C Corporation v P

• Jurisdiction: Cayman Islands
• Judge: (Smellie, J.)
• Judgment Date: 04 August 1994
• Date: 04 August 1994
• Court: Grand Court (Cayman Islands)

Grand Court

(Smellie, J.)

C CORPORATION

and

P and EIGHT OTHERS

P. Lamontagne, Q.C. and T.B. Shea for the plaintiff;

C.G. Quin and S. Hellman for the first to eighth defendants;

R.D. Alberga, Q.C. and Mrs. L. Chisholm for the ninth defendant.

Cases cited:

(1) A v. C, [1981] Q.B. 956; [1980] 2 All E.R. 347, dictum of Robert Goff J. applied.

(2) Bank Mellat v. Nikpour, [1982] COM LR 158; [1985] F.S.R. 87.

(3) Bankers Trust Co. v. Shapira, [1980] 1 W.L.R. 1274; [1980] 3 All E.R. 353, dicta of Lord Denning, M.R. applied.

(4) Behbehani v. Salem, [1989] 1 W.L.R. 723; [1989] All E.R. 143, dictum of Woolf, L.J. applied.

(5) Brink”s Mat Ltd. v. Elcombe, [1988] 1 W.L.R. 1350; [1988] 3 All E.R. 188, applied.

(6) Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2), [1969] 1 Ch. 93; [1968] 2 All E.R. 1002, applied.

(7) Cayman Islands News Bureau Ltd. v. Cohen, 1988–89 CILR 195, followed.

(8) Dubai Bank v. Galadari, [1990] 1 Lloyd”s Rep. 120, applied.

(9) Ebanks v. Clarke, 1992–93 CILR 195, followed.

(10) Federal Savings & Loan Ins. Corp. v. Molinaro, 1988–89 CILR 6.

(11) Lloyds Bowmaker Ltd. v. Britannia Arrow Holdings PLC, [1988] 1 W.L.R. 1337; [1988] 3 All E.R. 178, applied.

(12) Nordglimt, The, [1988] Q.B. 183; [1988] 2 All E.R. 531; [1987] 2 Lloyd”s Rep. 470, distinguished.

(13) Norwich Pharmacal Co. v. Customs & Excise Commrs., [1974] A.C. 133; [1973] 2 All E.R. 943, applied.

(14) R. v. Kensington Income Tax Commrs., ex p. de Polignac, [1917] 1 K.B. 486, dictum of Viscount Reading, C.J. applied.

(15) Selangor United Rubber Estates Ltd. v. Craddock (No. 3), [1968] 1 W.L.R. 1555; [1968] 2 All E.R. 1073; [1968] 2 Lloyd”s Rep. 289.

(16) Swiss Bank & Trust Corp. Ltd. v. Iorgulescu, 1994–95 CILR 149, dictum of Georges J.A. applied.

(17) Tate Access Floors Inc. v. Boswell, [1991] Ch. 512; [1990] 3 All E.R. 303, distinguished.

Legislation construed:

Grand Court (Civil Procedure) Rules, r.26: The relevant terms of this rule are set out at page 208, lines 37–40.

Civil Procedure-judgments and orders-setting aside-ex parte order-court not bound to set aside order obtained without full disclosure-may set aside if deliberate misstatement in supporting affidavit and applicant fails to explain reliance on it-court has duty to consider regranting order on basis of other evidence

Trusts-constructive trusts-breach of fiduciary duty-bank receiving funds misappropriated fraudulently and in breach of fiduciary duty is constructive trustee as soon as put on its inquiry-has duty to disclose all relevant information, including confidential information, to beneficiary

The plaintiff sought to recover funds from the defendants in respect of alleged fraud and breach of fiduciary duty.

The plaintiff, a US corporation, had brought proceedings in Texas alleging that its employees and corporations controlled by them had fraudulently and in breach of fiduciary duty misappropriated its funds. It then commenced the present proceedings in the Cayman Islands on the basis that some of the funds had been traced to accounts in the names of several of the first to eighth defendants with the ninth defendant, a Cayman bank.

On the basis of an affidavit made by a private investigator in Texas, exposing the trail of the funds to the ninth defendant, the plaintiff obtained an ex parte order against the defendants requiring them to make discovery of assets held in the jurisdiction and restraining them from removing their funds in Cayman banks. Similar orders were made against the ninth defendant in respect of accounts and funds in the names of the other defendants.

