Pt Tugu Pratama Indonesia v. Citibank N.A.

HCCL 1/2007

[2018] HKCFI 2233

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 1 OF 2007

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J U D G M E N T

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1.This is an action by the Plaintiff, an Indonesian company, against the Defendant bank in respect of 26 payments, totalling about US$51.64 million, out of its account held with the Defendant’s Hong Kong branch back in 1994 to 1998. It is the Plaintiff’s case that the account was opened and operated by its rogue directors, and the Defendant had failed to exercise the care owed to its in paying out the money.

2.The background facts set out below are largely uncontroversial. 

Background

3.The Plaintiff was the largest insurer in Indonesia in the 1990s. It was founded in November 1981 by PN Pertamina, the Indonesian state-owned oil and gas company, to act as its captive insurer.  There were 3 subsidiaries of the Plaintiff which are relevant to the present dispute. 

4.The Plaintiff had 2 subsidiaries to act as its agent in the London insurance market: TRB & Co Ltd was established in Guernsey in December 1986, and TRB (London) Ltd (TRB London) was established in London also in December 1986.

5.In February 1988, TRB & Co Ltd was renamed YHT & Co Ltd (YHT) and ceased to act as the Plaintiff’s London agent.  Instead, it was given a new role as a channel for charitable donations.

6.The Plaintiff also had a subsidiary in Hong Kong called Tugu Insurance Co Ltd (TIC).

7.A list of owners, commissioners and directors of the Plaintiff from 1986 to 2005 can be found in Core Bundle (CB) 1/ Tab 3.  Of particular note are the 4 alleged rogue directors, namely, Mr Mohamad Hasan (Hasan) who was a shareholder and Commissioner of the Plaintiff; Mr Sonni Dwi Harsono (Harsono), a director; Drs. Rizaludin Sunjaya (Sunjaya), a director; and Mr Anton S.A. Ponto (Ponto), a director.

8.Hasan was an associate of President Suharto and he served briefly as Minister of Trade and Industry from March to May 1998 just before President Suharto stepped down. 

9.The Plaintiff says that the above individuals owed fiduciary-like duties to it similar to those owed by directors to companies under Hong Kong law, and that their authority to act on its behalf only extended to acts done for its benefit but not for their own benefit.  In the absence of any evidence to the contrary, there is no reason to question the Plaintiff’s case in this regard. 

10.According to the Articles of Association of the Plaintiff (Article 9), it should be managed by a Board of Directors under the supervision of the Board of Commissioners.  Members of both Boards should be appointed by the shareholders in general meeting.  Pursuant to Article 11, the Board of Commissioners was obliged to supervise the work of the Board of Directors.  Its power included the inspection of the books of the Plaintiff.  The Board of Directors was obliged to provide the information required by the Commissioners.  The Board of Commissioners was entitled to request the assistance of expert to conduct its investigations.  It was also empowered to suspend a member of the Board of Directors from his post.  

11.TRB London was owned by Pertamina and/or Pertamina Pension Fund (20%), the Plaintiff (15%), Hasan (45%) and J.H. Minet Reinsurance Brokers Ltd (20%).  In 1994, all the shares were transferred to PT Tugu Pratama Interindo (Interindo), a wholly owned subsidiary of the Plaintiff.  This means that as from 1994, TRB London was an indirect wholly owned subsidiary of the Plaintiff. Its directors included Harsono and Sunjaya.

12.YHT was wholly owned by the Plaintiff.  The directors of YHT at the material times were Hasan, Harsono, Sunjaya and Mr Faisal Abdaoe (Abdaoe).

13.In respect of TIC, its shareholders from 1994-1998 were Pertamina, Hasan and the Plaintiff.  Its directors from 1990-2001 included Hasan, Harsono and Abdaoe.

14.The Plaintiff opened a bank account with the Defendant’s Jakarta branch in December 1981 shortly after its incorporation.  Another account was opened with the same branch in June 1989.

The account in question

15.In December 1990, Hasan, Harsono and Sunjaya opened a bank account in the name of the Plaintiff with Citicorp Investment Services Ltd (CISL) in Hong Kong.  CISL was at that time a subsidiary of the Defendant.

16.A Citifunds Account Application Form dated 13 December 1990 was signed by Hasan, Harsono and Sunjaya.  It was accompanied by a Mandate for Account of a Limited Company (Mandate) with the Plaintiff’s board resolution, which stated that a meeting of the directors of Plaintiff was held on 13 December 1990 passing, inter alia, the following resolutions :

(a) A Citifunds Account be opened with CISL in the name of the Plaintiff and CISL was authorised to treat and consider as valid instructions given in relation to the withdrawal of funds from and deposit of funds into and the general operation and opening of the Account in the following manner.

(b) Written instructions of the Plaintiff might be given and signed by any Two of the persons as set forth in Schedule 1.

(c) The Plaintiff certified that Schedule 1 was a true and correct list of specimen signatures of the persons who were authorised to sign the Account.

17.Schedule 1 of the Mandate contained the names of Hasan, Harsono and Sunjaya, their official title (respectively, Commissioner, President Director and Finance Director) and their specimen signatures.

18.It is important to note that the Plaintiff’s witness, Mr Tengu Parameswara (Parameswara), accepted in evidence that the opening of Account was properly authorised by the Plaintiff.  He appeared to have placed emphasis in the involvement of its Finance Director, Sunjaya[1].

19.For the “Mailing Address” on the Application Form, it was stated :

“C/O Citibank N.A. Jakarta

P.O. Box 2463 JKT

HAM Custodian”

20.HAM signified the “Hold-All-Mail” service offered by the Defendant to its customers both in private and retail banking.  The Defendant’s unchallenged evidence is that such service was needed by some clients for security reason.

21.In April 1994, as a result of corporate reorganisation, the Plaintiff’s account with CISL was transferred to the Defendant’s Hong Kong branch (the Account).  This was described by the Defendant as a migration of the Plaintiff’s CISL account.  A letter dated 25 April 1994 was sent by CISL to its customers notifying them of the transfer of accounts to the Defendant.

22.There was a set of opening documents and terms and conditions for the Account dated 6 July 1995, amongst which was a fresh Mandate with the Plaintiff’s supporting board resolution.  Paragraph 3 of the Mandate stated: “That you be instructed to honour all checks, bills accepted, promissory notes or other orders which may be drawn or made … which may be signed on our behalf … and honour all our written instructions as described below, provided such checks, bills, notes, orders or receipts or instructions are signed … by such number of signatories as from time to time authorized pursuant to this mandate …”.

23.Schedule 1 of the fresh Mandate had the same effect as the previous one, namely, the authorised signatories of the Account were Hasan, Harsono and Sunjaya, and that any two of them might give any instructions in relation to the Account.

