ARROW ECS NORWAY AS v. M YANG TRADING LTD AND OTHERS

HCA 239/2016

[2018] HKCFI 975

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 239 OF 2016

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JUDGMENT

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INTRODUCTION

1.  This is the Plaintiff’s application for summary judgment against the 5^th, 10^th, 11^th, 13^th, 14^th and 15^th Defendants (collectively the “Second Level Recipients”) in respect of various sums of money (totalling US$4,188,175) received by them from a bank account of the 2^nd Defendant which the Plaintiff says represent a portion of the money which it was induced by fraud to transfer to the said bank account of the 2^nd Defendant. The Second Level Recipients admit that they received the sums in question, and seek to defend the Plaintiff’s claims against them on the ground of change of position, in that they received the funds and subsequently paid them out in good faith and in the usual course of their “money changing business”.

2.  The main issue which arises for determination is whether the Second Level Recipients cannot rely on the defence of change of position because of “illegality”.

BASIC FACTS

3.  The Plaintiff, a company incorporated in Norway, is a subsidiary of Arrow Electronics Inc (“Arrow Electronics”), a NYSE listed company in the United States of America carrying on business as a global provider of products, services and solutions to industrial and commercial users of electronic components and enterprise computing systems.

4.  The 2^nd Defendant is a company registered in Hong Kong and the holder of a bank account at Bank of Communications, Shanghai Branch (“D2 Account”).

5.  Between 18 and 22 January 2016, the Plaintiff was induced by person(s) impersonating himself/themselves, over the telephone or in emails, as the CEO of Arrow Electronics or a lawyer with a Wisconsin law firm (“the Fraud”) to transfer, inter alia, 9 sums totalling US$23,395,000 to the D2 Account (collectively the “D2 Transfers”), as follows:-

	Date	Amount (US$)
(i)	18 January 2016	977,000
(ii)	19 January 2016	2,752,000
(iii)	20 January 2016	1,770,000
(iv)	20 January 2016	2,978,000
(v)	21 January 2016	2,997,000
(vi)	21 January 2016	2,979,000
(vii)	21 January 2016	2,970,000
(viii)	22 January 2016	2,995,000
(ix)	22 January 2016	2,977,000
	Total:	23,395,000

6.  On or about 22 January 2016, the Plaintiff and Arrow Electronics discovered that the Plaintiff had been the victim of the Fraud, and the D2 Transfers had been erroneously made as a result of the Fraud.

7.  The Plaintiff immediately contacted its banker, Nordea Bank Norge ASA, and instructed it to recall, inter alia, the D2 Transfers.  The bank was able to recall Items (vii) and (ix) above, but was unable to do so in respect of the balance of US$17,423,000.

8.  Between 20 and 22 January 2016, portions of the aforesaid sum of US$17,423,000 were transferred from the D2 Account to, inter alia, various bank accounts of the Second Level Recipients at HSBC in Hong Kong, as follows:-

Account	Amount (US$)
D5 Account	450,000
D10 Account	1,041,480
D11 Account	491,025
D13 Account	1,200,000
D14 Account	570,470
D15 Account	435,200
Total:	4,188,175 (“the Funds”)

9.  The Plaintiff does not allege that the 2^nd Defendant or the Second Level Recipients were directly involved in the Fraud, other than that they were in receipt of the Funds.  On this footing, the Plaintiff claims to be entitled to recover from the Second Level Recipients the respective sums which they received from the D2 Account on the grounds of money had and received, unjust enrichment and/or restitution.

The DEFENCE

10.  The Second Level Recipients’ defence to the Plaintiff’s claims is, in summary, as follows.

11.  Silver Fast Limited (“Silver Fast”) was at all material times a money service operator licensed by the Customs and Excise Department of Hong Kong (“CED”) to carry on money changing business providing remittance services and services for exchange of currencies (“the Money Changing Business”).

12.  Silver Fast primarily provided its services to residents or customers in the PRC who needed to exchange foreign currencies but had difficulties, or found it costlier, to do so in the PRC because of foreign exchange controls imposed by the PRC Government.

13.  Chen Mingui (“Madam Chen”) was at all material times the person responsible for the main operations of the Money Changing Business of Silver Fast.  She was a close friend of Ms Chen Yajian, Mr Luo Suixiong and Mr Chen Yongzhang, who were directors of the 10^th, 13^th and 14^th Defendants respectively (collectively the “Respective Directors of D10, D13 and D14”).

14.  In or about 2014, Silver Fast, in view of the cancellation of its bank account at HSBC for administrative reasons and with the consent of the Respective Directors of D10, D13 and D14, started to use the D10 Account, D13 Account and D14 Account for its Money Changing Business.

15.  On the other hand, the 5^th, 11^th and 15^th Defendants at all material times carried on business as unlicensed money service operators in Hong Kong.

16.  Zheng Zhouru (“Madam Zheng”), a PRC resident carrying on a money changing business in the PRC –

(1)  had business dealings with various money service operators in Hong Kong, including Silver Fast, and the 5^th, 11^th and 15^th Defendants;

(2)  had a long term customer called Hu Guozhi (“Mr Hu”); and

(3)  did not have any bank account in Hong Kong.

17.  Between 20 and 22 January 2016, Mr Hu informed Madam Zheng that he wished to convert approximately US$5 million into RMB.  Madam Zheng decided to engage Silver Fast and the 5^th, 11^th and 15^th Defendants to receive the funds (in USD) from Mr Hu, and they all agreed to provide the relevant remittance services and indicated that the funds could be transferred to the bank accounts of the Second Level Recipients.

18.  Pursuant to aforesaid arrangements, the following took place:-

(1)  In respect of the 5^th Defendant –

(a) on 20 January 2016, a sum of US$300,000 was transferred from the D2 Account to the D5 Account;

(b) on 21 January 2016, a sum of US$150,000 was transferred from the D2 Account to the D5 Account; and

(c) on 21 January 2016, pursuant to the instructions of Madam Zheng provided on behalf of Mr Hu, the 5^th Defendant arranged various transfers totalling RMB2,856,778 to Madam Zheng’s designated accounts in the PRC.

(2)  In respect of the 11^th and 15^th Defendants –

(a) on 21 January 2016, a sum of US$491,025 was transferred from the D2 Account to the D11 Account, and another sum of US$435,200 was transferred from the D2 Account to the D15 Account; and

(b) on 21 January 2016, pursuant to the instructions of Madam Zheng provided on behalf of Mr Hu, the 11^th and 15^th Defendants arranged various transfers or remittances totalling RMB6,131,609 to Madam Zheng’s designated accounts in the PRC.

(3)  In respect of the 10^th Defendant –

(a) on 21 January 2016, 5 different sums making up a total of around US$1 million were transferred from different accounts or entities to the D10 Account;

(b) the 5 transfers include one for US$300,000 transferred from the D2 Account; and

(c) on 21 January 2016, pursuant to the instructions of Madam Zheng provided on behalf of Mr Hu, Silver Fast arranged various transfers totalling RMB6,732,670 to Madam Zheng’s designated accounts in the PRC.

