Nicholas V.A. Schebek-fuerstenberg v. Yip Wai Sang and Another

HCA 221/2017

[2020] HKCFI 1618

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 221 OF 2017

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Before:  Hon B Chu J in Court

Dates of Hearing:  4 – 8 November and 29 November 2019

Date of Judgment:  28 July 2020

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J U D G M E N T

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Table of Contents

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A.    Introduction

1.The plaintiff alleges he was the victim of a fraud and he brought this action against the 1^st defendant and the 2^nd defendant respectively for return of sums of money on the basis of unjust enrichment, and/or money had and received by the defendants and held on constructive and/or resulting trusts by the defendants respectively for the plaintiff.

2.At the heart of the alleged fraud was Ms Zenia Li also known as Sandy Li or Sandy Lee (“Zenia”).  The total sum which the plaintiff (“P”) said he was defrauded by Zenia was HKD 2.8m.  Prior to the commencement of this action, P had obtained Norwich Pharmacal orders under HCMP 1407/2016 (“Norwich Pharmacal Orders”) against HSBC as a result of which, P had obtained documents and/or statements in relation to the transactions in the HSBC bank account into which the sum of HKD 2.8m was paid by P (“HSBC Account”).  P found out from those documents/statements obtained by him that on the same day he paid the sum of HKD 2.8m into the HSBC Account, a sum of HKD 1.7m was transferred out of the HKD 2.8m to the 1^st defendant (“D1”) and another HKD 500,000 was transferred out of the HKD 2.8m to the 2^nd defendant (“D2”).

3.On 26 January 2017, the day before the writ was issued, P obtained an injunction on ex-parte basis against D1 and D2 (collectively “Ds”) to restrain them from disposing of or dealing with their assets to the respective extent of HKD 1.7m and HKD 500,000 (“1^st Injunction Order”). The 1^st Injunction Order was later fixed for a substantive hearing on 26 April 2017 before Lisa Wong J, and eventually only continued for a further 14 days from 31 May 2017 by L Wong J for reasons set out in her decision handed down on 31 May 2017[1].

4.On 12 June 2017, P issued a new summons again for an interim injunction against Ds on the basis that some new bank documents had been obtained by P, and at the call over hearing on 14 June 2017, L Wong J granted an interim injunction until the hearing for substantive argument (“2^nd Injunction Order”).  The substantive hearing took place on 4 August 2017 and L Wong J handed down her decision on 23 July 2020.

5.Ds claimed to be bona fide recipients/purchasers for value without notice of the respective sums received by them.

6.Counsel Mr Toby Brown appeared for P and Mr Lawrence Cheung appeared for D1.  D2 acted in person throughout.

B.    Background

7.The parties are all Hong Kong residents.  P had not met either of Ds prior to this action.  They were all friends of Zenia.

8.P is a German national who has been living in Hong Kong since 2012, and prior to 2012, he would travel to Hong Kong frequently for business purposes.  P is married to Maren Schebek- Fuerstenberg and they have 2 children who are about 18 and 20 by now.  P’s entire family lived with him in Hong Kong from 21 August 2012 until around August 2016 when his wife and children decided to move back to Germany although they had travelled to Hong Kong from time to time to visit him.

9.P is a shareholder and the managing director of a trading business which trades in various consumer goods, including but not limited to electrical home appliances and electronic consumer products in the European markets.

10.D1 is a chartered surveyor and according to him, he worked for Jones Lang Lasalle from about August 1994 until April 2012 and thereafter became an investor.  According to D1, he did not know D2 personally except that D2 was known to him as a Sai Kung real estate agent, and that D1 had in the past listed properties through his estate agency for leasing purposes only. 

11.D2 is a real estate agent working in the Sai Kung area.

12.According to P, Zenia was a well known social and business figure in the Sai Kung area whom he first met in March 2010 during a dinner party at the Sushi Tenku Restaurant in Sai Kung.  She was introduced to him by his German colleague Ruediger Leh (“Ruediger”) as the owner of the Sushi Tenku Restaurant, and that he later learnt that Zenia was in the real estate business and that she was connected with L&D Property Agency Limited, a property agency in Sai Kung (“L&D”).

13.After they met, P and Zenia became friends and P said they would exchange pleasantries every time they saw each other in the Sai Kung area, in particular when he ate in the Sushi Tenku Restaurant and when he enjoyed a few drinks at a bar which Zenia purportedly owned called Aqua Plus and which Zenia caller her “business living room” where she usually met with other potential investors.   

