Dex Asia Ltd v. Dbs Bank (Hong Kong) Ltd and Others

CACV 245/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 245 OF 2007

(ON APPEAL FROM HCA 2361 OF 2006)

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BETWEEN

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Before : Hon Cheung JA and Chung J in Court

Date of Hearing : 15 November 2007

Date of Judgment : 6 December 2007

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J U D G M E N T

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Hon Cheung JA :

Application for security

1.The plaintiff is a foreign plaintiff.  The 1^st defendant is a local bank.  The plaintiff maintained an account in Hong Kong with the 1^st defendant.  It commenced action against the 1^st defendant and the 2^nd defendant who was at one time the director of the plaintiff to recover from them the sum of US$3.25 million.

2.The 1^st defendant applied for security for costs against the plaintiff on the ground that it was ordinarily resident out of Hong Kong.  The application was refused by the Master.  Saunders J dismissed the appeal by the 1^st defendant against the Master’s decision.  The 1^st defendant now appeals against the judgment of Saunders J. 

Background of the case

3.The background of this case is as follows. 

4.The 2^nd defendant was the sole director of the plaintiff.  He was also its sole authorized signatory of the plaintiff’s account with the 1^st defendant.  On 29 August 2006 Mr. Kazuhiko Moriya of the plaintiff informed Mr. Andy Sung of the 1^st defendant by email that the name of the authorized signatory would be changed : 

‘	FYI, from now on, I will be in charge of banking activities with regards to DBS (HK) acct.
	We will change authorized signor for this account to Ishibe, Omori and myself from Albert.
	Also, please always include Muramatsu ([email protected]) in the loop as he will be the main contact person for you from now on.
	Three of us hope to come down to your bank as early as next week if the situation allows to meet you and change authorized signors.
	Please kindly provide us with necessary documents to register our signatures as authorized signatures.’

5.The 1^st defendant then sent the account amendment forms to the plaintiff.  Although it was not apparent from the correspondence, certainly by August 30, 2006 the 1^st defendant was aware that the 2^nd defendant had left or resigned from the plaintiff.  This can be seen from the following email dated 30 August 2007 from Mr. Sung to Mr. Moriya

‘	The package of a/c opening forms are supposed to fulfill your need in account maintenance (as Albert Lin left and new authorized signed will be added), not for opening a ‘new’ bank account.  I trust we are on the same course of mind.’  (emphasis added)

6.On 12 September 2006 the plaintiff informed the 1^st defendant that it would remit US$248,007.50 and asked if the 1^st defendant would arrange the remittance.  The response came as follows :

‘

Please use the attached Telegraphic Transfer form to indicate the details of the requested remittance mentioned below.  Upon completion, you may fax the application to our remittance department 2376-3643 for processing.  Please note that according to our record, only “Lin Howe” is shown as the account authorizer of the bank accounts of Dex Asia Limited here at DBS.  If you require further info, feel free to contact us.  Thank you.’

7.On 13 September 2006 the plaintiff wrote to the 1^st defendant stating :

‘	Sorry to ask you, we will make remittance from holding company’s account in this time.
	But we are scheduling other remittance from DEX Asia’s accout (sic) at the end of this month.
	We would like to consult you again.’

8.The reply from the 1^st defendant on the same day was :

‘

If you plan to remit fund out of DEX Asia A/C and Mr. Albert Lin is resigned you may wish to update the signatory arrangement of DEX Asia as soon as possible.  Let me know if I can be of assistance in this signatory maintenance.  I believe you have already received from us a fresh set of account opening document, haven’t you?’  (emphasis added)

9.On 14 September 2006 Mr. Muramatsu of the plaintiff wrote again to Mr. Sung :

‘	Sure, we have received the fresh set.
	We also will to change the signatory to Ishibe, a new representative director of Design EXchange.
	I hear that in changing signatory, Ishibe have to go to Hong Kong.
	Does he need to go before the remittance of the end of this month?’

10.The reply from the 1^st defendant on the same day was :

‘

The formality to arrange the update of the a/c signatory has to be completed before a new remittance transaction taken place.  Unless the existing authorized signor is still available to execute a remittance order.  In your case, Mr. Albert Lin is resigned and a new authorized signor will replace his designation.  The new signor has to come to HK to complete the signatory update/revision.  Before he comes, please let me know have there been any changes in the board of director of DEX Asia.  Please give me a full director name list and if possible e-mail me a copy of the pass port of the new authorized signor.  Upon receipt of the required document, I shall tell you the next step after I read the required document.’  (emphasis added)

11.On 16 September 2006 the plaintiff wrote to the 1^st defendant :

‘	New directors of Dex Asia are given below.
	Masaki Ishibe (signor)
	Kiyoto Oomori (signor)
	Kazuhiko Moriya (signor)
	And they will go to Hong Kong sometime in the near future.   ’

12.The three representatives mentioned in the last e-mail came to Hong Kong at the end of September 2006.  According to the 1^st defendant they met Mr. Philip Chan,the Vice President, Corporate and Investment Banking of the 1^st defendant on two occasions : 28 and 29 September 2006.  It was clearly Mr. Chan’s understanding that the purpose of the meeting was for the plaintiff to change or update the authorised signatory of its account.  At the meeting the three representatives also informed that the 2^nd defendant had resigned as a director and the new director would be Mr. Ishibe.  They also provided Mr. Chan with the corporate documents of the plaintiff.  However, Mr. Chan said that these were old corporate records of the plaintiff and none showed that there was any change of directorship or resignation of directorship.

