Messrs Bruno Arboit and Ian Robinson, The Joint and Several Liquidators of Chung Ying Reminbi Exchange Co Ltd (in Compulsory Liquidation) v. Hu Yan and Another

HCA 2401/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2401 OF 2015

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DECISION

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Introduction

1.This is the hearing of the Defendants’ appeal against Master K Lo’s order dated 6 March 2017 granting summary judgment against them in the sum of JPY 736,829,638.  The Defendants also sought belatedly to adduce on appeal further evidence by way of summons filed on 21 June 2017.

The legal principles applicable to summary judgment

2.The principles applicable to summary judgment are well‑established and can be summarized as follows.

3.First, it is for the defendant to show there is a triable issue or an arguable defence: see Hong Kong Civil Procedure 2017 [1]. Summary judgment is for clear cases.  It is not appropriate where there is any serious dispute as to matters of fact or any difficult question of law: see Hong Kong Civil Procedure 2017 [2].  In considering whether there are triable issues, the court will not take the alleged defence on its face value but will test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents and inherent probability of the defence.  It shall not conduct a mini‑trial on complicated factual issues: see Paul Y Management Ltd v Eternal Unity Development Ltd [3].  In Re Safe Rich Industries Ltd [4] Bokhary JA (as he then was) said:

“ The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognized — because failure to recognise it would create a debt‑dodgers’ charter — that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.”

Where the circumstances are such as to require close investigation, there ought to be a trial and summary judgment would be inappropriate: see Hong Kong Civil Procedure 2017 [5] and Miles v Bull [6].

4.Second, where a defence, though arguable, can be described as shadowy, the court may order conditional leave to defend: see Hong Kong Civil Procedure 2017 [7].

5.Third, a counterclaim and set‑off raised can be a basis for granting unconditional leave to defend up to the amount of set‑off claimed.  This is regardless of whether the amount is ascertained, and whether the set‑off has been pleaded as a counterclaim or not.  However, the court must assess whether the counterclaim is credible or believable: see Hong Kong Civil Procedure 2017 [8]; Ling Dai Hong v 汪裕祖[9].

6.Fourth, whether to order interim payment is an exercise of the court’s discretion.  The test is essentially the same as that for granting conditional leave to defend, namely whether the defences and/or counterclaims raised can be said to be shadowy: see Hollywood Palace Co Ltd v Trans‑Global Hong Kong Investment Ltd [10].

The background

7.The Plaintiff are the joint and several liquidators of Chung Ying Reminbi Exchange Company Limited (the “Company”).

8.The 1^st Defendant and her mother, Madam Leung (the “Mother”) were the sole directors and shareholders of the Company which carried on a foreign exchange business.  The 2^nd Defendant is the 1^st Defendant’s brother who also worked in the Company.  Prior to its incorporation on 21 March 2012, the business had been operated as a sole proprietorship business set up by the Defendants’ father in 1994.  It was succeeded by the Mother following the death of the Defendants’ father on 30 July 2010.  It operated licensed money exchange shops at ten different locations in Hong Kong, including one at Shop 22B in 22 Tsuen Wan Market Street (the “Tsuen Wan Market Shop”).  The registered office of the Company was in Sha Tsui Road in Tsuen Wan.

9.Between 3 and 8 February 2013, the Defendants collected bags of cash in 14 tranches amounting to JPY 1,753,266,000 (the “Sum”) from Ms Zhou Yipei (“Zhou”) at Kowloon Shangri‑La Hotel.  They signed and issued 14 receipts confirming receipt of the Sum on behalf of the Company. According to these receipts, the Company contracted to exchange the Japanese Yen for Singaporean Dollars (“SGD”) on the dates specified on the receipts (the “Contracts”).

10.On 8 February 2013, the Company paid Zhou a total of SGD 15,134,737 pursuant to some of the Contracts equivalent to 58% of the Sum, but did not perform the other Contracts.  On 16 September 2013, Zhou obtained judgment against the Company for the amount of SGD 10,971,393, being the balance due under the Contracts.  Upon Zhou’s petition, the Company was wound up on 12 February 2014.  The Plaintiff were appointed as its joint and several liquidators.