24.The Account was a private banking account and for which there was a designated Relationship Manager (RM).  It appears that the RM was the primary point of contact with the Defendant’s private bank customers.  On the evidence, the RM for the Account during the relevant period was Ms Indah Hadimulya (Hadimulya).  A number of the PI were sent to the Defendant for her attention. The name of Yani Hamdani (Hamdani) appeared on some of the PI, who (according to one of the Defendant’s witnesses, Ms Sharon Chan) might be an assistant to Hadimulya.

The disputed payments

25.There were payments in and out of the Account between 23 June 1994 and about 14 July 1998, which formed the subject matter of Plaintiff’s claim.  Annex I to this Judgment is a table which sets out 25 of the 26 disputed payments (Disputed Payments).  The last Disputed Payment was the payment out of the balance in the Account when it was closed.

26.Out of the Disputed Payments, about US$11.7m went to Sunjaya; US$1.1m to Harsono; another US$33.1m to an account in the joint names of Sunjaya and Harsono; US$4.1m to Hasan; US$100,035 to Ponto; and US$1.4m to a Citibank account in Jakarta marked “as per your instructions” on the payment instructions. 

27.Parameswara confirmed in evidence that there is no dispute by the Plaintiff over the payments in and out of the Account apart from the Disputed Payments[2]. However, it should be said that there is no clear evidence on such payments due to the unavailability of the bank statements covering the period.

28.Although 5 of the payment instructions (PI) for the Disputed Payments are no longer available (I shall have to come back to this point about availability of evidence below), the inference from the evidence is that all such Payments were preceded by a PI.  It might be the case that some of the PI were initiated by a verbal instruction.  However, the parties are in agreement that whether that was or was not so can no longer be ascertained due to the state of the evidence.

29.There is no dispute that each of the available PI contained the signatures required pursuant to the Mandate, namely, those of Sunjaya and Harsono.  In respect of the 5 missing PI, again the inference is clear on the evidence, there is no reason to believe that payments were made other than in accordance with the Mandate. 

Closure of the Account

30.The Account was closed on 30 July 1998, upon the instructions by letter dated 16 July 1998 and signed by Harsono and Sunjaya.  That letter also instructed the Defendant to pay the balance in the Account to a Citibank account in Jakarta with the beneficiary being “Sonny D Harsono / R Sunjaya”. The balance, a sum of US$250,328.07, is the last of the Disputed Payments. 

2001 and thereafter

31.The Plaintiff says that it became aware of the Account and the Disputed Payments only in 2001 when it conducted a review of the affairs of TRB London.

32.Correspondence between the parties concerning the Account began on 3 April 2001, through which the Plaintiff inquired with the Defendant about the status of the Account and the transactions that the Account was involved in.  Shortly thereafter, the Defendant provided the Plaintiff with documents relating to the Account, including the account opening documentation, bank statements, payment instructions and the termination letter.

33.The Defendant says that subsequent to the Plaintiff’s inquires in April 2001, on 18 May 2001 it made a “defensive” report to the Joint Financial Intelligent Unit (JFIU) set up by the Hong Kong Police about the activities in the Account.

34.On 17 September 2001, the JFIU replied to the Defendant, stating that investigations had been conducted but no criminal activities had been detected.

35.The Defendant did not hear from the Plaintiff again until 6 October 2006, when the Plaintiff wrote to it and alleged that it had wrongly debited the Account in accordance with purported instructions which were given without the Plaintiff’s authority.

36.On 2 February 2007, the Plaintiff commenced this action.

Issues

37.There is a List of Agreed Issues filed pursuant to the directions of the court.  However, there is no consensus on a number of issues, but the disagreements are matters of formulation.

38.There are 2 main issues, namely, (i) whether the Defendant was in breach of its duty of care to the Plaintiff in making the Dispute Payments despite the compliance with the Mandate and (ii) whether the Plaintiff’s claim herein is time-barred. 

39.It will be seen below that the Defendant has an unassailable defence on limitation of action.  However, to properly resolve that issue, the court is required to examine the alleged breach of duty on its part.  In the course of resolving these issues, a number of ancillary issues will have to be dealt with. 

The evidence

40.Two witnesses were called by the Plaintiff: Parameswara and Mr Edwin Mahmud (Mahmud).  Neither one of them had any personal knowledge of the events in question.  Instead, their evidence was based on the available documents. 

41.Three witnesses were called by the Defendant.  The witness statement of one of them Mr Nicholas Stone was agreed with redaction.  Mr Stone’s evidence was confined to his experience and research over various events in Indonesia in the late 1990s to mid-2000s.  In particular, the downfall of President Suharto in May 1998 and the widespread investigations over the financial affairs of the Plaintiff thereafter.

42.The live witnesses were Ms Sharon Chan (Chan) and Mr Manoj Gopalakrishnan (Gopalakrishnan).  Ms Chan had some dealings with the Account during the time when she worked on the operation side of the Defendant’s business, whilst Gopalakrishnan had no such dealing.  He joined the Defendant in August 1997 as the Compliance Officer, and was during the material times involved in the compliance side of the Defendant’s business.

Documentary evidence

43.I have touched upon the absence of a complete set of documentary record in this case.  The absence of some of the relevant documents of the Account was attributable to the document retention policy of the Defendant.  In simple terms, generally documents were only kept for 7 years. 

44.The parties had tried to lay the blame on each other for this state of affairs, which is unhelpful for the resolution of this case.  The fact of the matter is that the action was only started in February 2007, although the existence of the Account and the involvement of the Defendant were admittedly known to the Plaintiff since mid-February 2001[3]. Further, most, if not all, of the important evidence now relied upon by the Plaintiff was available to it by July 2001[4].

45.Furthermore, more despite the suggestion made in cross-examination of Gopalakrishnan, there was no real reason for the Defendant to believe that it would be sued until the action was commenced.  In particular, I see no justification for the insinuation made that the Defendant was guilty of selective disclosure.

46.This court shall do what it can to resolve these matters based on the available evidence. 

Duty of care owed by a bank to its customers

47.The guiding authorities are not in dispute.  However, the parties differ materially on how the authorities are to be understood.  I start with the proposition that the relationship between the customer payer and the paying bank to which the payer delivers a money transfer order is that of principal and agent – the paying bank making payment on behalf of its principal, the payer.  In carrying out the transfer the bank owes the customer the usual banker-customer duty to exercise reasonable care and skill, which co-exists under both contract and in tort: see Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 at 375-376 per Steyn J (as he then was); Brindle & Cox’s Law of Bank Payments, 5th edn, at [3-102].

