Walsh and Taal v Horizon Bank International Ltd (in provisional liquidation)

• Jurisdiction: Bermuda
• Judgment Date: 27 September 2006
• Date: 27 September 2006
• Docket Number: Commercial Jurisdiction 2004 No. 25
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Kawaley, J

Commercial Jurisdiction 2004 No. 25

BETWEEN:

Allen Walsh and Hans Taal

Plaintiffs

and

Horizon Bank International Limited (in provisional Liquidation)

Defendant

Mr C Luthi for the Plaintiffs

Mr J Woloniecki and Ms K George for the Joint Liquidators

The following cases were referred to in the judgment:

Informission v Convertix CorpBDLR [2000] Bda LR 75

Donoghue v Armco [2002] 1 Lloyds Law Rep 425

Arabian American Insurance Co (Bahrain) EC v Al Amana Insurance & Reinsurance Co LtdBDLR [1994] Bda LR 27

National Iranial Oil Co v Ashland Overseas Trading LtdBDLR [1988] Bda LR 13

Re Atlantic Computer Systems PLCELR [1992] Ch 505

Companies Act 1981, s. 175

Freezing order — Tracing claim — Proprietary claim — Constructive trust — Appropriate forum — Competent forum — Depletion of assets

RULING of Kawaley, J

Introductory

1. The present proceedings were commenced by the Bermuda Commercial Bank by Originating Summons dated August 19, 2004 and resulted in an Order dated September 3, 2005 effectively freezing certain monies held in the Defendant's account there. Various customers of the Defendant, a St. Vincent and Grenadines bank, shortly thereafter formally joined the proceedings, and an interpleader action to determine entitlement to the monies, and in particular the Plaintiff's proprietary claim, proceeded with the original Plaintiff withdrawing from the proceedings in or about April 2005.

2. From the outset, the Court was concerned about the implications of tying up the monies of innocent depositors while the Plaintiff sought to establish its proprietary claim. On February 7, 2005, the Court ruled that the Plaintiff had a good arguable case for tracing its allegedly stolen monies into the Defendant's accounts based on an application of the lowest intermediate balance rule. The contention that a good arguable case was made out for a tracing claim attaching all the monies in the account was rejected at the interlocutory stage. The Plaintiffs' claim was that the Defendant was controlled by one company and certain individuals based in Ontario, Canada (‘the Toronto Defendants’), and that the Defendant received the Plaintiff's monies with notice of the fact that they were stolen monies, so that the monies received were impressed with a constructive trust in the Plaintiffs' favour. On April 22, 2004, the Plaintiffs had already sued the Toronto Defendants in Ontario, and alleged that the Defendant company was controlled by the Toronto Defendants.

3. This Court's Order of February 7, 2005, envisaging an expedited trial of the Plaintiff's seemingly somewhat tenuous claim to monies in excess of the lowest intermediate balance with a view to expediting the possibility of innocent depositors receiving their monies, proposed that a limited issue be tried. On the assumption that the monies were held on constructive trust for the Plaintiffs, could they prove as matter of evidence the right to trace monies in excess of the lowest intermediate balance? I envisaged that the other Defendants would likely receive some, if not all, of their monies in early course, and that the issue of whether or not as a matter of fact and law the Defendant did receive the Plaintiffs' monies impressed with a constructive trust could conveniently be tried in the Toronto action. This would minimize the prejudice to the depositors, enable the Plaintiffs to prove their proprietary claim in their preferred forum, should this prove feasible from an Ontario law perspective. The Defendant was, at this juncture, still under the formal control of the alleged perpetrators of the fraud, and it seemed possible that any deficit owing to its depositors might be made good out of other resources, and that any prejudice it might sustain in being sued in Ontario need not be taken into account. The ramifications of ordering a split trial on a non-consensual basis were simply not analyzed at this stage.

4. On April 5, 2005, when I declined an application by the Defendant's then attorneys for payment of their fees out of the Bermuda monies, I indicated that the information then before the Court suggested that independent management should be appointed because of the actual or contingent insolvency of the Defendant. On or about April 21, 2005 Marcus Wide of PricewaterhouseCoopers Toronto was appointed Provisional Liquidator of the Defendant in St. Vincent, and fresh lawyers were retained in Bermuda. At a hearing on October 6, 2005 with attempts still being made to finalize an order giving effect to the February 7, 2005 Ruling, Mr. Woloniecki for the Provisional Liquidator placed before the Court. his client's First Report. This indicated that: (a) the Plaintiffs appeared to have a good proprietary claim; and (b) that the Defendant was clearly insolvent with additional unsecured creditors not before the Bermuda Court. Counsel further stated that the only live issue was the extent of the proprietary claim. The matter was adjourned to a date to be fixed for further arguments on the terms of the February 7, 2005 Order, and further evidence was directed to be filed within 14 days. This First Report gave credence to the earlier view that the existence of the proprietary claim might not need to be adjudicated by this Court.

5. However, on November 10, 2005, ancillary liquidation proceedings were commenced in respect of the Defendant in Bermuda, and Messrs. Peter Mitchell and Marcus Wide were appointed Joint Provisional Liquidators (‘JPLs’) by this Court in Companies (Winding-Up) 2005: 359. The application was granted by me primarily on the jurisdictional ground that the Defendant was carrying on business thorough an agent, the Bermuda Commercial Bank Limited, in Bermuda. It followed that the External Companies (Jurisdiction in Actions) Act 1888 (as read with section 4 of the Companies Act) applied to give this Court jurisdiction as of right over the Defendant. The Petitioner's Counsel, Ms. George, cited Wade-Miller J's decision in Informission v Convertix CorporationBDLR[2000] Bda LR 75. The JPLs subsequently consented to the liquidation stay being lifted to permit the Plaintiffs to pursue the present claim. The other depositors, as unsecured creditors, were now prevented by the liquidation stay from further participating in the Bermuda proceedings.

6. By Summons dated April 7, 2006, the JPLs sought orders (a) directing the exchange of pleadings and trial of the Plaintiff's proprietary claim, and (b) payment out to them of monies in excess of the lowest intermediate balance. On April 26, 2006, by way of response, the Plaintiffs issued a Summons seeking orders that: (a) the issue of whether or not the Defendant was through Kevin Coombs fixed with knowledge of the Toronto Defendants' fraud when it received the Plaintiffs' monies should tried in Toronto, which was the natural and most appropriate...