The statement of claim and defence

11.In the statement of claim, the Plaintiff pleaded the above factual background.  They relied on two causes of action, namely conversion and unjust enrichment.  In paragraphs 8 and 9 of the statement of claim, they pleaded:

“ 8. The JPY is not accounted for in the books and accounting records of the Company, including but not limited to a Statement of Affairs dated 12 February 2014 sworn by Leung Sung Lin as being correct on 2 December 2014. The Plaintiffs therefore aver that the JPY has been misappropriated or converted by the 1^st and 2^nd Defendants to their own use.

9.  By reason of the aforesaid, the 1^st and 2^nd Defendants have been unjustly enriched and/or are liable to the Plaintiff in conversion.”

12.No defence has yet been filed by the Defendants.  In their affirmations filed in opposition to the summary judgment application, they pleaded the above background matters relating to the Company, particularly that its business was a family business with their Mother as the only person in charge of its accounting matters.  They admitted receiving the Sum on behalf of the Company but denied appropriating any of it.  The only defence raised is that they had immediately handed over the Sum collected from Zhou to their Mother on behalf of the Company.  They argued that as the Company partially paid Zhou the amounts due under some of the Contracts, the Sum must have been received by the Company.  They submitted that the Plaintiff’s claim was spurious and that the Plaintiff were not entitled to any of the relief claimed or at all.  In their affirmations filed in opposition to the summary judgment application, which mirrored one another, they described their Mother’s role in the Company as follows:

“ … At all material times the business operations of the Company and the commercial decisions related to the Company’s business have all been decided solely by Madam Leung. All along the Company’s accounts matters were also solely handled by Madam Leung …”

Grounds of appeal

13.In short, the Defendants’ ground of appeal is that summary judgment is wholly unwarranted because:

(1) the Plaintiff failed to establish a prima facie case for summary judgment in that (a) their pleaded case is critically defective and (b) there are evidential defects in the Plaintiff’s case;

(2) the substance of the Plaintiff’s case falls within the “fraud exception” under Order 14, rule 1(2)(b) of the Rules of the High Court; and

(3) there are serious factual issues which can only be resolved at trial.

14.As a matter of logistics, it would be convenient to deal with the Defendants’ application for leave to adduce the Mother’s affirmation first before dealing with the substance of the appeal.  I shall deal with Grounds (1)(a) and (b) as a separate grounds and then the Plaintiff’s case based on conversion and unjust enrichment.  Lastly, I shall deal with the Defendants’ “fraud exception” argument.

Application to adduce new evidence on appeal

15.Order 58, rule 1(5) of the Rules of the High Court provides that no further evidence, other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made, may be received on the hearing of an appeal under Order 58, except on special grounds.  A defendant seeking leave to adduce new evidence on appeal must satisfy the Ladd v Marshall [11] conditions that the evidence:

(1) could not have been obtained with reasonable diligence for use at the hearing below;

(2) must be such that, if given, would probably have an important influence on the result of the case, though it need not be decisive; and

(3) must be such as is presumably to be believed.

16.The affirmation was not prepared until 1 June 2017, three months after the hearing before the master.  It must have been prepared as a direct result of the Plaintiff’s criticism raised at that hearing.  The Defendants’ reasons for the belated application were totally unconvincing.  The Mother said she was 72 years old and had become very depressed after the winding up of the company as it was her late husband’s business.  But that was two years prior to the hearing before the master.  She was aware of the proceedings and was actually asked by the Defendants to prepare an affirmation to resist the summary judgment application.  She refused as she was still very depressed and she believed the Defendants should not be held personally liable because they were mere couriers.  It just begs belief that when both her children were facing a hundred and twenty million dollar claim, a depressed mother would rather live with her grief than to shake herself up to tell the truth and obtain supporting evidence to save her children.  Putting that observation aside, there is nothing to suggest that the evidence in the Mother’s affirmation could not have been obtained with reasonable diligence for use at the hearing before the master.  She could have easily made the same assertions on oath for use at the hearing before the master.