13.At the further meeting held on 29 September 2006 Mr. Chan informed the three representatives that the documents showed that there was no change of directorship of the plaintiff.  He asked for the updated corporate records. 

14.It was Mr. Chan’s case that :

‘	I told them unambiguously for no less than 2 times in the meeting that the authorized signatory of the Plaintiff’s Account would not be changed until and unless all the requisite update corporate documents of the Plaintiff are duly provided and given to the 1st Defendant.’

15.When the three representatives informed Mr. Chan that they did not know how to effect the change of directorship of the plaintiff and did not know which was the plaintiff’s secretarial firm, enquiries were made by Mr. Chan and he contacted the secretarial firm on the phone.  The representative of the secretarial firm informed Mr. Chan that there was no change of directorship of the plaintiff.  Mr. Moriya then spoke to her and asked her to update the corporate records of the plaintiff with regard to the change in directorship.  The representatives agreed that they would go to the secretarial firm to prepare the relevant documents. 

16.There was a dispute as to whether the following two documents were handed over by the representatives to the 1^st defendant on 29 September 2006 : the first was entitled ‘Resignation from Offic’ by the 2^nd defendant in which it was stated that :

‘	I resign from my office as a director of the Company as of 29 September 2006.
	I also hereby appoint the new director Mr Masaki Ishibe with immediate effect.’

17.The second document was a written resolution of the plaintiff passed on 29 September 2006 :

‘	Written Resolution of the sole director of DEX ASIA Limited passed on 29 September 2006.
	Resignation of Director :
	It is resolved that the resignation of Mr Lin Howe as the sole director of DEX Asia Limited be and hereby approved with immediate effect.
	It is further resolved that Mr Masaki Ishibe be and is hereby appointed as the new director of DEX Asia Limited with immediate effect.
	The adoption of the foregoing resolutions have been approved and consented to by the undersigned sole director of DEX Asia Limited.’

18.On 9 October 2006 the 2^nd defendant gave instruction to the 1^st defendant to transfer US$3.25 million to the account of a company called BBMF Corporation (‘BBMF’) which was also maintained with the 1^st defendant.  The transfer was effected and completed on the same day.  On 10 October 2006 the 1^st defendant at the plaintiff’s request froze the fund in BBMF’s account.

19.On 12 October 2006 the 1^st defendant received the updated corporate documents from the secretarial firm.  These documents showed that Mr. Ishibe had been appointed as the sole director of the plaintiff effective from 29 September 2006.  The 1^st defendant then updated the record of the plaintiff.

20.On 20 October 2006 BBMF obtained an injunction from the High Court against the 1^st defendant,

‘

restraining the Defendant whether acting by itself, its agents or servants, or any of them or otherwise howsoever be restrained until after Judgment in this Action or until further Order, from withholding of the funds or any part thereof now the Plaintiff (i.e. BBMF) deposited in the Saving Account of 494-470512278 held in the Defendant.’

21.The 1^st defendant then released the funds to BBMF and the money was then transferred by BBMF into another account maintained with HSBC. 

The principles on ordering security and exercise of discretion

Principles on customer’s mandate

23.The principles concerning the extent to which a bank can rely on the authority of an authorised signatory was discussed in Lipkin Gorman v. Karpnale Ltd. and another [1987] 1 WLR 987 at 1006 :

‘	(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.’

24.The English Court of Appeal in Barclays Bank Plc. v. Quince Care Limited and another [1992] 4 All ER 363 at 376 further held 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 (see proposition (3) inLipkin Gorman v. Karpnale Ltd. (1986) [1992] 4 All ER 331 at 349, [1987] 1 WLR 987 at 1006).  And, the external standard of the likely perception of an ordinary prudent banker is the governing one.

25.I agree with these principles and will apply them in this case.

Considerations by the Judge

26.Before the Judge an issue was taken whether the plaintiff was ordinarily resident out of Hong Kong.  This point was not pursued by the plaintiff in this appeal. 

27.While I agree with the view that it is not the Court’s function in an application for security for costs to conduct a preliminary inquiry at deciding the ultimate success or failure of the claim and that should only be done in a simple case : Porzelack and Sunchase International Group (China) Ltd & others v. Vincor Group of Companies (Investment) Ltd & others [2004] 1 HKLRD 731, in this case both parties had gone into details on the merits of the case.  It is clear from a reading of the judgment that the Judge was of the view that the plaintiff had shown that it has a high degree of probability of success at the trial. 

