TOYOTA BOSHOKU EUROPE N.V. v. KINGSVILLE (HK) ENTERPRISES LTD AND OTHERS

HCA 452/2022

[2024] HKCFI 231

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 452 OF 2022

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DECISION ON COSTS

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1.  In the Decision dated 24 August 2023, after hearing the parties on the Plaintiff’s Summons dated 26 May 2022 (the “Summons”), this Court continued the interlocutory proprietary injunction (the “Proprietary Injunction”)  and the Mareva Injunction (the “Mareva Injunction”)  (collectively the “Injunctions”)  ordered ex parte by Deputy High Court Judge Jenkin Suen SC on 25 May 2022 against the 7^th Defendant (“D7”), together with other ancillary disclosure orders.  However, for the reasons explained in the Decision, whilst this Court maintained the amount subject to the Mareva Injunction at USD311,833 as sought by the Plaintiff (“P”), this Court reduced the funds subject to the Proprietary Injunction from USD311,833 to HK$10,318.25.

2.  On costs, in the Decision, this Court made an order nisi that D7 do pay costs of the Summons to P forthwith, except that costs of the banker’s disclosure order be in the cause of this action. (the “Costs OrderNisi”).

3.  On 7 September 2023, D7 applied by summons for variation of the Costs Order Nisi to the extent that it should be required to pay only 50% of P’s costs of the Summons insofar as the Injunctions and the ancillary disclosure order are concerned (the “Variation Summons”).

4.  On 21 September 2023, P’s costs of the Summons, per the Costs Order Nisi, were summarily assessed at HK$260,000.

5.  The Variation Summons was directed to be disposed on paper. Written submissions for D7’s application, P’s opposition and D7’s reply were sequentially filed.

6.  Having considered the parties’ submissions, I refuse to vary the Costs Order Nisi.

7.  Firstly, P remains the overall winner of the Summons. P asked that D7’s money in the sum of USD311,833 be frozen.  It gets what it wanted.  USD311,833 is frozen under the Mareva Injunction.  Although the fund subject to the Proprietary Injunction is limited to HK10,318.25.  The overall position remains being USD311,833 being frozen.  The reduction in the Proprietary Injunction does not affect the overall result.

8.  D7 relied on Société Générale, Singapore Branch v Inter-pacific Group Pte Ltd & others[2020] HKCFI 1508 where Mr Recorder Manzoni SC continued an ex parte proprietary injunction against the 8^th  and 9^th defendants but reduced the limit to the remaining amounts sitting at their respective bank accounts traceable to the plaintiff's funds.  Counsel for D7[1] relied on the learned Recorder’s findings[2] that the plaintiff has not achieved anything more by coming to court than it could have achieved by accepting the offer of the 8^th and 9^th defendants, and that despite continuation of the proprietary injunction, the plaintiff was ordered to pay costs of the 8^th and 9^th defendant. 

9.  Société Générale is markedly different from the present case in one material aspect.  The learned Recorder in Société Générale refused to conclude that there is a risk of dissipation and for this reason he refused a Mareva injunction[3]. Were the plaintiff there successful in obtaining the Mareva injunction, it would have achieved more by coming to court than it could have achieved by accepting the offer of the 8^th and 9^th defendants, i.e. the reduced proprietary injunction.  In that event, the plaintiff would have much to say on the costs order that should be made.

10.  In contrast to the plaintiff in Société Générale, P here succeeded in continuing the Mareva Injunction, and in the amount asked for in the Summons.  

11.  D7 only offered payment of the sum of HK$10,318.25 into court[4]. This is meagre comparing with USD311,833 being the amount ordered to be subject to the Mareva Injunction.  P’s overall achievement in the Summons was not affected, notwithstanding the reduction in the amount subject to the Proprietary Injunction.

12.  Secondly, I do not consider P has raised issues or made allegations on which it failed, has caused a significant increase in the length or costs of the Summons and its hearing.  P applied for continuation of the Proprietary Injunction and it succeeded.  D7 raised the issue that the fund subject thereto should be reduced to HK$10,318.25 and adduced bank statements showing HK$10,318.25 being the remaining P’s traceable proprietary funds in D7’s account[5]. P disputed the “lowest intermediate balance” rule as a matter of law but failed[6]. This was a proper debate on legal arguments.  I do not consider such arguments to be significantly lengthy.  Further, nothing can be said that P’s arguments, though not accepted, were improperly, unnecessarily, or unreasonably made.

13.  Having revisited those general principles on costs helpfully summarized by To J in KJ v KMLM and KCK (Variation; Costs) [2014] HKFLR 227 at paragraphs 13-19, nothing warrants this Court to depart from the starting point that costs should follow the event.

14.  For the above reasons, I maintain the exercise of my discretion under Section 52A(1)  of the High Court Ordinance and Order 62 rule 2(4)  of the Rules of the High Court in the Decision dated 24 August 2023 and make absolute the order nisi set out in paragraph 57 thereof.

15.  I also dismiss D7’s Variation Summons with costs be paid by D7 to P forthwith.  I have considered P’s Statement of Costs, and order that P’s costs of the Variation Summons be summarily assessed at HK$60,000.

Mr Toby Brown and Mr Jeremy Yau, instructed by C. P. Lin & Co., for the plaintiff

Mr Tasman Tam, instructed by M.C.A Lai Solicitors LLP, for the 7^th defendant

HCA 452/2022

[2023] HKCFI 2056

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 452 OF 2022

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DECISION

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A.Introduction

1.  This is the substantive hearing of the Plaintiff’s summons dated 26 May 2022 (the “Summons”) for continuation of the proprietary and Mareva injunctions (respectively the “ProprietaryInjunction” and the “Mareva Injunction” and collectively the “Injunctions”) granted ex parte by Deputy High Court Judge Jenkin Suen SC on 25 May 2022 against the 7^th Defendant (“D7”).  In the Summons, the Plaintiff (“P”) also asks for an ancillary disclosure order and a banker’s disclosure order pursuant to section 21 of the Evidence Ordinance.

2.  D7 accepts[1] that for the Proprietary Injunction, P has a serious issue to be tried as to its proprietary claim, and that for the Mareva Injunction, P has a good arguable case over its claim for restitution based on unjust enrichment.

3.  D7 raised 3 issues which require determination by this Court:

(1)  Whether the Proprietary Injunction shall be limited to the lowest intermediate balance of D7’s account, namely HK$10,318.25 as of 18 May 2021[2].

(2)  Whether P has failed to show that D7 has any real risk of dissipation of assets, so that the Mareva Injunction ought to be discharged[3].

(3)  If the Mareva Injunction is to continue, whether the limit of the frozen assets should be reduced to avoid giving P “over-security”[4].   

4.  For the ancillary disclosure order, D7 accepts that it should rise and fall together with the Injunctions[5].

5.  For the banker’s disclosure order, without prejudice to its other submissions, D7 has no objection to this application[6].

B. Background Facts

6.  As mentioned above, this hearing concerns D7 only.  I adopt the description of this action by Deputy High Court Judge Le Pichon in her Reasons for Decision, [2023] HKCFI 1393, dated 22 May 2023 for the substantive hearing of the ex parte injunction order against the 8^th Defendant in the same action (the “D8 Decision”), as follows:

“2. The Plaintiff is the victim of a large-scale fraud in which approximately HK$500 million was paid to various companies as a result of unknown individual(s) impersonating the CEO and President of the Plaintiff's parent company, and causing the Plaintiff's general manager of finance to believe that the funds were required for a secret and urgent acquisition.

3. The Plaintiff has already obtained interlocutory proprietary and Mareva injunctions against 48 defendants in HCA 2091/2019 (“HCA 2091”) comprising “1^st layer”, “2^nd layer" and “3^rd layer” recipients of the Plaintiff’s funds (collectively referred to as “ADs” and individually as “ADX”).