17.In her affirmation, the Mother mainly repeated the Defendants’ assertions made in their affirmations.  As such, that part of the Mother’s evidence could not have any influence on the outcome of the present appeal.  On the Defendants’ and their Mother’s evidence, the Mother was the sole person in charge of all accounting matters of the Company and the Sum was paid by the Defendants to her, which she said was received on behalf of the Company.  Yet she did not produce any documents evidencing that the Sum had been received by the Company, entered into the Company’s books and put into the Company’s fund flow conduit.  That speaks volumes that her evidence is not credible.  The only new evidence she offered is that the Sum was immediately put into the safety box of the Company at the Tsuen Wan Market Shop.  Apart from being incredible that such a huge sum of money could have been kept in a safety box in a shop instead of in the Company’s registered office, the whereabouts of that Sum remains untold.  That piece of new evidence is unlikely to have any impact on the result of the application for summary judgment as the focus was on the whereabouts of the Sum and the lack of documentary evidence showing that it had been received by the Company.  Without the documentary evidence, that evidence has little probative value and is not such as is presumably to be believed.  This will be further elaborated in paragraphs 33 to 35 below.

18.I consider the Mother’s affirmation fell far short of the Ladd v Marshall requirements.  I therefore refuse the Defendants’ application to adduce her affirmation as evidence for the hearing of this appeal.

Defect in the Plaintiff’s pleading

19.Mr Chan SC, counsel for the Defendants, submitted that to suffice for summary judgment of a claim, the statement of claim must satisfy the following requirements.  First, it must be complete and good in itself with all material facts required for judgment adequately set out: Lai Yuen Wah v Hoi Kwong Printing Co Ltd [12].  Second, each of the material facts set out in the statement of claim must be verified on affidavit by a person with knowledge of those facts. Failing this, the application should be dismissed: Hong Kong Civil Procedure 2017 [13] and Ho Kwok Hung v Hung Dat Trading Co [14].  The burden is on the plaintiff to establish a case justifying the exceptional award of judgment without trial.  If there are doubts and suspicions as to the validity of the plaintiff’s case, the plaintiff’s application fails in limine and the defendant is entitled to unconditional leave to defend: Billion Silver Development Ltd v All Wide Investments Ltd [15] and Li Mingren v Questex Development Inc [16].  These are trite principles, which Mr Hughes, counsel for the Plaintiff, had no dispute.

20.Mr Chan SC argued that the Plaintiff’s pleaded case of conversion is fundamentally defective in that an essential element of the tort of conversion had not been pleaded.  He referred to the elements of the tort of conversion as set out in the judgment of Deputy High Court Judge Le Pichon in Linde HKO v Harvest Wise Gases [17]:

“ … [Such torts] ‘involve an intentional act or dealing with goods inconsistent with, or repugnant to, the rights of the owner of those goods, including possession and any right of possession. Such an act or dealing will amount to such an infringement of the possessory or proprietary rights of the owner if it is an intended act of dominion or assertion of rights over the goods.’”

On the basis of the above dicta, Mr Chan SC submitted that a plea of conversion must include the specific act said to amount to conversion, including particulars of intentional dealing, and the manner in which it was said to be inconsistent with the plaintiff’s proprietary rights.  The requisite elements should be pleaded with a sufficient degree of particularity such that the defendant had a fair opportunity to respond: Hong Kong Civil Procedure 2017 [18].  He then quoted Bullen & Leake & Jacob’s Precedents of Pleadings [19] and the three categories of conversion, namely, conversion by taking, by transfer and by detention mentioned by the learned authors.  He submitted that it was important to distinguish between the different types of conversion and to plead the specific acts said to amount to conversion.  He argued that the bare averment of “misappropriation” in paragraph 8 of the statement of claim was clearly insufficient to support a plea of conversion.