(4)  In respect of the 10^th, 13^th and 14^th Defendants –

(a) on 22 January 2016, 7 sums totalling US$2,511,950 were transferred from the D2 Account to the D10, D13 and D14 Accounts, as follows –

Recipient Account	Amount (US$)
D14 Account	325,240
D14 Account	245,230
D13 Account	423,880
D13 Account	310,820
D13 Account	465,300
D10 Account	357,375
D10 Account	384,105

(b)   on or about 22 January 2016, pursuant to the instructions of Madam Zheng provided on behalf of Mr Hu, Silver Fast arranged various transfers totalling RMB16,885,314 to Madam Zheng’s designated accounts in the PRC.

19.  It was the Second Level Recipients’ belief that the Funds were transferred from the D2 Account to their respective accounts in the course of the money changing businesses operated by them and/or Silver Fast for legitimate commercial purposes and the Funds were received in good faith, with consideration provided and without notice of the Fraud.

20.  The Second Level Recipients changed their position as a result of the receipt of the Funds, in that they transferred the Funds out of their respective accounts afterwards.

21.  Accordingly, the Second Level Recipients have not been enriched and are not liable to repay the respective sums received by them to the Plaintiff.

DISUCSSION

22.  As I understand from the submissions of Ms Connie Lee (for the Second Level Recipients), she does not seriously dispute that, subject to the defence of change of position, the Plaintiff is entitled to recover the respective sums that the Second Level Recipients received from the D2 Account on the grounds of money had and received, unjust enrichment and/or restitution.  This seems to me to be correct as a matter of principle (see paragraph 14 of an earlier Decision of Recorder L Wong SC, as she then was, given on 22 September 2016 when dealing with an application for summary judgment by the Plaintiff against the 1^st Defendant in this action).  On the other hand, Mr Anson Wong SC (for the Plaintiff), while accepting that, for the present purpose, the sums received by the Second Level Recipients were subsequently paid out, contends that they cannot make out the defence of change of position because:-

(1) there was no causal link between the receipt and change of position; and

(2) the Second Level Recipients cannot rely on the defence of change of position because of “illegality” and/or they did not act “in good faith”.

(i)   The effect of “illegality” on the defence of “change of position”

23.  I shall fist deal with the Plaintiff’s contention that the Second Level Recipients cannot rely on the defence of change of position because of “illegality”.

24.  In Barros Mattos Junior v MacDaniels Ltd [2005] 1 WLR 247, Laddie J held that an innocent recipient of stolen money could not rely on the defence of change of position where that change was regarded by the court as wrongful, and that if the recipient’s actions of changing position were treated as illegal the court could not take them into account and had no discretion to do so, unless the illegality was so minor as to be ignored on the de minimis principle.  In that judgment, Laddie J first set out the arguments of counsel for the claimants, as follows:-

“[22] Mr Briggs argues that this does not get the defendants home. He says that an innocent recipient cannot rely upon a plea of change of position where that change would be regarded by our courts as wrongful. This submission is based on the following passage in the speech of Lord Goff in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 , 580 (emphasis added):

‘I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration. They do not arise in the present case.’

[25] Mr Briggs explains this brief passage in the Lipkin Gorman case as follows. A court will not allow a party to plead or rely on activity which it regards as illegal or wrongful. Thus, if the change of position is wrongful, the court will decline to allow the recipient to rely on it…

[26]   He argues that this is consistent with the decision of the House of Lords in Tinsley v Milligan [1994] 1 AC 340…

[28]   This principle applies as between conspirators in a wrongdoing. Neither can be heard to base his claim or his defence upon the wrongdoing. The court will not take notice of illegal activity. The result is indiscriminate in the sense that the party which benefits from the application of the principle does so not because of any merits on his side but simply because the other party is debarred from relying on the illegal activity for his claim or defence, as the case may be. Mr Briggs says that the same principle must apply not only as between parties to the wrongdoing but also, as here, where the claimant is not a party to the wrongdoing but the recipient of the stolen funds is. On public policy grounds, the court will not allow the recipient to hold onto the claimant's money if, to do so, he has to rely on a change of position which the court considers illegal.

[30] First, our common law requires the English courts to take notice of the illegality of a contract in each of the following circumstances: (a) contracts the object of which involves committing a legal wrong or carrying out conduct otherwise contrary to public policy; (b) contracts entered into for the purposes of doing the above; or (c) contracts performed in such a way that one party (or both parties) commits a legal wrong or carries out such conduct.”

25.  The learned judge’s conclusion on the law can be found in the following passages of his judgment:-

“[42] I do not understand Miss Roberts to dispute Mr Briggs's general proposition. Her point is that this was an undeveloped area of law and that the courts have to decide on a case by case basis whether the wrongdoing is of sufficient significance to deprive the recipient of his defence of change of position. In each case the court needs to decide whether the recipient's actions are so heinous that it would be equitable to require restitution in full.

[43] I do not accept that submission. It would represent a return to the principle of the length of the Lord Chancellor's foot (or the foot of whosoever takes the Lord Chancellor's place). It seems to me that the approach of Lord Goff in Tinsley v Milligan [1994] 1 AC 340 , set out at para 27 above, applies to this sort of case. There is no room for the exercise of any discretion by the court in favour of one party or the other. If the recipient's actions of changing position are treated here as illegal, the court cannot take them into account. The recipient cannot put up a tainted claim to retention against the victim's untainted claim for restitution. It may be, as Mr Briggs suggests, that in some cases the illegality will be so minor as to be ignored on the de minimis principle. This is not such a case.”

26.  There have been some attempts to argue that the decision of Laddie J in Barros Mattos Junior is wrong (see, for example, Kathleen Margaret O’Neil v Faye Gale [2013] EWCA Civ 1554, at paragraphs 26 and 27; DBS (Hong Kong) Limited v Tian Wen Quan, HCA 3228/2016, 7 December 2017).  I have not, however, been referred to any case authority which holds that the decision of Laddie J is wrong.

27.  Similar to the argument advanced on behalf of the defendants in Barros Mattos Junior, Ms Lee argues that the effect of illegality on the defence of change of position is “subject to unsettled development at this stage”, and that the said decision of Laddie J is based on Tinsley v Milligan but that has effectively been overruled by the UK Supreme Court in Patel v Mirza [2017] AC 467.

28.  I accept that the correctness of the decision in Tinsley v Milligan may well be open to review in view of Patel v Mirza, but such review cannot be undertaken by the Court of First Instance.  This is because in Kan Wai Chung v Hau Wun Fai [2016] 5 HKC 585, Cheung JA (with whom Yeung VP and Kwan JA agreed) said at paragraph 8.7 that “this Court [ie, the Court of Appeal] is bound by the decision of the Court of Appeal which adopted the majority view of Tinsley”, and referred to the observation of Tang VP (as he then was) in Loyal Luck Trading Ltd v Tam Chun Wah [2008] 4 HKLRD 681, at paragraph 48, that the potential conflict between Tinsley v Milligan and Nelson v Nelson could only be resolved by the Court of Final Appeal.  If the Court of Appeal is bound to apply Tinsley v Milligan, so must the Court of First Instance.

