden were right on that issue as to the ambit of section 275, Wheelock Marden was nevertheless caught as a shadow director by subsection (5). ADS's pleading as to that is contained in paragraph 1.3 of the Consolidated Statement of Claim, which reads:-
23. Then, by the amendment which the judge allowed and is now attacked on appeal, an averment that Wheelock Marden had been a de facto director of Wheelock Maritime was added as one further or in the alternative to the averment of shadow directorship. That amendment is contained in paragraph 1.4 which reads:-
PARTICULARS
Wheelock Marden's primary argument 24. For Wheelock Marden, Mr Bunting's primary argument is that the addition of the de facto directorship plea as one further and in the alternative to the shadow directorship plea is impermissible. That, Mr Bunting urges, is so for two reasons. First, because those two forms of directorship are inherently mutually exclusive concepts. Furthermore, because if someone was a de facto director (Wheelock Marden conceding for the purpose of this appeal only that de facto directors are caught by subsection(1) of section 275) then there can be no scope left for his being caught by subsection (5) as well. De facto and shadow directors 25. As a matter of commercial reality, the general statement that de facto and shadow directors are very different is one which, in my view, can safely be made. What they share in common is that they are not de jure directors (as validly appointed directors are called to distinguish them from de facto and shadow directors). 26. But what makes someone a de facto director is his assumption of functions which only a de jure director can properly perform. While what makes someone a shadow director is his directing the directors, whether de jure or de facto, how to act in relation to the company's affairs, so that it becomes their custom so to act in accordance with his directions rather than their own judgment. 27. It follows that, in general at least, a de facto director takes on the appearance of a director, by which I mean one validly appointed as such, while a shadow director does not take on the appearance of a director in any shape or form, choosing to remain, as his name implies, in the shadows - from where he pulls the strings like a puppeteer. 28. That is generally so. But would it be prudent to insist that it must always be so? I do not think that it would be. It would, in my view, be going too far: further than Millett J, a judge of very considerable experience in these matters, was prepared to go in Re Hydrodan (Corby) Ltd [1994] BCC 161 when he said (at p.163C) that de facto and shadow directorships "are alternatives, and in most and perhaps all cases are mutually exclusive". (My emphasis). Conceivably both at the same time 29. Although not validly appointed a director, with sufficient power or influence, a person, either human or corporate, might well succeed in barging his or its way on to the board of a company: and not only exercise the functions of a director but even turn the other directors into puppets. 30. Conceivably, such a person could be a de facto and shadow director at the same time. His shadow directorship might be less shadowy than such directorships usually are. Or one might say that it was more blatant. Either way, it must be remembered that the expression "shadow director" is merely a convenient one to describe a person in accordance with whose directions or instructions the directors of a company have been accustomed to act. Such a person generally stands in the shadows. But he cannot escape liability for what he does just because he does it openly. In the alternative at least 31. Moving on, I would add this. Even if, contrary to my view, it would be prudent to go so far as to say that de facto directorships and shadow directorships must always be mutually exclusive, that would not mean that they cannot be pleaded in the alternative at least. If a pleader is confronted by circumstances in which each is a reasonable possibility, he is entitled to plead them in the alternative, and he would be wise to do so. 32. Of course, as with any other set of alternatives - indeed as with anything else at all - he must not plead them in such a way as to create anything which is embarrassing or which otherwise offends against the rules of pleading. But all of that is quite apart from Wheelock Marden's primary argument, which I summarised earlier. 