A A
DCCJ 1519/2009
B B
IN THE DISTRICT COURT OF THE
C HONG KONG SPECIAL ADMINISTRATIVE REGION C
D
CIVIL JURISDICTION NO.1519 OF 2009 D
____________
E E
BETWEEN
F F
WEALTHY CENTURY INVESTMENT LIMITED Plaintiff
G G
and
H H
DBS BANK (HK) LIMITED Defendant
I I
____________
J J
Coram: Deputy District Judge Alfred H H Chan in Chambers (Open to
K K
Public)
L Date of Hearing: 11 February 2010 L
M
Date of Handing Down Judgment: 13 May 2010 M
N ______________ N
O DECISION O
______________
P P
Q 1. There are 2 summonses before the court, both issued by the Q
R
Defendant dated 5 October 2009. The first summons seeks interpleader R
relief under Order 17 Rule 1 of the Rules of the District Court. The
S S
second seeks the disposal of the case on a point of law under Order 14A
T Rule 1 and summary judgment under Order 14 Rule 5. T
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V 1 V
A A
Background
B 2. The Defendant is a licensed bank in Hong Kong. In 2006 the B
Plaintiff, which runs an estate agency business, opened 2 bank accounts
C C
with the Defendant in the names of “Wealthy Century Investment Ltd”
D D
and “Kin Fu Realty o/b Wealthy Century Investment Ltd” respectively
E (“the Accounts”). E
F F
3. Before the dispute in this action arose, the mandates, or the
G signing arrangements, for the Accounts had required signatures from all 3 G
authorised signatories, i.e., Mr Sin To Keung (“Sin”), Madam Chui Siu
H H
Heung (“Chui”) and Mr Lui Chi Keung (“Lui”), together with the
I I
company chop for the respective accounts. All 3 signatories were
J shareholders and directors of the Plaintiff. These mandates took effect J
in late October and early November 2007.
K K
L 4. On 23 May 2008 the Defendant received an instruction to alter L
the mandates from Sin and a Mr Fong Kin Yee, the husband and alternate
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director of Chui (“Fong”), together with a copy of the minutes of a board
N meeting of the Plaintiff dated 22 May 2008 which resolved that the N
O
Accounts be operated by Sin and Fong jointly. Also on 22 May 2008, O
the board resolved to remove Lui as a director. On 24 May 2008 the
P P
Defendant received a letter from Lui stating that there were disputes
Q among the shareholders and directors and requesting the Defendant to Q
freeze the operation of the Accounts immediately until resolution of the
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disputes or until further notice.
S S
5. Following further correspondence among the parties, the further
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details of which I shall deal with later on in this judgment, the D efendant
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A A
informed the Plaintiff and Lui by letter dated 6 June 2008 that in the light
B of the conflicting instructions and the disputes among the shareholders B
and directors, it would freeze the Accounts with immediate effect,
C C
pending:
D D
E (a) a duly passed board resolution with unanimous consent of all E
directors with regard to the operation and maintenance of the
F F
Accounts; and
G (b) the execution of a new Mandate for the Accounts pursuant to the G
resolution after the disputes between the directors had been
H H
resolved.
I I
J 6. The shareholders were unable to come to any agreement. They J
did not take any legal action against each other either to have their
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disputes resolved. By letter dated 3 February 2009, the Plaintiff’s
L solicitors requested the Defendant to close the Accounts and return the L
balance of monies in the Accounts (“the Funds”) to the Plaintiff, failing
M M
which proceedings would be instituted against the Defendant. The
N Defendant having declined the request, the Plaintiff issued the writ in this N
O
action on 26 March 2009. Since then, pleadings have been filed, O
including the Defendant’s Defence and Counterclaim.