4. The Defendants in this action (“the Defendants”) are the “next layer recipients” of the Plaintiff's funds from ADs identified from the banking documents obtained in HCA 2091.”

7.  D7 is a “4^th layer recipient”.  It received traceable proprietary funds totalling US$311,833.00 on 20 August 2019.

8.  D7’s upper layer recipients of P’s traceable proprietary funds are[7]:

(a)  AD5, who received a total of US$8,163,000.00 from P, rendering it a “1^st layer” recipient;

(b)  AD24, who received payments from AD5 totalling US$1,145,656.00 and became a “2^nd layer” recipient;

(c)  AD47, who received payment of US$200,000.00 from AD24 of P’s traceable proprietary funds – a “3^rd layer” recipient; and

(d)  AD48, who (i) as a “3^rd layer” recipient, received two payments totalling US$450,001.00 from AD24 and (ii) as a “4^th layer” recipient, received a sum of US$199,999.08 from AD47.

9.  D7 received one payment of US$311,833.00 of P’s traceable proprietary funds from AD48 on 20 August 2019.

10.  US$311,833.00 is hence the subject matter of the Proprietary Injunction[8] and the Mareva Injunction[9].

C. Procedural History

11.  On 22 November 2019, the interlocutory proprietary and Mareva injunctions were made against AD48, on inter partes basis but in its absence, in reliance on information provided by the Hong Kong police.

12.  On 24 May 2021, AD48 issued a summons seeking discharge of the injunctions, on the basis that there is no serious issue to be tried and/or the P has no good arguable case.

13.  On 20 January 2022, the substantive hearing of AD48’s summons took place before Madam Justice Au-Yeung.

14.  On 22 April 2022, Madam Justice B. Chu granted ex parte injunctions against all the Defendants in this action, with the exception of the 3^rd Defendant and D7, insofar as they received funds from AD48.  P’s Counsel informed this Court that this was because AD48 has applied for discharge of the injunctions against it and the decision was still pending at that time; and Her Ladyship indicated that it would be appropriate for P to make a further injunction application after the decision if AD48 was unsuccessful in discharging the injunctions.

15.  On 6 May 2022, Madam Justice Au-Yeung handed down the Decision (Toyota Boshoku Europe N.V. v Hong Kong Kia Jia Trading Limited[2022] HKCFI 1328, the “AD48 Decision”) dismissing AD48’s application for discharge with costs.

16.  On 25 May 2022, consequent to the dismissal of AD48’s application, P applied ex parte for a proprietary injunction together with a “top up” Mareva injunction against D7.  Deputy High Court Judge Jenkin Suen SC was satisfied that there would be secrecy concern not to tip off D7 (hence justifying ex parte application), and that an ex parte proprietary and top up Mareva injunction should be granted in favour of P against D7 until the return day[10]. Accordingly, the learned deputy judge granted the Injunctions.

17.  D7 attended the hearing at the return day on 2 June 2022 and indicated its opposition to the Summons.  Madam Justice Cheng adjourned the Summons and continued the Injunctions in the interim. This is the adjourned hearing of the Summons.

18.  I shall deal with the 3 specific issues raised by D7 as set out in paragraph 3 above in turn below.

D. Proprietary Injunction - Lowest Intermediate Balance

19.  D7 contends that P’s proprietary claim against funds in D7’s bank account is limited to its lowest intermediate balance of HK$10,318.25[11].

20.  Mr Toby Brown (“Mr Brown”) (Mr Jeremy Yau with him), Counsel for P, argues that the “lowest intermediate balance” rule has no application here as alleged[12]. They submitted that this rule is a rule that applied to D7’s upper layer recipient’s bank account (i.e. AD48’s account) but not D7’s own bank account[13], and it determines how much of P’s proprietary funds can be traced out of AD48’s account to D7.  

21.  Mr Tasman Tam (“Mr Tam”), Counsel for D7 relied on The Maitri Trust v Hong Fei Sheng (HK) Trading Co Ltd and Others[2020] HKCFI 2764[14].  However, Maitri Trust did not explain the rationale and modus operandi of the said “lowest intermediate balance” rule[15].

22.  Snell’s Equity, 34^th edition, paragraph 30-057, explained the operation of the rule during the tracing process very well, as follows:

“ … Where, however, the trustee deposits money into the account after he has been proved by the rules above to have drawn against the claimant’s money, there is no presumption that he intends the deposit to replace the claimant’s money. The claimant is therefore limited to asserting a claim against the account for the lowest balance that his money has fallen to between the date of the deposit of his money and the subsequent deposit of the trustee’s own money. This result is consistent with the general presumptions operating in cases of mixture. Since the subsequent deposit of the trustee’s money does not originate in the mixed fund, the trustee can easily displace the evidential presumption that it is attributable to the claimant.” (emphasis in bold)

23.  In the present case, after (a) P’s traceable proprietary moneys were deposited into D7’s bank account and mixed with D7’s own money originally in the account, (b) money was then withdrawn from the account[16] and (c) further money was deposited into the account, P is still entitled to claim against the account, but the claim will be limited to the lowest balance that P’s money has fallen to between the date of the deposit of his traceable proprietary money and the subsequent deposit of D7’s own money (unless there is evidence showing that D7’s subsequent deposit is not its own money or from its own source but is attributable to P).  And if D7 has deposited its own money (or money from its own source) into the same account more than once, following the same logic, P’s claim will be limited to the lowest intermediate balance between the date of the deposit of the claimant’s proprietary fund and the date on which the account was frozen by injunction (from which there would be no further movement of fund).

24.  Mr Brown submitted that the “lowest intermediate balance” rule “determines how much of P’s proprietary funds can be traced out of AD48’s account to D7”[17]. He only told half of the story.  As explained in the above passage in Snell’s Equity, the “lowest intermediate balance” rule applies equally to D7’s account, as to what can be traced both (a) against D7’s account and (b) out of D7’s the account and into the next layer account.

25.  Paragraph 84(c) of P’s skeleton submission is a flawed illustration of the rule:

“So for example, if $100 of P’s proprietary funds were deposited into a first layer recipient’s account, and subsequently $40 was paid out leaving only $60 in the account. The lowest intermediate balance would be $60. If the first layer recipient subsequently received $40 from an unrelated third party, increasing the account balance back to $100, P’s proprietary funds in the account would still remain at $60. If the first layer recipient then paid $100 to a second layer recipient, P can only trace $60 of its proprietary funds to the second layer recipient, bound by the first layer account’s intermediate balance.”

The first fallacy of this illustration lies on its failure to take account of the $40 which was out of the account on the first occasion, as mentioned in the first sentence quoted above.  That $40 is also part of the proprietary funds which is traceable to the 2^nd layer recipient(s)’s account(s) (be it the same or a different recipient from the recipient who subsequently received $100, as mentioned in the last sentence quoted above).  The proprietary funds which are traceable out of the 1^st layer recipient’s account and into and against the 2^nd layer recipient(s)’ account(s) are $40 (paid out of the 1^st layer recipient’s account on the first occasion) and $60 (paid out of the 1^st layer recipient’s account on the second occasion), totalling $100.  In other words, the whole of $100 of traceable proprietary funds originally deposited into the 1^st layer recipient’s account has all been paid out of that account.  The “lowest intermediate balance” of the 1^st layer recipient’s account is $0.  Nothing is traceable against the 1^st layer recipient’s account.  This lies the second fallacy of Mr Brown’s illustration.  The lowest intermediate balance of the 1^st layer recipient’s account is $0, not $60 as submitted.     