33. I should just mention that Mr Bunting indicated that he was not interested in merely reducing the shadow directorship plea to one in the alternative, as opposed to one further and in the alternative, to the de facto director plea. 34. Finally in this connection, I would mention Re Tasbian Ltd (No.3) [1993] BCLC 297. There the Court of Appeal in England was concerned with the position of a Mr Nixon against whom the Official Receiver had obtained leave to seek a disqualification order out of time. Speaking with his vast experience in these matters, Balcombe LJ, with whose judgment the other two members of the Court agreed, observed (at p.304 f-g) that "the evidence disclosed an arguable case that Mr Nixon was either a shadow or a de facto director" (My emphasis). 35. In my judgment, Wheelock Marden's primary argument fails. Wheelock Marden's secondary argument 36. That brings us to the secondary argument on de facto directorship advanced by Mr Bunting on Wheelock Marden's behalf. It is that none of the particulars put forward by ADS for the purpose of supporting that plea are capable of supporting it. 37. Shortly stated, those particulars consist of:-
Acts and decisions 38. I will deal with those two categories in reverse order. Plainly, if they went to anything, those acts and decisions would go to de facto directorship. Directions and instructions 39. As far as the directions and instructions are concerned, ADS's case runs thus. Essentially, the directions and instructions concerned resolutions of Wheelock Maritime's board. 40. If the correct view at the end of the trial is that Wheelock Marden issued those directions and instructions from the outside, then it would have done so as a shadow director. 41. But if the correct view at the end of the trial is that Wheelock Marden issued those directions and instructions notionally from within the boardroom - and as if it were a director in a position of dominance - then it would have done so as a de facto director. 42. Both possibilities are real on the same basic facts. And running them in the alternative is permissible. 43. Running two such possibilities on the same facts is not, in my view, inherently objectionable. And I note that Balcombe LJ did not think so either when deciding Re Tasbian Ltd (No.3) (supra). At p.304 b-c, he said: "Mr Nixon decided which cheques drawn by the company could and which could not be submitted to the bank. This meant that he was concerned with which of the company's creditors were paid and in which order, and to that extent - I say no more than that - that he was able to control the company's affairs. This seems to me to raise at least an arguable case that he was either a shadow or a de facto director." No embarrassment or other infringement 44. We have been taken to the detailed particulars relied upon. As I see it, they are capable of supporting the de facto directorship plea and doing so without embarrassment or any other infringement of the rules of pleading. If done with due regard to the rules of pleading, it is permissible to plead that a person was a de facto and/or "shadow" director of a company at the same time. In my judgment, Wheelock Marden's secondary point also fails. Dismissed 45. I would dismiss Wheelock Marden's appeal (No.104) on de facto directorship. THE FRAUDULENT PURPOSES PLEA: cross-appeals (Nos 24 & 25) by ADS 46. Turning to ADS's cross-appeals (Nos 24 & 25) against the striking out of paragraph 30 of the Consolidated Statement of Claim, which paragraph contains its fraudulent purposes plea, I begin by quoting that paragraph. It said:-
(The initials "WM1" denote Wheelock Maritime) Three triggers 47. There are three things each of which triggers the court's power under section 275(1) of the Companies Ordinance, Cap.32. Each has to do with what appears in the course of the winding up of a company. The first is the carrying on of any business of the company "with intent to defraud creditors of the company." The second is the carrying on of any business of the company "with intent to defraud ... creditors of any other person." And the third is the carrying on or any business of the company "for any fraudulent purpose." 48. It is the third trigger which the pleader invoked by paragraph 30. Requests and answers 49. That paragraph drew this request for particulars (being Request 279):-
50. ADS's initial answer failed to give the particulars requested; and another division of this Court ordered ADS to furnish those particulars. 51. Thus ordered, ADS gave this answer (being Answer 279:-
52. As can be seen, that answer incorporates the answer to another request. So we have to look at: the paragraph to which that other request relates; that other request itself; and the answer thereto. They are: paragraph 28 of the Consolidated Statement of Claim; Request 275; and Answer 275. 53. Paragraph 28 reads:-
PARTICULARS
54. Request 275 reads:-
55. And Answer 275 reads:-