P P
Q 7. On 12 June 2009, the Defendant issued an interpleader summons Q
(“the First Interpleader Summons) under Order 17 Rule 1 of the RDC,
R R
which was also served on Lui as the Claimant. By that summons, the
S Defendant sought to interplead between the Plaintiff and Lui, who was S
represented at the hearing of that summons. Registrar S.T. Poon, as he
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then was, dismissed the summons on 7 August 2009. As appears from a
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A A
transcript of the hearing, one of the grounds on which the learned
B Registrar dismissed the summons was that Lui had no valid claim or B
interest in respect of the Funds. In the course of the hearing, Lui’s
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solicitor also stated that his client did not intend to issue p roceedings
D D
against the Defendant to recover the Funds. The Defendant did not
E lodge any appeal against the dismissal. E
F F
8. After further correspondence among the parties, the Defendant
G took out the 2 summonses which are now before the court, including the G
summons under Order 17, to which I shall refer as “the Second
H H
Interpleader Summons”. By the time of the hearing of these 2
I I
summonses, Lui, the Claimant in the interpleader summons, was no
J longer represented and he also failed to appear at the hearing. J
K K
L Shareholders’ Dispute L
9. The dispute between Sin, Chui and Fong on the one hand (“the
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majority shareholders), and Lui on the other, consists of allegations and
N counter-allegations. The majority shareholders alleged that Lui had N
O
duplicated more than 2,000 records of the Plaintiff’s clients from its O
computer without proper authorisation. It was this discovery that
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precipitated their decision to remove Lui from the board and change the
Q mandates for the Accounts in order, so they claim, to protect the Q
Plaintiff’s interests. Soon afterwards they also discovered that Lui had
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misappropriated commissions belonging to the Plaintiff, and set up a
S competing business called ‘New Home Realty Ltd” in breach of his duty S
as a director.
T T
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A A
10. Lui on the other hand alleged that he joined as a shareholder on
B the agreed basis that all decisions of the Plaintiff had to be taken B
unanimously by the 3 shareholders, and all bank accounts were to be
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operated by all 3 shareholders jointly, as evidenced in paragraphs 1 and 2
D D
of the minutes of the shareholders’ meeting of 25 October 2007. His
E removal from the board and the alteration of the mandates for the E
Accounts were contrary to that agreement. He also alleged that he had
F F
been deceived by Sin into investing $350,000 in the Plaintiff as a 33%
G shareholder in September/October 2007. He soon discovered that a G
substantial amount of money on the Plaintiff’s books had gone missing.
H H
I
11. The majority shareholders’ response to Lui’s allegation was that I
J all assets shown on the Plaintiff’s books when Lui joined as a shareholder J
were properly accounted for, and that the matter had been resolved
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between the two sides at the time.
L L
M M
The Second Interpleader Summons
N 12. I now turn to the Second Interpleader Summons. The N
O
Plaintiff’s position is that the summons should be dismissed as being an O
abuse of process, it being based on the same facts involving the same
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parties on the same issue as the First Interpleader Summons which was
Q dismissed by the court. The Defendant submits that it was justified in Q
issuing the Second Interpleader Summons because there had been a
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change of circumstance, in that while previously Lui did not properly
S formulate his claim, further correspondence since the dismissal of the S
First Interpleader Summons has shown the legal basis of Lui’s compe ting
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claim in respect of the Funds.
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A A
B 13. The correspondence relied on by the Defendant is as follows. B
The First Interpleader Summons having been dismissed on 7 August 2009,
C C
the Defendant wrote to Lui’s solicitors on 27 August 2009 stating that in
D D
the light of the decision by the court that Lui had no valid claim to the
E Funds and the confirmation given on his behalf at the hearing that he did E
not intend to sue the Defendant for the recovery of the Funds, the
F F
Defendant would be approaching the Plaintiff with a view to paying the
G Funds over to the Plaintiff. Lui then replied on 28 August 2009, G
maintaining his stance, and reserving his rights against the Defendant.