26.  In the present case, as mentioned in paragraph 9 above, the date when US$311,833.00 of P’s traceable proprietary funds was deposited from AD48 into D7’s bank account was 20 August 2019[18].  According to Mr Tam for D7[19]:

“(i) Immediately prior to the receipt, D7's Account had a balance of HK$679.72 at its HKD current sub-account, HK$59,719.88 at its HKD savings sub-account, and US$1,121.40 and AUD1.75 at its foreign currency savings sub-account;

(ii) After the deposit of US$342,831.08[20] from AD48, on the next day there was a further deposit of US$156,586.08. This was followed by two withdrawals of US$500,200.00 and US$33.86, leaving the balance of USD in the foreign currency sub-account to US$304.70 by the end of the day on 21.8.2019;

(iii) Whether before or after the receipt of funds from AD48, there had always been a consistent deposit/withdrawal pattern of having one or more successive deposits over a few days, followed by a substantial withdrawal. See e.g. the entries on 19.9.2019-20.9.2019 in the foreign currency sub-account [B4/50/1268]; …”[21]

27.  As mentioned in paragraph 16 above, the date on which the Injunctions was granted was 25 May 2022.  Between 20 August 2019 and 25 May 2022, according to the bank statements adduced by D7, there have been a number of many deposits in and withdrawals from the account.  According to Mr Tam’s submissions[22]:

“The lowest intermediate balance at D7's Account was on 19.5.2021 (and the balance stayed the same until 30.5.2021) [B4/50/1325]: at the end of the day of 18.5.2021, the HKD current sub-account had a balance of HK$683.98; the HKD savings sub-account had a balance of HK$0, and the foreign currency savings had a balance of US$1,240.54 and AUD$1.75. Converting the above balance into HKD at the then exchange rate[23], the total balance at D7’s Account was a minimal sum of HK$683.98 + HK$0 + HK$9,623.86 + HK$10.41 = HK$10,318.25 only.”[24]

28.  This means after all the deposits[25] and withdrawals in between in and out of D7’s account, as a result of the operation of the “lowest intermediate balance” rule as explained above, only HK$10,318.25[26] remained from the US$311,833.00 of P’s traceable proprietary funds which was originally deposited into D7’s account on 20 August 2019. 

29.  For the above reasons, I reject P’s submission that the rule has no application here and that since D7 received the entirety of US$311,833.00 being P’s proprietary funds, P is entitled to a proprietary injunction over the whole amount.  I accept D7’s submission that there is a serious issue to be tried in respect of P’s proprietary claim up to the sum of HK$10,318.25 in D7’s account.  

30.  Accordingly, I held that the Proprietary Injunction shall be limited to the lowest intermediate balance of D7’s account, namely HK$10,318.25 as of 18 May 2021.  

E. Mareva Injunction - Risk of Dissipation of Assets

31.  I shall then consider whether this Court should grant a “top up” mareva injunction to cover the whole amount of US$311,833.00 which was deposited in D7’s account on 20 August 2019. 

32.  As mentioned in paragraph 3(2) above, D7 accepts that P has a good arguable case over its personal claim for restitution based on unjust enrichment, but contends that the Mareva Injunction ought to be discharged because P has failed to show that D7 has any real risk of dissipation of assets.[27]

33.  A real risk of dissipation of assets must be shown by P before the Mareva Injunction can be granted.  I adopt the apt summary of Madam Justice Au-Yeung at paragraph 21 in the AD48 Decision:

“With regard to the risk of dissipation of assets:

(1) The applicant must show a real risk, judged objectively, that a future judgment would not be met because of an unjustified dissipation of assets. Whilst it may not always be necessary to demonstrate a nefarious intent, there must be something more than the mere ordinary or usual dealing with assets. The applicant is required to show that, at least objectively, the effect of the defendant’s conduct would be to frustrate the enforcement of any judgment.

(2) There must be solid evidence of the risk of dissipation showing appropriately clear and strong facts and risks. Mere inference or generalised assertion is not sufficient. The burden to adduce cogent evidence of commercially sharp practice likewise falls on the plaintiff.

(3) An assessment of the risk of dissipation necessarily involves an evaluative and predictive judgment. The evidential burden can be satisfied by drawing proper inferences from a holistic consideration of all the circumstantial materials that are indicative of risk, including matters which point against such risk.

See Predicine Holdings Ltd v Bianchi (Hong Kong) Ltd and ors[2021] HKCFI 123, §76, Coleman J; Seridom[28], §§67-68.”

34.  Firstly, while there is no dispute that the funds taken from P was swiftly channeled away through various and multiple layers of recipients, Mr Tam for D7 submits that the documentary evidence adduced by D7 (certain sales agreement, purchase agreement, packing list and invoice and the proforma invoice issued by D7 to AD48[29]), at least arguably evidences a genuine transaction under which D7 came to receive the subject US$311,833.00.

35.  I have grave doubt, for the present purpose, on the genuineness of the transaction which was said to be the alleged basis of D7’s receipt of the subject US$311,833.00. As submitted by Mr Brown for P[30], it appears to me:

(1)  The transaction came as if it was a coincidence. It is remarkable that when Mr Su, AD48’s representative called Mr Liu of D7 to enquire the purchase of certain new products, Mr Liu happened to know that its supplier, TGE sold the exact products and even already had them in stock. It was surprising that without first checking with TGE, Mr Liu told Mr Su that he had those goods, agreed with Mr Su on the quantity and specific model/capacity, committed on D7’s behalf to AD48 that the goods could be delivered in two weeks, negotiated and reached an agreement on the price, and signed the sales contract with AD48, all taking place before he actually approached TGE to request for those products.  This is quite extraordinary, if not incredible.

(2) The transaction is even more extraordinary when the evidence shows that the profit margin of the product is low.  If the profit margin was low, it is quite unbelievable that Mr Liu saw fit not to find out the actual cost price and instead entered into the sales agreement with AD48 outright.

(3) The commercial terms and mode of operation of this transaction were anomalous and disadvantageous to D7.  It is doubtful why D7 would have entered into the transaction in such a way and at these terms. For instances, D7 only issued the invoice to AD48, and hence would be paid, after the goods were collected.  D7 allowed 30 days for AD48 to pay, but accepted TGE’s requirement that it had to pay TGE for supply of the goods within 5 days.  On its face, without any explanation from D7 on why it disadvantaged itself, the integrity of this transaction has to be called into doubt.

(4) The documentary evidence produced by D7 which is capable of proving the existence or genuineness of the transaction is scanty.  The sales contract and invoice were produced but they could be self-serving because they were generated by D7.  No other documents, such as WeChat messages or photographs were produced.  No document or information was produced by D7 to substantiate or explain the source of its receipt of the sum of USD156,586.08[31].  D7 said it was from another customer from another transaction, but no information of and evidence on the other transaction was produced.  

36.  Secondly, Mr Tam for D7 submitted that the inherent likelihood of a recipient (as D7 being a 4^th layer recipient in the present case) being part of and/or having knowledge of the fraud decreases as one goes downstream.  I disagree.  Firstly, this is only a pure logical deduction, not based on facts and may turn out to be a red herring, particularly in light of the fact that the fraud money is very big – approximately HK$500 million in total.  The fraud appears to be well planned and organized.  The possibility that a large number of fraudsters were involved cannot and should not be excluded.  Secondly, here the issue in question is risk of dissipation. Whether D7 was involved in the original fraud is one thing.  But whether D7 has done anything which reflects a nefarious intent or reveals something more than the mere or usual dealing with assets, has conducted itself the effect of which would be to frustrate the enforcement of any judgment is quite another matter. It would be wrong to suggest that since (assuming) D7 was not involved in the original fraud, the risk of dissipation of its assets is automatically low.  In assessing the risk of dissipation, the Court must go back to the fundamental – to consider all circumstances which may be indicative of such risk.

