Grupo Arbulu S.L. v. City Apex Holdings Ltd
Read the full judgment text of HCA 2390/2017 on BabelCite. This High Court CFI judgment was delivered on 15 June 2018.
1. There are two applications before the Court:
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HCA 2390/2017 [2018] HKCFI 1351 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2390 OF 2017 ______________
______________ Before: Deputy High Court Judge Keith Yeung SC in Chambers Date of Hearing: 6 March 2018 Date of Decision: 15 June 2018 ______________ DECISION ______________ The applications 1.There are two applications before the Court:
2.In his written submissions, Mr Jin Pao, counsel for the plaintiff, informed the Court that for the purposes of the hearing, the plaintiff would not pursue the application for variation of the Injunction Order. That was confirmed by Mr Pao during the hearing. The relevant facts 3.The plaintiff is a Spanish company and is, according to its case, the victim of an email fraud. 4.The defendant is a BVI company whose sole director and shareholder is Huang Jingyi (“Huang”), a Mainland national. 5.According to the plaintiff’s case, between 4 and 7 April 2017, itwas deceived by certain fraudsters impersonating as its CEO into transferring a total of EUR 2,330,009 (“Deceived Sums”) from a Spanish bank account to a bank account in the Mainland held in the name of a company called Zhou Sunny Limited (“Zhou Sunny”). 6.Between 7 and 11 April 2017, nearly all of the Deceived Sums were transferred by Zhou Sunny to Hong Kong bank accounts held by two companies incorporated in Hong Kong, namely HK Guan Yi Co Ltd (“Guan Yi”) and Ning Yuan Industrial (Ningbo) Limited (“Ning Yuan”). In particular, a total of EUR 2,199,388 was transferred to Ning Yuan. 7.On 10 and 11 April 2017, a total of EUR 2,172,926.50 was transferred by Ning Yuan to a HSBC bank account of another company incorporated in Hong Kong, Koyer Med (Shanghai) Co Ltd (“Koyer Med”). 8.On 11 April 2017, a sum of EUR 540,690.00 was converted into HK$4,439,386.55 in Koyer Med’s HSBC account. After the foreign exchange conversion, on 11 April 2017, the sum of HK$4,411,358 (the “Target Sum”) was transferred from Koyer Med’s HSBC account into the defendant’s bank account held with the China Construction Bank in Hong Kong (the “Target Account”). 9.On 19 April 2017, the defendant withdrew a sum of HK$9,288,762.76 from the Target Account and converted it into RMB 8,104,445.41. That sum included the Target Sum. That sum of RMB 8,104,445.41 was then transferred to Minsheng Fengsheng (Tianjin) Aviation Leasing Co Ltd (“MSFS”). 10.In his written submissions and during the hearing, Mr Lam, counsel for the defendant, commented on the failure on the part of the plaintiff to exhibit records showing that it had in fact transferred the Deceived Sums to Zhou Sunny. Mr Pao accepted that those documents had in fact not been exhibited. He explained that it was because they were voluminous and were in Spanish. In the end, I granted the plaintiff leave to file a further affirmation within 3 days from the date of the hearing to produce those documents. I further granted Mr Lam leave to file within 14 days of receipt further submissions, should he want to, to deal with those documents, and Mr Pao to file any reply with 7 days thereafter. On 8 March 2018, the 4th Affidavit of Mr Tsui Ming Lun was filed. Certain records were produced thereby. No further submission on behalf of the defendant or the plaintiff has been filed. The Injunction Order 11.On 13 October 2017, the plaintiff obtained on an ex parte basis the Injunction Order. It restrains the defendant from removing from Hong Kong or otherwise dispose of or deal with or diminish the value of its assets up to the value of HK$4,411,358 (i.e. up to the value of the Target Sum). It also contains a proprietary injunction at paragraph 2, which provides that:
The plaintiff’s claim against the defendant 12.The Writ herein was issued on 16 October 2017. The Statement of Claim was filed on 26 January 2018 and later amended on 12 February 2018. The claim is based upon the fund flow summarized above and the inferences which the plaintiff avers may be drawn therefrom. A number of causes of action have been pleaded. They include knowing receipt of the Deceived Sums (or part thereof), dishonest assistance, and restitution based upon unjust enrichment or money had and received. The plaintiff seeks inter alia a “declaration that the Defendant holds the Target Sum … and/or any property representing all or part of the said amount … for the Plaintiff”, and delivery up to the plaintiff of the same. 13.During the hearing, Mr Pao informed me that for the purposes of the hearing, the plaintiff would not be alleging or inviting the Court to find that the defendant had contemporaneous unconscionable knowledge that the Target Sum represented any proceeds of crime. He invited me to focus on the cause of action based upon restitution, which cause of action, he submitted, was receipt but not knowledge based. The defendant’s case on discharge 14.The main evidence in support of the defendant’s application to discharge comes from Huang’s 2nd affirmation. Its case is summarized as follows. 15.Huang and her husband (“Chen”) own substantial businesses in the Mainland. The defendant is a BVI company acquired by Huang in March 2015 for the sole purpose of the acquisition of a private aircraft. 16.Under the hire and purchase agreement between the defendant and MSFS for the acquisition of the aircraft (the “HP Agreement”), the defendant has to from April 2016 onwards pay to MSFS rent in the total sum of RMB 97,634,873.16 by 12 instalments. Clause 8 of the HP Agreement provides that until full payment of all rents and relevant fees payable thereunder, MSFS remains the sole owner of the aircraft. But upon full payment of those sums, clause 19 provides that the defendant will automatically become the owner of the aircraft. 17.Before the execution of the HP Agreement, MSFS allowed the defendant to choose between two methods of effecting the instalment payments: in US dollars outside the Mainland (offshore), or by remitting payments to the onshore account of MSFS within the Mainland (onshore). Huang and Chen chose the onshore option. 18.MSFS only accepted payment made by the defendant. It also requested payments to be remitted from outside the Mainland. For those reasons, Huang and Chen had to arrange funds from their own sources in the Mainland to the Target Account so that the defendant could settle the rental instalments. 19.Due to foreign exchange restrictions and control in the Mainland, Huang and Chen enlisted the services of foreign exchange traders to assist in the remittance of funds to the defendant in Hong Kong. Whenever remittances were required, Chen would transfer money to bank accounts in the Mainland designated by the foreign exchange traders. Those traders would then arrange to have the corresponding amounts in Hong Kong dollar transferred directly to the Target Account (or indirectly through Huang’s Hong Kong account with the HSBC). Huang and Chen did not know the holders of those accounts in the Mainland which the foreign exchange traders designated. Nor did they know the entities which the foreign exchange traders used to transfer funds to the Target Account. 20.The defendant followed the same course of conduct when it settled the 5th rental instalment payable to MSFS (and indeed other instalments). On 11 April 2017, Chen transferred the sums of RMB 4,000,000 and RMB 4,511,700 to two bank accounts in the Mainland designated by the foreign exchange traders. Later on the same day, the corresponding sums in Hong Kong dollars, namely the Target Sum and the amount of HK$4,988,587, were transferred into the Target Account via the accounts of Koyer Med and Luxy Technology Co, Ltd. Huang and Chen did not know those two companies. 21.So in short, it is the defendant’s case that the Target Sum was received by it as a result of its use of what has been described variably as the “underground foreign exchange system” or “underground banking system”. In Huang’s own words at paragraph 28 of her 2nd affirmation, “… my husband and I have been using the PRC foreign exchange services to circumvent [emphasis added] the foreign exchange control and restrictions in the PRC for the purposes of settling the rental payments relating to the Aircraft on behalf of the Defendant.” She said that they had no knowledgeof any email fraud that might have been perpetrated upon the plaintiff. The sums they received were subsequently transferred by the defendant in its name to MSFS to settle the 5th rental instalment pursuant to the HP Agreement. 22.Mr Lam submitted that on the facts, “there is no serious issue to be tried (let alone a good arguable case) on any of the Plaintiff’s claims against the Defendant. In the circumstances, the Injunction Order should not be continued and ought to be discharged.” Illegality in circumventing the foreign exchange control 23.According to a Memorandum of Law prepared on behalf of theplaintiff, the method of foreign exchange remittance adopted by the defendantinvolves clear contraventions of certain specific laws and regulations in the Mainland. The conclusion is expressed as follows:
24.No contrary expert evidence has been adduced on behalf of the defendant. Indeed, Mr Lam accepted for the purposes of this hearing that the engagement in the underground foreign exchange system “may be” (Mr Lam’s words) illegal. 25.Under Hong Kong law, operating a “money service” (which include changing and remittance services) without a licence is a criminal offence — see section 29 and Part 1 of Schedule 1 of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Cap 615. Relevant applicable principles for the grant of the Injunction Order 26.The applicable principles are well established. There must be a good arguable case on the merits in order to support a Mareva injunction. “A good arguable case” does not mean a case which is more likely to succeed on a balance of probabilities, but one that is more than barely capable of serious arguable. On the other hand, to support a proprietary injunction, the lower threshold of a serious issue to be tried is sufficient—see Hong Kong Civil Procedure 2018 at para 29/1/66, Zimmer Sweden AB v KPN Hong KongLtd, unreported, HCA 2264/2013, 2 May 2014 at paras 76 – 77, and DBS Bank (Hong Kong) Limited v Tian Wen Quan, unreported, HCA 3228/2016, 12 October 2017 at para 11. 27.The requirements for Mareva relief, in addition to a good arguable case on the merits, are assets within the jurisdiction, and the existence of a real risk of dissipation of those assets to render any judgment nugatory. 28.On what should not be allowed in applications for a Mareva injunction, my attention has been drawn to Derby & Co Ltd v Weldon [1990] 1 Ch 48, where Parker LJ at page 58 gave the following warning:
The plaintiff’s restitutionary claim 29.This is the claim which Mr Pao invited the Court to focus on. This I will do. 30.A restitutionary claim can be proprietary in nature. The claim is to vindicate the property rights of the claimant. As explained in Virgo, The Principles of the Law of Restitution (3rd ed, 2015) (at pages 559 – 560):
31.A defendant to a restitutionary claim has two potential defences: bona fide purchase for value without notice, and change of position. It is the merits of these two defences on the facts of this case which the present application really turns on. Mr Pao submitted that there is at the very least a good arguable case that the defendant is entitled to neither of those two defences. On the other hand, Mr Lam submitted that even on the evidence available at this stage, both of those defences are open and available to the defendant, and the plaintiff has failed to establish any serious issue to be tried on the merits of its proprietary claim. Whether the Target Sum represented traceable proceeds of the Deceived Sums 32.Before turning to the defences, the first matter that I need to consider is whether the evidence supports the plaintiff’s claim to the requisite threshold that the Target Sum represents part of the Deceived Sums. In this regard, Mr Pao invited me to draw the inference from the amount and time proximity of the relevant transfers that it does. In particular, adopting the “first-in-first-out rule”, Mr Pao demonstrated from the HSBC account statement of Koyer Med for the month of April 2017 that the Target Sum was funded by the relevant transfers from Ning Yuan. 33.On the other hand, Mr Lam highlighted to me a number of missing links in the evidence. I note however that whilst there might be some such missing links, there is nothing amongst the evidence which is positively inconsistent with the inference which Mr Pao invited me to draw. 34.Having considered the evidence, parties’ submissions, the amount and time proximity of the relevant transfers, and the absence of any evidence that is positively inconsistent with the inference, I accept Mr Pao’s submissions that the evidence supports a good arguable case that the Target Sum represents the traceable proceeds of part of the Deceived Sums. Bona fide purchase for value without notice 35.The nature and elements of the defence are summarized in Lewin on Trusts (19th ed)at para 41-117, that:
36.In Virgo, citing Lipkin Gorman (a firm) v Karpnale [1991] 2 AC 548, it is explained at page 659, in the context of this defence, that:
37.In Lipkin Gorman, a partner of the plaintiff firm of solicitors withdrew cash from the firm’s client account and used the money to fund his gambling at the defendant club. In an action by the plaintiff against the defendant for restitution of the monies, the House of Lords rejected the defendant’s defence that it had provided valuable consideration for those monies because the gaming contract between the defendant and the partner was illegal and void under the Gaming Act 1845. 38.The facts in DBS Bank (Hong Kong) Limited v Tian Wen Quan were similar to what we have here. The plaintiff was the victim of an email fraud. Part of the funds which it was defrauded of were traced to the accounts of the defendant. The defendant denied knowledge of any fraud, and said that he received the relevant funds as part of his use of the underground foreign exchange system (which operation was similar to what Huang has described in the present case). In respect of the defendant’s claim that he had bona fide supplied consideration for those funds, Anthony Chan J, having considered the illegal nature of the transactions, held at paragraph 37 of his Judgment that “I therefore see no answer to the illegality point, which would defeat [the defendant’s] Bona Fide Purchaser claim.” 39.Mr Lam tried to distinguish Lipkin Gorman. He submitted that the wagering contracts in that case were rendered void by the Gaming Act 1845. In the present case, he submitted that there is in contrast no evidence showing that any transactions of the nature described by Huang were void (as opposed to having been tainted by illegality only). There is further no evidence suggesting that Huang or Chen has incurred any criminal liabilities as a result of those transactions. Mr Lam submitted that “the illegality of the underground foreign exchange transaction is no bar to a finding that the Defendant (and Mr. Chen) is a bona fide purchaser for value without notice”, and that “there was no unjust enrichment and the Defendant has a complete defence to the Plaintiff’s claim”. 40.I have considered Mr Lam’s submissions. The expert evidence at this stage shows that the underground foreign exchange transactions are illegal. The defence of bona fide purchase for value therefore has to be viewed and considered in this light. I see no difference in this regard whether Huang and Chen at the same time also incurred criminal liabilities. Further, Mr Lam has produced to me no authority which for the purpose of this defence draws the distinction between “illegal transactions” and “transactions having been tainted by illegality”. In particular, no authority has been shown to me in support of the proposition that for the purpose of this defence, only those considerations that were transferred pursuant to illegal and void transactions should be disregarded. 41.Mr Lam has referred me to Arrow ECS Norway AS v Xin ChengHoldings (International) Company Limited, unreported, HCA 239/2016, 12 May 2016. The facts in that case were again similar to what we have here. It was again a fight between the victim of an email fraud and a subsequent recipient of part of the traceable proceeds as a result of his use of the underground foreign exchange system. There is however one crucial difference between that case and our present one: whilst there is un-contradicted evidence before me on the illegality of the underground foreign exchange system under Mainland law, there was none before Au-Yeung J in Arrow ECS Norway. The conclusions reached by Her Ladyship will therefore have to be understood in that light: see paragraphs 33 and 35 of her Ladyship’s Judgment:
42.It should further be noted accordingly that in Arrow ECS Norway, when counsel was making submissions on, and when Her Ladyship was considering the issues of “good faith” and “illegality”, their emphasis was not on any illegality that the underground foreign exchange system gave rise to, but on the illegality in connection with the offence commonly known as money laundering under section 25 of the Organized and Serious Crimes Ordinance, Cap 455 (“OSCO”). This becomes obvious when one reads paragraphs 29, 30, 37, 38, and 43 to 45 of the Judgment. I will come back further to this point when I consider below the defence of change of position. 