14.P’s wife and children came from Germany in around July 2012 to visit him, and P introduced his wife to Zenia and later Zenia and her brother Lee Kin Chiu also known as Derek Lee (“Derek”) helped them to look for a family home to rent when P’s wife and children decided to move to Hong Kong.

15.P’s evidence was that he and his family grew very close to Zenia after his family relocated to Hong Kong, and that every other weekend, his family would have dinner at the Sushi Tenku Restaurant or he and his wife would have drinks at Aqua Plus, and that P and his wife had also brought their children to a fish farm Zenia purportedly owned where they could swim and wakeboard and enjoyed spa facilities.

16.According to P, during the time they spent together, Zenia would often discuss her various business ventures, investments and successes with P and his wife.  As P was looking for investment opportunities in the Hong Kong real estate market, he said Zenia’s claim that she was in an advantageous position to identify and take advantage of property related investment opportunities to generate profit had appealed to him most.

17.P said it was in or about October 2012 that Zenia first broached the idea of developing agricultural land, and that later in March 2013, Zenia claimed that she owned land that could be developed into residential buildings, and that due to the Hong Kong rules and regulations pertaining to planning and development of real estate, it would take 2 to 4 years to complete the development of the properties and that she recommended that a corporate vehicle should be used to own and hold such properties.

18.In around the middle of April 2013, P and his wife, accompanied by Ruediger, Zenia and her brother Derek went on a site visit (“Site Visit”) to view plots of land which P said he later found out were identified as Lots Nos 137, s A, s B, s C and RP in DD 230, Siu Hang Hau, Clear Water Bay, Sai Kung, New Territories, Hong Kong (“Lots”). According to P, he and his wife were so impressed with the experience and how Zenia presented the business opportunity that they decided to invest in the residential development proposal of Zenia.

19.According to P, on 8 May 2013, at the Sushi Tenku Restaurant, Zenia presented him and his wife with a draft of a “Memorandum of Joint Residential Development Scheme Agreement” (“Memorandum”) and on the same day, the Memorandum was signed by P and his wife as “Party A” and by Zenia as owner of a company called Great Birch Limited (“Great Birch”) as “Party B”, with a view for P and his wife to participating in a joint development scheme of  the Lots for residential use (“Development Scheme”)^[2]. After signing, they then went on to celebrate at the Sushi Tenku Restaurant.  Before leaving the restaurant, P asked Zenia about the account details of Great Birch, and that she wrote the account number of the HSBC Account on a piece of paper and gave it to P.

20.Pursuant to the Memorandum, P was required to pay a deposit of a sum of HKD 2.8m to Great Birch which Zenia guaranteed to return in the event that the Lots were not developed in the following four years.  The terms of the Memorandum will be considered later in this judgment.  Suffice to say at this stage, on 9 May 2013, P paid the sum of HKD 2.8m into the HSBC Account, which P said he thought belonged to Great Birch.

21.Thereafter, according to P, from 9 May 2013 up to December 2015, he and his wife spoke with Zenia from time to time in relation to the progress of the Development Scheme, but it was not until around late 2015 or early 2016 that his suspicions grew as to the genuineness of the Development Scheme.

22.He said that in or around April 2014, he became aware of rumours circulating in Sai Kung regarding Zenia’s poor financial position, her failed business ventures, her alleged dealings with the triads and stories about victims she had defrauded.  Aqua Plus closed down in about February 2015 and P said he found it increasingly difficult to get in touch with Zenia, although he could still reach her through her mobile telephone from time to time.  According to P, the last time he saw Zenia in person was on 10 December 2015.

23.P later managed to get in touch with Zenia in around March 2016, through a number which his wife was able to obtain from someone else in Sai Kung but when he demanded an explanation from Zenia as to the progress of the Development Scheme, she gave him various assurances and promises and said that she would call him back.

24.P then conducted certain investigations which revealed that :

(i)  Great Birch was not owned by Zenia but by her brother Derek;

(ii)  The Lots were not owned by Zenia or Great Birch but by a “Lo Lo Louisa” who did not seem to have any connection with Zenia or Derek.

25.According to P, it was at that point that he realized that he had been defrauded by Zenia and that the Development Scheme was never going to materialize.

