Deak Perera Far East Ltd. v. R. Leslie Deak and Others

CACV000116/1990

Headnote

Rules of the Supreme Court Order 11 rule 1(1)(c). Breach of fiduciary duty by directors. Application for leave to issue and serve writ out of the jurisdiction. Meaning of "good arguable case", rights of strangers to enforce the provisions of contracts to which they were not parties and factors material to "forum conveniens" considered. Exercise of the judge's discretion upheld. Importance of compliance with proper practice in relation to the drafting of orders and the contents of affidavits emphasised.

BETWEEN

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Coram: Hon Sir Derek Cons, V-P, Kempster and Clough, JJA

Dates of Hearing: 28 - 30 November and 4 December 1990

Date of Handing-down of Judgment: 18 December 1990

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JUDGMENT

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Kempster, JA :

1. On 20 May 1987 the plaintiffs, Deak Perera (Far East) Ltd in liquidation, by the Official Receiver as liquidator, commenced proceedings against seven defendants only three of whom were resident, and duly served, within the jurisdiction. On 5 June, ex parte, Master Jones made an order permitting the plaintiffs to issue a concurrent writ copies of which might be served on the first, second, third and seventh defendants out of the jurisdiction.

2. The claim against the sixth defendant has been settled and the order of 20 May 1987 set aside as against the seventh and 3rd defendants by Barnes J and Master Perrior on 5 and 23 February 1988 respectively. On 23 June 1989 Master Perrior declined to set that order aside as against the first and second defendants. Those defendants appealed to Bokhary J who, on 27 June 1990, acceded to their application and discharged the order. However, he granted a fresh application made by the plaintiffs for the issue of another concurrent writ for service on the first and second defendants out of the jurisdiction. Against that part of his order those defendants appeal. It is to be observed that the order, which refers to parties with whose interests the judge was not at the material time concerned, does not recite what affidavits he read. This failure to conform with long established practice has occasioned uncertainty and the waste of time and money in the course of the hearing before this court and will cause difficulties for the taxing-master hereafter.

3. The judge set the order of Master Jones aside by reason of the plaintiffs' failure to make the full and frank disclosure required of a party making an ex parte application even though, to quote Farwell LJ in The Hagen 1908 P 189 at p 201 : -

"the party might afterwards be in a position to make another application."

4. By their Notice of Appeal the first and second defendants contend that the circumstances of non-disclosure, coupled with other factors, warranted the dismissal of the second application to serve out or, alternatively, a corresponding exercise of the discretion of the court. They also contend that the plaintiffs failed to demonstrate that they would probably succeed at trial by reason of the matters relied upon by way of defence.  By their cross-appeal the plaintiffs seek the reinstatement of the order of blaster Jones which, they submit, should not nave been discharged since their admitted non-disclosure was not deliberate. They also seek the costs of the hearing before the judge and advance supporting reasons additional to those upon which he explicitly relied when granting leave to issue a fresh concurrent writ for service out of the jurisdiction.

5. On the basis of the cause or causes of action pleaded a party seeking, as here, an order for service of a writ out of the jurisdiction on persons alleged to be proper parties to a claim made against persons already duly served must satisfy the court that in the light of all the evidence and of the law he has a good arguable case on the merits as against the parties already served as well as against those sought to be served and that there is a strong probability that the jurisdictional provisions of Order 11 rule l(c) of the Rules of the Supreme Court are satisfied. He must further persuade the court that its discretion should be exercised in his favour. In the latter context the question of "froum conveniens" may, and in the instant case does, arise. By "good arguable case" is meant a good prospect of success at trial. It does not mean that the applicant would probably succeed or obtain judgment in Order XIV proceedings and may be consistent with the availability of a good arguable defence. This analysis is derived not only from the authorities cited to us such as Vitkovice Horni v Korner [1951] AC 589; Wo Fung Paper Making Factory Limited v Sappi Kraft (Pty) Limited [1988] 2HKLR 346; Attock Cement v Romanian Bank [1989] 1WLR 1147 and Metall und Rohstoff A-G v Lufkin [1989] 3WLR 563 but also from the implications of Order 11 rule 4 the material parts of which read : -