21.The law of conversion is very well settled.  It is a tort of strict liability.  The nature of the tort has been succinctly summarised by the learned authors of Clerk & Lindsell on Torts [20] as follows:

“ Conversion is a tort of strict liability. The intention of the defendant in relation to the claimant is therefore, of no significance. That is to say that, should a defendant have exercised full possessory rights over an asset, honestly and reasonably believing himself to be the one legally entitled to do so, he will still be liable in conversion, should someone else turn out to have the current superior possessory right in that asset. Conversion presents, therefore, as a classic tort of strict liability.”

The elements of the tort of conversion are:

(1) a plaintiff who has the superior possessory right;

(2) a deprivation of the plaintiff’s full benefit of that right; and

(3) an assumption by the defendant of that right.

22.On the pleading point, I am unable to read from Bullen & Leake & Jacob’s Precedents of Pleadings that it is the law or the learned authors’ view that the tort of conversion is divided into three water‑tight compartments such that when pleading conversion the pleader must identify into which compartment the tort falls.  If one wants, one can create many more categories of conversion, such as conversion by sale, by destruction, by suffering the chattel to lawful execution, by non‑performance of obligation,by breach of fiduciary duty etc.  Equally, I am unable to draw any support for that proposition from Linde HKO v Harvest Wise Gases quoted by Mr Chan SC.  But I agree that a plea of conversion must include the specific act said to amount to conversion, including particulars of intentional dealing and the manner in which it is said to be inconsistent with the plaintiff’s proprietary rights and that the requisite elements should be pleaded with sufficient particularity such that the defendant has a fair opportunity to respond.  But whether a pleading meets these requirements is a question of fact depending on all the circumstances in which the tort was said to have been committed. 

23.In paragraph 8 of the statement of claim, the Company pleaded that “the Plaintiffs therefore aver that [the Sum] has been misappropriated or converted by the 1^st and 2^nd Defendants to their own use”.  The word “therefore” must be taken to refer to the fact pleaded in the preceding sentence, ie “[the Sum] is not accounted for in the books and accounting records of the Company”.  The receipt of the Sum by the Defendants on behalf of the Company have been clearly pleaded in paragraphs 4 and 5 of the statement of claim.  The act of conversion pleaded is therefore the Defendants’ act of misappropriation by not handing the Sum over to the Company pursuant to their obligation as director or employee of the Company.  One may call this conversion by detention, by breach of fiduciary duty or by non‑performance of duty.  Whatever one classifies this conversion does not matter.  The tort of conversion has been pleaded.  The act and the manner in which the act is said to be inconsistent with the Company’s proprietary right has been pleaded.  I would not disagree with any argument that this act could have been better pleaded.  But in my view, it has been pleaded with sufficient particularity.  The Defendants understood what was alleged against them and responded focussing on the very pertinent issue raised.

24.Mr Chan SC argued that the word “misappropriated” in the statement of claim was insufficient to support the Plaintiff’s case of conversion at all.  He submitted that the critical question of both law and fact was precisely how the Defendants were said to have exceeded their authority and how they had intentionally dealt with the Sum inconsistently with the proprietary rights of the Company.  He argued that the Defendants cannot fairly be expected to traverse every act which could potentially be beyond the bounds of their lawful authority or otherwise inconsistent with the Company’s rights.  This is just another aspect of the same issue dealt with in the preceding paragraph.  The word “misappropriated” was used together with the words “or converted”.  There was only one act of conversion involved, ie the act of not handing over the Sum pursuant to their duty as director or employee of the Company.  This is what the word “misappropriated” means in the context of the statement of claim.  It simply means “converted”.  It is superfluous.  The Defendants had no misunderstanding that this was the act of conversion alleged.  They responded in their affirmations.  As for the Company’s rights, the Defendants had no dispute that the Sum belonged to the Company.  They repeatedly emphasised in their affirmations that they received the Sum on behalf of the Company and immediately handed it over to the Mother on behalf of the Company.  The question is whether what they said is believable.  Despite his mention about other acts which could potentially be beyond the bounds of the Defendants’ authority or otherwise inconsistent with the Company’s rights, Mr Chan SC could not point to any such act.  The Defendants have no misunderstanding about what was alleged against them.  Though not perfect, the statement of claim, as it now stands, has pleaded the act of conversion with sufficient particularity.