29.  In the circumstances, I consider that I am bound to accept Tinsley v Milligan as correctly stating the law in Hong Kong. It follows that I should also accept the correctness of the decision of Laddie J in Barros Mattos Junior, because that is the logical consequence of the application of the principle established in Tinsley v Milligan.

30.  In the present case, it is clear that the 5^th, 11^th and 15^th Defendants cannot rely on the defence of change of position because, according to them, the receipts and payments out mentioned in paragraph 18(1) and (2) above occurred in the course of their operation of unlicensed, and therefore illegal, money service businesses, contrary to Part 5 of Division 2 of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, Cap 615 (“the Ordinance”).

31.  The same consideration applies to the position of the 10^th, 13^th and 14^th Defendants. Although Silver Fast was a licensed money service operator and, allegedly, used the D10 Account, D13 Account and D14 Account for its Money Changing Business:-

(1)  According to the affirmations filed by the Respective Directors of D10, D13 and D14, they had no control over the D10, D13 and D14 Accounts and allowed those accounts to be used by Silver Fast to operate the Money Changing Business as it liked, and had no knowledge as to the identity of the 2^nd Defendant.

(2)  According to the 1^st affirmation of Madam Chen, Silver Fast was told by Madam Zheng on or about 21 January 2016 that one of her customers (unidentified) wished to exchange US$1 million to an equivalent sum in RMB and Silver Fast provided the money changing service requested by Madam Zheng, apparently without making any further inquiries about the identity of the “customer” or other details of the transaction.  The same is true of Madam Zheng’s further approach on 22 January 2016 when Silver Fast was informed that “she had another US$2 odd million which would need to be exchanged into an equivalent sum of Renminbi”.  Indeed, it was only after Madam Chen had received notice of the Injunction Orders granted by the court in this action in January/February 2016 that she “enquired with Zheng as to what really happened” and was given to understand that “Zheng also does not and did not know D2 and she only received instructions from her long term customer known as Mr. Hu Guozhi” (see paragraphs 21, 25 and 35 of Madam Chen’s 1^st affirmation).

(3)  In paragraph 15 of her 2^nd affirmation, Madam Chen further said that she “was not even aware that the transferor was D2”.

(4)  In the circumstances, it is clear that Silver Fast, and (in so far as relevant) the 10^th, 13^th and 14^th Defendants, failed to comply with the raft of customer due diligence requirements imposed by paragraphs 2, 3, 8, 9 and 13 of Schedule 2 to the Ordinance.  I do not propose to set out the details of those requirements here because the breaches are not seriously disputed by Ms Lee.  She has not advanced any submissions to contend that there was no breach of the relevant requirements.

(5)  In other words, the receipts and payments out mentioned in paragraph 18(3) and (4) above occurred in the course of Silver Fast’s Money Changing Business which was being carried out in an unlawful or illegal manner.

(6)  The breaches of the customer due diligence requirements cannot be said to be so minor as to be ignored on the de minimis principle.  On the contrary, those requirements are, it seems to me, precisely the sort of measures designed to prevent what happened here, namely, the rapid and successive transfers of the proceeds of a fraud by unknown or unidentified persons or entities through different bank accounts in multiple jurisdictions.

(ii)   Absence of causal link between the receipt and change of position

32.  Having reached the above conclusions, I propose to deal with the Plaintiff’s remaining arguments, namely, (i) there was no causal link between the receipt and change of position, and (ii) the Second Level Recipients did not act “in good faith”, only briefly.

33.  In order to make out the defence of change of position, it is obvious that the Second Level Recipients must show that there was a causal link between the receipt and change of position.  For this purpose, in order to successfully resist the Plaintiff’s application for summary judgment, the Second Level Recipients are required to condescend upon particulars and adduce sufficient evidence that is capable of being believed to show that there is a fair or reasonable probability of a real or bona fide defence.

34.  In so far as the 5^th, 11^th and 15^th Defendants are concerned, they allege that they carried on business as money service operators.  However, none of them has produced any business records such as contracts, invoices, receipts, clients’ instructions, books and accounts in respect of their alleged businesses.  The absence of business records cannot be explained away simply on the ground that they are unlicensed money service operators, because such business records are essential even for an illegal business operation of the nature in question.  Further, the evidence adduced by or on behalf of these defendants in respect of the relevant fund flows is scanty.  In particular, no documentary evidence such as bank statements, remittance advices or receipts has been produced to show that funds were transferred by the 11^th and 15^th Defendants to Madam Zheng’s designated accounts in the PRC as alleged.  I do not consider that the 11^th and 15^th Defendants have produced sufficient evidence of a causal link between the receipt and change of position of such quality as would entitle them to be given leave to defend the Plaintiff’s claims against them.  In so far as the 5^th Defendant is concerned, if this were the only point against it, I would be disposed to grant only conditional leave to defend, namely, payment into court of the amount claimed less such sum in the D5 Account as may have been frozen by the Injunction Orders.

35.  The quality of the evidence produced by Silver Fast and the 10^th, 13^th and 14^th Defendants regarding the fund flows is better, but is still incomplete to establish a complete chain of funds flowing from the D2 Account to the D10/D13/D14 Accounts to Silver Fast’s account and then to Madam Zheng’s designated accounts in the PRC.  If this were the only point against the 10^th, 13^th and 14^th Defendants, I would be disposed to grant them only conditional leave to defend, namely, payment into court of the respective amounts claimed against them less such sums in the D10/D13/D14 Accounts as may have been frozen by the Injunction Orders.

(iii)   Absence of good faith

36.  The Plaintiff’s further argument that the defence of change of position is precluded because the Second Level Recipients did not act “in good faith” is based on the same facts and matters relied upon by it in support of the argument about “illegality”.  It has been said that “bad faith” is capable of “embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself” (see Niru Battery Manufacturing Co v Milestone Trading Ltd [2002] EWHC 1425 (Comm), per Moore-Bick J at paragraph 135, which was approved by the English Court of Appeal, [2004] QB 985, at paragraph 164 per Clarke LJ).  At paragraph 149 of the judgment of the Court of Appeal, Clarke LJ said that the essential question is “whether it would be inequitable or unconscionable, and thus unjust, to allow the recipient of money paid under a mistake of fact to deny restitution to the payer.” In view of the illegality mentioned above, I consider that the Second Level Recipients failed to act in a commercially acceptable way, and that it would be inequitable, unconscionable, or unjust to allow the Second Level Recipients to deny restitution to the Plaintiff.

DISPOSITION

37.  For the foregoing reasons, I give judgment in favour of the Plaintiff in terms of paragraphs 1(a) and (e), 2(a) and (e), 3(a) and (e), 4(a) and (e), 5(a) and (e), and 6(a) and (e) of the Plaintiff’s summons dated 8 February 2018, together with pre-judgment interest at the prime rate plus 1% per annum from the respective dates on which the judgment sums were received by the 5^th, 10^th, 11^th, 13^th, 14^th and 15^th Defendants respectively to the date of this judgment, and post-judgment interest pursuant to Section 49 of the High Court Ordinance.