43.Mr Lam referred the Court to the Decision of B Chu J in BR CAT International Co Ltd v Hongkong Proof Import and Export Trading Co, Limited & Others, unreported, HCA 1023/2014, 22 September 2017. Arrow ECS Norway was referred to B Chu J, which Her Ladyship relied upon. On the face of the judgment in BR CAT International, one again sees no reference to any evidence on the illegal nature of the underground foreign exchange system. B Chu J simply recorded her understanding that transactions under that system would be illegal under the law of Mainland China, and that such transactions “may be considered illegal under the Mainland law”—see paragraphs 92 and 97 of Her Ladyship’s judgment. The emphasis in that judgment was again on illegality in connection with the source of the funds (see paragraphs 96 and 97), but not any illegality which the underground foreign exchange system gave rise to. The latter issue has simply not been specifically raised by counsel for Her Ladyship’s consideration. 44.Issues like: the exact nature of the underground foreign exchange system, whether the related transfers were illegal or merely tainted thereby, whether they were as a result void or voidable, and consequentially whether the defendant for the purpose of the defence of bona fide purchaser for value can be regarded as such, will no doubt have to be canvassed furtherduring any trial in this action. This is however not the stage to resolve them. The issue now is whether a good arguable case has been made out. On the evidence before me, and having considered the authorities cited and summarized above, I accept Mr Pao’s submission that it has been. I reject Mr Lam’s submission that the evidence at this stage supports “a complete defence” of bona fide purchaser for value, to the extent that there is no serious issue to be tried on the merits of the plaintiff’s restitutionary claim. 45.For completeness, I record that Mr Pao has made a subsidiary point that, in any event, no consideration moved from the defendant (as the transfers originated from Huang and Chen). Given my conclusion above, there is no need for me to consider this point. Suffice for me to say, on the strength of Lewin on Trusts (para 41-120) and Macmillan Inc v Bishopsgate Investment Trust (No 3) [1995] 1 WLR 978 (page 1001G–H, as cited by B Chu J in BR CAT International at paragraph 102), that there is force in Mr Lam’s submissions that this limb of Mr Pao’s submissions ignores the fact that the defendant was the nominee of Huang and Chen. If this had been the only point relied upon by Mr Pao, my finding on the strength of the defence of bona fide purchase for value would have been different. Change of position 46.In Lipkin Gorman, Lord Goff observed at page 579F–H that: “ … where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position. Likewise, on facts such asthose in the present case, if a thief steals my money and pays it to a third party who gives it away to charity, that third party should have a good defence to an action for money had and received.” 47.In support of his submissions that this defence of change of position is not available to the defendant, Mr Pao made two points:
Surviving assets 48.Mr Pao relied on paragraph 27-16 of Goff & Jones, The Law of Unjust Enrichment, where the concept of surviving assets in the context of the defence of change of position is explained as follows:
49.In reply, Mr Lam submitted that until performance of the HP Agreement, MSFS remained the sole owner of the aircraft. But given paragraph 18 of the same (which provides that the defendant will automatically be the owner of the of the aircraft upon payment of all rents and relevant fees under the HP Agreement), there can be no denial that the Target Sum survives as a contractual benefit which the defendant acquires and retains under the HP Agreement. 50.I therefore do not accept Mr Lam’s submission that “the Defendant has changed its position in good faith to its detriment” (emphasis added) to the extent that the evidence even at this stage demonstrates the existence of a complete defence. I find that the plaintiff has a good arguable case that the defence of change of position is not available to the defendant. Illegality in the context of “change of position” 51.Given the conclusion which I have reached above on the issue of surviving asset, there is in fact no need for me to consider the separate issue of illegality. I will only deal with the point briefly below. 52.In Lipkin Gorman, Lord Goff observed at page 580 as follows:
53.In Barros Mattos Junior v General Securities and Finance Co Ltd [2005] 1 WLR 247, Laddie J, following and applying Lipkin Gorman, held that if the change of position was wrongful, the court would not allow the recipient of the stolen funds to rely on it. In that case, the change of position was the exchange of stolen money into local currency in breach of Nigerian law. 54.In Burrows, A Restatement of the English Law of Unjust Enrichment, it is stated at pages 117 and 121 that: “ But the defendant does not have this defence if—
55.On the defence of change of position, Mr Lam made three main points:
56.On (a), I find that there is good argument that on the facts of this case, Mr Lam’s proposition is too narrow, and that it is artificial to look at the transfer by the defendant to MSFS in isolation without regard to the illegality surrounding and leading to that transfer. 57.On (b), I find that there is good argument that the defendant will have to plead and rely on the use of the underground foreign exchange system to prove causation: see Virgo at page 682:
58.I come back here to the case of Arrow ECS Norway. At paragraph 37 of the judgment, Au-Yeung J recorded counsel’s submissions on the defence of change of position as follows:
Counsel’s submissions were not directed towards any illegality which the underground foreign exchange system gave rise, but towards the illegality in connection with OSCO. It was in that context that Au-Yeung J observed at paragraph 45 of her Judgment that:
It is quite clear that that by “illegal conduct”, Au-Yeung J was referring to the illegal conduct of money laundering under OSCO. So viewed, Arrow ECS Norway is not authority for the proposition that there is no need for the defendant here to plead and rely on the use of underground foreign exchange system to prove causation. If anything, Au-Yeung J in fact observed that the defendant would have to provide “explanations on the flow of funds” – i.e. the use of the underground foreign exchange system. 59.On (c), it invovles a developing point of law. I note that in DBS Bank (Hong Kong) Limited v Tian Wen Quan, even though the defence of change of position had not been taken in the course of the application, Anthony Chan J on 7 December 2017 granted leave to appeal on the point as to whether, in light of the illegality of the relevant transaction under Mainland law, the defendant could rely on change of position to defeat the plaintiff’s proprietary claim based on money had and received or the case of Lipkin Gorman. On 1 February 2018, the Court of Appeal further allowed the defendant to proceed with the appeal based on that ground. 60.I also take heed of the warning given by Parker LJ in Derby & Co Ltd v Weldon. The scope and correctness of Lipkin Gorman on the defence of change of position ought not to be finally decided at this stage. 61.Having considered all the authorities and counsel’s submissions, I find that the plaintiff also has a good arguable case that the defence of change of position is not open to the defendant. Risk of dissipation 62.Mr Lam submitted that the plaintiff has failed to prove any risk of dissipation on the part of the defendant. In response, Mr Pao referred me to paragraph 49 of Au-Yeung J’s judgment in Arrow ECS Norway AS that:
63.Mr Pao further submitted that the defendant is a BVI company. It was set up for the sole purpose of acquiring the aircraft under the HP Agreement. It apparently carries no other business. It has been involvedon multiple occasions in the use of the underground foreign exchange system to transfer funds. He submitted, and I agree, that the evidence supports a real risk of dissipation. Disposal 64.For the reasons set out above, I allow the plaintiff’s application for the continuation of the Injunction Order. I dismiss its application for variation of the same. I also dismiss the defendant’s summons for the discharge of the Injunction Order. Costs 65.The plaintiff has not pursued its application for variation, which I have dismissed. Despite its pleaded case, it for the purposes of this application focused only upon the cause of action of restitution, which stance Mr Pao only made clear in his written submissions. I note that in his written submissions, Mr Lam dealt with quite extensively the other pleaded causes of action. In the circumstances, I make the following order nisi: that 70% of the costs of the plaintiff’s summons be the plaintiff’s cost in the cause, and that the costs of the defendant’s summons be the plaintiff’s cost in the cause.
Mr Jin Pao, instructed by Jun He Law Offices, for the plaintiff Mr Kestrel Lam and Ms Kinsey Kang, instructed by Peter K S Chan & Co, for the defendant | ||||||||||||||||
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