48.Generally, a bank is bound by the customer’s instruction to make payments.  In the first instance judgment in Lipkin Gorman v Karpnale Ltd [1987] 1 WLR 987 (a case where a solicitor misused his authority over the client’s accounts to obtain funds to satisfy his gambling habit), Alliott J held at 1006C-E :

“(1) the bank is entitled to treat the customer’s mandate at its face value, save in extreme cases; (2) the bank is not obliged to question any transaction which is in accordance with the mandate, unless a reasonable banker would have grounds for believing that the authorised signatories are misusing their authority for the purpose of defrauding their principals or otherwise defeating his true intention; (3) it follows that, if a bank does not have reasonable grounds for believing that there is fraud, it must pay; (4) mere suspicion or unease do not constitute reasonable grounds and are not enough to justify a bank in failing to act in accordance with a mandate; and (5) a bank is not required to act as an amateur detective.”

49.In Quincecare, supra, at 376e to h, Steyn J held :

“In judging where the line is to be drawn there are countervailing policy considerations. The law should not impose too burdensome an obligation on bankers, which hampers the effective transacting of banking business unnecessarily. On the other hand, the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties. To hold that a bank is only liable when it has displayed a lack of probity would be much too restrictive an approach. On the other hand, to impose liability whenever speculation might suggest dishonesty would impose wholly impractical standards on bankers. In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company. … And, the external standard of the likely perception of an ordinary prudent banker is the governing one.” [emphasis added]

50.In Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340, CA, at 1356E-G, May LJ referred with approval to Steyn J’s analysis in Quincecare :

“For my part I would hesitate to try to lay down any detailed rules in this context. In the simple case of a current account in credit the basic obligation on the banker is to pay his customer's cheques in accordance with his mandate. Having in mind the vast numbers of cheques which are presented for payment every day in this country, whether over a bank counter or through the clearing bank, it is, in my opinion, only when the circumstances are such that any reasonable cashier would hesitate to pay a cheque at once and refer it to his or her superior, and when any reasonable superior would hesitate to authorise payment without inquiry, that a cheque should not be paid immediately on presentation and such inquiry made. Further, it would, I think, be only in rare circumstances, and only when any reasonable bank manager would do the same, that a manager should instruct his staff to refer all or some of his customers’ cheques to him before they are paid. In this analysis I have respectfully derived substantial assistance from the material parts of the judgment of Steyn J in [Quincecare] …” [emphasis added]

51.In the same case, Parker LJ held at 1378B-D :

“The question must be whether, if a reasonable and honest banker knew of the relevant facts, he would have considered that there was a serious or real possibility, albeit not amounting to a probability, that its customer might be being defrauded, or, in this case, that there was a serious or real possibility that Cass was drawing on the client account and using the funds so obtained for his own and not the solicitors’ or beneficiaries’ purposes. That, at least, the customer must establish. If it is established, then in my view a reasonable banker would be in breach of duty if he continued to pay cheques without inquiry. He could not simply sit back and ignore the situation. In order so to establish the customer cannot, of course, rely on matters which a meticulous ex post facto examination would have brought to light. Such an examination may well show that it was indeed obvious what Cass was doing, but in the present case the inquiry is simply whether Mr Fox [the branch manager of the bank], and therefore the bank, had, on the basis of the facts and banking practices established at the time, reason to believe that there was a serious possibility that Cass was misusing his authority to sign under the mandate in order to obtain and misapply the cash handed to Chapman [a clerk employed by the solicitors] in fraud of the solicitors.” [emphasis added]

52.In assessing whether the bank was put on inquiry, factors such as (i) the standing of the corporate customer; (ii) the bank’s knowledge of the signatory; (iii) the amount involved; (iv) the need for a prompt transfer; (v) the presence of unusual features; and (vi) the scope and means available to the bank for making reasonable inquiries are relevant: Quincecare at 377a-c and DEX Asia Ltd v DBS Bank (HK) Ltd [2009] 5 HKLRD 160 at §56 where Deputy Judge Chua SC emphasised the need to consider the particular facts before the court.

53.The authorities show that the threshold which triggers the banker’s duty to make inquiry is high.  In Quincecare, Steyn J held at 377a-c and 377e-f :

“Everything will no doubt depend on the particular facts of each case. ... But there is one particular factor which will often be decisive. That is the consideration that, in the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of instinctive disbelief.

…

… trust, not distrust, is also the basis of a bank’s dealings with its customers.  And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company.”

54.Similarly, in Lipkin Gorman (CA), May LJ held at 1356F-G that :

“it would … be only in rare circumstances, and only when any reasonable bank manager would do the same, that a manager should instruct his staff to refer all or some of his customers’ cheques to him before they are paid.”

55.Recently, in Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2018] 1 WLR 2777, CA, putting the Quincecare duty in context, Sir Geoffrey Vos C held at 2810G to 2811C that :

“First, we were told by Mr Miles that this is the first case where the court has found against a bank in respect of the Quincecare duty. That is because it will be a rare situation for a bank to be put on inquiry; there is a high threshold. … the banker’s duty only arises where, abnormally, the banker is put on inquiry by the particular circumstances. As Steyn J said in Quincecare: trust, not distrust, is the basis of a bank’s dealings with its customers; and full weight must be given to this consideration before one can conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company.” [emphasis supplied]

56.On behalf of the Defendant, Mr Scott SC (appeared with Mr Hui) was critical over the Plaintiff’s approach to or understanding of the Defendant’s duty owed to it.  Where it was suggested by the Plaintiff that the Defendant had a duty to detect and prevent the wrongdoings of the Rogue Directors, was contractually obliged to detect the fraud of the wrongdoing directors or had a duty to monitor the transactions on the Account, such propositions were contrary to the authorities.

57.I am inclined to agree with Mr Scott.  The authorities suggest that the duty of inquiry is only triggered in clear case.  It is a duty not to facilitate any fraud practised on its customer.  It is not the function of a bank to act as a fraud detector.  Had it been otherwise, banks would have to employ teams of additional and specialist staff to carry out such detective work.  This is contrary to the banking system or relationship which is built on trust. 

58.This brings me to another criticism of Mr Scott over the conduct of this trial by the Plaintiff in respect of the internal policies or guidelines of the Defendant (Policies).  Considerable amount of time was spent by Mr Kat SC, who appeared for the Plaintiff with Mr Ng, on the Policies as if they prescribed the duty of care in question.  However, they were not pleaded as part of the “red-flags” which gave rise to the Defendant’s duty of inquiry.

59.In my view, the relevance of the Policies rests in the fact that they tend to shed some light on what a reasonable and prudent banker might do at the relevant time (a point accepted by Gopalakrishnan).  However, this case is not about whether the Policies were followed by the Defendant’s staff or how well they were followed.  The Plaintiff is bound by its pleaded case on the red-flags, which will be considered below. 

60.Further, Mr Scott is right to point out that the Policies were not made known to the customers, nor did they not form part of the contract between the Plaintiff and the Defendant. 

Fraud of the Rogue Directors

61.Before the red-flags are considered, I should dispose of the issue concerning the proof of the fraud of the Rogue Directors.  The Defendant’s challenge in this regard can be understood.  Surprisingly, the Plaintiff had not even tried to sue any of the Rogue Directors to recover its loss.  No report was made to the police about the fraud.  It was said by Parameswara that the Plaintiff could identify no asset owned by the Rogue Directors which might justify legal proceedings against them.