38.  On the question of costs, I order the 5^th, 10^th, 11^th, 13^th, 14^th and 15^th Defendants to pay the Plaintiff’s costs of the application for summary judgment, including the costs of the hearing on 12 February 2018, to be taxed if not agreed with certificate for one counsel.  As for the costs of the action itself, I shall leave it to the parties to agree on how they should be apportioned having regard to the fact that the present action includes other claims against other defendants not before the court, with liberty to the parties to apply for further directions in the event that the matter cannot be resolved by agreement.

39.  The Plaintiff does not oppose the 5^th, 10^th, 11^th, 13^th, 14^th and 15^th Defendants’ summons dated 8 February 2018 seeking leave to file and rely on the affirmation of Tsang Hin Man Terence for the purpose of the hearing on 12 February 2018.  I make an order in terms of that summons.

40.  Lastly, it remains for me to thank counsel for their assistance rendered to the court.

HCA 239/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.239 OF 2016

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DECISION

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1.  This is the hearing of the plaintiff’s application by Summons dated 8 September 2016 (“Summons”) against the 1^st defendant for summary judgment and/or judgment on admissions, supported by the 4^th Affirmation dated Chong Chooi Har dated 7 September 2016. 

2.  Despite the express notice to the 1^st defendant indorsed on the Summons that it should send to the plaintiff’s solicitors a copy of any affidavit intended to be used by the 1^st defendant not less than 3 days before the hearing, the 1^st defendant has so far not filed or served any affidavit in opposition to the Summons. 

3.  According to Mr Arthur Randall, solicitor for the plaintiff, he has had no response to the Summons from the 1^st defendant until 20 September 2016 (which was after the plaintiff’s solicitors have lodged and served Skeleton Submissions on 19 September 2016 and just 2 days before the hearing) when he received a letter from the 1^st defendant’s solicitors simply asking the plaintiff to agree to give the 1^st defendant time to file evidence in opposition.  By its solicitors’ letter dated 21 September 2016, the plaintiff has turned down such request.  

4.  At the hearing this morning, the 1^st defendant through Counsel Ms Katy Chung invited me to adjourn the Summons for substantive argument and to give directions for the filing and service of affidavit evidence by the parties.  I inquired with Ms Chung what the 1^st defendant would raise by way of grounds of defence or triable issues in the evidence to be filed.  Ms Chung was however unable to assist me save to say, in effect, that those instructing her would have to take instructions.  I have to say that I was surprised by this complete lack of preparation on the part of the 1^st defendant, especially in light of the procedural history of this matter.  Prior to the issuance of the Summons, the plaintiff has applied for and obtained a Marvea injunction against the 1^st defendant on 26 January 2016, supported by affidavit and documentary evidence setting out in detail the plaintiff’s case against the 1^st defendant.  And the 1^st defendant has had the opportunity to file and serve two affirmations by its sole shareholder and director Li Yuebi, one of which touched upon the funds that are the subject-matter of the Plaintiff’s claim against the 1^st defendant.  Indeed, in making the present application, the plaintiff relies partly on what is said in paragraph 8 of the 2^nd Affirmation of Li Yuebi dated 11 May 2016 which is to the effect that she has no knowledge of the funds claimed by the plaintiff and believed that there were some operation mistakes or other unknown reasons in relation to the receipt thereof by the 1^st defendant.

5.  Although this hearing is set down for just 30 minutes and it is not uncommon for the court to give directions for the filing and service of affidavit evidence by the parties and to adjourn the matter for substantive argument at the first hearing of this type of applications, litigants and their legal representatives should not assume that the court will in all cases mechanically so proceed.  The court is entitled, as matter of proper case management, to ask to be satisfied that a substantive hearing is sought in good faith and would not be a waste of time for both the applying party and the court.  And the court would not normally be so satisfied without sight of the defendant’s affidavit in opposition, or if there has not been sufficient time for the preparation of such evidence, without being given at least some indication as to the broad grounds of defence or triable issues that the defendant intends to raise.  And where further time is needed, the responding party should approach the applying party with a view to agreeing on a timetable.  Such approach should be made at an early, rather than late, stage.  A request for time made at the last minute may, depending on the circumstances, give rise to the suspicion that one is stalling.

6.  However, apart from dealing with the question whether the “fraud” exception provided for in Order 14, rule 1(2)(b) of the Rules of the High Court applies to the plaintiff’s claim against the 1^st defendant, despite my said reservation regarding the manner in which the 1^st defendant has approached this hearing, to err on the cautious side, I am going to give the 1^st defendant time to file and serve affidavit evidence on the merits. 

7.  In resolving to rule on the applicability of the “fraud” exception, I have not overlooked Ms Chung’s statement that she has not had a full opportunity to prepare her argument.  However, Counsel should have had sufficient time.  This is an exceedingly short point.  It does not depend on the 1^st defendant’s evidence on triable issues, but turns entirely on how the plaintiff frames its claim against the 1^st defendant.  It is eminently suitable for disposal at the first hearing of the Summons.  If the “fraud” exception applies, then that is the end of the plaintiff’s application and no further hearing thereof would be required.  If it does not apply, the parties can put this argument behind them and focus their attention on matters of merits at the adjourned hearing.

8.  To put the “fraud” exception issue in context, the subject matter of the plaintiff’s claim herein against the 1^st defendant is the sum of US$24,813,000 (“Funds”) in a multi-currency savings account numbered 016478788603665 that is held in the 1^st defendant’s name with DBS (Hong Kong) Limited (“Account”).

9.  The evidence adduced by the plaintiff shows that prior to the receipt of the Funds, the Account had a zero balance and the whole of the Funds are traceable to 5 bank transfers made by the plaintiff to the Account on 20 and 22 January 2016.

10.  It is unnecessary to go into the detailed background that led to these transfers save that it is the plaintiff’s case that they were the result of a course of telephone and email scam perpetuated against the plaintiff on 20 to 22 January 2016 by fraudsters who purported to be senior personnel of the Arrow group of companies and whose real identities the plaintiff has so far not been able to identify and that there was otherwise no reason for the plaintiff to transfer any money to the 1^st defendant. 

11.  Given the underlying fraud, Mr Randall has very properly raised, and addressed me on, the question whether this application may fall foul of Order 14, rule 1(2)(b) which provides that summary judgment may not be given in “an action which includes a claim by the plaintiff based on an allegation of fraud”, which has been construed widely and liberally to include allegations of deliberate dishonesty: Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94 (CA).

12.  In Universal Capital Bank v Hongkong Heya Co Ltd [2016] 2 HKLRD 757, in rejecting the defendant’s opposition on the basis that the plaintiff’s application was caught by the “fraud” exception, Deputy High Court Judge Burrell said at [18(1)]:

“The underlying reason for the fraud exception is to prevent summary judgment in a case where serious allegations of dishonesty are made or implied against a party to the proceedings so that such a party may have an opportunity to answer the allegations, or put in a more familiar way, “have his day in court”.”