6. At all material times the late Nicholas Louis Deak, whose estate the first defendant represents, and Otto Emil Roethenmund were directors of and controlled the plaintiffs, Deak & Co. Inc., and other corporations within the Deak-Perera Group of Companies. In late 1984 these companies became insolvent and on 5 December the first and second defendants caused the unrequited transfer from accounts held by the plaintiffs with the fourth to seventh defendants, all banks, to the third defendant, also a bank, of US$2,161,191.10 and the further transfer of that sum, together with US$198,898.90 owed by the third defendant to the plaintiffs, to three companies in the Group, namely Deak & Co. Inc., Deak-Perera International Banking Corporation and Deak-Perera Wall Street Inc. These three companies ("the Debtors") were incorporated in the USA and, as therefore entitled, on the following day, 6 December, petitioned the United States Bankruptcy Court in the Southern District of New York for relief pursuant to Chapter 11 of the US Bankruptcy Code. By such proceedings the petitioners and monies standing to the credit of their accounts were protected from suit or execution on the part of creditors. The plaintiffs, correspondingly impoverished, were wound up by order of this court made

on 4 February 1985.

7. The consequential claim made against the first and second defendants, pleaded and supported by evidence, is that they are liable to the plaintiffs in their fiduciary capacity for damages and for an account of trust monies misapplied. Without more the plaintiffs have shown a good arguable case. By the same token the plaintiffs have also shown that the first and second defendants are, in all probability, proper though not necessary parties to the action against the fourth and fifth defendants, duly served within the jurisdiction, for damages for transferring the sums in question to the third defendant in breach of mandate and, as against the fourth defendant, for complicity in breach of trust also; showing a good arguable case against those defendants as well. That apparently sufficed for the judge but, in my view, it is necessary to consider the nature of the defences disclosed by the evidence in relation not, as in the case of The Brabo [1949] AC 326, to a differently worded rule and to the claims made against the defendants within the jurisdiction but to those made against the first and second defendants. For example, the existence of a good arguable case would not be consistent with a good arguable defence demonstrating beyond a peradventure that the claim had been brought after the expiry of an applicable period of limitation. Further, the nature of the defences bears on the question of "foram conveniens".

8. On 12 December 1985, in New York, a stipulation, being an agreement to compromise conflicting claims, was. concludes between the Debtors, the Creditors' Committee, representing the creditors of those corporations, and the plaintiffs, by the Official Receiver. It was approved by the Bankruptcy Court on 26 December 1985 as it had been, somewhat earlier, by the High Court of Hong Kong. Its terms were recited in the judgment of Bokhary J and warrant repetition now : -

"WHEREAS:

9. By "affiliate" is meant an "entity that owns, controls or holds with power to vote 20 per cent or more of the outstanding voting securities of the debtor.... " and a "corporation 20 per cent or more of whose outstanding voting, securities are ... owned, controlled or held with power to vote by the debtor or by an entity that ... owns, controls or holds with power to vote 20 per cent or more of the outstanding voting securities of the debtor ...". "Entity" includes "person, estate, trust, governmental unit and United States trustee". Section 101(2) and (14) of the United States Bankruptcy Code. It is thus strongly arguable that by reason of his ownership of "voting securities" (shares) the late Nicholas Louis Deak was an affiliate within the meaning and intent of the stipulation, as were the plaintiffs themselves, and that, by the Official Receiver, the plaintiffs compromised their claims, inter alios against him even as a director while the Debtors' claims against them were likewise compromised. The plaintiffs duly received payment from the Debtors of US$2,360,000. Since, however, neither the first nor the second defendant was a party to the stipulation further questions arise.