37.  Thirdly, it appears that D7 effectively has no answer to P’s criticism that D7 has not established that it is operating a genuine or legitimate business, and in this particular line of business (i.e. trading of MicroSD cards and readers).

38.  I find force in P’s submission that D7 has failed to adduce the following categories of documents, without providing any explanation[32]:

(1)  D7 has adduced no tax return.

(2)  D7 has adduced no financial documents, e.g. management accounts, books and records.

(3)  D7 has adduced no trading documents or records, importantly those from third parties, e.g. suppliers or purchasers.

(4)  D7 has adduced no documentary evidence, e.g. payroll, MPF records etc., in support of its allegation that it retains five to eight employees.

39.  D7’s explanation on the location of its business is extraordinary:

(1)  Mr Liu said the registered address was borrowed from a residential address of his relative in Tin Shui Wai.[33]  In my view, this is already strange for a business undertaking if genuine.

(2)  What is even stranger is, D7’s address stated in the proforma invoice issued by D7 to AD48 was not the Tin Shui Wai’s residential address, but an address of a factory building in Kwun Tong[34].

(3)  Mr Liu explained[35] that he loosely recollects that D7 rented the Kwun Tong premises for a short period in 2017.  D7 did not renew the tenancy.  At that time D7 changed the address in the proforma invoice to the Kwun Tong address and continued to use this address until now, because he forgot to change it.  I agree with Mr Brown that this story is incredible and unbelievable.    

40.  Other than the contract and invoice of the subject transaction the genuineness of which I have expressed doubt, as mentioned above, D7 has not adduced any other trading documents.  Consequently, I accept P’s submission that D7 has not been able to demonstrate to this Court that it carries a genuine or legitimate business generally, or a genuine or legitimate business in the trading of microSD cards and card readers.

41.  Mr Tam submits that these findings do not qualify as D7 having engaged in any conducts of low commercial morality and that there is no allegation that D7 was part of the subject fraud.  This submission is misconceived and must be rejected.  The following passages per Deputy High Court Judge Le Pichon in the D8 Decision are apposite to this submission and in my view provided a complete answer:

“77. D8 submitted that the Plaintiff has failed to demonstrate a real risk of dissipation citing Universal EntertainmentCorporation v Kazuo Okada[2020] HKCFI 1406 at §37 where the relevant considerations are summarised. Of relevance to the present case are those mentioned in subparagraphs (4) and (9) which state that the purpose of the freezing order is not to prevent a corporate defendant from dealing with its assets in the normal course of business provided that such dealing and conduct are legitimate and an assessment of the risk of dissipation necessarily involves an evaluative and predictive judgment. The evidential burden can be satisfied by drawing proper inferences from a holistic consideration of all the circumstantial materials that are indicative of risk.

78. As was recognised in Universal Entertainment, each case is fact specific and the relevant factors must be looked at cumulatively.

79. In the present case, D8 sought, but failed, to justify its receipt of the Funds on the basis that it was carrying on a legitimate wholesale trading business and that the Funds were received in the normal course of its business. Had a bona fide and legitimate business been established, no question of a risk of dissipation would arise for consideration.

80. For the reasons set out, the court found D8’s evidence wanting in many fundamental respects and rejected its case of being a bona fide purchaser, there having been a lack of transparency and an absence of full disclosure. The transactions with Guolong are concerning.

81. The Funds said to have been received in the course of carrying on a legitimate business stem from a fraud. Where the legitimacy of the business being carried on is itself in issue, taking into account all the evidence that led the court to reach that conclusion, I consider that a risk of dissipation could be inferred in all the circumstances.”

42.  Because of the various doubts, anomalies and extraordinary matters explained above, for the present purpose, I do not consider D7 has, at least at this stage and on the evidence so far adduced, satisfied the Court that it has been carrying on a genuine or legitimate business, particularly in the business of trading microSD cards and card readers and more particularly that the subject transaction through which it received the subject US$311,833.00 of P’s funds.  Given its failure to make full disclosure, the suspicion against the genuineness of its business, the question that it was not acting bona fide in the transaction and hence in receiving the subject money (irrespective of whether D7 has any involvement in the fraud), having considered all the relevant matters presented to this Court, I find that there is a real risk of dissipation of assets.

43.  For completeness, I shall deal with two remaining points raised by D7.

44.  Mr Tam for D7 submits that the bank statements of D7’s account demonstrate that the deposit/withdrawal pattern in the account (i.e. substantial funds being deposited successively, followed by a substantial or successive withdrawals) was adopted consistently at least for the 6 years since January 2016, and as such in D7's submissions, the lack of any abrupt change in deposit/withdrawal pattern that negates, or at least mitigates, the suspicion that D7 might put its assets out of reach of a judgment[36].  This submission, in my view, is another red herring.  Such an analysis, basing on a so-called “pattern”, is building castle in the air.  It proves nothing[37].  It is the source of each deposit and the reason for each withdrawal that matters.  D7 adduces no evidence in this respect.

45.  Lastly comes the argument of delay.  Mr Tam for D7 submitted[38] that there was a gap of 1 year and 11 months for P in applying for the Injunctions ex parte.  Assuming giving P’s Expert a generous period of 11 months to examine the relevant documents and records, conducting the tracing exercise and preparing the expert report setting out the results, in Mr Tam’s submissions, there is still an unexplained gap of 1 year.  In contrast, D7, despite a lapse of 2 years and 8 months, i.e. from the date of D7’s receipt of US$342,833.00 from AD48 (on 20 August 2019) to the date where P applied for, inter alia, injunctions against D7 unsuccessfully before Madam Justice B. Chu (as mentioned in paragraph 14 above) on 22 April 2021, has not done anything during this period to dispose of its assets.  Mr Tam went further to suggest that should D7 inclined to dissipate its assets, it would already have done so.

46.  P’s response is of two-fold[39].  Firstly, P denies that there was delay on its part.  Mr Brown submitted that the fraud was discovered in late August 2019 and from that moment onwards P has taken steps towards the recovery of its funds, including obtaining injunctions against 47 defendants being the first “batch” of recipients of P's funds identified with the help of the police.  The recovery of P's funds is an ongoing and time-consuming process due to the size of the fraud and the complexity of the tracing made difficult by the volume of transactions and number of banks, bank accounts and recipients involved. 

47.  Secondly, delay per se does not necessarily bar the relief.  The law in this respect is clear, as explained by the Court of Appeal in Convoy Collateral Ltd v Cho Kwai Chee & Others [2020] 6 HKC 81, §§54,77-81 per Lam VP (as he then was):

“54. We should also mention that evidence of delay would also be relevant. Delay after a defendant gained knowledge of a plaintiff's claim can militate against the risk of dissipation as such defendant would already have the opportunity to dispose of assets should he be inclined to do so. This is the stable-door argument which Mr S Wong strongly urged upon us in the present appeal by way of a respondent's notice. We shall deal with this contention below. …

77. As identified by P Ng J in Re Chan Cham Wong Patrick [2016] 2 HKLRD 278 at [24], the underlying premise of the stable-door argument is that equity does not act in vain.

78. It is also clear from the authorities that delay per se would not necessarily bar relief. The ultimate question is still whether the plaintiff could show a real risk of dissipation despite delay. A recent exposition of the relevant law is contained in the judgment of Jacobs J in PJSC National Bank Trust v Boris Mints [2019] EWHC 2061 (Comm) at [48] to [51] where recent English Court of Appeal judgments were discussed. In JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 906 at [34] Bean LJ endorsed the proposition that if the court is satisfied on the evidence that there remains a real risk of dissipation it should grant an order, notwithstanding delay, even if only limited assets are ultimately frozen by it.

