Damaging court case for Kwantas Corporation Bhd

From SPH's website, article appeared in Straits Times, written by K. C. Vijayan, January 12, 2012:

http://www.singaporelawwatch.sg/remweb/legal/ln2/rss/legalnews/74720.html?utm_source=rss%20subscription&utm_medium=rss

THE High Court has ordered a shipping company to pay US$2.89 million (S$3.73 million) in damages after finding that it had conspired with another firm to defraud a Chinese bank.

The Panama-registered Universal Shipping Group was involved in the fraud following the shipment of 3,000 tonnes of palm oil to a Chinese company in 2008. The palm oil was carried from Kuantan in Malaysia on Universal's vessel The Dolphina.

Justice Belinda Ang, in judgment grounds released on Tuesday, said this was a 'most unsatisfactory case', involving a long drawn-out hearing that stretched over two years.

Her 63-page judgment is expected to be a reference point for court rulings on the requirements to support future claims of civil conspiracy, said lawyers.

Among other things, the judge invoked the rarely used 'law of attribution' to link a director of Universal directly to the fraud by the firm.

The Dolphina was chartered to Malaysian palm oil producer Kwantas Oil, which had sold the cargo to Chinese company Zhejiang Zhongguang Industry.

The Bank of Communications (BOC) in Zhejiang Province advanced a letter of credit for US$3.4 million on Zhongguang's behalf to Kwantas. But it never got its money back.

Kwantas, as charterer, had undertaken to the bank to protect Universal against all liability after the cargo was unloaded in Huangpu without the original bills of lading being produced.

But Zhongguang ran into financial difficulties, which meant it could not pay BOC. The bank found out too late that the cargo had been released to various end-users in China through Dongma Oils & Fats, a company linked to Kwantas and Universal, some two months earlier than the June 2008 due date.

It then began proceedings against The Dolphina, which was seized in Singapore waters in July 2008, and sued Universal for conspiring with others to defraud it.

A claim against Universal for breach of contract failed in the same case.

BOC's lawyer Vivian Ang argued that Universal had conspired with Kwantas to induce BOC to make the US$3.4 million payment to Kwantas on the strength of documents presented.

The two companies are closely connected, Justice Ang found. The three directors of Universal are also directors of Kwantas.

Key to the case was the role of director Steve Kwan, whose knowledge of what transpired could be attributed to Universal, the judge ruled. Mr Kwan did not testify in court - unlike the two other Universal directors, who had denied any knowledge of the events leading to the proceedings.

'Unless I am to believe that the entire board of directors of Universal and Kwantas was collectively ignorant of the goings-on of either company,' it must follow that everything was done with their knowledge or approval, she added.

The judge rejected defence lawyer Prem Gurbani's claim that BOC's loss was caused by the financial straits of its customer Zhongguang, and not by any alleged conspiracy.

Justice Ang held that the case for conspiracy had been satisfactorily made, and ordered Universal to pay BOC's losses, set at US$2.89 million.

The full judgement can be found here:

http://www.singaporelawwatch.sg/remweb/legal/ln2/rss/judgment/13237.html?utm_source=web%20subscription&utm_medium=web&title=The%20%22Dolphina%22 %5B2011%5D%20SGHC%20273

Key Players:

BOC: Bank of Communications Co Ltd

KOSB: Kwantas Oil Sdn Bhd, a subsidiary of Kwantas Corporation Bhd (KCB)

Universal: Universal Shipping Group Inc, a related party of KCB

Steve Kwan: Kwan Ngen Chung, Director and shareholder of Universal and KCB

KOSB and Universal are related parties, as disclosed in KCB's 2009 yearreport:

Some excerpts:

196 Yet, KOSB went ahead to endorse BL4 in blank, falsely representing that it still had legal effect, and intending that it be so treated, as part of a raft of measures to defraud third parties. I have already described the fraud involved in opening the June L/C (see [98] above), and the endorsement of BL4 in blank, as well as the creation and backdating of the 24 March 2008 invoice, was merely a continuation of that fraud, because the relevant documents had to be doctored and a false trail created in order to comply with the key requirements of the June L/C (see [101] above), so that payment could be obtained thereunder.

230 (f) Amongst his many portfolios (see [7] to [11] above), Steve Kwan is one of three directors in both Universal and KOSB, but is the only director not to have testified in this case. In addition, the other two directors (Alvin Kwan and K H Chong) who did testify vociferously denied having any knowledge about the events leading to these proceedings. Unless I am to believe that the entire board of directors of Universal and KOSB was collectively ignorant of the goings-on in either company, and that all the actions taken by their employees were without approval or authority, which is not supported by the evidence, it must follow that the common course of business had been followed (s 116(f) of the Evidence Act (Cap 97, 1997 Rev Ed)) and that everything that was done was done with board approval or knowledge, and that the reason Steve Kwan has not come forward to produce evidence is that such evidence would not be favourable to either him or to Universal (s 116(g) of the Evidence Act).

299 In my view, the answer is clear. Universal already knew, whether through Steve Kwan or otherwise, that the Cargo (including the BL4 Cargo) had been discharged on the Discharge Date against KOSB’s LOI, and that, under its terms, BL4 was supposed to be returned to Universal and deemed accomplished once it was obtained by KOSB. As a result of Steve Kwan’s knowledge, Universal also knew that BL4 had at some point in fact been obtained by KOSB; that the June L/C had been opened in KOSB’s favour and that it required, inter alia, BL4 to be endorsed in blank; that BL4 therefore had to be endorsed in blank in order to comply with the terms of the June L/C if KOSB was to negotiate it or receive payment on maturity of the June B/E; that KOSB in fact endorsed BL4 in blank and transferred it to Maybank as part of KOSB’s negotiation of the June L/C; and that KOSB was thereby falsely representing that an accomplished bill of lading was still valid, and intending that BL4 be so regarded, in order to negotiate the June L/C or to secure payment upon maturity of the June B/E.

300 Knowing all this, Universal was in a position to prevent KOSB from effecting the fraud by simply demanding the return of BL4, as it was fully entitled to do. In addition, there was every reason for Universal to have done so in light of its earlier breach of the presentation rule (ie, delivery of the BL4 Cargo without production of BL4), because as long as BL4 remained out of Universal’s possession, there was every possibility that (as has happened in this case) Universal would be exposed to liability from someone who came into possession of BL4 and decided to sue Universal for misdelivery of the BL4 Cargo once it was discovered that the BL4 Cargo had been discharged otherwise than against presentation of BL4.

301 Looking at all the facts, on analogy with what was said in Credit Lyonnais (see [272] above), the inference seems to me irresistible that Universal was operating in furtherance of a common design with KOSB so as to perpetuate an unlawful fraud by early June 2008: the blank endorsement of BL4 by KOSB was an essential part of the fraud, because without it there would have been no compliance with the requirements of the June L/C and BOC would not have disbursed funds thereunder to KOSB, and Universal not only knew all this but also knew of KOSB’s blank endorsement of BL4, yet Universal did nothing to prevent it, in circumstances where Universal had absolutely no reason to allow such an endorsement. In my view, Universal’s conduct is only explicable on the basis that it had come to an agreement with KOSB that the latter could dishonestly make use of BL4 so as to trick BOC into advancing funds under the June L/C.