10. According to the sworn testimony of Mr Zylberberg, a New York attorney, the law in that State has developed rather more rapidly than that of England and Hong Kong where clear intention to create a trust is required before a stranger to a contract may himself enforce its terms and circumvent the doctrine of privity reaffirmed by the House of Lords in Dunlop v Selfridge [1915] AC 847. Further, in the absence of any waiver of the requirement, the trustee must be a part to the proceedings. Les Affreteurs Reunis SA v Walford [1919] AC 801; in Re Schebsman [1944] Ch 83; Green v Russell [1959] 2QB 226. On the other hand in Hirachand Punanichand v Temple [1911] 2KB 330 a strong English Court of Appeal, following Welby v Drake (1825) 1C&P 557 and Cook v Lister (1863) 13 CBNS 543, held that plaintiff creditors who had accepted from a stranger a lesser sum in satisfaction of the debt owing to them by the defendant could not maintain an action against the defendant for the balance. The analogy to the present case is that pursuant to the terms of the stipulation the plaintiffs have accepted from strangers a lesser sum in satisfaction of the monies claimed against the first defendant and others. As Vaughan Williams LJ said at p 337 : -

" ... the debt is gone, because it would be a fraud upon the stranger who pays part of a debt in discharge of the whole that an action should be brought on the debt."

Likewise Fletcher Morton LJ at pp 339 and 340 : -

"The effect of such an agreement between a creditor and a third party with regard to the debt is to render it impossible for the creditor afterwards to sue the debtor for it ... But in the present case we are dealing with the question of the affect of money paid by a third person. In such a case there is no difference between payment or the total amount and payment of a portion of it only so long as it is paid in settlement of the debt. If a third party person steps in and gives a consideration for the discharge of the debtor, it does not matter whether he does it in meal or in malt or what proportion the amount given bears to the amount of the debt. Here the money was paid by a third person and I have no doubt that upon the acceptance of that money by the plaintiffs with full knowledge of the terms on which it was offered, the debt was absolutely extinguished."

Farwell LJ agreed and his judgment concludes at p 342 : -

"I have no hesitation in saying that a Court of Equity would have regarded the plaintiffs as disentitled to sue except as trustees for the father (the stranger) and would have restrained them from suing ... "

The Debtors and the Creditors' Committee might well be entitled to stay any proceedings brought by the plaintiffs against the first defendant. Snelling v John Snelling Ltd [1973] 1QB 87. But, again, referring to the evidence of Mr Zylberberg : -

"It is settled law of the State of New York that third parties are entitled to obtain benefits under a contract and such third parties can enforce those rights notwithstanding that they are not a party to the contract. ... It is my view that in the instant case the contract clearly identifies, by class, the persons intended to benefit from the contract, namely, affiliates of Deak & Co. Inc. The law of the States of New York provides that the third party beneficiary may enforce the promise made for his benefit even though he is a stranger both to the contract and to the consideration."

Mr Zylberberg exhibits authorities in support of his contention.

11. The second defendant does not claim to be an affiliate but, on the footing that the plaintiffs' claim against the first defendant, his co-trustee jointly and separately liable for breach of trust, was released by the stipulation, submits that he too has a good defence according to the Law of England in that the release of one of several defaulting trustees releases the others by analogy with joint tortfeasers whose rights have been explained in Duck v Mayeu [1892] 2QB 511; Cutler v McPnail [1962] 2QB 292 and Gardiner v Moore [1969] 1QB 55. He relies on Blackwood v Borrowes (1843) 4 Dr & War 466. There, at p 466, it was argued that the compromise with one trustee would be "mere waste paper" if his co-trustee" would have an equity to call upon the former to recoup him". However, Sugden LC relied on the acceptance by the beneficiary of an investment made in breach of trust but, at p 475, said : -

"I do not rely upon the technical ground of the release of one trustee operating as a release to the other ..."

He may thereby be thought to have recognised the existence of such a doctrine. The matter is far from clear. In Edwards v Hood Barrs [1905] 1Ch 20 Kekewich J allowed the beneficiary suing several trustees to prove in the bankruptcy of one for the full amount claimed albeit he had received part payment from one of them in satisfaction of the claim as against him.

12. Overall I am satisfied that the plaintiffs have disclosed a good arguable claim as against the first defendant although he has disclosed a good arguable defence thereto. A fortiori they have disclosed a good arguable claim against the second defendant who has disclosed only the most shadowy of defences.