79. Thus, the significance of delay in each case must be considered on its own circumstances. There are no doubt cases where a defendant has little connection with and limited assets within Hong Kong, particularly when the assets could be easily removed. There are also cases where the fact that the assets remain here notwithstanding a defendant has knowledge of the claim for a long period of time can be evidence negating an inference of risk of dissipation. In those cases, an unexplained delay can be fatal. The authority cited by Mr S Wong, China Art Bank Co Ltd v Xu Zhiqiang[2018] HKCA 63 is one of such cases.

80. On the contrary, the delay in this instance is not unexplained and the stable door was not completely opened (secured as it were, at least with regard to Roy Cho's holding in Broad Idea, by the BVI injunctions). Further, given the fact that the base of the defendant's business empire is in Hong Kong and the scale and complexity of his financial affairs, we are satisfied that there is still a real risk of unjustified dissipation notwithstanding the lapse of time before the summons was issued on 25 June 2019.

81. In short, we do not think equity will act in vain by the grant of Mareva relief.  For these reasons, we rejected Mr S Wong's arguments based on delay.”

48.  In light of the particular circumstances of the present case, such as the facts that the scale of the fraud is large, that the number of recipients of P’s funds is large, that multi-layers of recipients of P’s funds are involved, that the relevant banking documents are voluminous, that the tracing exercise is highly complex and exceptionally time-consuming and that recovery actions involve a large number of defendants and different layers of recipients, I do not consider that there has been a delay on P’s part.  And even if there has been a delay, in my view, that delay would not have been excessive, and would not militate against my finding in paragraph 42 above that there is a real risk of dissipation of assets.     

49.  My conclusion is therefore that equity will not act in vain by continuing the Mareva Injunction.

F.  Mareva Injunction – Over Security

50.  The third issue raised by D7 is, as mentioned in paragraph 3(3) above, is that: If the Mareva Injunction is to continue, whether the limit of the frozen assets should be reduced to avoid giving P “over-security”.

51.  In summary, D7 says[40], as mentioned in paragraph 8 above, D7 received P’s funds from AD48.  In this so-called “branch” of 3^rd and 4^th layer recipients starting from AD48, AD48 received from AD24 US$450,001.00 and from AD47 US$199,999.08 of P’s funds, totalling US$650,000.08.  At present, there is a sum of US$450,001.00 frozen at AD48’s account under HCA 2091/2019, to avoid freezing assets of over and above the maximum liability for which D7 could be held liable, D7 submitted that the asset limit of the Mareva Injunction against D7 ought to be reduced to US$199,999.08.

52.  I do not understand why the limit of frozen assets of AD48 was used by D7 to compare with D7’s maximum liability, and why the “branch” should start from AD48 and not earlier layer recipient and why other same layer recipient was not taken into account.  Anyway, the essence and effect of D7’s submission is that, as pointed out by P, P is not entitled to injunct D7 while it is injuncting AD48 (being a “3^rd layer” recipient of US$450,001.00 from AD24 and a “4^th layer” recipient of US$199,999.08 from AD47).

53.  Mr Tam for D7 relies on Galsworthy Ltd v Liu Cheng Chan and Others, HCA 560/2017, 11 August 2017, a judgment of Mr Justice Anthony Chan, and submits that P is not entitled to any injunction which exceeds the value of its claim.  However, I do not agree that judgment has application[41] here because firstly the facts and circumstances of that case share no similarity to the present case at all, and do not involve multi-layers of recipients of plaintiff’s funds.  Secondly, more importantly, I agree with P[42] that the yardstick against each defendant is always, for proprietary injunction – “serious issue to be tried”, and for Mareva injunction – “good arguable case”.  If claims against all defendants are established at the trial, it will be up to the plaintiff to elect against which defendant to seek recovery or enforcement of the judgment.  This depends on various considerations such as balance available in each bank account of each judgment debtor and whether there are any competing claims, and is subject to the requirement of no double recovery.  I agree with Mr Brown that at the interim stage, P is entitled to seek injunctions against AD48, D7 or other defendants to protect the interim position as it is all a matter of contingency and uncertainty as to how much P will be able to ultimately recover from each of the defendants, or if any.  It is plainly wrong as a matter of principle that P is forbidden by law to seek protection of recoverable assets for enforcement in due course against different layers of recipients of P’s funds at the same time.

54.  In the present case, D7 received US$311,833.00 of P’s proprietary funds from AD48.  P, having established against D7 a serious issue to be tried on its proprietary claim and a good arguable case on the bases of restitution and unjust enrichment, is entitled to seek proprietary injunction and Mareva injunction against D7.        

G. Conclusion & Disposal

55.  Having taken account of all the relevant circumstances, I have come to the view that the Injunctions should be continued, save that the Proprietary Injunction shall be limited to the lowest intermediate balance of D7’s account, namely HK$10,318.25 as of 18 May 2021.  I shall also grant the ancillary disclosure order and the banker’s disclosure order pursuant to section 21 of the Evidence Ordinance as sought by P.

56.  Accordingly, I made an order in terms of (a) paragraph 1 of the Summons, save that Schedule 1 of the Injunction Order be further varied to the effect that the “Funds subject to proprietary injunction” be amended from “311,833.00” to “10,318.25”, (b) paragraph 2 of the Summons, and (c) paragraph 3 of the Summons.

57.  On costs, as P has been, in the main, successful, in this application, I make an order on a nisi basis that D7 do pay costs of the Summons (except those costs which have been provided for in relation to the order made in respect of paragraph 3 of the Summons per the draft Order in Schedule 1 to the Summons) to the Plaintiff forthwith, to be summarily assessed, with the direction that (a) P does provide a statement of costs within 7 days of this order, (b) D7 does file and serve a list of objection to P’s statement of costs within 7 days thereafter and (c) P does file and serve a list of reply to D7’s list of objections within 7 days thereafter.

58.  I am grateful for Counsel’s assistance.

HCA 452/2022

[2023] HKCFI 1393

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 452 OF 2022

____________________

BETWEEN

___________

___________

R E A S O N S    F O R    D E C I S I O N

___________

1.  This is the substantive hearing of the ex parte injunction order granted by Madam Justice B Chu on 22 April 2020 (“the Injunction”) against the 8^th defendant, Hong Kong Shun Yuen Import and Export Limited (“D8”) as varied and continued by the order of Madam Justice Cheng on 29 April 2022. At the conclusion hearing, the Injunction was continued until further order. My reasons appear below.

Background facts

2.  The Plaintiff is the victim of a large-scale fraud in which approximately HK $500 million was paid to various companies as a result of unknown individual(s) impersonating the CEO and President of the Plaintiff’s parent company, and causing the Plaintiff’s general manager of finance to believe that the funds were required for a secret and urgent acquisition.

3.  The Plaintiff has already obtained interlocutory proprietary and Mareva injunctions against 48 defendants in HCA 2091/2019 (“HCA 2091”) comprising “1^st layer”, “2^nd layer” and “3^rd layer” recipients of the Plaintiff’s funds (collectively referred to as “ADs” and individually as “ADX”).

4.  The Defendants in this action (“the Defendants”) are the “next layer recipients” of the Plaintiff’s funds from ADs identified from the banking documents obtained in HCA 2091.

5.  This hearing concerns D8 only, a “3^rd layer recipient” who received 2 sums of the traceable proprietary funds totalling USD 274,986.08 (“the Funds”) on 19 August 2019 and who is opposing the Plaintiff’s application for the continuation of the Injunction.