Evidential defect in the Plaintiff’s case

25.Mr Chan SC submitted that there are significant gaps or discrepancies between the 2nd Affidavit of Bruno Arboit, one of the joint and several liquidators, filed on behalf of the Plaintiff in support of the summary judgment application. His argument was that in the second paragraph of that affidavit, Arboit merely stated that the Defendants were “justly and truly indebted” to the Plaintiff without providing any reasons or facts in support. He argued that these factual assertions were critical to the Plaintiff’s case against the Defendants but were unverified. 

26.With the greatest respect, this argument was frivolous and fault finding.  In paragraph 1 of the affidavit, Arboit stated that the facts and matters stated in the affidavit were either within his own knowledge and were true or to the extent that they were based on sources which he shall identity were true to the best of his information and belief.  In paragraph 2, Arboit referred to the statement of claim in which the material facts in support of the Plaintiff’s claim of conversion and unjust enrichment were set out.  Annexed to the statement of claim was a statement of truth signed by Arboit.  Then, in paragraph 3, he exhibited copies of the Contracts evidencing receipt of the Sum signed by the Defendants.  Reading that affidavit together with the statement of claim, the annexed statement of truth as well as the exhibits together, there was sufficient verification of the claim of misappropriation or conversion.

27.Next, Mr Chan SC argued that there was non-disclosure of key evidence relied on by the Plaintiff in the statement of claim.  By this, he meant the Statement of Affairs signed by the Mother and all the accounting records of the Company mentioned in paragraph 8 of the statement of claim.  He argued that these accounting records were likely to shed further light on the veracity of the Plaintiff’s case.  He said, if the records show the Company held other assets, particularly cash besides Japanese Yen, the question arose as to why the Defendants would misappropriate the Yen but not the other cash assets.  If the records pointed to a dearth of assets generally, it would be consistent with the Company being unable to fulfil its remaining obligations to Zhou.

28.The Plaintiff’s case was founded on the absence of any evidence in the books and accounting records showing the receipt of the Sum by the Company.  I fail to see how attaching boxes of documents to the affidavit would serve any purpose, let alone one which was useful.  The Defendants had access to the books and accounting records of the Company before the appointment of the liquidators.  The Company was a small family company with the 1st Defendant and her Mother as the sole directors.  The Defendants, at least the 1st Defendant, had access to the books and accounting records before the winding up.  The 1st Defendant had admitted playing some role in the management of the Company’s affairs.  She and her Mother must know where in the books and accounting records the receipt of the Sum could be found.  If they had any basis for challenging the assertions of Arboit in his affidavit, they could and should have identified and asked for access to those books and accounting records which are now kept by the Plaintiff.  They did not.  They just made bare assertions and did not even seek their Mother’s help in filing an affirmation.  If they wanted to raise any inference from the presence or absence of other cash to further their defence, they should condescend on particulars, and if necessary seek access to accounting records held by the Plaintiff.  They did not.  With respect, their arguments were spurious and only demonstrated the lack of substance and good faith in their defence.  I do not agree with Mr Chan SC that there were any evidential gaps in Arboit’s supporting affidavit.

The claim in conversion

29.Having dealt with Mr Chan SC’s pleading and procedural arguments, I now turn to the real question in this appeal, which is whether the Plaintiff have shown that this is a suitable case for summary judgment.  Their claim was founded on conversion.  They were seeking to recover money in species, ie the banknotes in the bags of money making up the Sum.  They were not suing for money as a fungible.  In law, banknotes are capable of being the subject matter of the tort of conversion: Clerk & Lindsell on Torts [21].