13. The matter of "forum conveniens" remains to be considered. As Lord Goff explained in Spiliada Maritime Corporation v Consulex Ltd [1987] 1AC 460 at pp 480 and 481 it is for the plaintiffs to demonstrate not only that for the trial of their claim against the first and second defendants Hong Kong is : -

"the forum in which the case can be suitably tried for the interests of all the parties and for the ends of justice"

but "... clearly so."

14. In almost every case a balancing exercise will be required and the solution "is preeminently a matter for the trial judge" per Lord Templeman at p 465.

15. The two defendants are resident in the State of New York where the chapter 11 application was made and the stipulation negotiated and concluded. The stipulation falls to be construed in accordance with these laws. Likewise its effect and the rights of enforcement afforded to the late Nicholas Louis Deak and the first defendant. To render the evidence as to the negotiations admissible which, before us at least the plaintiffs have said that they wish to adduce, a claim for rectification may well be necessary involving the joinder of other parties. The Hong Kong court would hardly presume to entertain such a claim with reference to the terms of the stipulation. This would redound to the disadvantage of the plaintiffs if the action against the first and second defendants were to be tried in Hong Kong. Further, nearly all the expert and other witnesses concerned are in New York where matters of fact can as well be resolved as here and where, were the plaintiffs to recover judgment against the first and second defendants in Hong Kong they would have to enforce it by action. On the other hand the testimony of witnesses from Hong Kong may be required in the exploration of the part played by Mr Nicholas Louis Deak and the second defendant in and about the matters alleged against the fourth defendant by way of breach of trust and the fourth and fifth defendants will lose any claim for indemnity or contribution as against the first and second defendants in Hong Kong if they are not also to be sued here.

16. Overall the considerations favouring New York as the appropriate forum; particularly those relating to witnesses liable, by reference to the plaintiffs' case, to be called to describe the course of the negotiations which were not mentioned by Bokhary J, seem to me as significant as those which decisively influenced him. The first was that the claim is made against former directors of a Hong Kong registered company for breach of fiduciary duty. I accept that the relationship between such a company and its directors must be a matter for Hong Kong law and, what is more, prima facie at least, Hong Kong is the natural forum but, as yet, the issues between the parties in this regard are not defined and I doubt if the law of the State of New York is appreciably different. The second was the probability of a more favourable order for costs were the plaintiffs to succeed in their claim in Hong Kong. This consideration seems to me to be neutral in its effect. Had the judge relied upon the detriment to the Hong Kong depositors he would have put an irrelevant factor into the scales.

17. With the material factors so finely balanced this court will be loath to interfere with the exercise of discretion by a judge applying the correct tests. Further, I am far from satisfied that Bokhary J failed to take all such factors into account or relied upon irrelevant material so as to permit our interference. In the premises, following the guidance of Lord Templeman, I accept the judge's conclusion as to the appropriate court for the trial of the plaintiffs' claim against the first and second defendants.

18. The submission that the plaintiffs' application should be refused on the basis of non-disclosure was less than convincing as was that made in support of the plaintiffs' application for the restoration of Master Jones's order of 5 June 1987 and a more favourable order for costs below. The more one considers how important the terms of the stipulation were in order to allow a proper exercise of judicial discretion at the ex parte stage the more unfortunate its non-disclosure seems to become. In setting that order aside the judge acted in vindication of the principle that a party should not be permitted to retain a procedural advantage improperly, albeit innocently, obtained.

19. In the premises I would uphold the order for service on the first and second defendants out of the jurisdiction and dismiss both their appeal and the cross-appeal of the plaintiffs.

Sir Derek Cons, V-P :

20. I agree entirely with my Lord. However I wish to add observations of my own which arise from the conduct of the proceedings below and with which both my Brothers have intimated to me their full agreement.