62.Whilst I accept that the court should in these circumstances approach the Plaintiff’s case with circumspection, on balance, I find that the Plaintiff has proved that it was defrauded by the Rogue Directors to the tune of about US$51.64 million. 

63.I agree with Mr Kat that the fraud of the Rogue Directors had been sufficiently pleaded.  In short, the Plaintiff pleaded that they had fraudulently diverted the money in the Account to themselves for their personal benefit, and not in good faith or to further the interest and business of the Plaintiff. 

64.Parameswara’s evidence is that “none of the [PI] and Disputed Payments were authorized or ratified either by [the Plaintiff] or by its shareholders”, and “none of the Disputed Payments was used for investment services associated with [the Account] or was in any way relevant to the purpose and objective of [the Plaintiff].  Instead, they were remitted into the Rogue Officers’ own pockets for their own benefits.  The Rogue Officers’ act of enriching themselves with [the Plaintiff’s] monies without [the Plaintiff’s] or its shareholders’ permission or consent could not possibly be an act in promoting [the Plaintiff’s] interest”.  Such evidence was not challenged.

Red-flags

65.As I have indicated above, it is a matter of fairness that the Plaintiff be confined to its pleaded case.  It is evident from the cross-examination of Chan and Gopalakrishnan that various unpleaded features had assumed considerable prominence. 

66.For instance, it is alleged that Schedule 2 of the Mandate: “(List of officers and directors other than those mentioned in Schedule 1)” should have been completed as part of the Account opening procedure, and the failure to do so had “disabled [the Plaintiff] from meaningful monitoring or detecting the Account”[5]. This is a serious allegation which cannot be found in the Plaintiff’s pleading.  Chan was evidently surprised when she was cross-examined on the subject. I have to say that it is not clear what was the basis for suggesting that Schedule 2 should have been completed.  There is no reason to doubt Chan’s evidence that Schedule 2 was only applicable when the signatories under Schedule 1 were not the directors of the customer authorised under a board resolution[6].

67.Another example is the allegation of the Plaintiff concerning Hasan as a public figure.  Hasan only became a public figure in March 1998, shortly before the closure of the Account, by reason of his office as Minister of Trade and Industry.  Many questions were asked of Gopalakrishnan about the need for reviewing an account with a public figure as a signatory pursuant to a 1997 Policy, which was not implemented at the time when the Account was closed[7]. It is difficult to understand how that subject could assist the Plaintiff’s case.

68.Much of the challenges made in the cross-examination of Chan and Gopalakrishnan were based on hindsight and with a mind to look for suspicious circumstances. This is not the applicable test. 

69.I now turn to the pleaded red-flags.  

(1)   Lack of apparent business connection between the Disputed Payments and the Plaintiff

70.There is no dispute that the Defendant, in particular Hadimulya, was aware of the fact that the Plaintiff was in the insurance business.  Save for the payments to an unidentified account held with the Defendant’s Jakarta branch, all the Disputed Payments were made to the known officers of the Plaintiff with the exception of US$100,035 which went to Ponto (there is no clear evidence whether the Defendant or its staff knew about Ponto’s position in the Plaintiff).

71.Mr Scott submitted that there were legitimate reasons for the Plaintiff to pay large amounts of money to the Rogue Directors, including remunerations and, in the case of Hasan, dividends.  There is indeed evidence of payments of legitimate remuneration to them.  On the other hand, these payments were made once a year, and although the payments were of significant amount, they were dwarfed when compared with the Disputed Payments. 

72.I do not believe that the Defendant can simply rely on the proposition that, eg, the number of times where legitimate payments were made to the Rogue Directors was a matter which an outsider would not know.  The point here is that from June 1994 to July 1998 there were 25 (or 26) payments made from the Account and most of which went to the Rogue Directors personally, and there was no apparent connection between such payments and the business of the Plaintiff. 

73.Further, there was no other material activity in the Account during the period of time apart from the payments into the Account from YHT, TRB London and TIC and the subsequent transfer out via the Disputed Payments: see Annex 1 of the Plaintiff’s Opening Submissions, which is attached hereto as Annex II with redaction of account numbers. 

74.It might be the case that this feature alone would not trigger a duty of inquiry, but this feature did not stand alone. 

(2)   The PI were signed by those who would benefit from them

75.All the available PI were signed by Harsono and Sunjaya.  It is right that for the payments to Hasan and Ponto, this point cannot be made. This court also bears in mind Gopalakrishnan’s evidence that the Defendant was entitled to take comfort in the fact that according to the Mandate, any 2 out of 3 authorised signatories (who were described by the witness as the top echelon of the Plaintiff) must sign to give valid instructions, as the Defendant would not normally expect two such persons to collude and commit a fraud with their company’s own account. 

76.However, when one examines the evidence to see if the Defendant had reasonable ground(s) for believing that the instruction it received was an attempt to misappropriate the funds of the Plaintiff, I do not believe that this indicium should be ignored, and the distinction that some of the PI were not signed by those who would benefit from them is a little fine.

77.Giving due weight to Gopalakrishnan’s evidence identified above, this is again a feature which might not have by itself called for an inquiry by the Defendant.

(3)   The pattern of payment

78.This is a powerful indicium that there was something wrong with the PI.  The point is well demonstrated with the aid of Annex II from which it can be seen that the payments from YHT, TRB London and TIC, most of which exceeded US$1m, all went out of the Account together with the accrued interest.  Further, the PI all came within a short period of time, mostly within 2 weeks of payment (see Annex I).  The Plaintiff’s suggestion that the Account appeared to be have been used as a temporary repository of funds is justified. 

79.Gopalakrishnan said in evidence that the transaction pattern was not unusual for an operational account of a private company, and he maintained that there was nothing which “jumps out” from the same.  With respect, it appears to me that Gopalakrishnan was over-protective with the Defendant, and I am inclined to treat this part of his evidence with caution.  In any case, whether the Defendant was put on inquiry is ultimately a question for this court.

80.In my view, when this feature was considered in conjunction with the previous 2, they presented a picture which should have alarmed a reasonable and prudent banker, ie, there was a serious or real possibility that the Plaintiff was defrauded by its directors.  The Account was operated by 3 directors as a temporary depository and the monies paid into the Account were duly paid out to themselves with no apparent connection with the business of the Plaintiff.  All these features must have been known to the RM who handled the Account.

81.Much to her credit, Chan accepted under cross-examination that: (i) that the RM should have considered the common features of the PI and the pattern of the Disputed Payments[8]; (ii) had the RM looked at the previous transactions on 23 November 1995 or on each PI thereafter, she would have seen that the Account was being used as a temporary repository for funds[9]; and (iii) that the Disputed Payments themselves were unusual[10].