26.P said he further found out that :

(1)  Zenia and L&D were convicted of criminal offences in respect of various violations of the Mandatory Provident Fund Schemes Ordinance, Cap 485 on 11 April 2016;

(2)  Zenia had been declared bankrupt in about early to mid 2000s but had been discharged on about 7 July 2007;

(3)  Zenia was a defendant in two High Court actions and two District Court actions, issued by various other persons (collectively “4 Actions”).

27.On 27 April 2016, P instructed his solicitors to send a demand letter to Zenia (“Demand Letter”) and also a demand letter to Great Birch, but there was no response from either.

28.As mentioned earlier, P then obtained the Norwich Pharmacal Orders and from the documents and statements he obtained, P found out that:

(i)  the HSBC Account was held by “Digital Financial Technologies Limited (“Digital”) rather than Great Birch or Zenia;

(ii)  the HSBC Account was opened by Madam Law Fung Sin, who he later found out to be Zenia’s mother (“Madam Law”);

(iii)  Madam Law was Digital’s sole shareholder and director;

(iv)  Zenia was a director of Digital and its secretary.

29.Further, P found out from the HSBC statement as at 25 May 2013[3], that after his payment of HKD 2.8m into the HSBC Account on 9 May 2013, on the same day the following sums were debited, leaving a balance of HKD 55,898 in the account :

(i)  Two sums were withdrawn in cash, namely a sum of HKD 500,000 and a sum of HKD 3,000;

(ii)  HKD 1,700,000 was transferred to D1’s HSBC bank account (“D1 Account”);

(iii)  HKD 43,684 was withdrawn, which was not relevant to this action;

(iv)  HKD 500,000 was transferred to D2’s HSBC bank account (“D2 Account”).

30.This then led P to issue the present action on 27 January 2017 against Ds. 

31.It was not disputed that P did not sue Zenia, nor Great Birch (or Derek), nor Digital (or Madam Law).  According to D2’s Opening Submissions, Zenia died of cancer on 1 May 2018[4].

32.D1’s defence was, briefly at this stage, that he, together with two others made an investment of HKD 1,500,000 with Zenia in the venture of sale and purchase of rafts for culture of marine fish (“Culture Rafts”).  There was no actual investment agreement, but only a guarantee dated 9 April 2013 (“Guarantee”) pursuant to which Zenia guaranteed to pay back the principal of HKD 1,500,000 and a return of investment of HKD 166,667 on or before 2 May 2013 (“April 2013 Investment”), and D1’s case was that the amount of HKD 1,700,000, was the return of the sum due under the Guarantee plus an additional sum for late payment. 

33.D2’s defence was that the HKD 500,000 he received was part repayment of a sum of HKD 2,230,000 previously loaned to Zenia on about 8 April 2013, by his friend Mr Lam Wai Man (“Lam”) whereby D2 was merely the conduit for payment between Lam and Zenia.  Of the loan of HKD 2,230,000, HKD 500,000 was provided on behalf of Lam by Lam’s mother, Madam Wong Sim Luen (“Madam Wong”) and HKD 1,500,000 was provided by Lam’s company “Superior Motors Company Limited”. 

34.So far as D1’s defence was concerned, P’s answer was that the investment arrangement or the Guarantee was a disguise for loan/s and as the rate of return was 117.48%, the arrangement was illegal under the Money Lenders Ordinance Cap 163 (“MLO”), ad that the payment made to Zenia by D1 was tainted with illegality, which defeats any bona fide purchaser defence.

35.In relation to D2’s defence, P’s answer was that D2 was unable to show that Zenia received a legitimate loan from Lam via D2 and that there was no evidence that any funds were ever received by Zenia from the loan.

C.    The list of agreed disputed issues

36.P’s Counsel, Mr Brown, submitted an “Agreed List of Issues in Dispute” on 29 October 2019.  D1’s Counsel Mr Cheung submitted that the answers to the 1^st and 2^nd issues listed therein, in particular the 2^nd issue, would be related to whether a fraud was indeed committed by Zenia against P, and that a separate issue should be added, namely whether P was a victim of fraud, allegedly committed by Zenia. 

