Zhang Yan and Others v. Asa Bullion Ltd

HCA 1555/2018

[2018] HKCFI 2309

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1555 OF 2018

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DECISION

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1.The is the defendant’s application by summons dated 11 September 2018 (“Summons”) for an Order that:

“ Pursuant to the Order of Deputy High Court Judge K. Yeung SC dated 10^thAugust 2018, the Defendant be allowed to release the sum(s) to its customer(s) as per the written request(s) made by way of letters exhibited in ‘KCW-25’ in the 7^thAffirmation of Kan Ching Wing affirmed hereon on 11^thSeptember 2018;”

The application is supported principally by the 7^thAffirmation of Kan Ching Wing dated 11 September 2018 (“Kan’s 7^th Affirmation”).

The background

2.The defendant is licensed in the Chinese Gold and Silver Exchange Society.  It has been carrying on bullion trading since 2006.  It operates an internet trading platform for bullion trading so that investors/ customers can set up accounts with it and to carry out buying and selling of bullions in the market.  How exactly the platform operates and the defendant’s role in the transactions undertaken by its customers are matters that require further consideration in future proceedings.

3.On 6 July 2018, the plaintiffs took out a generally indorsed Writ against the defendant. They say that they are a group of victims of a collective scheme of investment fraud perpetrated by the defendant and its agent in the Mainland.  Their case is that they have each opened an account with the defendant and had deposited into their accounts funds for the purpose of trading.  The total amount of the deposits involved was US$13,222,533.84.  All were lost.  According to the general indorsement, “[the] Plaintiffs’ claims against the Defendant are based on (1) breaches ofthe duty of care (both contractual and tortious) and/or fiduciary duties owed by the Defendant to the Plaintiffs; (2) the Defendant’s conspiracy with its PRC agent … to injure the Plaintiffs; (3) the tort of deceit; (4) constructive trust; and (5) money had and received.”  They seek, amongst other forms of relief:

(a)   a Declaration that the defendant does hold as a constructive trustee for the plaintiffs all the funds misappropriated from the plaintiffs’ accounts maintained with the defendant as money had and received by the defendant for the use of and on behalf of the plaintiffs;

(b)   an account of all sums which the defendant had and received and misappropriated from the plaintiffs up to the date of the Writ; and

(c)   an Inquiry into the proceeds of the sums misappropriated from the plaintiffs.

4.On 9 July 2018, the plaintiffs obtained on an ex parte basis a Mareva injunction against the defendant to the extent of US$10,578,027.07 (the “Injunction Order”).  It was continued by Deputy Judge M Ng on 13 July 2018.  The defendant’s position is that the Injunction Order is liable to be discharged.  Substantive argument of the matter has been adjourned.

5.In the meantime, on 31 July 2018, the defendant took out a Summons (“Variation Summons”) for an Order to vary the Injunction Order.  That summons has been before me twice.  Extensive submissions have been made by counsel for the parties.  The hearing has not been concluded.  So that the parties (primarily the defendant) could have the chance to adduce further evidence on certain aspects of the case, the hearing of the Variation Summons was on 10 August 2018 further adjourned by me to 23 November 2018.

6.Before I adjourned the Variation Summons on 10 August 2018, parties sought to deal with one aspect of the case.  As has been said above, the defendant operates an internet trading platform.  Its customers open accounts with it, deposit funds into them and carry on trading.  Some funds which the defendant is holding therefore may not belong to the defendant, but are held on trust for its customers.  In the course of its business, the defendant receives requests from is customers for withdrawal of such funds.  The defendant, if it is in effect a trustee of those funds, has to comply.  Failure to do so may have consequences.  Not the least is that what is in effect a bank-run may be triggered.

7.Strictly speaking, trust properties are not caught by the Injunction Order.  It should also be noted that whilst the Injunction Order contains no provision which allows the defendant to spend any sum on ordinary and proper business expenses, the defendant contends that there should be, and this is indeed one of the matters raised in the Variation Summons.  However, on the facts of this case, identification of what are trust properties and what are not is not straightforward.  It ought to be straightforward (eg if all trust funds are in a separate account), but it is not.  Identification of what are bona fide business expenses is also a process which is hotly disputed.