H H
On 15 September 2009, Lui’s solicitors also wrote, saying that Lui would
I I
claim against the Plaintiff for the amount of $825,240, urging the
J Defendant not to release the Funds (which by then was just over J
$528,000). On 18 September 2009, the Defendant’s solicitors wrote to
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Lui’s solicitors, stating their understanding of Lui’s claim, which was that
L the Plaintiff company had been formed as a quasi-partnership of the L
shareholders with the common intention that each of them would be
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involved in the management of the Plaintiff, and that Lui had a beneficial
N interest in the Funds which Lui was now asserting against the Plaintiff or N
O
the two other shareholders. O
P P
14. It is on the basis of this correspondence that the Defendant now
Q claims that there has been a change of circumstance since the First Q
Interpleader Summons. Unfortunately for the Defendant, the alleged
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facts on which Lui’s claim based on a quasi-partnership were not new at
S all. Soon after the dispute arose, Lui wrote a letter dated 23 May 2008 S
(received by the Defendant on 26 May 2008), enclosing a copy of the
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minutes of a shareholders’ meeting of the Plaintiff held on 25 October
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A A
2007. Whether or not Lui’s “adverse claim” was presented to Registrar
B Poon in the same way as it has been put before me, Lui’s letter to the B
Defendant dated 23 May 2008 and the relevant minutes of the
C C
shareholders’ meeting were both before the court in the First Interpleader
D D
Summons. The Defendant may have since then given a new shape to
E Lui’s “claim”, but I cannot see how there has been a change of E
circumstance. I agree with the Plaintiff’s submission that the Defendant
F F
may not issue a fresh summons in the circumstances of this case.
G G
15. Mr Justin Wang, counsel for the Plaintiff, further argues that the
H H
Defendant does not satisfy the criteria for relief under Order 17,
I I
including the requirement that the applicant does not collude with any of
J the claimants to the subject-matter in dispute. I agree with him, for a J
number of reasons. The Defendant, instead of interpleading at a much
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earlier stage, decided to freeze the Accounts, which was what Lui
L requested. Even after the Plaintiff issued the writ (by which time the L
Accounts had been frozen for 9 months), the Defendant chose not to
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interplead there and then, but filed a Defence and Counterclaim,
N maintaining that it was entitled to freeze the Accounts. Even after the N
O
court ruling on the First Interpleader Summons, the Defendant yet again O
wrote to Lui asking if he had a valid claim to the Funds (a question which
P P
had already been decided by the court), and even formulated a claim for
Q him, in effect “playing the same game” as Lui. See Staryork Investment Q
Limited v Cheung Chi Keung (unrep, HCA 2176/2003, Reyes J, 15
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October 2003). For all the above reasons, I dismiss the Second
S Interpleader Summons. S
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A A
Order 14A Summons
B 16. Both the Plaintiff and the Defendant submit that this is a proper B
case for determination under Order 14A, and these two parties are
C C
desirous of bringing the matter to a close, if at all possible. The 2 main
D D
questions to be determined are contained in paragraph 1 of the summons:
E E
(a) whether the Defendant in freezing the Accounts from 6 June
F F
2008 onwards acted in accordance with the terms of the
G Mandates and Terms and Conditions of the Defendant which G
governed the operation of the Accounts; and
H H
(b) whether the Defendant was “put on inquiry” of possible fraud,
I I
misappropriation of company funds or irregularities at the
J Plaintiff such that it was reasonable for the Defendant as the J
Plaintiff’s banker to freeze the Accounts from 6 June 2008
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onwards.
L L
The remaining questions are largely consequential upon the
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answers given to the above questions.
N N
O O
Evidence
P P
17. The evidence in this case is mainly contained in the
Q correspondence among the three parties. I have earlier referred to the Q
instruction from Sin and Fong to the Defendant to change the mandates
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for the Accounts on 23 May 2008 (enclosing the board minutes which
S purported to record a resolution that the mandates be changed), and Lui’s S
letters to the Defendant dated 23 and 24 May 2008, and the minutes of a
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shareholders’ meeting dated 25 October 2007.
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A A
B 18. On 26 May 2008, the Defendant received from Sin a letter dated B
22 May 2008 signed by Sin allegedly on behalf of the Plaintiff and
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addressed to Lui, stating that the board had resolved to terminate Lui’s
D D
directorship with immediate effect.
E E
19. On 27 May 2008, Lui spoke on the telephone to Ms Alice Sze,
F F
Assistant Vice President and Customer Service Manager of the Defendant,
G claiming there had been past incidents of misappropriation of the G
Plaintiff’s funds by the other directors (although Ms Sze has not specified
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in her affirmation what exactly she was told by Lui) and had reported the
I I
matter to the police.