37.Thus, taking into account what Mr Cheung submitted, the agreed list of issues was as follows:

(1)  Whether P was a victim of fraud, as allegedly committed by Zenia (“Issue 1a”);

(2)  Whether Zenia held the sum of HKD 2.8m paid to her by P pursuant to the Memorandum on trust for P (“Issue 1”);

(3)  Whether P had a prima facie claim (ie subject to D1/D2’s defence) in constructive trust, unjust enrichment/money had and received, and/or restitution against D1 and D2 as a result of their receipt of funds traceable from the sum of HKD 2.8m (“Issue 2”);

(4)  Whether D1 and D2 were bona fide recipients for value without notice (“Issue 3” of which, later on in this judgment, the issues in respect of D1 will be referred to as “Issue 3a” and the issues in respect of D2 “Issue 3b”):

a.  Whether D1 and D2 respectively were able to prove that the transactions in which Zenia was said to have become indebted to each of them were legitimate transactions; and

b.  In respect of D1 only:

(i)  if the transaction reflected in the Guarantee was otherwise a legitimate transaction, whether such transaction was illegal by operation of the MLO;

(ii)  if so, whether such illegality was fatal to D1’s defence of bona fide recipient for value without notice;

(iii)  in order to resolve (i) and (ii), the Court would need to resolve whether the arrangement reflected in the Guarantee was in fact a loan and if so, whether the effective rate of interest exceeded 60% per annum; and whether D1 was in the business of a money lender.

D.    Issue 1a – Whether P was a victim of fraud

D.1    P’s pleaded case

38.P’s pleaded case was essentially that he was the victim of a fraud which arose out of his investment of HKD 2.8m in the Development Scheme at the request of Zenia and that P decided to invest in the Development Scheme in reliance on Zenia’s claims that (i) she was an expert in the Hong Kong real estate business having decades of experience in the field; (ii) she was in advantageous position to identify and take advantage of property related investment opportunities to generate profits; and (iii) she owned the Lots[5].

39.It was P’s pleaded case that the proposed Development Scheme [as evidenced by the Memorandum] was a sham, and pursuant to the Memorandum, he had deposited HKD 2.8m into the HSBC Account, and that he would not have deposited the HKD 2.8m into the HSBC Account had he known (i) the Lots were owned by Lo Lo Lousia and not Zenia or Great Birch; and (ii) the HSBC Account was held in the name of Digital and not Great Birch[6].

D.2    The Site Visit

40.As said earlier, P’s evidence was that (i) Zenia first broached the idea of developing agricultural land in about October 2012, and that she claimed that the potential profit was very promising and that she had completed similar transactions numerous times before[7] (“1^st Occasion”),  and (ii) on another occasion in about March 2013, while having drinks in Aqua Plus, Zenia claimed that she owned 4 plots of agricultural land in Sai Kung that could be developed into residential buildings and that it would take 2 to 4 years to complete the development of such properties and that a corporate vehicle should be used to own and hold the properties[8]. (“2^nd Occasion”).  Further, according to P’s written evidence It was at that juncture that Zenia invited P and his wife to view the plots of land.

41.The above were the only two occasions mentioned by P in his witness statement prior to the Site Visit in relation to the proposed development and both took place in the Aqua Plus while P was having drinks, and then P and his wife were invited by Zenia to view the site.  As seen in P’s witness statement, no details were discussed during the two occasions, and there was clearly no mention by P as to any discussion of costs or the amount of HKD 2.8m during those two occasions.  

42.When P was asked during the trial about how he and Zenia arrived at the amount of HKD 2.8m, he said it came from Zenia when they were visiting the agricultural land in March 2013 with his wife and kids and his colleague Ruediger, his wife’s father and step mother together with Zenia and her brother Derek.  As he had mentioned only one site visit in his witness statement, which was around middle of April 2013, presumably he was referring to the Site Visit, and that the amount of HKD 2.8m was only mentioned during the Site Visit.

43.When asked when Zenia mentioned the amount of HKD 2.8m, whether he had asked her how the amount was arrived at, P’s answer was “not really”.  He then went on to say that before they visited the agricultural land, they moved around with Zenia in Sai Kung, and saw the “Colour by the River” development with houses already constructed, and that P and his wife thought the amount of HKD 2.8m seemed reasonable for the Development Scheme proposed by Zenia.  P admitted that Zenia did not tell him about any particular projects which had been developed by her but he maintained that she told him that she had expertise in this and that she had knowledge of agricultural land and what to buy to turn into residential land. 

44.It was also clear from P’s evidence that he did not ask Zenia to show him any projects she was involved in previously in developing.