(The initials "S & C" denote Schroders & Chartered Ltd, while the initials "CSSC" denote the China State Shipping Corp.) Cutting through 56. To be understood, complex cases often require very detailed particulars. But then there is the danger of getting lost in the details. And sometimes you have to cut through them to get to the essentials. 57. That has to be done here. Doing it, I begin by deciding what questions ADS must answer in order to comply with Request 275. Then I decide what answers emerge from the particulars which ADS has in effect supplied when Answer 275 is looked at realistically in the context of the pleadings as a whole. 58. What I get from doing that are these questions and answers:-
Viable and adequately pleaded 59. In my judgment, the fraudulent purposes plea contained in paragraph 30 is a viable and adequately particularised one. Judge's reason for striking out 60. The judge gave only one reason for striking out that paragraph. This is how he articulated that reason:-
61. I do not share that view of the judge's. Other reasons urged for striking out 62. Whether one looks at the judge's reason on its own or along with all the reasons urged by Mr Bunting for Wheelock Marden and Mr Kotewall for the individual defendants, there is no justification for striking out paragraph 30. Allowed 63. I would allow ADS's cross-appeals (Nos 24 & 25) against the striking out of paragraph 30 of the Consolidated Statement of Claim, setting aside the judge's order that it be struck out. FURTHER & BETTER PARTICULARS: appeals out of time (Nos 36 & 37) by ADS 64. As to further and better particulars, I have seen in draft the judgment which my brother Mayo is about to read. 65. My brother Mayo takes the view that the judge's decision should be upheld save to a very limited extent. I agree. 66. In so far as we are upholding the judge's decision, I do not see any need to say more than this. There, the worst that can be said of the judge's decision is that it is in the "grey area". That is not enough to upset the decision of a judge in the discretionary area of a case for which he must have acquired a good "feel". 67. In so far as we are reversing the judge, all I wish to say is as follows. As to request 103 directed to Wheelock Marden and the identical request 99 directed to the individual defendants, the defendants concede that those requests must now be answered because the judge, misled by a clerical error in the defendants' pleadings, was wrong in thinking that they had already been answered. 68. And as to item (3) of request 90 directed to Wheelock Marden and the identical item (3) of request 86 directed to the individual defendants, it is plain that the defendants put forward gross figures when they should have put forward net figures. Gross sale prices will not suffice. Instead, the net sale prices, arrived at after deducting expenses and encumbrances, must be given. That is obvious. DISCOVERY: appeal (No.24) by Wheelock Marden & appeal (No.25) by the individual defendants 69. As to discovery, the parties have come to terms, and they will submit a draft consent order. Mayo, J.: 70. I have had the benefit of seeing in draft my Lord, Bokhary JA's judgment. I am in complete agreement with the views he has expressed and the conclusions which have been reached. 71. As to Civil Appeals 36 & 37 of 1994 I would state. 72. This is the Plaintiff's appeal against the order of Barnett J. of the 20th October 1993 when he declined to order that the Defendants should furnish various Further and Better particulars of their Defences. The requests were similar for the 1st Defendant and the other Defendants and the decisions made by Barnett J. in respect of the requests were the same. I will accordingly deal with the requests as they were raised by the 1st Defendant and our conclusions will be equally applicable to the other Defendants. 73. The 1st Request is request 33(5) and (6).
74. The Defendants claimed that the Plaintiffs were not entitled to all these particulars. Barnett J. considered that 33(5) & (6) were requests for evidence. 75. Para. 5.1 of the Consolidated Statement of Claim is as follows:-
76. The Defence to this was set out at some length. It set out a positive case. It referred to WMI's trading situation and concluded with an assertion to the effect that the impact of liquidity problems became serious in January and February 1983. 77. In considering the approach to be adopted in deciding the extent to which it is necessary to provide particulars, it is desirable to take cognisance of the principals referred to on p.8 of this Court's judgment dated the 13th July 1994, when it was dealing with the first limb of these appeals.