J J
20. On 2 June 2008, the Defendant received a letter from Lui’s
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solicitors repeating Lui’s complaints against the other directors, and his
L request to withhold any changes of the mandates for the Acc ounts. L
M M
21. On 3 June 2008, Sin provided the Defendant with a copy of the
N statement he gave to the police dated 30 May 2008 in which he N
O
complained about misappropriation of funds by Lui. See Defence and O
Counterclaim paragraph 6(1)(k). None of the parties have exhibited this
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statement in the affidavit evidence.
Q Q
22. Then on 6 June 2008, the Defendant wrote to both parties
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informing them of its decision to freeze the Accounts.
S S
23. On 10 June 2008, the Defendant received a copy of Lui’s police
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statement dated 4 June 2008 from his solicitors. In this police statement,
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A A
Lui complained about the earlier dispute in October 2007 when he first
B invested in the Plaintiff, his more recent removal as a director, and the B
attempt to change the signing arrangement for the Accounts.
C C
D D
24. On 19 June 2008, the Defendant received from Sin and Fong a
E certified true copy of the minutes of the AGM of the Plaintiff dated 19 E
June 2008, which stated that all directors (including Lui) had completed
F F
their office as directors and retired, all stood for election, and Chui and
G Sin (but not Lui) were elected as directors, with Fong as alternate director G
of Chui. Also received was a certified true copy of a resolution of the
H H
new board that the Accounts should be operated by Sin and Fong jointly.
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On the same day, new mandates were executed for the Accounts, so that
J the new authorised signatories were Sin and Fong only. One of the new J
mandates was witnessed by Ms Alice Sze of the Defendant.
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L 25. After the execution of the new mandates, the Plaintiff requested L
the Defendant to release the Funds while Lui continued to demand that
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the Accounts be frozen. In the meantime, the Accounts remained frozen.
N N
O
26. The Plaintiff’s solicitors then informed the Defendant, by letter O
dated 2 January 2009, that the police had completed the investigation and
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had confirmed that there would be no prosecution against either Sin or
Q Lui. The Plaintiff’s solicitors requested the Defendant to reactivate the Q
Accounts. Lui’s solicitors on the other hand responded to the effect that
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the shareholders’ dispute had still not been resolved.
S S
27. On or about 23 January 2009, the Plaintiff’s share capital was
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increased from $10,000 to $510,000, the additional shares having been
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A A
allotted to Chui and Sin equally. Sin explains in his affirmation that th e
B increase in share capital represented the amount frozen in the Accounts B
as a result of Lui’s request to the Defendant to freeze the Accounts. Lui
C C
was given the opportunity to subscribe to the new shares which he turned
D D
down.
E E
28. On 3 February 2009, the Plaintiff’s solicitors by letter requested
F F
the Defendant to close the Accounts and release the Funds. The
G Defendant did not comply with the request, and the Plaintiff issued the G
writ in March.
H H
I I
J Submissions J
29. Mr Wang for the Plaintiff submits that a banker is not entitled to
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refuse to carry out a customer’s instructions unless the authorised
L signatories are misusing their authority for the purpose of defrauding L
their principal or otherwise defeating his true intention, and that for this
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purpose, mere suspicion is not sufficient: Gray v Johnston (1868) LR 3
N HL 1. Mr Norman Nip, counsel for the Defendant, submits that a N
O
banker has a duty to take reasonable care in the operation of a bank O
account, and when it has notice of possible fraud, misappropriation of
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funds or other irregularities, it is bound to make inquiries to satisfy itself
Q that it is proper to carry out an instruction. Mr Nip mainly relies on the Q
case of DEX Asia Ltd v DBS Bank (Hong Kong) Ltd [2009] 5 HKLRD
R R
160, which itself refers to a number of other authorities. Mr Nip also
S argues that the Defendant was entitled to freeze the Accounts pursuant to S
the Terms and Conditions under which the Accounts operated.
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Although counsel have taken different starting points for their legal
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A A
submissions, they do not take issue with the relevant legal principles.