And then at [18(4)]:

“Whilst it is true that the Hong Kong courts have adopted a fairly wide and liberal interpretation of “fraud” when considering the application of Order 14, rule 1(2)(b), it should not be applied automatically merely because there are allegations of fraud or dishonesty in the bigger picture.  The question remains, does the underlying allegation of fraud (which does exist here) on which the claim is based (which it is not in this case) constitute an allegation of fraud against the defendant? … ” (emphasis added)

13.  The latter observation is equally apt in this case.  Although a fraud perpetrated by unknown fraudsters is the underlying reason why the plaintiff has suffered loss and commenced these proceedings, as against the 1^st defendant, the plaintiff has taken great care to stress that it does not have evidence that the 1^st defendant or those behind it were involved in such fraud.  Nor does the plaintiff make any allegation of fraud or dishonesty against the 1^st defendant.  The plaintiff has expressly confined the bases of its claim against the 1^st defendant to payment under mistakes of fact and unjust enrichment.  See paragraphs 44 to 48 of the Statement of Claim.  See also paragraph 13 of the 4^th Affirmation of Chong Chooi Har.   

14.  In making its case on such bases, the plaintiff does not, and does not need to, make or rely on any allegation of dishonesty or fraud against the 1^st defendant.  All that the plaintiff has to say and prove is that it transferred the Funds into the Account for no valid underlying reason; that it did not intend the 1^st defendant to have the Funds; no consideration has been paid for the Funds by the 1^st defendant to the plaintiff and there is no legitimate reason for the 1^st defendant to have received the Funds from the plaintiff so that the 1^st defendant has been unjustly enriched by receiving the Funds at the plaintiff’s expenses.

15.  For these reasons, I hold that the plaintiff’s claim against the 1^st defendant does not fall within the “fraud” exception under Order 14, rule 1(2)(b). 

16.  I hereby adjourn the Summons to a date to be fixed for argument before a Judge in Chambers with 3 hours reserved with liberty to the plaintiff to apply to fix the date for the adjourned hearing forthwith. 

17.  I further direct as follows:

(1)  leave to the 1^st defendant to file and serve affidavit evidence in opposition within 14 days from today;

(2)  leave to the plaintiff to file and serve affidavit evidence in reply (if so advised) within 14 days thereafter; and

(3)  no further affidavit evidence without leave of the court.

18.  The costs of today’s hearing shall be costs in the cause of the Summons.

HCA 239/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 239 OF 2016

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D E C I S I O N

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Introduction

1.  There are 2 applications before the Court:

(1)     A Summons issued by D18 on 3 March 2016 to discharge the injunction order against it (“the Discharge Summons”), and

(2)     A Summons issued by the plaintiff on 12 April 2016 to vary the injunction order as against D18 to increase the amount of the injunction to US$1,420,000 (“the Variation Summons”);

2.  After issuing the Discharge Summons, D18 has, on 15 March 2016, paid US$450,000 into Court, such that the injunction order ceased to have effect against D18.  Thus, the Discharge Summons should be treated as an application for release of the sum in court.  There is an alternative application for an increase in the limit for its ordinary and proper business expenses, which D18 no longer pursues and is content with an order for liberty to apply if the court were to continue the injunction order against it.  In the event the court dismisses the Discharge Summons, D18 does not resist the Variation Summons.

3.  The grounds for discharge are that there is no good arguable case and no risk of dissipation of assets.

Background

4.  The plaintiff was the victim of an email and telephone scam (“the Fraud”), as a result of which a total sum of US$42,236,000 was transferred to a number of bank accounts in Hong Kong during the few days from 18^th to 22^nd January 2016.

5.  The plaintiff obtained Mareva injunction against every entity (except banks) into whose hands the money had gone.  Three sets of Mareva injunctions have been obtained: 

(a) The 1^st Injunction Order: obtained ex parte against D1 and D3-D15 granted by B Chu J on 26 January 2016;

(b) The 2^nd Injunction Order: against D16 granted by Chung J on 5 February 2016; and

(c) The 3^rd Injunction Order: against D17-D26 granted by DHCJ Sakhrani on 25 February 2016.  As against D18, this injunction restrained it from disposing of, dealing with, or diminishing its assets up to US$450,000.

6.  The undisputed facts, so far as concerns D18, are as follows:

(1) Between 18^th and 22^nd January 2016, the plaintiff transferred a total sum of US$23,395,000 to D2’s bank account at Bank of Communications Shanghai branch (“the BoComm Account”) as a result of the Fraud.

(2) Very shortly thereafter, sums of US$1,023,440 and US$967,830 were transferred from the BoComm Account to D6 and D7’s bank accounts at Hang Seng Bank (“HSB”) respectively.

(3) Shortly thereafter, the sums of US$200,000 and US$250,000 were transferred from D6 and D7 respectively to D18’s account at HSB on 20^th and 22^nd January respectively.  These 2 sums formed the basis for the 3^rd Injunction Order against D18.

(4) On 22 January 2016, 3 sums totalling US$1,200,000 were transferred from the BoComm Account to D13 at HSBC and 2 sums of US$490,000 and US$480,000 were transferred from D13 to D18. These 2 sums formed the basis for the Variation Summons.

7.  The plaintiff claims against the defendants for, amongst others, unjust enrichment, constructive trust, conspiracy, fraud, misrepresentation and/or deceit.  No statement of claim has yet been filed.

8.  D18’s case is that:

(1) It received the funds in question as part of a currency exchange transaction without knowledge of the alleged Fraud, and that the funds had been immediately paid out to repay entirely legitimate bank loans. 

(2) There is no arguable case against D18, who had no knowledge of any fraud, had bona fide supplied consideration for the monies received, and has changed its position in good faith.

(3) The plaintiff has not made out a case for risk of dissipation.

Legal principles for grant of a Mareva injunction

9.  To obtain a Mareva injunction, an applicant has to satisfy the court that he has a good arguable case on his claim, that there are assets within the jurisdiction, that there is a risk of dissipation of those assets so as to render any judgment which the plaintiff may obtain nugatory and that the balance of convenience is in favour of a grant of the Mareva injunction: Hong Kong Civil Procedure 2016, Vol 1, §29/1/65.

Good arguable case

10.  In order to show a ‘good arguable case’, “the plaintiff need not go so far as to persuade the judge that he is likely to win”.  He must show that his case “is one that is ‘more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success’ ”.  See Hong Kong Civil Procedure 2016, Vol 1, §29/1/66, citing Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co. KG [1984] 1 All E.R. 398, applied in AkaiHoldings Ltd v Ho Wing On (unrep. HCCL 37/40 of 2005; [2009] H.K.E.C. 191).

11.  This leaves open the question of how far short of an even chance the prospects are allowed to fall before the court should refuse leave under Order 11.  Here the words “strong” and “good” do become material.  It is not enough to show an arguable case, namely, one which a competent advocate can get on its feet.  Something markedly better than that is required, even if it cannot be said with confidence that the plaintiff is more likely to be right than wrong.  Gee on Commercial Injunctions, 5^th ed (2004), §12.024, citing Orri v Moundreas [1981] Com. LR 168, Mustill J.

