AKTIESELSKABET DANSK SKIBSFINANSIERING v. WHEELOCK MARDEN & CO LTD AND OTHERS

CACV000200/1989

IN THE COURT OF APPEAL 1989, Nos 200 & 201
(Civil)

BETWEEN

Aktieselskabet Dansk Skibsfinansiering

Plaintiffs

(Body Corporate) (Respondents)
AND
Wheelock Marden & Co Ltd

Defendants

John Louis Marden (Appellants)
William John Lees
Lee Pei-chung
Robert John Francis Brothers
Leung Hon-wan
Patrick Poon
David Andrew Hussey
Charles Brian Murray Lloyd
Yuen Chu-wing
Anthony Louis Marden

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Coram: Hon Kempster and Macdougall, JJA, and Nazareth, J

Dates of Hearing: 10 – 13 July 1990

Date of Handing down Judgment: 20 July 1990

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JUDGMENT

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Kempster, JA :

1. By reason of the separate representation of the defendants to these proceedings we have before us two appeals from the reserved judgmentof Jones J handed down in chambers on 15 December 1989 whereby applications to strike out the Statement of Claim, settled anonymouslyin London and wrongly bearing the purported signature of Hong Kong counsel, were dismissed. Albeit not appearing in his Order ofeven date, which should be the subject of an application under RSC Order 20 rule 11, the judge also dismissed the action as againstthe 11th defendant. There is no cross appeal in that regard.

2. By originating summons dated 29 December 1988 the plaintiffs, a Danish corporation and creditor of Wheelock Maritime InternationalLtd, in liquidation, (WWI), sought as against 12 defendants relief pursuant to section 275(1) of the Companies Ordinance (Cap 32) which reads : –

“If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraudcreditors of the company … or for any fraudulent purpose, the court, on the application of the Official Receiver, or the liquidatoror any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly partiesto the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, forall or any of the debts or other liabilities of the company as the court may direct.”

Such conduct could also be the subject of criminal proceedings.

3. As in the case of section 332 of the Companies Act 1948 section 275(1) contemplates : –

“a state of facts in which the intent of the person carrying on the business is that the consequence of carrying it on … will bethat creditors will be defrauded, ‘intent’, of course, being used in the sense that a man must be taken to intend the natural orforeseen consequences of his act.”

per Templeman J in Re Cooper Chemicals [1978] Ch 262 at p 267. Thus, –

“If a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonableprospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carryingan business with intent to defraud.”

per Maugham J in Re william C Leitch Brothers Ltd [1932] Ch 71 at p 77. This authority has been followed in Re white and Osmond (Parkstone) Ltd 30 June 1960 (unreported) by Buckley J and by the English Court of Appeal in R v Grantham [1984] QB 675. The liquidator is not a party to the originating summons but has been made aware of this claim whereby, in relation to a periodduring which there was a downturn in charter and freight rates, graphically described to us by Mr Thomas on behalf of the first defendants,Wheelock Marden & Co Ltd, the plaintiffs contend that the shipowning and chartering business of WMI was carried on with intentto defraud its creditors, that the defendants were knowingly parties to such conduct and that they should personally and withoutlimitation of liability be responsible for the payment of the debts owing to the plaintiffs by WMI.

4. The Statement of Claim was served on 10 April 1989 and on 1 May extensive Further and Better Particulars were requested by the firstdefendants. A draft answer appears in the court bundle but meanwhile, on 7 September, the defendants issued their summonses to strikeout; contending that the form of the pleading and the manner in which the cause of action was presented was objectionable.

5. At all material times until 2 August 1985, when it went into voluntary liquidation, the first defendants had been the general managersand secretaries of WMI and, with the qualification that the 7th defendant resigned on 3 April 1985, all the other defendants hadbeen directors of that company. The plaintiffs allege that to the knowledge of the defendants WMI had been incurring liabilitieswithout prospect of honouring them since February 1983; a fortiori when, subsequently, it incurred various liabilities to them.

6. Paragraphs 4 and 5 of the pleading impugned include variations on formulae, prima facie apt for allegations of negligence or of “wrongfultrading” pursuant to section 214 of the Insolvency Act 1986, such as “which ought to have been known”, “ought to have known”, “shouldhave been clear”, “should have been” and “apparently” which may be, depending on context, consistent with an innocent state of mind.Belmont Finance v Willims Furniture [1979] 1 Ch 250. These expressions, particularly when “rolled-up” in pleas reading, for example, “the defendants knew or were reckless or ought tohave known”, are said to be demurrable since, as was common ground before the judge, liability for fraudulent trading requires proofof actual fraud; which may comprehend recklessness. Negligence will not suffice. We have been favoured with an exhaustive citationof authority relative to the issue of knowledge in support of the submission that the plaintiffs have been willing to wound and yetafraid to strike by unequivocally alleging fraud and dishonesty as required on the authority of Davy v Garrett (1878) 7 Ch D 473.