30.It is an admitted fact that the Sum was received by the Defendants on behalf of the Company and they signed receipts for it on behalf of the Company. As a matter of law and fact, the Sum was the Company’s the very moment the Defendants signed and issued the 14 receipts for and on behalf of the Company.  Hence, the Company has superior possessory right against the Defendants and the whole world.  Mr Chan SC does not disagree with the above propositions.  The Defendants had no dispute that it was their duty to hand over the Sum to the Company.  Their case was that they had handed it over to the Mother “on behalf of the Company for handling”.  If they had handed it over to their Mother in her capacity as a director of the Company for handling on behalf of the Company, it was a complete defence.  If they had handed it over to their mother in any other capacity, it was a deprivation of the Company’s benefit of that possessory right and an assumption by them of that right.  That was conversion.  Thus, the only issue in this claim of conversion is whether the Defendants’ assertion is believable.

31.Mr Chan SC submitted that the allegation against the Defendants was very serious involving a triable issue which was not suitable for determination on affidavit evidence.  That the parties are in dispute over a factual issue does not necessarily mean that there is a triable issue.  The threshold of proving a triable issue or bona fide defence is not high, particularly in view of the seriousness of the allegation made against the Defendants.  It is trite that matters of believability and probability are to be assessed on the basis that the more serious the alleged misconduct, the less likely will the court prefer the evidence for misconduct over the evidence against it.  As I have said, the test at this summary stage is as simple as whether the defendant’s assertions are believable: see Re Safe Rich Industries Ltd.  The threshold is not high.  The defendant need not present all the evidence it intended to adduce at trial, but must condescend on particulars and adduce such evidence as to make the defence, not only arguable, but believable.  This is a question to be answered not by taking their assertions in isolation but rather by taking them in the context of so much of the background and evidence which is either undisputed or beyond reasonable dispute.

32.I shall test the Defendants’ defence against the following background.  The Company was a family company, practically devolved from the Defendants’ father’s sole proprietorship business.  The 1^st Defendant and her Mother were the two sole directors and sole shareholders.  The Company never submitted any tax returns.  I also assume in the Defendants’ favour that the Company was operated on an informal basis with the Mother in charge of accounting and management matters of the Company; that the Company has no bank account; and that its books had been taken over by the Plaintiff.  

33.The Plaintiff had verified that the Sum was not accounted for in the books and accounting records of the Company.  Arboit specifically asserted that it was not even mentioned in the Statement of Affairs dated 12 February 2014 sworn by the Mother.  In the face of the above undisputed evidence, the Defendants’ answer was that upon receipt of the Sum, they immediately handed it over to their Mother for handling by the Company.  Apart from their bare assertions, there was absolutely no supporting evidence, documentary or otherwise.  For transactions of this magnitude, it is utterly incredible, even for a small family business operated on an informal basis, that there was absolutely no record kept evidencing receipt of such a huge Sum, its entry into the Company’s fund flow conduit and its whereabouts.  If there were no such records, how could the Company know what amount of Singaporean dollars to pay Zhou?  Had the Sum been received by the Company and entered into its fund flow conduit, it must have been recorded in the Company’s books or accounting record.  I assume in the Defendants’ favour that the books and accounting records of the Company had been seized by the Plaintiff.  If the Defendants were serious in their defence and if records do exist, they would and could have identified them and asked for access to these books and accounting records from the Plaintiff.  They did not.

34.Not until recently, they never asked their Mother to give evidence to support their account.  I presume that they now did so as a result of the Plaintiff’s criticism at the hearing before the master.  According to the Defendants’ case, their Mother was the only other person who received the Sum on behalf of the Company and the only person who knew what happened to the Sum.  Now that the Mother had been asked to make an affirmation, her affirmation contained no information as to where the Sum had been kept or deposited, for what purpose the Sum had been applied, when and how it had been so applied, where were the books and accounting records in which the receipt of Sum was recorded, and what was the evidence in support?  It is absolutely incredible that she or the Company kept no record whatever of the receipt and movements of this huge Sum.  If records existed, the Mother should have produced them.  If the records were in the possession of the Plaintiff, she could have asked the Plaintiff for access.  Her affirmation was prepared in a half-hearted manner. 