82.In the circumstances of this case, I am in no real doubt that the Defendant was indeed put on inquiry.  However, it must be said that the pattern would not have emerged from the beginning.  In cross-examination, Mr Kat suggested that by the 3^rd of the Disputed Payments, a pattern would have emerged.  I believe that the suggestion is fair and I agree with it.

(4)   The HAM arrangement

83.I do not believe that there was anything untoward with the HAM service, bearing in mind in particular that the signatories were all based in Jakarta.  On the other hand, it is a fact that with such an arrangement in place there was a risk that the Plaintiff might not have seen the bank documents of the Account.  Gopalakrishnan recognised that risk in his evidence in cross-examination[11].

84.This feature fortifies my view that the Defendant was put on inquiry by the time it received the PI for the 3^rd Disputed Payment, sometime at the end of November 1994 (the PI is missing): see Annex I.

(5)   Other pleaded red-flags

85.They can be dealt with collectively because they do not add up to much.  Firstly, lack of letterhead for the PI and acting on fax instructions. There was no prescription for such requirements.  It must be said that on the face of the PI, and despite the difficulty with legibility, it can be seen that they were subjected to various checking by the Defendant. 

86.Secondly, irregularities with the account opening documents. This allegation is simply not made out on the evidence.  I fail to see what material irregularity there was.  As regards the delay in preparing the fresh opening documents after the migration of the Account (see para 22 above), I accept the Defendant’s evidence that the migration of all the accounts from CISL was a very substantial task and the process took some time.  Chan said that the Account would continue to be governed by the existing Mandate before the fresh opening documents were prepared.  I see nothing in this alleged red-flag. 

87.Thirdly, the report to JFIU (see para 33 above).  I agree with Mr Scott that this is a red-herring.  There is no merit in any suggestion that the report in 2001 would somehow indicate that the Defendant was put on inquiry in 1994 to 1998.

Lack of inquiry by the Defendant

88.It is not in dispute that the Defendant had taken no action to inquiry about the proprietary of the PI.  I agree that the Plaintiff is entitled to rely upon the dicta in DEX (supra) at §58 :

“If an honest and reasonable banker would be put on enquiry, but the bank does not make enquiries, then it would be negligent: Lipkin Gorman v Karpnale Ltd (at p 1378 B-C); Selangor United Rubber Estates Ltd v Cradock [1968] 1 WLR 1555 per Ungoed-Thomas J (at p 1607C):

‘If inquiry ought to be made, and no inquiry is made, then the weight of authority establishes, in my view, that it is to be assumed that a true answer would be given; and, if no inquiry is made, that negligence is established. (Emphasis added.)’”

89.In the premises, I hold that the Defendant was in breach of its duty of care to the Plaintiff.

Limitation

90.There is no dispute that, prima facie, the limitation period for the Plaintiff’s causes of action had expired by July 2004 at the latest (6 years from the last Disputed Payment).

91.It is trite that once the defence of limitation is pleaded, the onus is on the Plaintiff to prove that its causes of action accrued within the limitation period: Kensland Realty Ltd v Tai Tang & Chong (2008) 11 HKCFAR 237, §§67 and 153.  In this case, the Plaintiff has to demonstrate why the limitation period did not expire until 2 February 2007.

92.The Plaintiff attempts to answer the limitation defence by: (i) contending that there is no limitation period which bars its claim in reconstitution of the Account; and (ii) relying on concealment under s.26(3) of the Limitation Ordinance, Cap 26 (Ordinance).

Reconstitution of the Account

93.Central to this argument of the Plaintiff is the proposition that the unauthorised Disputed Payments and the unauthorised closure of the Account were of no effect.  The Plaintiff was therefore entitled to demand the reconstitution of the Account without the wrongful debits on 6 October 2006, and any limitation period would only run from that day.

94.The Plaintiff relies on Paget’s Law of Banking, 14^th edn, [4.41] :

“As an unauthorised debit by the bank is simply a nullity and of no effect on the balance owing by the bank to the customer, it may follow that the customer can challenge such a debit more than six years after it is made, since the customer is at that time entitled to demand the repayment of the true balance owing.”

95.The Plaintiff also relies on Joachimson v Swiss Bank Corporation [1921] 3 KB 110, at 131 for the proposition that a demand by the customer is a prerequisite to the accrual of a cause of action against his banker.

96.I agree with the Defendant that the fragility of the Plaintiff’s argument lies in the closure of the Account in July 1998.  In Chitty on Contracts, 32^nd edn, vol 1, [28-039], the learned editors commented that: “[i]f the relationship of bank and customer is terminated before a demand is made, e.g. by dissolution of the bank, the money thereupon becomes repayable”.

97.In Russian Commercial and Industrial Bank [1955] Ch 148, at 156-157, Wynn-Parry J held as follows :

“For myself I prefer to approach this aspect of the matter from a different point of view. The last paragraph in the judgment of Atkin LJ in Joachimson v Swiss Bank Corporation proceeds, as I read it, on the assumption of the continued existence of the relationship of banker and customer; it is an incident of that relationship so long but only so long as it lasts; just as the banker has the corresponding obligation not to stop acting as the customer’s banker without reasonable notice. But if the relationship of banker and customer is terminated, there can be no need for either of those incidents of that relationship to continue, and indeed they must cease with the termination of the relationship. Thereafter, it appears to me that on such termination any balance belonging to the customer in the hands of the banker becomes payable to the customer.”

98.Mr Kat argued that the closure of the Account was unauthorised and of no effect.  I understand the Plaintiff to be saying that the closure of the Account was not for its purpose and/or was in breach of the fiduciary duties owed to it by the Rogue Directors.  I am unable to accept the Plaintiff’s argument.  It is unsupported by the authorities referred to this court, and is tantamount to attributing to the Defendant knowledge of the wrongdoings by the Rogue Directors.

99.The incontrovertible fact is that that Account was closed in accordance with the Mandate.  The Defendant might have been negligent in not discharging its duty to make inquiry, but there is no basis to suggest that it knew of any wrongdoing by the Rogue Directors.  Further, if the opening of the Account was authorised, I fail to see why the Defendant was not entitled to act on the Mandate to close it.  If necessary, I would have held that the general rules of attribution applied to the closure of the Account (see Attribution below). 

100.With respect, the proposition that the closure of a bank account may be reopened without time constraint after the customer has discovered that, eg, it involved a breach of fiduciary duty of its director is indeed a stark one and for which I can see no adequate legal support. 

101.Two cases had been referred to this court involving unauthorised payments in relation to a bank account.  Neither of them assists the Plaintiff.  Firstly, National Bank of Commerce v National Westminster Bank [1990] 2 Lloyd’s Rep 514, where the bank made 8 debits based on 8 mail transfer orders purportedly signed by 2 authorised officers of the customer.  The latter alleged that none of the transfer orders was in fact signed by such officers. There was no allegation of fraud. 