7. It may be that the words complained of add nothing to the general allegations of fraud but, be that as it may, they are in my opinionin no way calculated to embarrass the defendants in relation to the case which they have to meet or to which they have to plead.Indeed defences have already been served. The material words of the “conclusory” paragraph 9 of the Statement of Claim, encompassingparticulars which, far from being as consistent with innocence as with fraud, are apt to permit the “proper inference” describedin william C Leitch Brothers Ltd, are unequivocal. They are : –

“In all the circumstances, the business of WMI was being carried on fraudulently within the scope and meaning of section 275 of theCompanies ordinances … “

Further, the form of the plaintiffs’ pleading overall accords with that suggested in Note 18/12/13 of the Supreme Court Practice 1988and the averments “must” or “ought to have known” predicate the rider “if acting honestly”. It demonstrates that the plaintiffs havenot been afraid to strike. In so finding I am relieved to find that insofar as the judgment of May LJ in Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 at p 1352 suggests that these “rolled-up” pleas are indeed demurrable his opinion was not shared by Parker and Nicholls LJJ as longas the pleas are girded with adequate particulars of knowledge. I am also happy to be able to follow the approach to a similar questionby this court in Advance Finance Ltd v Pang Sze-mui [1986] HKLR 523. As Lawton LJ said when giving the judgment of the English Court of Appeal in R v Landy [1981]1 WLR 355 at p 365 what a jury can say in relation to a defendant prosecuted for conspiracy to defraud is : –

“We are sure he was acting dishonestly because we can see no reason why a man of his intelligence and experience would not have appreciated,as right minded people would have done, that what he was doing was dishonest.”

This approach is very similar to that of Peter Gibson J in the civil case of Baden, Delvaux and Lecuit v SG (1983) BCLC 325 where, at p 407, he referred to the position of a stranger to a trust who might incur liability to the beneficiaries by knowinglyassisting in a fraudulent design by the trustees. His words were : –

“What types of knowledge are relevant for the purposes of constructive trusteeship? Counsel for the plaintiff … submits that knowledgecan comprise any one of five different mental states which he described as follows : –

(i) actual knowledge

(ii) wilfully shutting one’s eyes to the obvious

(iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make

(iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man

(v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

More accurately, apart from actual knowledge they are formulations of the circumstances which may lead the court to impute knowledgeof the facts to the alleged constructive trustee even though he lacked actual knowledge of those facts. Thus the court will treata person as having constructive knowledge of the facts if he wilfully shuts his eyes to the relevant facts which would be obviousif he opened his eyes, such constructive knowledge being usually termed (though by a metaphor of historical inaccuracy) ‘Nelsonianknowledge’. Similarly the court may treat a person as having constructive knowledge . of the facts (‘type (iv) knowledge’) if hehas actual knowledge of circumstances which would indicate the facts to an honest and reasonable man.”

8. At the very least the case to the contrary is neither plain nor obvious despite the doubts about William C Leitch Brothers Ltd expressed by Dixon CJ and Kitto J in Hardie v Hanson (1960) 105 CLR 451.

9. Jones J came to the same conclusion and held that in the instant case the pleading could not properly be criticised in that therewas no alternative plea in negligence. He stated : –

“The rolled-up plea to which objection was taken relates to an allegation of dishonesty which has been properly particularised.”

If further particularity is required other remedies are available to the defendants and it is certainly apparent to me, as it wasto the judge, that paragraph 7 of the Statement of Claim, like the allegations in paragraph 5 and the now corrected paragraph 6,which include. allegations that the defendants took unwarranted risks with creditors’ monies and made fraudulent representations,all constitute part of the case on fraud. Sensibly no argument has been addressed to us in relation to the relief sought in the prayer.At trial it will fall to the judge “to consider what was the directors’ view of WMI’s position at the time they obtained the credit”as pointed out by Buckley J in Re White and Osmond (Parkstone) Ltd at p 13. It will be open to the defendants to demonstrate that the line between taking a legitimate business risk and dishonestywas not crossed and that “the proper inference” should not be drawn. To adapt further words of Templeman J in Re Cooper Chemicals Ltd at p 269 : –

“All I decide now is that the points of claim appear to establish a case which invites investigation under section 275(1) and at theplaintiffs’ risks as to costs if they fail to establish the liability of one or more of the respondents under that section.”

10. In my opinion the judge so exercised his discretion as to reach the correct conclusion on the Summonses before him. I would dismissthese appeals accordingly.

11. I would also make an order nisi that the plaintiffs should have their costs of these appeals.

Macdougall, JA :

12. I agree.

Nazareth, J:

13. I also agree.

Representation:

Michael Thomas, QC and John Scott (M/s Richards Butler) for D1/Appellants

A Barma (M/s Alsop Wilkinson & Driver) for D2-D10, D12/Appellants

Terence Cullen, QC and Clifford Smith (M/s Holman Fenwick & Willan) for Plaintiffs/Respondents