6.  D8’s upper layer recipients are

(a) AD 5, a Hong Kong company which received in excess of US $8 million of the Plaintiff’s traceable proprietary funds, rendering it a 1^st layer recipient; and

(b) AD 27, a Hong Kong company to whom AD 5 transferred an amount in excess of US $5 million out of over US $8 million of the Plaintiff’s traceable proprietary funds it received, making AD 27 a 2^nd layer recipient.

Procedural history

7.  On 8 April 2021, the Plaintiff obtained default judgments against both AD 5 and AD 27. Banking documents obtained from a section 21 banker’s disclosure order revealed that the Funds were paid into the D8’s account.

8.  As against the Defendants whose immediate upper layer recipient was a defaulting defendant, the Injunction granted was both a proprietary and a “top up” Mareva injunction. This applied to D8 since both AD 5 and AD 27 were defaulting defendants.

9.  On 29 April 2022, the Injunction was varied to include ancillary disclosure orders with the added disclosure of the proprietary funds. While D8 indicated its opposition to the continuation of the injunction, it did not oppose the ancillary disclosure order or the section 21 banker’s disclosure order.

Legal principles

10.  The principles governing the grant of a proprietary injunction and those for the grant of a Mareva injunction are well-established. For present purposes, it suffices to highlight the following differences between the 2 types of injunctions:

(a) for a proprietary injunction to be granted, the applicant has to show that there is “a serious issue to be tried”, namely a claim that is not frivolous or vexatious and is not a higher standard of a “good arguable case” whereas for a Mareva injunction, the applicant needs to establish a “good arguable case”, that is to say its 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”: Hong Kong Civil Procedure 2023, §29/1/66; and

(b) the need to show a real risk of dissipation is required for a Mareva injunction but not for a proprietary injunction.

11.  Where a party opposes the continuation of the injunction at the interlocutory stage, the burden is on him to put up a defence and evidence of sufficient cogency so as to water down the merits of the applicant’s claim to an extent that it no longer amounts to a serious issue to be tried (for a proprietary injunction) or a good arguable case (for a Mareva injunction). In such a case, the injunction would be discharged.

12.  The Court is not to resolve disputes of fact and difficult points of law on an interlocutory basis: per Au-Yeung J in Toyota Boshoku Europe NV v Hong Kong Longshenyuan International Trade citing DBS Bank (Hong Kong) Limited v Tian Wen Quan, unrep., HCA 3228 of 2016, 12 October 2017 at §13; and Pacific Rainbow International Inc v Shenzhen Wolverine Tech Limited & Ors, unrep., HCA 3023 of 2016, 2 May 2017 at §40 citing Derby & Co Limited v Weldon [1990] 1 Ch 48 at 58. Except in a clear case, those matters are to be resolved at trial.

13.  However, the existence of a “good arguable defence” does not necessarily negate a “good arguable case”. It is entirely possible to have, at the interlocutory stage, both the claim and the defence being more than barely capable of serious argument and not necessarily having a better than 50% chance of success.

14.  For a Mareva injunction, there is no requirement that the applicant must show that he has a “much better” case or argument then the opposing party: Pacific Rainbow at §42 citing Kazakhstan Kagazy plc v Arip [2014] EWCA Civ 381 at §25.

D8’s defences

15.  D8 opposes the continuation of the injunction. Its pleaded defence is that (A) it is a bona fide recipient of the Funds through a transaction conducted in its wholesale wine business; and/or (B) it has so changed its position by making part payment for wine purchased from its supplier that it would be inequitable in all the circumstances to require it to make restitution.

16.  Mr Toby Brown and Mr Jeremy Yau, counsel for the Plaintiff, highlighted the fact that the burden of proof is squarely on D8 to show that it is a bona fide purchaser without notice and/or that it has so changed its position to render it inequitable to require it to make restitution. With that in mind, I turn to consider the defences raised.

(A) Bona fidepurchaser without notice

(a) The proper approach

17.  Mr Brown submitted that the court’s task is to look at D8’s version of events and form a broad brush view as to its credibility based on inherent probabilities and whether it is supported by the contemporaneous materials which have been (or should have been) disclosed by D8, citing the observations of DHCJ D Lam in Pacific Rainbow at §50.

18.  The court was reminded that D8 was not under time constraints for filing its affirmation in opposition. The Injunction was granted just over a year ago and hence it has had ample time to marshal and adduce the necessary evidence to discharge its burden of proof, sufficient to meet the high standard required in order to establish that it is running a bona fide business and the transactions in question are legitimate.

19.  The transactions cannot be looked at in isolation but in the more structured context of the running of a legitimate business generally, whether the particular line of business in question is legitimate (in the present case, trading in wine) and the specific transactions involved.

20.  The Plaintiff submitted that at this stage of the proceedings, when there has been no discovery, witness statements or cross examination, it is important to see whether the bigger picture holds together based on the available evidence.

(b) D8’s business

21.  D8 is a Hong Kong incorporated company in October 2016 whose sole shareholder and director was and is Ms Li Ho Lin (“Ms Li”). It is said to be engaged in the wholesale trade in frozen meat and, at some point, also in wine.

22.  Prior to the incorporation of D8, Ms Li was employed as a clerk by a trading company. Upon gaining “some experience and contacts” from her employment, she started her own wholesale trading business. It was small-scale trading business, largely a “one-man band”, utilising her contacts to import goods from abroad and then resell them to purchasers in Hong Kong and mainland China. Her evidence is that business is largely developed by word of mouth: D8 eventually came to accumulate repeat customers but it also accepted ad hoc/one-off orders from new customers: see the 2^nd affirmation of Ms Li dated 22 July 2022 (“Li 2^nd”) at §§7-8.

23.  Upon the incorporation of D8, Ms Li caused D8 to open a bank account with the Nanyang Commercial Bank (“NCB”). In March 2017, it opened a USD savings account (“the NCB Account”) for its wholesale trading business in addition to HKD current and savings accounts D8 maintained with NCB.

24.  According to D8’s Reports and Financial Statements certified by its auditors for the financial years ending 31 December 2018 and 2019 (respectively “the 2018 accounts” and “the 2019 accounts”), its principal ‘activities’ consisted of “wholesale of frozen meat”.

25.  For the first 18 months of its business activity, D8’s only line of business appeared to be confined to trading in frozen meat. On 24 September 2018, the NCB bank statement shows a remittance out of over USD 924,110 to QuintMas SDN BHD (“QuintMas”), a Malaysian trading company, said to be D8’s only wine supplier.

26.  The transactions whereby the Funds were paid into D8’s account related to 2 orders for wine of USD 140,000 and USD 135,000 respectively, placed by Guolong Trade Limited (“Guolong”) on consecutive days, namely on 13 and 14 August 2019, for a total of 2130 cartons of wine.

27.  The invoice for the order placed on 13 August 2019 contained the following particulars:

Description	Quantity[1]	Unit Price (USD)	Total (USD)
Penfolds Bin 2 Shi Mataro 75cl	1400	100	140,000

28.  The invoice for the order placed on 14 August 2019 contained the following particulars:

Description	Quantity	Unit Price (USD)	Total (USD)
Penfolds Bin 28 Kalimna Shi 75cl	150	130	19,500
Penfolds Bin 128 Shi 75cl	390	150	58,500
Penfolds Bin 389 Cab Shi 75cl	190	300	57,000

29.  D8 relies on the following matters to show that it was operating a legitimate wholesale trading business:

(i) it operates bank accounts for that business and relevant bank statements[2] have been produced;

(ii) it is the lessee of a Container Yard with storage and office space in Yuen Long from which it conducts its trading activities and 3 lease agreements for consecutive two-year periods from 2018 onwards have been exhibited;

(iii) it has 3 employees and their MPF records for the period from July 2021-June 2022 been adduced: and

(iv) it has made available the 2018 and 2019 accounts which record that D8 had been paying income tax.