12.  In terms of merits, the court will have regard to the relative strength of the parties’ cases in the exercise of its discretion:

“In Mareva cases, the all-important question is whether, in the circumstances of the case, it is ‘just and convenient’ to grant the injunction ... the court will take into account the apparent strength or weakness of the respective cases in order to decide whether the plaintiff’s case, on the merits, is sufficiently strong to reach the threshold, and this will include assessing the apparent plausibility of statements in affidavits ... Although a good arguable case remains the minimum requirement, the judge’s view of the merits of the plaintiff’s case and his chances of ultimate success are obviously important factors in the exercise of his discretion.” Gee on Commercial Injunctions (5^th ed, 2004), §§12.024-12.025

13.  Victims of a fraud would have a good arguable case against the recipient of funds for money had and received and constructive trust.  They may assert a proprietary claim to the extent that their funds can be traced and identified as representing recognisable assets of the recipient, unless the recipient can establish the defence of bona fide purchaser for value without notice: Leonard Koutsomihalis & anor v Aki Enterprises & anor, HCA 2509/2014, 16 June 2015, per Chow J at §22; Zimmer Sweden AB v KPN Hong Kong Limited & anor, HCA 2264/2013, 2 May 2014, per DHCJ Kent Yee at §§71, 89-94; Cheer Signal Development Limited v Wong Siu Fan & ors, HCA 780/2015, 27 April 2015, per Au-Yeung J at §22.

14.  For unjust enrichment, it has to be shown that the defendant was enriched at the expense of the plaintiff and that the enrichment was unjust: Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, per Ribeiro PJ at §67.

15.  Applying the principles in paragraphs 13 and 14 above, the plaintiff, as victim of the Fraud has a claim against D18 for money had and received, constructive trust and unjust enrichment.

16.  Mr Man SC points out that there is no information as to whether there were any pre-existing amounts in the BoComm Account, with which the monies originated from the plaintiff were mixed.  In other words, the plaintiff has not proved that monies flowing out of the BoComm Account were necessarily the traceable proceeds of its money.

17.  I have taken into account the difficulty of the plaintiff in obtaining evidence.  Due to the restrictions under PRC banking practice, the plaintiff’s PRC counsel could not copy the full bank transfer records of the BoComm Account but was only allowed to inspect and take handwritten notes of some of the records.  The plaintiff was accordingly not able to produce copies of the transfer records of the BoComm Account as evidence.  

18.  At this stage, the evidence is incomplete. However, the plaintiff need not satisfy the court that it has more than 50% chance of success.  Given the proximity in time of the transfers and the considerable amounts of money being transferred during that short period from 18^th to 22^nd January 2016, a strong inference may be drawn that those sums of money paid into D18’s account were traceable to the proceeds of the Fraud.  There was a good arguable case to obtain the 3^rd Injunction Order in the first place.

D18’s explanation as to the flow of funds

19.  D18 is a company incorporated in Hong Kong in 1997.  It engages in the business of manufacture and import/export of textiles and garment, and owns various subsidiaries in the PRC, including Fujian XinCheng Synthetic Fibre Co Ltd (“the PRC Subsidiary”).  D18 was to help its subsidiaries to buy raw materials and arrange financing for the entire group of companies.  The PRC Subsidiary would be responsible for the manufacturing side.  Most of the profits of the group are generated from the PRC Subsidiary.  Hence D18 needs regular remittance of funds from the PRC Subsidiary or other subsidiaries to pay off its operating expenses and those of the group.

20.  D18 explained that the US$1,420,000 were received as part of the remittance of funds in RMB from the PRC Subsidiary to itself in Hong Kong in USD, using the service of a remittance and currency exchange agent by the name of Ms Wu Zhu (“Ms Wu”).  This mode of remittance is commonly known as the “underground banking system”.

21.  D18 has been using the service of Ms Wu for more than 10 years.  The arrangement involved the following steps:

(a) When remittance is required, the PRC Subsidiary would contact Ms Wu informing her of the sum required to be remitted to D18 in Hong Kong.  The parties would then agree on the exchange rate from RMB to USD.

(b) Ms Wu would inform the PRC Subsidiary of the details of certain designated bank accounts in the PRC to which sums in RMB should be transferred.  The PRC Subsidiary would then make the transfers to the designated accounts.

(c) Once Ms Wu has confirmed that the requisite sums were received in the PRC, she would arrange for the agreed amount in USD to be transferred in Hong Kong to D18.  She would notify the PRC Subsidiary of the details of the bank accounts in Hong Kong which would be making the transfer.

22.  The 4 sums in question were remitted to D18 in the manner described in the preceding paragraph.  They were then paid out:

(a) The sum of US$200,000 received from D6 on 20 January 2016 was part of a remittance of US$5,150,000 on the same day.  The remittance was applied repay a bank loan of  about US$5,000,000 with the Oversea-Chinese Banking Corporation Limited (“OCBC”) and to pay for other sundry expenses of D18, leaving the balance of US$2,686.85.  The transfer was stated to be for “nylon yarn” on the relevant receipt, allegedly due to unspecified “legal implications” in the PRC.

(b) The sum of US$250,000 from D7 and the sums of US$470,000 and US$480,000 from D13 were part of a remittance of US$4,500,000 on 22 January 2016.  The remittance was applied to repay a bank loan of RMB29,550,000 with the Bank of East Asia (“BEA”)., leaving the balance of US$12,552.87.  The relevant receipt similarly stated to be for nylon yarn.  There was an unexplained mistake as to the transferor being D6 when it should have been D7.

23.  D18 has further produced documentary evidence of 3 previous transactions using the underground banking system.  The remittances were on 5 October 2015 (predating the Fraud), 25 January 2016 and 2 February 2016.

24.  D18’s explanation is supported by documents and disclosed a pattern, both before and after the alleged Fraud.  The amounts transferred out in the PRC and the amounts received in Hong Kong were on the same day and substantially corresponded in terms of amount.

25.  It is to be noted, of course, that the system of remittance that D18 described involved the transfer of large sums of money between complete strangers holding accounts in the PRC and Hong Kong respectively.  D18 is at risk of not receiving the intended remittances.

26.  Ms Wu has not made any affirmation and her name did not appear on any document. 

27.  The account in the PRC from which funds were transferred was not in the name of the PRC Subsidiary, but in the name of a “蘇曉玲” (“Ms Su”).  She is not a shareholder, director or supervisor of D18, but an employee earning only a meagre RMB3,000 per month.

28.  D18’s explanation is that Ms Su is a nominee holding the account used for the purpose of the remittances from PRC to Hong Kong (so as to avoid legal implications in the PRC for the PRC Subsidiary).  The account is controlled by the financial controller of the PRC Subsidiary and Ms Su had no involvement in its operation. 

Defences available

29.  The next question is whether, the defence of bona fide purchaser for value without notice applies.  Alternatively, in an unjust enrichment claim, the defence of change of position in good faith might be available to a person whose position had so changed that it would be inequitable in all the circumstances to require him to make restitution in whole or in part: Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, per Lord Goff of Chieveley at 580E-F.

30.  Being a mere recipient of funds (like D18) remitted through an underground banking system is not sufficient in itself to find guilt.  It has to be proved that the recipient knew or had reason to believe that the money had an illicit source.