8.However, so that there is, pending disposition of the Variation Summons, a mechanism for the defendant to obtain funds to settle such requests for withdrawal, when adjourning the Variation Summons, and having heard counsel for the parties, I ordered (“my Order”) that:

“ The Injunction shall not prohibit the Defendant from releasing any sum to its customers upon their written requests as in the Listexhibited in ‘KCW-4’ of the Affirmation of Kan Ching Wing filed herein on 31 July 2018 (the ‘Affirmation of Kan Ching Wing’) in the manner as stated in paragraph 38 of the Affirmation of Kan Ching Wing upon to HK$0.5 million per week on condition that such applications for payment out be provided to the Plaintiffs’ solicitors for consideration with supporting documents, with undertaking from the Plaintiffs’ solicitors that a reply will be provided within 20 hours of receipt, with liberty to the Defendant to apply.”

9.The defendant says that since the adjournment of the Variation Summons, it has indeed received requests from its customers for withdrawalof funds in their respective accounts (68 requests, involving the total amount of US$348,858.76, as one can glean from the correspondence).  Between 16 August 2018 and 7 September 2018, Messrs Patrick Mak & Tse (“PM&T”) on behalf of the defendant had on a number of occasions written to Messrs KCL & Partners (“KCL”), solicitors for the plaintiffs, for their consent to the release of those funds. The parties could not agree on the adequacy of the supporting documents which the defendant has provided.  The plaintiffsrefused to give any consent—hence this Summons taken out by the defendant pursuant to the liberty to apply permitted by my Order.  

The nature of the supporting documents provided by the defendant

10.My Order directs that the applications for payment out have to be provided to the plaintiffs’ solicitors “with supporting documents”.

11.For each of the requests for withdrawal said to have been received by its customers, the defendant provided the following three documents in support:

(a)   the request from the customer:

(i)   my Order makes reference to written requests “in the manner as stated in paragraph 38 of the Affirmation of Kan Ching Wing”;

(ii)   paragraph 38(a) of that affirmation of Mr Kan reads:

“ The current practice of [the defendant] is that Customer has to provide written requests (or by fax) to notice [the defendant] about the withdrawal”

(iii)   The request said to have been received and provided to the plaintiffs as supporting document was not “written request” in the traditional sense.  It was computer generated.  That is fine (subject to what I say below at paragraph 17).  Apparently, the request for withdrawal was made by the customer via the internet, and then generated on the defendant’s side by computer;

(b)   a document said to be a history report showing the customer’s opening balance, which the defendant said proves the existence of the customer concerned; and

(c)   a document said to be the history report showing the customer’slatest balance, which the defendant said proves that there is sufficient fund in the relevant customer’s account for the withdrawal.

12.The “supporting documents” provided by the defendant were heavily criticized by KCL.  In their letter of 24 August 2018, those “history reports” were described as “home-made documents … which [do] not even bear any logo or sign pointing to your client.”  Certain irregularities were also raised.

13.In their reply dated 28 August 2018, PM&T said that:

“ 2. Our client has doubled [sic] checked all history reports attached with our letter to you dated 24 August 2018. Save and except the account numbered 6805872 as mentioned in Item No 4 of your said letter which our client needs time to verify, our client confirms that all other history reports are correct.

3. The history reports attached to each written request were retrieved by our client’s staff in the computer system which are sufficient to serve as the supporting documents as required in the Variation Order dated 10/08.”

14.PM&T has subsequent to that letter of 28 August 2018 made further similar requests for payment out.  They were supported by documents of the same three types as described above.  To each of those subsequent requests, KCL repeated the criticisms they make in their letter of 24 August 2018.