35.The Defendants had mentioned about a safety box kept in the Tsuen Wan Market Shop but had never said that the Sum was kept there.  It was for the first time advanced by the Mother on their behalf that the Sum was immediately put into that safety box.  Having made that bare assertion, she never accounted for what happened to the Sum or the box thereafter.  She never said she had taken the Sum out, put it into the Company’s fund flow conduit and recorded the movement in the Company’s books and accounting records.  She never explained why she did not return the Sum to Zhou when the Company could not perform some of the Contracts, or when Zhou commenced action against the Company, or why she did not use it to satisfy judgment.  Was the Sum just left stored in the safety deposit box unattended for over a year despite the intervening events of litigation and winding-up proceedings and then disappeared with the safety deposit box when the shop space was repossessed by the landlord?  Her evidence was hanging in the air.  It carried the hallmark of an utterly incredible and evasive witness who was hiding the truth from the court.  I consider the Mother’s affirmation have no influence on the result of this appeal and is not such as is presumably to be believed.  I therefore refused the Defendants’ application to adduce it as evidence for the purpose of supporting their appeal.

36.Mr Chan SC argued that as the Company had paid 58% of the Singaporean dollars due under some of the Contracts, the Sum must have been received by the Company.  This is a possible inference.  But as against the total lack of documentary evidence of receipt by the Company and the entry of the Sum into the Company’s fund flow conduit, a more compelling inference is that those payments were met by the Company’s other funds to partially discharge its obligations under some of the Contracts and that the Sum had been misappropriated.

37.To show a bona fide defence, the Defendants are required to condescend on particulars. They did not.  They merely made a bare assertion that they had handed over the Sum to their Mother and kept their Mother out when resisting the summary judgment application before the master.  As a result of the criticism raised at that hearing, they attempted to adduce the Mother’s evidence.  Apart from offering another bare and incredible assertion that she had put the Sum in the safety deposit box in the Tsuen Wan Market Shop, their Mother’s evidence added nothing new.  Her evidence has no influence on the result of this appeal.  I have to refuse their application to adduce the Mother’s affirmation as a matter of legal principle. Having tested the Defendants’ assertion against so much of the background and evidence which is undisputed or beyond reasonable dispute, I do not consider the Defendants’ assertion believable.  To accept their assertion on its face value would be to create a debt‑dodger’s charter to delay justice to the Company.  I therefore come to the conclusion that that the Defendants have failed to show a bona fide defence.  There is no triable issue.

The claim of unjust enrichment

38.The Defendants’ challenge to this cause of action is basically that to establish a cause of action based on unjust enrichment, the plaintiff must plead as to which of the legally recognized categories the claim comes within which makes retention of a benefit by the recipient unjust.  Mr Chan SC quotes Goff & Jones on the Law of Unjust Enrichment [22] in support of the above proposition.  Mr Hughes had no argument to the contrary.  Indeed in Uren v First National Home Finance Ltd [23], Mann J noted that the authorities have not yet moved to a position in which it can be said that there is a freestanding claim of unjust enrichment in the sense that a claimant can get away with pleading facts which he says leads to an enrichment which he says is unjust.  The Plaintiff have to establish that the facts bring them within one of the established categories of unjust enrichment or some justifiable extension thereof. 

39.Mr Chan SC submitted that as the Plaintiff had failed to locate their claim within or even near any of the established categories of unjust enrichment by reference to any pleaded facts, their claim of unjust enrichment is defective.  I agree that should the Plaintiff fail to prove conversion, their claim in unjust enrichment must also fail.  On the other hand, if conversion is proved, it is plainly inequitable for the Defendants, having taken possession of the Sum for and on behalf of the Company, and having signed and issued receipts in the company’s name confirming, as a matter of fact and law, that the Sum is the Company’s money, to retain the money.  They have offered no defence to this claim.  This claim just stands or falls with the Plaintiff’s claim in conversion.

