Arrow Ecs Norway As v. Xin Cheng Holdings (International) Co Ltd
Read the full judgment text of HCA 239/2016 on BabelCite. This High Court CFI judgment was delivered on 12 May 2016.
1. There are 2 applications before the Court:
Cited by 7 cases · Cites 11 cases
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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 ________________________ Introduction 1.There are 2 applications before the Court:
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 18th to 22nd 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:
6.The undisputed facts, so far as concerns D18, are as follows:
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:
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 Akai Holdings 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, 5th 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:
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 18th to 22nd 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 3rd 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:
22.The 4 sums in question were remitted to D18 in the manner described in the preceding paragraph. They were then paid out:
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:
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:
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):
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:
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, 5th 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:
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 3rd 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 3rd 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:
63.In the present case, there could be no complaint about the plaintiff seeking the 3rd 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 3rd 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.
Ms Rachel Lam, instructed by Kobre & Kim, for the plaintiff Mr Bernard Man, SC and Mr Keith Lam, instructed by Anthony Siu & Co, for the 18th defendant |
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