45.According to P’s evidence, during the Site Visit, Zenia talked about her vision and plans as to how the site would be developed and explained further the intricate rules of real estate planning in Hong Kong.  P said Zenia’s brother Derek did not speak much because of his relatively poor command of the English language.  P then said he and his wife were so impressed with the experience and how Zenia presented the business opportunity that they decided to invest in the joint residential development scheme proposed by Zenia.  As said earlier, it was P’s evidence that it was during the Site Visit that the HKD 2.8m came from Zenia, and that he said he and his wife found that the sum HKD 2.8m was reasonable and they agreed.

46.There were no photographs produced by P as to the Site Visit, nor was there any evidence as to where the site he visited was, since P said he only later out found out that the plots of land were identified as the Lots which were stated in the Memorandum.

47.There was no evidence in P’s witness statement that during the Site Visit that there was any total costs estimate provided to him or his wife by Zenia, or any forecast of profits provided by Zenia. 

48.When P was asked during the trial about forecast of profits for the Development Scheme, he had said the sale price of a house in that area would be HKD 25m or above, and that the plan was to build 2 houses, which could be sold for HKD 50m.  He then said the joint venture was on a 50/50 sharing basis between him and Zenia.  He also said his understanding was that Zenia owned the land 100% and that she was to supply the land, and that construction costs would be approximately HKD 15m for each house.  He said the profits and costs were to be shared 50/50.  None of this part of P’s evidence was in his witness statement, nor in the Memorandum.    

49.There were many people who attended the Site Visit including his wife and Ruediger, and yet P did not call any one to give evidence to support what he said.  If the intention was 50/50, there was no reason as to why the cost of the land would not be taken into account, and if Zenia did own the land and that was her share of the contribution, there should be a value attached to it. 

50.P is well educated and had studied jurisprudence at the University of Hamburg, Germany, although he had said he was not qualified to practise law because in order to practise, one needed to pass two examinations, one examination at the university and a second examination to practise, which he did not take.  P admitted that he had been doing business after 1995, and by 2013, he had been doing business for some 18 years.

51.There was no evidence from P as to what kind of house was proposed by Zenia or discussed between them to be built on the land during the Site Visit, e.g. whether it was to be a “village house” or a “villa”, whether it was to be detached or semi-detached, and whether it would be 3 storeys or 2 storeys, or whether there would be a garden space etc.  There was simply no evidence as to how P arrived at a sale price of HKD 25m for each house.  There was also no evidence as to how P arrived at the construction cost of HKD 15m for each house.  I have to say I do not find P’s such evidence credible.

D.3    The Memorandum

52.It is recorded in clause 1 of the Memorandum[9] that Party A (P and his wife) and Party B (Zenia, holder of HKID card no xxxxxxx and owner of Great Birch) “have unanimously agreed to enter into a joint Residential Development of [the Lots]”.  Hence, prior to the Memorandum, P and his wife had already agreed to enter into the Development Scheme, and as seen above, as seen above, P’s evidence was that he and his wife had agreed during the Site Visit.

53.The Memorandum then went on to state, amongst other things, that:

(1)  Great Birch was the owner of the Lots as shown on the “Lot Index Plan at Appendix I” (clause 2);

(2)  Party A had agreed to deposit HKD 2.8m to Great Birch for joining the Development Scheme as proposed by Party B and Zenia, being the guarantor (clause 3);

(3)  Both Parties were aware that even planning approval was given to change the site from Zone “CA” to “RC3”, modification of the lease conditions by way of land exchange from agricultural land use status to building and garden land use status was required and always subject to payment of land premium to Government (clause 4);

(4)  Party A has the absolute right to demand the refund of the deposit from Party B with Zenia as guarantor in the sum of HKD 2.8m in full amount but without interest after the expiry of 4 years from the date of the Memorandum should there be no development has been made, with an option for Party A to extend the period of Development Scheme for further period (clause 5);

(5)  Should government approval be granted to develop the Lots, both Party A and Party B agreed to pay the Planning Consultancy fees (each to pay HKD 1m) for the rezoning on successful basis and to share equally the land premium, government fees, construction costs, professional fees and legal charges and any other charges and fees incidental to the Development Scheme equally (clause 6);

(6)  It was expressly mentioned that Party A’s deposit of HKD 2.8m was not to be accounted in the sharing of the cost, and it was the so (sic) benefits of Party B once the Development Scheme [was] kick-off (sic) (clause 7).