The “fraud exception”

40.The subject of “fraud exception” as it applies in Hong Kong was thoroughly examined by the Court of Appeal in the recent case of Zimmer Sweden AB v KPN Hong Kong Ltd & Anor (No 2) [24].  The following propositions distilled from that case are relevant:

(1) The court should not only consider the statement of claim, it should also look at all the pleadings and affirmations.

(2) The test is “does this action include a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim?”

(3) It does not matter whether or not the word “fraud” has been used.  One looks at the substance and not the mere form.

(4) The fraud exception would be engaged if the plaintiff would have to allege fraud when rebutting the defence.

(5) The fraud exception would be engaged where what is alleged is an intentional or reckless dishonest act (or omission) done with the purpose of deceiving.

41.The thrust of Mr Chan SC’s argument is that in substance and in reality, the Plaintiff’s pleaded case amounted to or included a claim of deliberate misappropriation of assets from a company by its directors, officers, or agents.  Hence, the “fraud exception” is engaged.  

42.Looking critically at the statement of claim, the Plaintiff’s affidavit and the Defendants’ affirmations, this case was a simple case of conversion in which the Defendants failed to hand over the Sum to the Company.  The Plaintiff were not alleging fraud or dishonesty not even in any broad sense of those words and certainly not in the Derry v Peek [25]sense.  The defence is just a denial alleging that the Sum had been handed over to the Company. The Defendants are not raising any defence in which the Plaintiff would have to rebut by pleading fraud.  

43.As for Mr Chan SC’s argument based on the use of the word “misappropriated” in paragraph 8 of the statement of claim, I think he was quoting the word out of context.  I have mentioned in paragraph 28 above that the word “misappropriated” as used in the statement of claim is not to be understood in its technical sense.  It merely referred to the act or omission of not handing over the Sum pursuant to their duty as director or employee of the Company.  The Plaintiff’s cause of action is conversion, which is a tort of strict liability.  The intention of the defendant in relation to the claimant is of no significance. The claimant does not have to prove dishonesty.  The defendant’s honest and reasonable belief that he was entitled to exercise possessory right over the subject matter of conversion is also irrelevant.  Given this context in which the word was used, it is impossible to infer any allegation of fraud or dishonesty.  As was held by the Court of Appeal in Menfond Electronic Art & Computer & Design Co Ltd v Wong Wang Tat Victor [26], the court should not infer the making of an allegation of deliberate dishonesty too liberally, it should not put a spin of deliberate dishonesty on an alleged act or omission simply because the plaintiff said it was wrongful on his version of event.  What Mr Chan SC was seeking to do was to put that spin of deliberate dishonesty on the word “misappropriated” by quoting it out of context.  This is just a simple case, involving simple facts which left no room for any argument of the “fraud exception”.

44.Mr Hughes suggested seeking the court’s indulgence to amend the statement of claim by deleting the word “misappropriated”.  I do not consider that necessary.  The meaning of that word in its proper context is so clear that it is incapable of being misunderstood.

Conclusion

45.For the above reasons, I find that the Plaintiff have made out a prima facie case that they are entitled to judgment, and that the Defendants have failed to show any bona fide defence or raise any triable issue.  Though some of the Contracts had been performed by the Company paying Zhou about 58% of the amount due, the entire Sum was shown to have been converted.  While there is no doubt that the Company performed some of those Contracts using its own funds, it does not necessary mean those funds came from part of the Sum.  It would have been appropriate to enter judgment for the entire Sum.  However, I would err in favour of the Defendants and adopt the same generous course taken by the master, ie to enter summary judgment to the extent of the outstanding amount of the Sum which the Company had failed to pay Zhou and to give unconditional leave to defend the balance.  I therefore uphold the master’s decision and dismiss the appeal with costs.

Mr Sebastian Hughes, instructed by Munros, for the Plaintiff

Mr Abraham Chan SC and Mr Joshua Chan, instructed by Tsui & Lok, for the 1^st and 2^nd Defendants