B Where they differ is in the conclusions to be drawn applying those B
principles to the facts of this case.
C C
D D
30. Mr Wang submits that any suspicion cast upon the majority
E shareholders should have been dispelled when the police decided, in E
January 2009, that there would be no prosecution against the majority
F F
shareholders.
G G
31. Mr Nip on the other hand submits that a bank is justified in not
H H
complying with a customer’s instruction if it has notice of any fraud or
I I
irregularity or is put on inquiry, i.e. has reasonable grounds (although not
J necessarily proof) for believing that the instruction is an attempt to J
misappropriate the customer’s funds or for believing that the customer
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might be the victim of a fraud, an irregularity or other improper and
L extraneous purpose: Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340; L
Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363. Once a
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banker comes under a duty to make inquiries, then until the banker
N obtains information as a result of such inquiries or from other sources N
O
which would satisfy a reasonable and honest banker that it is proper to O
carry out the disputed instruction, the duty to inquire and to refuse to
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carry out the instruction continues: Baden v Societe Generale du
Q Commerce SA [1983] BCLC 325. Q
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32. Mr Nip also relies on provisions in the Mandates, and the Terms
S and Conditions governing the Accounts. Clause 7(a) of the Mandates S
provides that the Authorised Signatories will remain unchanged until the
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Defendant receives a duly certified copy of an amending resolution duly
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A A
passed by the Plaintiff’s board of directors and has had an opportunity to
B act upon the amending resolution. Under the Terms and Conditions, B
Clause 8 provides that the Defendant shall be entitled at any time to
C C
refuse to honour and comply with the Plaintiff’s instructions by reason of
D D
notice which the Defendant may have of any third party’s interest in or
E claim in respect of the relevant monies. Clause 19 provides that the E
Defendant may reject the Plaintiff’s instructions at its discretion, with or
F F
without prior notice or giving reasons. Under Clause 20, the Defendant
G reserves the right to suspend or terminate any account at any time without G
giving notice or reason if any legal or regulatory requirement prohibits or
H H
renders illegal the maintenance and operation of the account, or if the
I I
account is being used or is suspected of being used for unlawful activities
J such as illegal gambling. J
K K
33. I would pause here to note that these general provisions reflect
L the statements of legal principles referred to above with which both L
counsel do not take issue, and do not add substantially to Mr Nip’s
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arguments.
N N
O
34. Mr Nip argues that having received the complaint by Lui about O
the misappropriation of funds by the majority shareholders, the
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Defendant came under a duty to make inquiries. He relies on the
Q following circumstances. The copy of the board minutes dated 22 May Q
2008 purported to record that Lui was present, but Lui told the Defendant
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that he was not, and that he was given an hour’s notice when he was
S physically in Shenzhen. The minutes of the shareholders’ meeting on 25 S
October 2007 supplied by Lui recorded the shareholders’ agreement that
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all bank accounts had to be operated by all shareholders jointly, and the
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A A
new signing arrangement requested by the Plaintiff was inconsistent with
B that agreement. The letter dated 22 May 2008 signed by Sin purporting B
to terminate Lui’s directorship contained no written acknowledgement by
C C
Lui, and did not enclose with it any copy of the board resolution pursuant
D D
to which the termination was effected; there was also no indication that
E Lui was present at the board meeting. Subsequently, Lui complained to E
the Defendant of incidents of illegal activities by the majority
F F
shareholders.
G G
35. These circumstances, Mr Nip submits, entitled the Defendant to
H H
freeze the Accounts as from 6 June 2008. Subsequent events, he goes
I I
on, raised further suspicion in the mind of the Defendant as a prudent
J banker about the Plaintiff’s instructions. He refers to t he police J
statement dated 4 June 2008 given by Lui. He also points out that the
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minutes of the AGM on 19 June 2008, which recorded the retirement of
L the existing directors (including Lui) “did not sit well” with the purported L
termination of Lui’s directorship on 22 May 2008. The increase in
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share capital in January 2009, with the new shares being allotted to the
N majority shareholders and not to Lui, was also inconsistent with the N
O
shareholders’ agreement of 25 October 2007. O
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Q Discussion Q
36. The relationship between a banker and his customer, in respect
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of the balance of money in an account, is that of debtor and creditor.