15.I have considered the contents of the letters issued by PM&T on the defendant’s behalf to KCL.  I have also considered the supporting documents. Unfortunately, they have a number of problems.  I highlight the following:

(a)   In PM&T’s letter of 28 August 2018, it was said:

“ We enclose herewith a list together with the written requests [sic]the Defendant’s customers at a total sum of US$279,888.02 …”

That statement was wrong.  That figure appeared to be the total balances of all the accounts at the various points of time when the holders concerned made requests for withdrawal.  The total amount of the requests for withdrawal said to have received was much smaller (about US$50,000 less according to the rough calculation by me);

(b)   I have considered the account of 6805872.  According to the supporting documents supplied, the account holder between 18 July 2018 and 21 August 2018 made five requests for withdrawal (in the respective sum of US$21,000 (against the account balance of US$21,064.57), US$21,450 (against the account balance of US$21,460.37), US$13,000 (against the account balance of US$13,000.87), US$11,100 (against the account balance of US$0.87) and US$11,400 (against the account balance of US$11,437.17).  Was the first request for withdrawal met by the defendant?  If so, with what assets?  And if the first request was in fact met, the account would havebeen depleted and there would have been practically nil balance left.  Did the customer make further deposits into the account?  If not, what were the funds that he was seeking to withdraw subsequently?  The history reports however did not show any deposit between the 1^st and 2^nd requests.  Where did they come from?  On the other hand, if the 1^strequest was not met, what was the nature of the subsequent requests?  Did they represent repeated requests of the 1^strequest by the same customer?  But why were the figures different?  It should also be noted that on the face of correspondence, PM&T treated all the requests as separate ones, so that the total amount of the requests from that customer was the total of all five requests.  Mr Kan has failed to explain any of these matters.  Maybe there are legitimate explanations.  But they are not before the Court;

(c)   The above are only examples of some of the issues I have seen.  In particular, there are indeed other accounts which involved repeated requests similar to account 6805872.

The evidence filed in support of the Summons

16.The present Summons is supported principally by Kan’s 7^th Affirmation.  It is a brief affirmation.  The material parts read as follows:

“ 8. Despite the above clear terms of the said Order and the Defendant had submitted the relevant ‘written requests’, the plaintiff had failed to give consent accordingly, and had unreasonably refused to give consent to allow the Defendant to release such fund(s) to its customers.

9. There are now produced and shown to me marked ‘KCW-25’ the relevant ‘Written Requests’ of the Defendant by letters…

10.   In the premises, the Defendant has no choice but to take out this application so that it can maintain its obligation as the bullion trading company and release the fund(s) (which belong to the customers and held in the trust account) to them accordingly as per the customers’ request.”

17.The above is the sum total of Mr Kan’s evidence in support of the Summons.  He did not verify the receipt of the requests, the existence of the customers concerned, or how those requests were generated.  Nor didhe attempt to explain the accounting system of the defendant which recorded and generated the “history reports”.  I have reproduced above what PM&T said in their reply dated 28 August 2018 concerning the “history reports”.  Not even those matters have been confirmed by affirmation.

18.In paragraph 10 of Kan’s 7^thAffirmation, Mr Kan talks about funds “which belong to the customers and held in the trust account”.  He has failed to explain what “the trust account” is.  During a previous hearing, I enquired with Mr Chan, counsel for the defendant, as to whether all clients’ monies were held in trust account or accounts.  If they were, the identification of those funds would have been straightforward.  I was informed that they were unfortunately not.  If Mr Kan is now saying that they were, he ought to provide details.

Disposal

19.Given the state of the evidence, Mr Chan sensibly accepts that the Summons is not adequately supported by the evidence.  He seeks leave to withdraw the same.  In the circumstances, and for the reasons set out above, I grant the defendant leave to withdraw the Summons.  I order that costs of this Summons be to the plaintiffs, which I summarily assessed at HK$55,000.

Ms Cherry Xu and Mr Howard Wong, instructed by KCL & Partners, for the 1^st to 67^th plaintiffs

Mr Kenneth C L Chan and Mr Billy N P Ma, instructed by Patrick Mak & Tse, for the defendant