These are considered in turn

(i) Bank accounts

30.  As earlier noted, D8 opened its account with NCB in November 2016, at about the time of its incorporation. NCB closed D8’s accounts on 10 December 2019 “for reasons unknown[3]”.

31.  In late 2019, Ms Li received a call from a staff member of NCB who simply informed her that NCB would close the 3 bank accounts D8 held with NCB. Ms Li was not given a reason nor did she enquire as she thought it was “not uncommon for companies involved in the trading business, which often have large sums going through their accounts[4]”.

32.  Mr Brown submitted that there are 2 possibilities: either NCB’s employee could not divulge the reason, for example, if the Joint Financial Intelligence Unit (“JFIU”) was involved, or Ms Li was not disclosing the real reason.

33.  The notion that a bank would suddenly close a business account that has been active for several years and which maintained a positive balance throughout without giving any reason for so doing is difficult to accept and appears to be contrary to common sense.

34.  Be that as it may, in so far as it is suggested that “since then” D8 has switched to other banks (including Dah Sing Bank and Standard Chartered Bank), there is no evidence as to when accounts with the other banks named were established: no bank statements from those banks showing the date the relevant account was opened have been produced.

35.  No composite NCB monthly bank statement is available from March 2019 onwards. The financial history transaction list for the period commencing 1 April 2019 to 31 March 2020 provided to D8 on 3 May 2022 shows that the cash balance of USD 4825.03 in the NCB Account was converted into HKD on 10 December 2019, leaving the NCB Account with a zero balance but there is no evidence as to what happened to the converted balance, whether it was withdrawn in cash or transferred to an account with another bank.

36.  In those circumstances, it has not been shown that upon the closing of the NCB Account, D8 had extant bank accounts with other banks. That fact renders it even more inexplicable that NCB was not pressed for an explanation.

(ii) The Container Yard lease

37.  The 3 leases have identical provisions apart from the year of commencement. Each is for a period of 2 years commencing 1 July to 30 June at a monthly rent of HK $122,121, terminable upon 3 months’ prior notice in writing. It provided for reimbursement by D8 of water and electricity charges according to the meter readings and that it was incumbent on D8 to manage the Container Yard. It contained no other provisions.

38.  The relevance of each lease lies in its treatment in the 2018 and 2019 accounts provided: see §§41-43 below.

39.  It should be noted that the leases make no reference to or mention of any refrigeration equipment/facility being provided in the Container Yard. This is relevant to the evidence adduced to show that D8 was carrying on a legitimate wholesale trade in frozen meat[5].

(iii) MPF records

40.  These relate to the period from July 2021 to June 2022 and are irrelevant when determining whether during the period in question (August 2019) D8 was carrying on a wholesale trading business. It is to be noted that no employment contract for any employee is in evidence.

(iv) The 2018 and 2019 accounts

41.  Mr Brown invited attention to the entries in the 2018 and 2019 accounts which show that for the years ended 2017, 2018 and 2019, the amount of rent paid for the Container Yard is shown as HK $336,000 when the annual rental payable under the relevant lease exceeds $1.46 million per annum.

42.  There is no explanation given in the accounts for this serious discrepancy which necessarily undermines the reliability, accuracy and credibility of the accounts produced.

43.  That matter apart, it is odd that no trade receivables and/or no trade payables are shown for the year ended 2018. Ms Valerie Tang, counsel for D8, submitted that that is of little consequence when trade receivables[6] and trade payables[7] are shown in the 2019 accounts but it is far from clear why that should be so. After all, it is not the case that D8 only commenced trading in the course of 2018. The statements for the NCB Account show transactions commencing April 2017.

44.  Both sets of accounts state D8’s principal ‘activities’ as “wholesale of frozen meat”. However, for the year ended 2018, of the cost of purchases (in round terms) of HK $40.3 million, approximately HK $7.2 million or just under 18% of the total cost was attributable to the purchase of wine made in September 2018.

45.  So far as concerns 2019, D8 placed orders with QuintMas in May and July 2019 (invoices SY 1004-1011) totalling approximately HK $7.7 million and representing over 18% of the total value of purchases made by D8 in 2019.

46.  In those circumstances, to describe D8’s principal ‘activities’ as confined to frozen meat trading is inaccurate if not also misleading.

47.  To substantiate D8’s wholesale trading business, only 21 pages of documents[8] (relating to 3 transactions conducted in 2021 and 1 transaction conducted in 2022) are exhibited to Li 2^nd. None of the transactions presented took place in 2019 when the transfer of the Funds occurred.

48.  Unless a complete set of documents for a particular transaction is provided, it would not be possible to trace through the entire transaction to ensure that everything tallies. A complete set has been provided for only one[9] of the 4 transactions presented as representative of the trading carried on.

49.  That aside, the following matters require comment:

(a) the exhibits include 2 “Meat and Poultry Export Certificate of Wholesomeness” (“certificate of wholesomeness”) dated 3 July 2020 and 28 April 2021 signed on behalf of the relevant US authority for the export of frozen meat as part of the documents relevant to D8’s purchase of frozen meat in May 2021:

(i) the relevance of the certificate dated 3 July 2020 has not been explained when the relevant purchase was made in May 2021 is not evident[10];

(ii) instead of seeing the name and address of the consignee/importer entered in the relevant box, there is a handwritten entry of a container number; in addition, the name of the consignor/exporter and the name and address of the export establishment have been left blank. But markings or traces discernible from the copies provided show that the original entries had been tinkered with by the application of correction tape or a ‘white-out’ or such like to conceal/obliterate the original entries;

(b) in the complete set of documents exhibited, there is a certificate of wholesomeness which contains all the relevant entries and shows that it was exported from an establishment called “Millard Refrigerated Services”:

(i) in so far as it was suggested that as D8 actually traded in frozen meat, there must have been refrigeration facilities in the Container Yard, Ms Tang had to accept that there is no evidence of the existence of such facilities;

(ii) as earlier noted, there is no mention of such facilities in the lease; and

(iii) there are no entries in the 2018 and 2019 accounts that reflect the cost of acquiring and/or maintaining such facilities.

50.  In short, the four matters relied on by D8 in support of its legitimate operation of a wholesale trading business are entirely unsatisfactory and the evidence presented falls far short of what is required.

51.  Even assuming (which is not accepted) that D8 was carrying on a wholesale trading business in frozen meat, it does not follow that it would automatically legitimise its trading in wine.

Trading in wine

52.  From Ms Li’s account of why D8 came to be incorporated (see §22 above), one would expect her “experience and contacts” to have been derived from the work she had to carry out for her previous employer. Not only is there no evidence about the nature of the work she carried out as a clerk or the duration of her previous employment, nothing is known about the type(s)/line(s) of wholesale trading in which her previous employer was engaged, the size of the operation and the number of employees working there.

53.  D8’s reasons for suddenly placing an order for wines, as it were, out of the blue, are not disclosed. Pausing here, trading in wines is not for the uninitiated and is certainly not an undertaking one would embark on or dabble in without being conversant with the wine trade. The absence of any explanation for suddenly branching out into the wine trade absent evidence of Ms Li’s knowledge and experience in that field is inexplicable and inevitably raises a red flag as to the legitimacy of that line of wholesale trading.

54.  The value of the very first order for wine placed with QuintMas in September 2018 was not insignificant, representing almost 18% of D8’s total purchases for 2018. The circumstances precipitating that order are not disclosed nor its particulars.

55.  Ms Li’s evidence is that she received a phone call from a representative of Guolong, a trading company with which she had had no previous dealings, who placed 2 orders. As the invoices issued bear consecutive dates and are not numbered sequentially, one would expect that 2 separate orders[11] were placed on separate days by separate phone calls rather than in a single phone call but all that is unclear.