S Money from time to time deposited into the Accounts was the Plaintiff’s S
money, which became the Plaintiff’s chose in action. There is no
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suggestion in this case that any money deposited into the Accounts was
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A A
ever the subject matter of a trust held by the Plaintiff as trustee for any
B other party. B
C C
37. Lui’s complaints appear to run as follows. Firstly, on 22 May
D D
2008, the majority shareholders or directors attempted to dismiss or
E remove him as a director, in contravention of the shareholders’ agreement E
made on 25 October 2007. Secondly, the majority shareholders had
F F
misappropriated company funds when Lui first invested in the Plaintiff,
G back in September/October 2007. For present purposes, I cannot and do G
not express any views on the truth of these allegations or those made by
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the majority shareholders. I only consider them in respect of how it might
I I
affect the Defendant.
J J
38. The attempt to remove Lui as a director, by itself, could provide
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no justification for freezing the Accounts. Even if the Plaintiff
L company was intended by the shareholders to operate as a quasi- L
partnership as from October 2007 as alleged by Lui and as formulated by
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the Defendant for him, and the attempted removal of Lui as a director
N was a breach of the shareholders’ agreement, his remedy would be to N
O
invoke the court’s jurisdiction to grant him appropriate relief or to wind O
up the Plaintiff under the relevant provisions of the Companies Ordinance.
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Furthermore, the Funds remained the property of the Plaintiff. Lui did
Q not have any direct legal or equitable interest therein, as has already been Q
held by Registrar Poon against Lui and the Defendant in the First
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Interpleader Summons. In so far as the Defendant purported to protect
S Lui’s interest in the Funds, there was no such interest to protect. S
T T
39. The alleged misappropriation of company funds by the majority
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A A
shareholders back in October 2007, again by itself, could provide no
B justification for freezing the Accounts. Any alleged loss was the B
Plaintiff’s loss, not Lui’s. Alternatively, if Lui had any claim for any
C C
loss which he may have suffered, his remedy would be against the
D D
majority shareholders, not in respect of the Funds which remained the
E Plaintiff’s property. Therefore freezing the Accounts could not serve E
the purpose of protecting Lui’s interest in the Funds, which there was
F F
none.
G G
40. I now deal with the third aspect of Lui’s complaint (which was
H H
not really clearly spelled out but could potentially arise), that in the light
I I
of these two allegations, namely, the earlier misappropriation and the
J attempt to remove Lui as a director, there was a concern that the request J
to change the mandates for the Accounts might lead to furthe r
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misappropriation of company funds by the majority shareholders. Here
L we are concerned with the Plaintiff’s interest, and the Defendant’s duty L
to take reasonable care in respect of the operation of the Accounts.
M M
N 41. First of all, it should be noted that the thrust of Lui’s first letters N
O
to the Defendant dated 23 and 24 May 2008 respectively which O
immediately followed the board meeting on 22 May 2008, was that there
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was a dispute among the shareholders/directors, not about the earlier
Q misappropriation of company funds, or any alleged apprehension of Q
further misappropriation. He did subsequently on 27 May 2008 in a
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telephone conversation with Ms Alice Sze of the Defendant refer to the
S earlier alleged misappropriation. The fact that there is an allegation that S
certain directors have in the past stolen company funds does not
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necessarily justify a banker in refusing to carry out a valid instruction
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A A
given by those directors on behalf of the company, unless there is some
B indication that further misappropriation might follow. See Gray v B
Johnston (1868) LR 3 HL 1, at 12-13. Every case will depend on its
C C
particular facts. As it happened, the Defendant obtained copies of the
D D
police statements of Sin and Lui, respectively made on 28 May and 4
E June 2008, and given to the Defendant on 3 and 10 June 2008. I have E
not been provided with a copy of Sin’s police statement. According to
F F
the Defendant’s letter dated 6 June 2008, Sin in that statement referred to
G misappropriations of company funds by Lui. G
H H
42. In any event, even on Lui’s own account, he agreed to make a
I I
further investment in the Plaintiff in the sum of $100,000 (despite the
J discovery of the alleged misappropriation), and later accepted a payment J
of $171,901.71 being about one-third of the amount which Lui alleged
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was missing from the Plaintiff’s books. That matter would appear to
L have been resolved between the parties already. L
M M
43. Having seen the evidence of the parties’ correspondence and the
N allegations which have been made, I cannot help but conclude that N
O
ultimately it was a shareholders’ dispute over the management of the O
company in which on the one hand, the attempts by the majority
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shareholders to remove Lui as a director and to change the mandates for
Q the Accounts, and on the other, Lui’s request to the Defendant to freeze Q
the Accounts and his subsequent complaint about prior misappropriation
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by the other directors, were strategic manoeuvres made by both sides to
S fortify their own positions in the dispute. The factual allegations were S
such that it was not a matter that could be resolved by the Defendant in
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correspondence.