102.Secondly, Limpgrange Ltd v Bank of Credit and Commerce International SA [1986] FLR 36 was a case where the bank acted upon oral instruction which was plainly in breach of the mandate.

103.The argument that the closure of the Account was ineffective for purposes of the running of time under the Ordinance due to the fraud or breach of fiduciary duty of the Rogue Directors sits poorly with the legislative policy or scheme thereunder.

104.In Hotung Investment (China) Ltd v Ernst & Young (a firm) [2012] 5 HKLRD 421, per Kwan JA at §25 :

“It is common ground that when construing a provision of the Limitation Ordinance, it is the court’s duty to construe such provision so as to promote its underlying legislative policy (Kensland Realty Ltd v Tai Tang & Chong at p.247H, para.2).  Both counsel have referred us to the words of Chan PJ at p.254H, para.28, in which he stated that the purpose of having limitation provisions is “to ensure on the one hand, that a defendant is not unduly vexed by stale claims to his disadvantage particularly when the relevant evidence has been lost and the memory of the witnesses has failed; and on the other hand, that a plaintiff is not unfairly prejudiced by a lack of knowledge of the relevant facts required to bring a claim until after it is time-barred”.”

105.Under the Ordinance, the Plaintiff may be allowed to pursue a claim which is prima facie time-barred if it can meet the requirements under s.26.  There is no scope for the reconstitution argument made in this case.

106.In the premises, I am unable to agree to this argument of the Plaintiff.

S.26 of the Ordinance

107.This section provides a means by which a plaintiff can delay the accrual of limitation period.  The relevant provisions are :

“(1) Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either –

…

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant;

…

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

…

(3) For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.” [emphasis added]

108.In Annotated Limitation Ordinances of Hong Kong (Cap 347), the learned editors commented at [26.04] that :

“In Hotung Investment (China) Ltd v Ernst & Young (a firm) & Ors …, the Court of Appeal indicated that this section was directed at the knowledge of the plaintiff, not the ability to sue. Historically, this section was enacted to reflect the equitable principle that a statute should not be used as an engine of fraud and ‘deliberate concealment’ was merely a species of fraud. This section was construed strictly against plaintiffs; it is for a plaintiff to establish ‘he falls strictly and literally within the exception the benefit of which is given to him by the statute’. References to the ‘plaintiff’ in sub-s (1) must be the same person as the person on whom the defendant has practised fraud, deliberate concealment, etc. In the case of a corporate plaintiff, the special rule of attribution should be applied to the substantive rule in this section to give effect to the legislative policy to ensure that a plaintiff is not prejudiced by any period of delay created by fraud, deliberate concealment or mistake, and which the plaintiff had not discovered or could not with reasonable diligence have discovered.”

109.As noted above, the Plaintiff seeks to rely on s.26(3) of the Ordinance.  However, before the court turns to the provisions thereunder, the issue of attribution has to be resolved.

Attribution

110.The Defendant contends that the Plaintiff cannot rely on s.26 because it knew about the facts relevant to its causes of action.  This turns on whether the knowledge of the Rogue Directors was attributable to the Plaintiff.  If so, for the purpose of the Ordinance, the Plaintiff would be treated as having knowledge of the PI and Disputed Payments at all material times.  S.26 would become irrelevant. 

111.The starting point is that directors’ knowledge is, by virtue of the principles of agency, attributed to the company.  This is known as the “general rules of attribution”, see Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, per Lord Hoffmann at 506 :

“… The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company’s primary rules of attribution, count as the acts of the company. And having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort.”

112.However, there are cases where special rules of attribution apply, such that the directors’ knowledge is not attributed to the company.  A common example is the “fraud exception” applied in cases where the company sues its fraudulent directors for their wrongdoing. Applying the general rules in such cases would have defeated the company’s claim in favour of the fraudsters.

113.Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 is the guiding authority in this jurisdiction.  In that case, the company’s accounts were systematically falsified by directors in order to deceive the company’s creditors, as a result of which excessive tax was paid on the inflated profits.  After the liquidators took over the company, they claimed a refund of that excess tax.  The CIR objected on the ground that since the company had knowledge of the fraudulent tax returns, the company was not prevented from lodging an objection to the assessment within the statutory time limit of one month.

114.The CFA ruled in favour of the CIR, holding that in the context of the statutory scheme under the Inland Revenue Ordinance, Cap 112, a director’s knowledge should be generally attributed to a company even though the director is fraudulent.  It would frustrate the statutory purpose if the “fraud exception” were to intrude into the scheme.  The relevant parts of the judgment are :

“131. … The crucial distinction depends on the nature of the proceedings in which the issue of attribution arises. On one side there are what Patten LJ (in Bilta, [34]) called the liability cases, such as El Ajou, Meridian, McNicholas and Morris. In them a company is being sued by a third party (which may be an official body) because the company is responsible for dishonest conduct on the part of one or more of its directors or employees. Here the fraud exception does not apply, even if the company is in some sense a victim. On the other side are what may be called the redress cases, such as Gluckstein, Belmont, Beach and Bilta itself. In cases of this sort a company is seeking to make its own delinquent director or employee (probably by then an ex-director or ex-employee), or an accomplice of such a person, accountable for the loss that the company has suffered. That is the situation in which the fraud exception applies, because it would be absurd and unjust to permit a fraudulent director or employee to be able to use his own serious breach of duty to his corporate employer as a defence.

…

134. The liquidators’ claim against the Commissioner fits even less comfortably into either of the “liability” and “redress” categories. The Commissioner is not the accomplice of a fraudster. The Commissioner’s position has a faint resemblance to that of insurers or auditors in that they are all third parties from whom a corporate employer hopes to recoup, indirectly, part of a loss that it has suffered as the result of a director’s or employee’s misconduct. But there are obvious differences. The Commissioner, unlike insurers or auditors, cannot be expected to make inquiries about a taxpayer’s business in such a way as to become well acquainted with it. Furthermore, the Commissioner’s functions, powers and obligations are to be found wholly in the sphere of public law, and in particular in the IRO. An essential part of the scheme of the IRO is that the Commissioner should be able to make assessments on the basis of the taxpayer’s returns. It would frustrate this statutory purpose if the fraud exception were to intrude into this scheme. The fraud exception must be limited to its proper, limited role, that is of barring an unmeritorious defence in claims by corporate employers against dishonest directors or employees, or accomplices who have conspired with them.

135. The liquidators cannot therefore rely on the proviso to s.64(1) of the IRO, because MGET was not prevented from lodging an objection within time; it chose not to do so.  Nor can the liquidators rely on s.70A, because MGET must be taken as having known that its returns were false, and (to summarise Extramoney), a deliberate lie is not an “error” for the purposes of that section.” [emphasis added]

115.The question for the court is this: in the context of limitation period, and bearing in mind the nature of these proceedings, should the special rules of attribution of knowledge apply so that the Plaintiff (free of the knowledge of the Rogue Directors) can invoke s.26 of the Ordinance?