56.  That D8 did not maintain a log or chronological record of incoming orders for wine is surprising since one would have thought that such records would have to be kept for accounting purposes.

57.  The particulars given in the invoices do not specify the vintages of the wines ordered which is remarkable as different vintages are differently priced. The explanation given that D8 had in fact only ever purchased one type of vintage for each of the wines sold to Guolong.

58.  That does not explain how Guolong came to know that was the case or what vintages to order. As is acknowledged, D8 has no internet footprint showing the particular wines it carries and their vintages. It is not suggested that there were advertisements or such like that disseminated that information.

59.  D8 relies on word-of-mouth. But how that would actually operate in practice (at least as regards the very first order for which payment was made in September 2018), remains a mystery.

60.  It is remarkable that D8 does not appear to maintain records of its customers, be they repeat or one-off customers. The invoices in question specify the name of the purchaser but without any address or contact number. While the invoices contain important information (such as the name of the beneficiary and details of the bank account into which payment should be made), surprisingly, the terms of payment are nowhere specified which, putting it mildly, is somewhat odd.

61.  D8 was at pains to stress that an address was unnecessary as Guolong picked up the 2130 cartons of wine that were ordered from the Container Yard. Had delivery been required, there would have been an additional charge and it is clear from the invoices issued that they do not state any additional charge.

62.  However, that does not explain how the invoices were delivered to Guolong for settlement since it is hardly likely that Guolong had been allowed to collect the wine ordered before making payment. That is a glaring gap in the evidence.

63.  Much was made of the fact that complete sets of the wine orders placed with QuintMas in May and July 2019 (totalling in excess of 21,000 cartons of wine) are before the court. A curious and inexplicable feature of purchases from QuintMas is the absence of any terms for making payment. D8’s written submissions[12] refer to it being able to enjoy the credit extended, there being no specific deadlines for full payment to QuintMas. How a legitimate business (assuming QuintMas to be such) could be conducted on such a basis for payment is bizarre and beyond comprehension.

64.  The fact that the particular wines Guolong ordered happened to be carried by D8 is neither here nor there. As no records of stock maintained by D8 are in evidence, bearing in mind that D8 apparently sold wine to customers other than Guolong, it is impossible to tell whether or not D8 had sufficient stock of each of the 4 types of wine ordered.

65.  For the foregoing reasons, I remain unconvinced and unpersuaded that D8 was carrying on a bona fide business of wholesale trading in wine.

(B) Change of position in good faith

66.  D8’s alternative defence is that it had altered its position in good faith since the receipt of the Funds in that the Funds have been applied in partial payment for the wines D8 ordered in July 2019.

67.  The defence of change of position is set out in the following passage in Lipkin Gorman (a firm) v Karpnale Limited [1991] 2 AC 548, 580.

“…… At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions. In this connection I have particularly in mind the speech of Lord Simonds in Ministry of Health v. Simpson [1951] A.C. 251, 276.”

68.  That test was applied by Marlene Ng J in Seridom Servicios Integrados Idom SAU v Heng Wen Trade Code Ltd & Ors[2019] HKCFI 85 at §75.

69.  What D8 has done in the present case is to make a payment in the ordinary course of business. That does not come within the defence of a change of position as explained by Lord Goff in Lipkin Gorman. D8 cannot show that as a result of receiving the Funds, it engaged in some extraordinary expenditure: D8’s liability for the July order had already arisen before it received the Funds from AD 27 on 19 August 2019.

The proprietary injunction

70.  It is D8’s submission that for the proprietary injunction to be continued, the Plaintiff needs to show that the Funds or its traceable proceeds are held by or under the control of D8. Its case is that after receipt of the Funds on 19 August 2019 into the NCB Account, the Funds together with D8’s own funds were used to pay QuintMas for the July 2019 wine order.

71.  The Funds are clearly traceable into the wine stock. The fact that D8 resold that wine to other customers must mean that D8 would have been paid by those customers. As D8 was required to disclose the current location of those assets and there is no evidence that D8 did something else with payments received from its customers, the same continues to be traceable into the proceeds of sale held by D8.

72.  A further objection raised by D8 to the continuation of a proprietary injunction relates to the principles concerning adequacy of damages and balance of convenience. Thus, in Essilor Manufacturing (Thailand) Co Limited v G Doulatram and Sons (HK) Ltd & Ors[2021] HKCFI 30 at §59 that:

“where the proprietary claim of the plaintiff is not to any specific real or personal property but money, the plaintiff can be adequately compensated by a monetary award, unless there is evidence which calls into question the ability of the defendant to meet the award (for example its insolvency), a proprietary injunction is not necessary or justified.[13]”

73.  Mr Brown submitted that there is evidence to suggest that D8 would have difficulty to meet the award. The 2019 accounts state a profit of over HK $700,000 (projected to increase), but even as of this date, there are no accounts available for the year ended 31 December 2020. As earlier noted, the annual rental for the Container Yard has been grossly understated (by over $1 million per annum) and the discrepancies would probably be more than sufficient to offset any profit.

74.  It is no excuse to refer to the fact that D8’s accountant appears not to be able to submit accounts until 2 years and 9 months after the end of the relevant financial year. It would mean that D8 has been in breach of section 429-431 and 610 of the Companies Ordinance.

75.  Ms Tang referred to D8’s disclosure of assets as of 6 May 2022 which comprise a van and stocks of red wine with an aggregate value of over HK $9 million. It is to be noted that there were no stocks of frozen meat when wholesale trading in frozen meat was its principal activity and the Injunction was imposed only a month earlier. Ms. Li evidence is that she is now borrowing money to sustain the business which strongly suggests that D8 may not be in a position to meet the award.

76.  It was open to D8 to make a payment into court of the amount enjoined so that the balance of its assets could be released for its business pending this hearing and/or the trial of this action but that did not happen.

The Mareva injunction

77.  D8 submitted that the Plaintiff has failed to demonstrate a real risk of dissipation citing Universal Entertainment Corporation v Kazuo Okada[2020] HKCFI 1406 at §37 where the relevant considerations are summarised. Of relevance to the present case are those mentioned in subparagraphs (4) and (9) which state that the purpose of the freezing order is not to prevent a corporate defendant from dealing with its assets in the normal course of business provided that such dealing and conduct are legitimate and an assessment of the risk of dissipation necessarily involves an evaluative and predictive judgment. The evidential burden can be satisfied by drawing proper inferences from a holistic consideration of all the circumstantial materials that are indicative of risk.

78.  As was recognised in Universal Entertainment[14], each case is fact specific and the relevant factors must be looked at cumulatively.

79.  In the present case, D8 sought, but failed, to justify its receipt of the Funds on the basis that it was carrying on a legitimate wholesale trading business and that the Funds were received in the normal course of its business. Had a bona fide and legitimate business been established, no question of a risk of dissipation would arise for consideration.

80.  For the reasons set out, the court found D8’s evidence wanting in many fundamental respects and rejected its case of being a bona fide purchaser, there having been a lack of transparency and an absence of full disclosure. The transactions with Guolong are concerning.

81.  The Funds said to have been received in the course of carrying on a legitimate business stem from a fraud. Where the legitimacy of the business being carried on is itself in issue, taking into account all the evidence that led the court to reach that conclusion, I consider that a risk of dissipation could be inferred in all the circumstances.

Conclusion

82.  Accordingly, I ordered that the Injunction be continued.

Mr Toby Brown and Mr Jeremy Yau, instructed by C. P. Lin & Co., for the Plaintiff

Ms Valerie Tang, instructed by Wan Yeung Hau & Co., for the 8^th Defendant