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A A
B 44. In particular, there was no real evidence to suggest that the B
majority shareholders were going to misappropriate funds from the
C C
Plaintiff if they were allowed to operate the Accounts without the
D D
signature of Lui. What evidence there was at the time was that the
E majority shareholders were attempting to oust Lui from the board. E
Whether they were justified in doing so was a matter of internal
F F
management of the Plaintiff with which the Defendant should not be
G concerned, as long as the validity of the instruction purportedly given on G
behalf of the Plaintiff to the Defendant was not in question.
H H
I I
45. Mr Nip for the Defendant submits that a corollary of the duty to
J inquire is that unless and until a banker receives information, either as a J
result of its inquiries or from some other source which would satisfy an
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honest and reasonable banker that it would be proper to carry out the
L disputed instruction, the banker must continue to refuse to carry out the L
transaction. As a general statement I do not disagree with it, although I
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would add that co-existing with the duty to inquire is also the duty to
N carry out a customer’s valid instruction. Mr Nip’s statement of N
O
principle also presupposes that there was something to inquire about in O
the first place, but on the evidence in this case, I have found that there
P P
was insufficient material to suggest that proceeding with the new
Q mandates might result in misappropriation of funds by the majority Q
shareholders.
R R
S 46. What the Defendant then decided to do, in the light of the S
material supplied to it by the two sides to the dispute, was to freeze the
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Accounts (which was Lui’s request) as from 6 June 2008. Not only that,
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the stance which the Defendant took was that it would cont inue to freeze
B the Accounts until they received a board resolution made with the B
unanimous consent of all the shareholders/directors, with regard to the
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mandates and operation of the Accounts.
D D
E 47. In the absence of provisions to the contrary in the articles o f E
association, a company’s board acts by majority. I have not been shown
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that the Plaintiff’s articles of association require board decisions to be
G made unanimously. Therefore, any board resolution made by a majority G
of the directors of the Plaintiff would be valid, certainly vis-à-vis the
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Defendant. The condition imposed by the Defendant for the
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reactivation of the Accounts was clearly one upon which the Defendant
J was not entitled to insist, either as a matter of company law, or under the J
contract between the Plaintiff and the Defendant. Clause 7(b) of the
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Mandates provides: “A copy of any resolution of a meeting of the
L Company’s Board of Directors, if purporting to be certified as correct by L
the Chairman of the Meeting, shall, as between the Bank and t he
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Company, be conclusive evidence of the passing of such resolution and
N once so delivered to the Bank, shall be binding on the Company.” The N
O
Defendant was entitled to require a valid board resolution, but not a O
unanimous resolution of the board.