116.This case does not fall within the “liability” or “redress” categories.  It is a claim against “third party”.  Like the claim in Moulin Global (supra), it has some resemblance with a claim against auditors. 

117.However, the relationship between client and auditors differs significantly with that between customer and bank.  In the case of auditors, they were professionally trained and paid to look out for irregularities in the books of their clients.  As analysed above, the duty of a bank is a negative one in that it should not allow itself to facilitate any fraud practised on its customers. 

118.I do not believe that the Policies take the Plaintiff’s case much further.  The Defendant might have set a certain standard for itself, eg, in respect of fraud detection, but that was not part of the contract with the Plaintiff.  A bank who had set a high standard for itself should not be penalised for it in that it might attract a heavier legal responsibility as compared with a competitor who applied a lower standard. 

119.At worst, the Defendant was negligent in not spotting the indicia which put it on inquiry.  I see nothing in the nature of these proceedings to justify the application of the special rules of attribution. 

120.In the context of the Ordinance, it provides under s.26 for delay in the running of time in cases of fraud, concealment and mistake.  The fraud and concealment have to be of/by the defendant.  That tends to militate against the application of the special rules. 

121.In The New China Hong Kong Group Ltd v Ernst & Young, HCCL 41/2004, unrep., 29 August 2008, Recorder A Ho SC held (in the context of s.31 of the Ordinance) at §92:

“Insofar as knowledge of corporate bodies are relevant for the purpose of section 31, there appears nothing in the provision – whether as a matter of policy or interpretation of the language – to require the general rules of attribution to be displaced or adjusted.”

122.I am compelled to the same conclusion in respect of s.26, and this action must fail.

123.However, I proceed to deal with the remainder of the limitation issues in case this conclusion is wrong. 

Deliberate commission of a breach

124.The Plaintiff seeks to pray in aid the “deliberation concealment” (by the defendant of any fact relevant to its right of action) limb (s.26(1)(b)) by relying on s.26(3).  To begin with, the Plaintiff must show that there was a deliberate commission of a breach of duty.

125.Cave v Robinson Jarvis & Rolf (a firm) [2003] 1 AC 384 is an authority on point.  It was a case involving alleged negligence of solicitors.  Lord Millett examined the English equivalent of s.26 of the Ordinance and held that :

“23 … in enacting the 1980 Act Parliament substituted ‘deliberate concealment’ for ‘concealed fraud’. This is a different and more appropriate concept. It cannot be assumed that the law remained the same. But reference to the old law explains why Parliament enacted section 32(2) and did not rely on section 32(I)(b) alone to cover the whole ground. With all reference to fraud or conscious impropriety omitted, there was an obvious risk that ‘deliberate concealment’ might be construed in its natural sense as meaning ‘active concealment’ and not as embracing mere non-disclosure. Section 32(2) was therefore enacted to cover cases where active concealment should not be required. But such cases were limited in two respects: first, the defendant must have been guilty of a deliberate commission of a breach of duty; and secondly, the circumstances must make it unlikely that the breach of duty will be discovered for some time.

24 Given that section 32(2) is (or at least may be) required to cover cases of non-disclosure rather than active concealment, the reason for limiting it to the deliberate commission of a breach of duty becomes clear. It is only where the defendant is aware of his own deliberate wrongdoing that it is appropriate to penalise him for failing to disclose it.

25 In my opinion, section 32 deprives a defendant of a limitation defence in two situations: (i) where he takes active steps to conceal his own breach of duty after he has become aware of it; and (ii) where he is guilty of deliberate wrongdoing and conceals or fails to disclose it in circumstances where it is unlikely to be discovered for some time.  But it does not deprive a defendant of a limitation defence where he is charged with negligence if, being unaware of his error or that he has failed to take proper care, there has been nothing for him to disclose.”

126.In similar vein, Lord Scott held that :

“58 … The relevant words in section 32(2) are ‘deliberate commission of a breach of duty … amounts to deliberate concealment of the facts involved in that breach of duty’. These are clear words of English. ‘Deliberate commission of a breach of duty’ is to be contrasted with a commission of a breach of duty which is not deliberate, ie, a breach of duty which is inadvertent, accidental, unintended – there are a number of adjectives that can be chosen for the purpose of the contrast, and it does not matter which is chosen. Each would exclude a breach of duty that the actor was not aware he was committing.

…

60 … Subsection (2), however, provides an alternative route.  The claimant need not concentrate on the allegedly concealed facts but can instead concentrate on the commission of the breach of duty.  If the claimant can show that the defendant knew he was committing a breach of duty, or intended to commit the breach of duty – I can discern no difference between the two formulations; each would constitute, in my opinion, a deliberate commission of the breach – then, if the circumstances are such that the claimant is unlikely to discover for some time that the breach of duty has been committed, the facts involved in the breach are taken to have been deliberately concealed for subsection (I)(b) purposes.”

127.There is no basis for suggesting that the Defendant was guilty of a deliberate breach of duty.  I therefore hold that the Plaintiff cannot rely upon s.26.

128.For completion, I should mention 2 other points.  Firstly, there may be a question whether the fraud of the Rogue Directors constitutes part of the “circumstances” which should be considered under s.26(3).  In particular, whether the Plaintiff is entitled to argue that such fraud prevented it from discovering the Defendant’s breach of duty.  It was a point raised by the court in final submissions, and the parties did not have the opportunity to fully consider or research on it.  I therefore resist from expressing a view on the matter.

129.Secondly, even if the Plaintiff were able to rely upon s.26(3), I would not have accepted that it had discharged the burden of proving that it could not with reasonable diligence have discovered the concealment until mid-February 2001 (see para 43 above). 

130.The relevant legal test may be found in: (i) Paragon Finance Plc v Thakerar & Co [1999] 1 All ER 400 at 418c-d, per Millett LJ (as he then was); (b) Limitation Periods by McGee, 8th edn, [20.004]; and (c) Angela Yang v AXA Wealth Management (HK) Ltd, HCA 2016/2014, unrep., 30 November 2017 at §54, per Chow J.

131.It must be borne in mind that the Plaintiff, being the largest insurer in Indonesia, had all the resources at its disposal.  Further, it had been cheated out of a very substantial sum of money.  However, the evidence it relies upon did not address adequately or at all the key contentions relied upon by the Defendant. 

132.Firstly, Abdaoe was at all material times a director of YHT and TRB London, and the President Commissioner of the Plaintiff.  He was also a director of TIC until 6 February 1998.  In the absence of evidence to the contrary, it must be assumed that Abdaoe was familiar with the financial affairs of these companies.  In particular, the payment of large sums of dividends from these companies to the Plaintiff (which were subsequently dissipated via the Disputed Payments).  There is indeed evidence that Abdaoe was aware of the declaration of dividends by YHT and that such dividends were reported in its annual accounts.  Parameswara had no quarrel with such evidence.  