21. In recent years this court has on many occasions commented adversely on what appears to be a fairly widespread and growing practice to include argumentative material in affidavits or affirmations submitted to this court or the courts below: see, for example, Robert Lee Flickinger v Director of Immigration [1988] 1HKLR 81 at 94. Nevertheless the present instance provides yet another blatant example; so much so that the judge felt constrained to add to his judgment the following comments : -

"Before parting with this case, I would like to express my indebtedness, to counsel. But on this occasion, sadly, I have to couple it with this reflection: Despite the high quality of the counsel involved, a large amount of bickering entered into the arguments before me; and I think that that was due in no small measure to the fact that the affidavits are extremely argumentative and, what is worse, argumentative in a heated sort of way. The Court of Appeal has spoken out against such affidavits on more than one occasion. It is not the function of affidavits to argue, still less to argue in a quarrelsome fashion. I hope that in future the profession will bear in mind what the Court of Appeal has said on the point."

22. In view of the failure of this court's criticisms to produce any improvement in the past we feel unable to share the hope expressed by the judge in his last sentence. Rather do we venture to suggest that instead the time has now come when judges at first instance should carefully consider, when affidavits or affirmations of that kind are presented to them, whether the nature and extent of the offensive material is such that the whole affidavit should be struck out: see Rules of the Supreme Court, Order 41 rule 6.

23. Should the judge in the event take that course, he may well conclude also that in the interests of the lay client the proceedings before him should be adjourned to enable a further, but acceptable, affidavit or affirmation to be filed. If so, he might like to consider at the same time whether an order, under Order 62 Rule 8 should be made against the solicitor responsible for filing the original.

24. The second observation stems from the formal order filed in pursuance of the judge's decision below, and to which my Lord Kempster JA has already referred. We wish to remind solicitors acting for a party who has the carriage of an order of any court that it is their duty, and their responsibility alone, to ensure that the order is correctly drawn up. If necessary, precedents are to be found in Atkin's Court Forms or Chitty & Jacobs Queen's Bench Forms.

Clough, JA :

25. I agree that the appeal and cross-appeal should be dismissed and I respectfully adopt what has been said by my Lord Sir Derek Cons regarding the content of affidavits and the drafting of orders. I only wish to add that, whilst I agree with the other members of the court that this is not an appropriate case for interfering with the judge's exercise of his discretion I, for my part, would have been disposed to decide the "forum conveniens" issue in the same way as the judge if the discretion had been mine to exercise.

26. By participating as directors in the management of a Hong Kong company the late Mr Nicholas Deak and the second defendant, although not resident in Hong Kong, rendered themselves amenable to Hong Kong law and assumed the fiduciary duties imposed by that law which they are alleged to have breached. The plaintiffs' claim amounts to an allegation of misfeasance by the controlling directors of a Hong Kong company which is now in the process of being compulsorily wound up by the Hong Kong Court. This is, in my opinion, a potent factor connecting the action with Hong Kong. In this connection I think the judge was rightly concerned by the fact that the first and second defendants, although disclosing no defence to the allegation of breach of trust other than the New York stipulation, were not prepared to concede through their counsel that the stipulation would be the only basis for their defence at trial. I therefore approach the forum conveniens issue on the footing that at trial the breach of trust issue would not necessarily be defended only by reference to the stipulation and its consequences.

27. There being evidence on behalf of the plaintiff regarding the risk of non-availability of its material witnesses if the trial has to be in New York I, for my part, whilst accepting the weighty factors, referred to by the judge and, in greater particularity by my Lord Kempster, connecting the action with New York, would have given greater weight to the Hong Kong factors in all the circumstances. This being a case in which different views can reasonably be formed of the weight to be given to the various factors, we have dismissed the first and second defendants' appeal against the exercise by the judge of his discretion, but I nave thought it right to indicate that I would, had the discretion been mine to exercise, have come to the same conclusion as the judge.

Sir Derek Cons, V-P

28. The appeal and the cross-appeal are therefore both dismissed. We make an order nisi that the plaintiffs are to have the costs of the appeal and the first and second defendants the costs of the cross-appeal.

Representation:

Charles Ching, QC and Ronny Tong, QC (M/s Denton Hall Burgin & Warrens) for Appellants/D1 & D2

Barrie Barlow (Official Receiver) for Respondents/Plaintiffs