It was subsequently revealed that the affidavit on which these orders were based was false and misleading as there were no such accounts. Before the defendants could apply to discharge the order, the plaintiff discontinued the proceedings. It gave no explanation for the errors in the affidavit and appeared reluctant to inquire into the details. Having presented other compelling affidavit evidence of the fraud perpetrated by the first and third defendants, it sought to discharge the order against the first to eighth defendants and to substitute an injunction against the ninth defendant, preventing the movement of funds in any account in which the other defendants had an interest, together with an order for the early discovery of account records. It also sought to amend its writ by striking out the names of and claims against the first to eighth defendants and substituting indorsements for tracing orders and a declaration that any

funds in the accounts were held by the ninth defendant as constructive trustee.

The plaintiff submitted that (a) the court should exercise its discretion to allow the ex parte orders to stand since the plaintiff had not been a party to the making of the false affidavit and it could be rectified by the Texas court; (b) in any event, the Mareva and discovery orders should be regranted since funds which had been or were being held in the Cayman Islands would be removed and untraceable without the orders and the ninth defendant owed a duty of disclosure in consequence of its involvement; and (c) the amendment of the writ should be allowed since an action against the ninth defendant as constructive trustee could be sustained from the moment it received notice of the plaintiff”s claim and was put on its inquiry and, under the Grand Court (Civil Procedure) Rules, r.26, the action should not be denied as a result of non-joinder of the other defendants who could be joined subsequently to protect their interests.

The ninth defendant submitted that (a) the court was bound to set aside the ex parte orders obtained as a result of deliberate misstatement on oath; (b) the Mareva order should not be regranted since the original order was directed to non-existent accounts and had not succeeded in preventing any assets held in the Cayman Islands to be removed; (c) the discovery order against it should not be regranted before the plaintiff submitted a statement of claim or at all since the ninth defendant owed a duty of confidentiality to its customers; and (d) the amendment of the writ should not be allowed since the plaintiff could not sustain an action against the ninth defendant while admitting that it was innocent of all wrongdoing and accusing the other defendants who were no longer able to protect their interests.

Held, striking out the ex parte orders, granting an order for discovery and amending the writ:

(1) The court was not bound to set aside an ex parte order obtained in breach of the duty to make full disclosure but in the present case it would do so since the process of the court had been abused by the plaintiff”s reliance upon an affidavit containing deliberate misstatements, to obtain relief which would otherwise not have been available. Furthermore, the plaintiff”s subsequent failure to provide a proper explanation of its reliance on the affidavit also amounted to a breach of the duty of uberrima fides it owed to the court. There was no question of the affidavit”s being rectified in Texas, since it was the process of the Cayman court which had been abused (page 195, line 20 – page 197, line 3; page 197, line 22 – page 200, line 13).

(2) Notwithstanding the setting aside of the orders, the court had a duty to consider whether, on the basis of the evidence now advanced, the plaintiff was in danger of being seriously prejudiced by the likely dissipation of assets or the disappearance of evidence and, accordingly, whether it should regrant the order. The evidence (excluding the impugned affidavit and the information obtained directly as a result of the original order, which could not be considered) revealed a serious risk that assets,

albeit of an indeterminate kind and sum, were being or had been held in the Cayman Islands and could not be traced without an appropriate order. The plaintiff had reaffirmed its undertaking to observe the caveat that there was no automatic right to use any information obtained in the Cayman proceedings in the Texas proceedings and, consequently, the order for discovery against the ninth defendant would be regranted before the statement of claim was filed. It owed a duty of full disclosure to the plaintiff as a result of its innocent involvement in the wrongdoing of the other defendants, irrespective of its duty of confidentiality owed to them, and it would not be prejudiced by the order which should enable the plaintiff to discover whether there were sufficient assets in the Cayman Islands to justify continuing with the action. However, the Mareva injunction would not be regranted since, as a result of the original order”s being directed to non-existent accounts, any assets held by the ninth defendant to the benefit of the other defendants could have been long since removed and any remaining were likely to continue to be held (page 200, line 20 – page 204, line 39; page 205, lines 7–28).

(3) The ninth defendant bank did not become a constructive trustee simply on receipt of the plaintiff”s misappropriated funds since it was ignorant of the other defendants” wrongdoing and was not required to inquire into the ownership of the money. However, it ought to have known that it was misappropriated when the circumstances would have put a reasonable man on his inquiry. Consequently, an action could be sustained against the ninth defendant bank from the moment it received notice of the plaintiff”s claim (page 206, line 11 – page 208, line 32).

(4) Under the Grand Court (Civil Procedure) Rules, r.26, this action should not fail simply as a result of the non-joinder of the other defendants, who could be joined subsequently in order to protect their interests. Accordingly, since the proposed amendment of the writ did not prejudice the defendants it would be allowed on the terms applied for except in respect of any allegation that the ninth defendant had been a constructive trustee...