The 1st defendant’s case

28.Mr. Shieh S.C. who appeared together with Mr. Lawrence Ng as counsel for the 1^st defendant, argued that the 1^st defendant was entitled to rely on the mandate which clearly provided that the 2^nd defendant was the sole authorised signatory of the plaintiff.  Further the 1^st defendant had told the plaintiff that the 2^nd defendant remained to be the authorised signatory and that the new signatory could only sign after the formality had been gone through.  Accordingly the 1^st defendant was entitled to act upon the instruction of the 2^nd defendant on the transfer of funds from the plaintiff’s account to BBMF.

My view

29.Bearing in mind the nature of the current application and without expressing a final view on the matter, my view is that this approach is too restrictive.  While the 2^nd defendant was the sole signatory under the mandate given to the 1^st defendant, events had developed to such a stage that in my view that the plaintiff has put forward a strong case that the 1^st defendant must be put on inquiry as to whether the 2^nd defendant still had authority to transfer the fund when he gave the instructions.  The plaintiff had by correspondence informed the 1^st defendant of its intention to replace the 2^nd defendant as the authorized signatory.  Representatives of the plaintiff had come to Hong Kong and met the 1^st defendant for the purpose of amending the bank records. 

30.Mr. Shieh argued that the new representatives may not have the authority to represent the plaintiff.  My view is that there was no indication from the evidence that the 1^st defendant was in any doubt about the authority of the Japanese representatives who would be replacing the 2^nd defendant.  Certainly the correspondence starting from 29 August 2006 showed that the 1^st defendant was corresponding with these representatives instead of with the 2^nd defendant.  In these circumstances an ordinary prudent bank ought to make enquiries with the plaintiff to see whether the 2^nd defendant still had the authority to transfer the fund before his instruction was to be complied with.  There were sufficient reasonable grounds for the 1^st defendant to consider whether the 2^nd defendant was misusing his authority for the purpose of defrauding the plaintiff or otherwise defeating its true intention.  The situation went beyond ‘mere suspicion or unease’ on the part of the 1^st defendant.  The simplest way for the 1^st defendant was to make inquiries with the plaintiff before carrying out the instruction of the 2^nd defendant.  This was not done by the 1^st defendant. 

31.I agree with the assessment of the plaintiff’s case by the Judge.

The principle in Liggett

32.The 1^st defendant seeks to rely on the principle in the case of B. Liggett (Liverpool) Ltd v. Barclays Bank Ltd [1928] 1 KB 48 that it was not liable to the plaintiff.  In that case the bank had paid cheques drawn on the plaintiff’s account in breach of a mandate requiring two signatories.  The plaintiff brought an action for money had and received.  Wright J held that the bank was entitled to the benefit of that payment if it could show that that payment went to discharge a legal liability of the customer.  The customer in such a case was really no worse off because the legal liability which had to be discharged was discharged, though it was discharged under circumstances which at common law would not entitle the bank to debit the customer.

33.Although there were Commonwealth cases which relied on this decision : see the cases referred to in the Law of Subrogation by Charles Mitchell, a qualification has been placed on the principle in B. Leggett by the English Court of Appeal in Cantrave Ltd (In liquidation) v. Lloyds Bank PLC [2000] Q.B. 917 that

‘	in the absence of authorisation or ratification by the company of the bank’s payment to the third party, the “mere fact” that the bank’s payment enured to the benefit of the company does not establish an equity in favour of the bank against the company.’

34.The true application of the B. Liggett principle remains to be considered.  Further in the present case the plaintiff clearly disputed that it was liable to pay BBMF.  As a result the 1^st defendant is not able to show that it has a high probability of success in the action. 

Interpleader proceeding

35.The Judge further took into account the fact that the 1^st defendant could have interpleaded after it had frozen the money that was transferred to BBMF’s account.

36.I do not regard the decision by the 1^st defendant not to interplead as a relevant factor in considering the question of security for costs. 

37.Mr. Manzoni, counsel for the plaintiff, argued that the purpose of security for costs is to ensure that there is sufficient fund in the jurisdiction to meet the costs of the successful party and had the 1^st defendant interpleaded the fund would remain in Hong Kong to meet this requirement. 

38.In my view the fund will only be available if BBMF failed in the proposed interpleader proceedings.  If BBMF succeeds then it means that the fund will belong to BBMF and the so-called purpose of having the fund in Hong Kong will not be achieved.  Hence the interpleader proceedings could not be a relevant consideration. 

39.However this will not affect the validity of the exercise of the discretion by the Judge who also considered the merits of the parties’ case.

Conclusion

40.In the circumstances I will dismiss the appeal.  I will make a provisional order that the 1st defendant is to pay the plaintiff the costs of this appeal.

Hon. Chung J :

41.I agree.

Mr. Charlie Manzoni, instructed by Messrs Leland Chu & Co., for the Plaintiff

Mr. Paul Shieh, S.C. and Mr. Lawrence Ng, instructed by Messrs Wilkinson & Grist, for the 1^st Defendant