31.  In HKSAR v Yan Suiling (2012) 15 HKCFAR 146, the defendant was charged with money laundering, contrary to section 25 of the Organized and Serious Crimes Ordinance (Cap 455) (“OSCO”).  The defendant claimed that the subject cheque she received from unconnected parties was received as part of an underground currency exchange arrangement. The defendant did not know and had no reasonable grounds to believe that the cheque received by her represented the proceeds of an indictable offence. She had been using the underground banking system for some time before she was charged.  The Court of Final Appeal held that if the defendant’s version was true, this would support her defence (§§24 & 48).

32.  D18 is in a similar situation to the defendant in Yan Suiling.  The account holders involved in the underground banking system have no formal and obvious connections with each other.  They were all arranged by Ms Wu and D18 had no knowledge of who those entities were.  There was nothing to show that D18 had knowledge of the Fraud or anything that would have caused D18 to make enquiries.  The fact remained that monies paid at the direction of D18 in RMB in the PRC were then paid, shortly thereafter, to D18 in USD in Hong Kong. 

33.  Ms Lam very fairly accepts that, at this stage, the plaintiff does not purport to say that D18 was party to the Fraud in the sense of being one of the conspirators, as opposed to a mere recipient.  There is also no evidence as to what PRC law has been breached and its effect on the remittances to D18.

34.  There may be unexplained aspects in D18’s documents, eg why the transferor was wrongly stated as D6 instead of D7; why Ms Su was used.  However, in my view, there are insufficient to show that D18 knew or had reasonable grounds to believe that the funds had an illicit source.

35.  D18 has purported to show that it has provided consideration (through the PRC subsidiary in the form of RMB) for the equivalent amount of US dollars that it received.  On the current evidence, D18 appeared to be a bona fide purchaser for value without notice.

36.  Even assuming that the US$1,420,000 had come from the plaintiff initially, D18 has changed its position by paying out the bulk of that sum to pay off what appeared to be bank loans.  If such a defence is established, the plaintiff no longer has a proprietary claim against D18.

37.  Ms Lam submits that it is at least arguable that the defence of change of position would not apply to D18 for 3 reasons:

(a) D18 had not acted in good faith;

(b) D18 has not adduced any evidence to show that the money it received were used to repay loans due to OCBC and BEA;

(c) D18 needs to plead illegality in its defence, ie the participation in the underground banking system that could contravene ss.25 & 25A of OSCO.

38.  With regard to reason (a), Ms Lam submits that what needs to be proved may not be knowledge but that D18 ought to have known about the illicit source of the money.  D18 has wilfully turned a blind eye to how or what sort of money was remitted to it and was reckless in not making any inquiry that an honest and reasonable person in her position would have made. She relies on Dresdner Bank (Schweiz) AG v Andreas  Kessler & anor, HCA 4709/2003, 24 December 2004, per DHCJ K Y Chan (as he then was) at §§21, 25-28. At §29 of that judgment, it was held that:

“On the issue of risk of dissipation of assets, I also find that a good arguable case has been established that the 2^nd defendant has shown an unacceptably low standard of commercial morality in choosing to remit money through Bashiru in the manner described by her when she knew that she could have remitted money from Nigeria to Hong Kong through reputable banks.”.

39.  The Dresdner Bank case is distinguishable on the facts.  D2 claimed to have received the money on behalf of one Lap Shing (of which she was a shareholder and director). She was expecting funds from Nigeria.  She did not know how the remittance agent Bashiru (“B”) arranged the funding and the remittance advice did not state the name of the remitter.  She bona fide changed her position by causing Lap Shing’s agents in Nigeria to reimburse B before receiving notice of P’s claim. In fact, B did not remit money on the instructions of Lap Shing and Lap Shing did not have the necessary funds to remit.  B apparently had substantial sums of US dollars in the international banking system and, instead of remitting them to Nigeria, he remitted them to D2 in Hong Kong and then swapped it with her for US dollars in cash in Nigeria.  However, Nigeria had no restriction against remittance in foreign currency out of Nigeria.  It was not necessary for Lap Shing to resort to remittance agents who were untrustworthy.  B bore the risk of not getting reimbursement, received no commission and subsidized the interest and bank charges.  D2 and her brother were on the soliciting side of the remittance business.  B was dictating how much funds and when to remit to D2.  It was in those circumstances (§§14, 17, 20, 27 & 28) that DHCJ K Y Chan came to the view set out in the preceding paragraph.

40.  I agree with Mr Man SC that the Dresdner Bank case did not establish any general proposition.  DHCJ K Y Chan was applying established principles to the peculiar facts of that case.

41.  Similarly, the case of HKSAR v Yang Sigai [2015] 5 HKLRD 230, §73 which Ms Lam relies on is distinguishable.  There, the defendant was an operator, not customer, of the underground banking system.

42.  There is not sufficient to question the good faith of D18.

43.  With regard to reason (b), Mr Man SC has demonstrated the flow of funds by contemporaneous documents.

44.  With regard to reason (c), a plaintiff is entitled to recover if he is not forced to plead or rely on illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction: Tinsley v Milligan [1994] 1 AC 340 at 376E, per Lord Browne-Wilkinson; followed in Lau Kwai Kiu v Bian Xintian [2012] 2 HKLRD 954 at §§54-56, Yuen JA.

45.  By reason of D18’s explanation of the flow of funds in paragraphs 19-24 above, there is no need for D18 to plead any illegal conduct to be able to satisfy the court that it has a defence as bona fide purchaser for value without notice.

46.  Taking both parties’ evidence into consideration, the good arguable case that the plaintiff once had on the merits is much watered down by the arguable defence.

Risk of dissipation of assets

47.  As to risk of dissipation, a useful summary of the principles can be found at §26 of Eastman Chemical Ltd v Heyro Chemical Co Ltd (No 2) [2012] 3 HKLRD 307 (DHCJ Winnie Tam SC): 

“(1) Mareva injunctions put the recipient party in a seriously disadvantaged position right from the start, from which it may never recover. It is therefore essential for the Court to carefully and critically scrutinise the materials placed before it before making such an order.

(2) When considering whether there was unacceptably low commercial morality to infer a risk of dissipation of assets, the Court should scrutinise the evidence with care and should not too readily infer a real risk of dissipation from the defendant’s conduct or commercial morality: Hornor Resources (International) Co Ltd v Savvy Resources Ltd [2010] 4 HKC 50, 57.

(3) There must be “solid evidence” of the risk of dissipation of assets. The order, being a very serious infringement of rights and liberties of the defendant, can only be justified on appropriately clear and strong facts and risks. The standard of proof of the risk of dissipation is relatively high.

…

(5) The plaintiff cannot beforehand prevent the defendant from disposing of his assets merely because he fears that there will be nothing against which to enforce his judgment nor can he be given a secured position against other creditors. The dissipation of assets must be shown to be with an intention or for the purpose of defeating the plaintiff’s claim, or otherwise “improper”.

(6) The plaintiff is required to show that at least objectively, the effect of the defendant's conduct would be to frustrate the enforcement of any judgment. The conduct in question must be unjustifiable. There must be a risk that the asset will be used otherwise than for normal and proper commercial purposes.