78. The first thing which must be said concerning this request is that the financial situation of WMI was a material fact and not simply an issue which would be dealt with in the evidence. 79. Mr. Cullen submitted that this is a matter of crucial importance and that Expert reports are being prepared and that it is contemplated that they will be exchanged in February 1995. 80. It would obviously be desirable that the Plaintiffs' expert should have these particulars when he is preparing his report. It is quite possible that the Experts might be able to agree their evidence in this connection, thus obviating the necessity for ventilating the issue at the trial. 81. Mr. Kotewall adopted the submissions made by Mr. Bunting and it is accordingly convenient to refer to the composite submissions as 'Defence Counsel's' submissions. 82. They submitted that as the orders came within the ambit of the Judge's discretion, we should be slow to interfere with his decision. Unless it could be clearly demonstrated that he was in error, the order should stand. I accept that this is right. 83. Defence Counsel contended that the requests in 33(5) and (6) went beyond the scope of what had been pleaded. However, more important than this they referred to the considerable difficulties which would be encountered if the Defendants were required to provide these particulars. They went so far as to argue that it would be oppressive to require this. 84. The main complaint was the nebulous nature of the requests. To what extent, would it be necessary for the Defendants to give particulars of the insufficiency of cash to meet its on going commitments. The period under consideration was the months of January and February 1983. Almost certainly the financial situation of WMI would vary from day to day or perhaps even from hour to hour. It would also be difficult to reconstruct the overall situation throughout this period. 85. 33(6) requires full details of the outgoings and debts that WMI was unable to meet during the period. This request would almost inevitably require a reconstruction of the affairs of WMI at that time, and it would involve questions of subjective judgments as to whether difficulties would be encountered in respect of particular debts. 86. Mr. Cullen's answer to this was that he was concerned with the positive case being put forward by the Defendants. The Directors must have specific information available to them, to enable them to conclude that liquidity problems were impacting on them seriously. 87. I consider that the question as to whether or not these requests should be complied with came within the scope of the judge's discretion. In particular I accept the validity of the submissions made by Defence Counsel concerning the difficulty in providing the particulars sought. 88. Although he only gave a brief reason for declining to order that the particulars should be given, I do not think that the judge's discretion should be interfered with. I would uphold his order on these requests. 89. The next requests are requests 89, 91, 93 and 94.
The Plaintiffs' allegation was:-
90. The period referred to was the period prior to 22nd March 1984. 91. The Defendants Counsel contended that the Plaintiff was not entitled to the particulars sought and Barnett J. upheld this view of the matter. He did so on the same basis as in request 33 (5) & (6) that the requests were for evidence. 92. Again, the Defendants pleaded a positive case and at paragraph 102 gave details of the measures which had been taken to ameliorate the position. 93. Mr. Cullen argued that the particulars requested were part of the factual matrix of this litigation. It was undoubtedly the case that the interests of justice would be best served if the Expert previously referred to had this information in sufficient time to enable him to embody it in the report which it was proposed should be exchanged. There was then a possibility that the evidence may be agreed. 94. There was a further dimension here. Para. 102(6) of the Defence refers to measures taken to alleviate the financial situation by reference to U.K. Taxation. It was obviously desirable that the Expert should have prior notice of the steps taken so as to enable him to comment meaningfully on the measures which were taken. 95. Defence Counsel raised similar objections to these requests as the previous ones. 96. It was very difficult for the defence to know how these requests should be dealt with. The cash flow situation would continually fluctuate. At what point of time should the situation be encapsulated. 97. I did not have before us details of what records had been kept or how much work would need to be done to obtain all the particulars which may be required. 98. This was a matter coming within the scope of the Judge's discretion and I do not consider that I would be justified in interfering with the manner in which he exercised it. 99. The next request is request 90.
100. The particulars sought relate to para. 102 of the Defence. The Defendants did supply some particulars. However, complaint is made that the particulars given concerning the 14 vessels which were sold were deficient in that reference was made only to the "sale value". It was not readily apparent how this information would be of assistance as the vessels would probably have been subject to incumbrances. The actual alleviation of the financial position was not apparent. 101. I do not think that the Plaintiff's are entitled to detailed particulars concerning the extent to which the sales improved the liquidity of WMI for much the same reasons as I have given in respect of the other requests. However, having regard to the way in which the request has been framed, I do consider that the Defendants should give sufficient information to show what were the net proceeds of sale of each of these vessels. These particulars must be given. Bokhary, J.A.: RESULT 102. In the result:-
Representation: Mr M. Bunting (instructed by Messrs Richards Butler) for Wheelock Marden (appellant) Mr R. Kotewall QC and Mr G.H. Chua (instructed by Messrs Alsop Wilkinson) for the other defendants (appellants) Mr T. Cullen QC and Mr Clifford Smith (instructed by Messrs Holman) Fenwick & Willan) for ADS (respondents) |