P P
Q 48. As to the shareholders’ agreement which provides that all bank Q
accounts should be operated jointly by all shareholders/directors, that
R R
was a matter between the shareholders themselves, and its enforceability
S by Lui would not have been a foregone conclusion, given the two sides’ S
allegations against each other. It was not for the Defendant to involve
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itself with the internal management of the Plaintiff, and certainly not for
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the Defendant to enforce the shareholders’ agreement on behalf of Lui, as
B the Defendant’s letter of 6 June effectively sought to do. B
C C
49. I mentioned earlier the need for a valid board resolution in order
D D
to change the mandates. If there was any doubt initially about the
E validity of the board resolution of 22 May 2008, due to insufficient notice E
given to Lui or for other reasons, any such doubt was removed at the
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AGM on 19 June 2008, when Lui was not re-elected. Mr Nip argues
G that there is inconsistency between the purported removal of Lui earlier G
in May (22 May 2008 letter), and his retirement as director in June
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(minutes of AGM on 19 June 2008). But clearly this was corrective
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action on the part of the Plaintiff or the majority shareholders as a matter
J of caution, in case the validity of the earlier removal of Lui as a director J
was challenged. Therefore by 19 June 2008 the latest there was a
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validly reconstituted board (with Lui being ousted) after the holding of
L the AGM, and a valid board resolution to change the mandates for the L
Accounts, a certified true copy of which was given to the Defendan t, in
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accordance with Clause 7(b) of the Mandate.
N N
O
50. I am not unsympathetic to the Defendant’s position in this case, O
and do not intend to be over-critical of it. It was caught in the middle of
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a shareholders’ dispute to which it was not privy. Its duty to wards the
Q Plaintiff was to take reasonable care and to act prudently, but prudence Q
does not normally require a bank to go into the internal management of a
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corporate customer. As regards Lui’s possible claims and the
S Defendant’s concern, if any, about dealing with assets potentially S
resulting in assisting in a breach of trust, the benchmark for such
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accessory liability is one of honesty. See Royal Brunei Airlines v Philip
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A A
Tan Kok Ming [1995] 2 AC 378. If there was any lingering doubt that
B either Lui’s or the Plaintiff’s interest might be jeopardised by allowing B
the Accounts to be operated on the new mandates, the solution would
C C
have been to give notice to Lui that the Defendant, having been given a
D D
valid board resolution to change the mandates for the Acc ounts, and not
E being in a position to resolve the conflicting allegations made by the two E
sides concerning the right to manage the company, was under a duty to
F F
proceed with the use of the new mandates, and Lui could take whatever
G steps he considered appropriate to protect his or the Plaintiff’s interest, G
including obtaining interim injunctive relief. By doing so, the
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Defendant would have discharged its duty to the Plaintiff to take
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reasonable care, and acted honestly with regard to Lui in case his claims
J of interest in the Funds should turn out to be well-founded. J
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L Conclusion L
51. Therefore the answers to the questions raised in paragraph 1 of
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the Order 14A summons are as follows:
N N
O O
(a) Whether the Defendant in freezing the Accounts from 6 June
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2008 onwards acted in accordance with the terms of the
Q mandates and/or Terms and Conditions: the answer is no. Q
(b) Whether the Defendant was “put on inquiry” of possible fraud,
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misappropriation of company funds or irregularities at the
S Plaintiff such that it was reasonable for the Defendant as the S
Plaintiff’s banker to freeze the Accounts from 6 June 2008
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onwards: the answer is no.
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(c) Since the answers to (a) and (b) are in the negative, the
B Defendant is not entitled to the declaration sought in the B
Counterclaim.
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(d) The sums standing in credit in the Accounts should, in the light
D D
of the answers given above, be paid out to the Plaintiff.
E E
52. I therefore give judgment to the Plaintiff in the sum of
F F
$528,006.56, being the total amount of the Funds in the Accounts at the
G close of business on 25 March 2009, just before the writ was issued, and G
interest thereon from the date of the writ to the date of judgment at the
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prime rate, and thereafter at the judgment rate until payment. The
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Counterclaim is dismissed. The application for final judgment u nder
J paragraph 3 of the summons is also dismissed. Since the outcome of the J
Order14A summons disposes of the entire action, I make an order nisi
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that the Defendant should pay the Plaintiff’s costs of the action, including
L the 2 summonses before me, to be taxed if not agreed, with certificate for L
counsel.
M M
N N
O O
Alfred H H Chan
P Deputy District Judge P
Q Q
Mr Justin Wang, instructed by Lam Lee and Lai, for the Plaintiff
R Mr Norman Nip, instructed by Wilkinson & Grist, for the Defendant R
Claimant (in the interpleader summons) absent
S S
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