…”

48.  The rationale behind points (5) and (6) in Eastman Chemical can be found in TTMI Ltd of England v ASM Shipping Ltd of India[2006] 1 Lloyd’s Rep 401 at §§25-26:

“The purpose of the Mareva jurisdiction is sometimes referred to as the prevention of the “dissipation of assets”. Without explanation that phrase is, itself, obscure… the underlying purpose of the jurisdiction is not to provide a claimant with security for its claim but to restrain a defendant from evading justice by disposing of assets otherwise than in the ordinary course of business so as to make itself judgment proof with the result that any judgment or award in favour of the claimant goes unsatisfied. The purpose is not to provide security for the claimant in respect of his claim. It is well established that it is not necessary to establish that the defendant is likely to act with the object of putting his assets beyond reach. What has to be shown is that there is, absent an injunction, “a real risk that a judgment or award in favour of the plaintiffs would go unsatisfied” … That formulation cannot, however, be regarded as a complete statement of the law. A defendant may be likely to make perfectly normal dispositions, such as the payment of ordinary trading debts, the effect of which may be that, when any award is made, it is, in whole or in part unsatisfied when, absent those payments, it might have been satisfied or satisfied to a greater extent. Something more than a real risk that the judgment will go unsatisfied is required. (emphasis added)

Thus in a case in the Court of Appeal of Ontario - Chitel v Robart [1982] 39 OR (2d) 513 at 532-533, the court said:

“The applicant must persuade the court by his material that the defendant is removing or there is a real risk that he is about to remove his assets from the jurisdiction to avoid the possibility of judgment, or that the defendant is otherwise dissipating or disposing of its assets, in a manner clearly distinct from his usual or ordinary course of business or living, so as to render the possibility of future tracing of the assets remote, if not impossible in fact or in law.” ” (emphasis added)

49.  The nature and financial standing of the defendant’s business and the length of time it has been in business are relevant.  Stronger evidence of potential dissipation will be needed where the defendant is a long-established company with a reasonable market reputation than where little nor nothing is known or can be ascertained about it. Gee on Commercial Injunctions, 5^th ed (2004), §12.039(2)-(3) at p 354.

50.  The present case was originally run, at the ex parte stage, on the basis that all the defendants were involved in the Fraud, such that the defendants have displayed “unacceptably low standard of commercial morality”.  Since the plaintiff does not allege, at this stage, that D18 is someone more than a recipient of funds, the original basis for arguing for a risk of dissipation is now gone.

51.  The matters now relied on to show risk of dissipation are that:

(a) While D18 has a huge group turnover, D18 only has insubstantial funds in its bank accounts and a property under mortgage in Hong Kong.

(b) D18’s bank account was very active in receiving and remitting large sums but the account only has a nominal balance at the end of the month. 

(c) D18’s admitted involvement in the underground banking system involved receiving funds from and transferring funds to unknown sources.

(d) The source of US$450,000 paid into Court by D18 is unknown, given its lack of liquid assets in the jurisdiction.

52.  With regard to (a) and (b), D18 has explained its role and that of the PRC Subsidiary and the need for remittance of funds to Hong Kong (see paragraph 19 above). Remittances and transfers of funds appeared to be part of D18’s ordinary course of business.  Just bank loans accounted for HK$1.36 billion, according to audited financial statements for 2014. This way of operating business in Hong Kong and PRC shows nothing objectionable in itself.  The mere fact of insubstantial bank balance and ownership of an encumbered property in Hong Kong show nothing in the way of dissipation of assets.

53.  With regard to (c), regular usage of the underground banking system is not, in itself, equivalent to dissipation of assets.  The funds (at least those in question) were not from “an unknown source” and were documented.

54.  With regard to (d), the sum of US$450,000 paid into Court was said to have come from a personal loan by D18’s majority shareholder and one of the directors. Although there was no documentary proof, such a personal loan is not a ground for finding risk of dissipation of assets. 

55.  Whether viewed individually or collectively, matters in paragraph 51 do not show risk of dissipation of assets. 

57.  D18 also has a property in Hong Kong.  The market value is HK$22.5 million, with an outstanding mortgage of HK$5.3 million. Disregarding the unknown amount owing under the all monies mortgage (secured by the property as well) this asset alone would have been sufficient to meet the amount sought to be frozen.  There is no evidence of D18’s intention to dispose of this or any asset.

58.  Ms Lam submits that there is inconsistency in D18’s evidence on its financial status. The financial statements of D18 for the year ended 31 December 2014 show that D18 had assets of “Property, Plant and Equipment” in the amount of HK$617 million, “Cash at Bank” in the sum of HK$441 million and “Cash in Hand” in the sum of HK$9.7 million.  That is to be contrasted with the paltry disclosure in D18’s affirmation in which the only assets of HK$50,000 or more were said to be 2 bank accounts with balances of US$13,618.73 and US$41,422.93 respectively, and the encumbered property.

59.  However, as pointed out by Mr Man SC, the audited accounts were for the group of companies, whereas the affirmation in which D18 disclosed its assets were limited to assets in Hong Kong, as required by paragraph 3 of the 3^rd Injunction Order.

60.  Taking all evidence at the highest, there is no solid evidence of risk of dissipation of assets or acts with intent to frustrate enforcement the plaintiff’s claim. 

Conclusion

61.  In summary, notwithstanding an initial good arguable case, there is a good arguable defence shown of bona fide purchaser for value without notice or that D18 had changed its position without notice of the Fraud.  There is no solid evidence of risk of dissipation of assets.  It follows that the 3^rd Injunction Order should be discharged as against D18, and that the Variation Summons should be dismissed.  The funds in court should be refunded to D18.

Costs

62.  The principles for awarding costs in an interlocutory injunction have been set out in Korea Exchange Bank, Hong Kong Branch & anor v SSCP Holdings (Hong Kong) Ltd & ors, HCA 146/2013 (unrep, 26 June 2013), §§10-15, Au Yeung J:

(a) The court has a broad discretion as to costs. In an interlocutory matter, costs to follow the event is but one option: Order 62, rule 3(2A), Rules of the High Court.

(b) For an interlocutory injunction, where a party has acted improperly or is in some way to be penalized, or the application is totally baseless, the court may consider an immediate order as to costs.

(c) It is not necessarily the case that costs should be in the cause. The court is entitled to look at the merits of the injunction at the time of its application. The plaintiff may be granted costs of the injunction if there were strong merits to support that application.

63.  In the present case, there could be no complaint about the plaintiff seeking the 3^rd Injunction Order in the first place.  D18 now manages to obtain a discharge on evidence in its possession, which the plaintiff could hardly have access to before D18 filed its affirmations.  Accordingly, costs incurred on or before B Chu J on 4 March 2016 (which continued the 3^rd Injunction Order subject to D18’s application for discharge) should be in the cause and those thereafter should be paid by the plaintiff to D18.  Costs of the Variation Summons should likewise be to D18.  There should be certificates for 2 counsel.  I make a costs order nisi accordingly.

64.  I summarily assess costs and award, on a nisi basis, an amount of $280,000, for costs on and after 5 March 2016.

65.  I thank counsel for their great assistance.