133.There is no proper explanation by the Plaintiff, eg, why Abdaoe’s knowledge about the dividends was not reported to the Plaintiff, or why he had failed to discharge his duties to ensure that large sums of dividends destined to the Plaintiff were safely received.  If Abdoae did in fact fail to so discharge his duties, whether the Plaintiff had made enquiries with him, and if not, why not. 

134.The Plaintiff’s case, like the fact that it took no action to pursue the Rogue Directors for redress, is shrouded in mystery. 

135.Secondly, the downfall of President Suharto in May 1998 was followed by well-publicised investigation of the Plaintiff’s business affairs and those of Hasan.  The latter was arrested in early 2000 on fraud and corruption charges.  Given such unusual circumstances, it must be incumbent upon the Plaintiff to adequately explain what action it had taken to look into its own financial affairs, especially those conducted by Hasan.  The Plaintiff’s evidence fell far short of discharging its burden of proof.

136.Under pressure of cross-examination, Parameswara admitted that if the Plaintiff had exercised reasonable diligence, it could have discovered the diversion of funds much earlier, certainly by 1995[12]. Likewise, Mahmud admitted that the staff at TIC who completed the TT transfers of 2 payments totalling US$2.9m to the Account (and probably also the general manager to whom they reported to) must have known of such payments[13].

137.Finally, it must be added that the Plaintiff relies primarily on the evidence of Parameswara on this issue, instead of calling any of the other board members who took no part in the wrongdoings of the Rogue Directors.  Parameswara had no first hand knowledge to offer in respect of the events before February 2001.  Moreover, he was not an impressive witness, having been shown in cross-examination to have made unreliable accusation against the Defendant[14].

Remaining issues

138.It is unnecessary to deal with the remaining issues given that the Plaintiff claims are time-barred.  However, out of deference to counsel, I would set out succinctly my decisions on them. 

Reckless assistance

139.The Plaintiff also alleged that: (a) the Defendant was “reckless” and “turned a blind eye” to the Rogue Directors’ diversion of funds for their personal benefit and acting in breach of fiduciary duties; and (b) the Defendant “recklessly assisted” the Rogue Directors in the breach of their fiduciary duties.  I agree with the Defendant that these allegations involve an element of dishonesty on the part of the accused (see Hui Cheung Fai v Daiwa Development Ltd, HCA 1734/2009, unrep., 8 April 2014, DHCJ E Fung SC at §130).

140.With respect, these very serious allegations are simply unsupported by the evidence.  They were not even put to the Defendant’s witnesses.  I have no hesitation to dismiss this part of the Plaintiff’s case.

Contributory negligence

141.The Defendant contends that the Plaintiff is partly responsible for the loss it suffered by reason of its own negligence. 

142.Firstly, according to the findings above, the Defendant is only responsible for the loss arising from the 3^rd Disputed Payment where a pattern of payment had emerged. 

143.Secondly, with respect, I am inclined to follow the English[15] and the current Australian approach where the defence of contributory negligence is available when the contractual duty of care co-exists with one owed in tort, despite the case of International Trading Co Ltd v Lai Kam Man [2004] 2 HKLRD 937 at §78, where Tang J (as he then was) followed the Australian authority of Astley v Austrust Ltd [1999] Lloyd’s Rep PN 758. 

144.In Hondon Development Ltd v Powerise Investments Ltd [2005] 3 HKLRD 605, §47, the Court of Appeal left the issue open after finding no contributory negligence on the facts of that case.  However, as noted by the CA (§57), Astley is no longer the law in Australian due to legislative changes.  Such changes have brought the law in Australia line with the English position.

145.Thirdly, the burden of proof here is on the Defendant.

146.Fourthly, there is no real answer to Mr Scott’s submissions that the Plaintiff could have prevented the wrongdoings in question had it put in place proper governance concerning its management and the management of its subsidiaries as well as its accounting.  The evidence is that the Rogue Directors did not at any material time constitute more than half of the Plaintiff’s Board of Directors.  The fact that Parameswara claimed that the Plaintiff did not know about the existence of YHT at the time of the wrongdoings speaks volumes.  This court is left with a distinct uneasiness that the Plaintiff has not proffer to the court what was actually going on with the Plaintiff, YHT, TRB London or TIC.

147.However, I do not agree with the Defendant that the apportionment of blame should be 80% on the part of the Plaintiff.  In my view, an equal division of responsibility between the Plaintiff and Defendant would be just. 

Exemption clause

148.The Defendant relies on Clause I(P) of its General Terms which provided as follows :

“[The Plaintiff] hereby agrees to release [the Defendant and its] nominee and agent and to indemnify and hold [them] harmless from and pay for any and all acts, omissions, negligence, claims, proceedings, demands, costs and expenses (including, without limitation, tax or other levy, interest or service charges and attorney's fees and expenses) in connection with all or any of the matters or investments in respect of this Agreement other than those done or incurred in bad faith on [the Defendant’s] part or as the direct result of [its] wilful default.”

149.Firstly, the General Terms were part of the contractual documents which only came into existence on 6 July 1995.  They could not apply to 3 Disputed Payments made previously totalling about US$14.5m.

150.Secondly, I agree with the Plaintiff that the Defendant cannot rely on Clause I(P) due to its “wilful default”.  That term was considered in Lee Ming Yueh v Broadway-Nassau Investments Ltd [2012] 5 HKLRD 208, which concerned a claim by an owner of a flat against the building manager for breach of duty under a DMC and the Building Management Ordinance, Cap 344 to maintain the roof, a common part of the building.  The CA (§27) referred with approval to the explanation of “wilful default” given by Bowen LJ in Re Young and Harston’s Contract (1885) 31 Ch D 168, 174-175 :

“The term “wilful default” … is not a term of art … Default is a purely relative term, just like negligence. It means nothing more, nothing less, than not doing what is reasonable under the circumstances - not doing something which you ought to do, having regard to the relations which you occupy towards the other persons interested in the transaction. The other word which it is sought to define is “wilful”. … it generally, as used in courts of law, implies nothing blameable, but merely that the person of whose action or default the expression is used, is a free agent, and that what has been done arises from the spontaneous action of his will. It amounts to nothing more than this, that he knows what he is doing, and intends to do what he is doing, and is a free agent.”

151.On the evidence, there is no question that the Defendant’s staff, in particular the RM, was aware of what they were doing.  There is no contrary submission in the Defendant’s Opening or Closing.

Conclusions

152.For these reasons, this action is dismissed with costs to the Defendant. 

153.I am grateful to counsel for their assistance.

Mr Nigel Kat SC and Mr Tom Ng, instructed by Holman Fenwick Willan, for the Plaintiff

Mr John Scott SC and Mr John Hui, instructed by Clifford Chance, for the Defendant

Annex I

Annex II