54.There was actually no exact date of signing on the Memorandum.  It was also not clear where the Memorandum was signed. Apart from P and his wife, and Zenia, there was a company chop of L&D and there was someone who appended his/her signature thereunder as an authorised signature for L&D, as witness to the signatures of P, his wife and Zenia.  It was not exactly clear as to who the witness was.

55.It was P’s evidence in his witness statement that on 8 May 2013, at the Sushi Tenku Restaurant, Zenia presented him and his wife with a draft of the Memorandum, and he then said on the same day, the Memorandum was signed and executed between Party A and Zenia as owner of Great Birch as Party B.  There was no mention by P in his witness statement as to where the Memorandum was signed.  P’s evidence was only that the Memorandum was signed on 8 May 2013 and that later that same day, after signing, his wife and he stayed with Zenia in Sushi Tenku Restaurant to celebrate.  P said it was a sheer oversight that he, his wife and Zenia forgot to put the exact date of signing on the Memorandum.    

56.During the trial, P maintained that the first time he saw the draft of the Memorandum was at the Sushi Tenku Restaurant on 8 May 2013.   

57.However, the Memorandum did not contain any provisions described by P during the trial in relation to forecast of profits, or any 50/50 sharing of profits, or indeed any sharing of profits.  In fact, it was not even stated that Great Birch was to provide the Lots for the Development Scheme.  It was also not clearly stated as to what obligations Great Birch or Zenia had under the Memorandum, or who was to apply for the planning approval for the change of zoning of the Lots, or the modification of the lease conditions or use of the Lots.  All it stated was that should there be no development made after the expiry of 4 years from the date of the Memorandum (which was not dated), the sum of HKD 2.8m was to be returned.

58.When P was asked about the “kick-off” of the Development Scheme in clause 7, he claimed that his understanding was that the scheme would be kicked off after the transfer of the zoning of the agricultural to residential. It was his evidence during the trial that he envisaged that it would take some years to change the zoning and the use of the land.  P also said during the trial that although what was discussed before the Memorandum was that it would take 2 to 4 years to change the zoning and the use, Zenia had put 4 years in the Memorandum. 

59.When it was pointed out to P during that none of the profit forecast or profit sharing mentioned by him during the trial was stated in the Memorandum, P’s reply was that before signing the Memorandum, everything had been clearly discussed between him and Zenia.  As said earlier, there was no evidence as to the basis of how P arrived at the sale price and the constructions costs.  It was also not clear whether the prices/costs given by P during the trial were for the prices/costs in March 2013 (time of the Site Visit) or in November 2019 (time of the trial).   

60.What was clear was that by signing the Memorandum, P did agree that if there was no development after expiry of 4 years from the date of the Memorandum, then the sum of HKS 2.8m was to be returned without interest subject to P’s right of election as to whether to extend the deadline.   The deadline should be 8 May 2017, namely 4 years from 8 May 2013, if this was indeed the date that the Memorandum was signed (“Deadline”).

61.As set out in clause 6, it was only when government approval was granted to develop the Lots, then P (and his wife) had to share equally with Zenia (i) the “Planning Consultancy fees” of HKD 2m (each party HKD 1m) for the rezoning case on success basis and (ii) the land premium, government fees, construction costs, professional fees and legal charges and any other charges and fees incidental to the Development Scheme.

62.P accepted during the trial that the sum of HKD 2.8m was paid as deposit for joining the Development Scheme, and he was not buying a share or interest in the Lots, and that the HKD 2.8m was not intended to be used for costs in the future for the project.

63.Thus, even on P’s own case, the sum of HKD 2.8m was no more than a right to join / to participate in the Development Scheme and this is also my finding.  In other words, it was a “joining fee” or a “participation fee”.  However, apart from clauses 6 and 7 providing for his paying 50% of the costs therein stated, as said earlier, there was no mention of any proportion for profit sharing.  According to P’s evidence that profits were to be shared 50/50, and if Zenia or Great Birch indeed owned the Lots, and that the Lots were to be provided by Zenia or Great Birch for the Development Scheme, then there was no reason as to why no value was attached to the Lots as being Zenia’s contribution towards the Development Scheme.  It did not seem to make any commercial sense that Zenia or Great Birch (if they were indeed the owner) would agree to provide the Lots free.   

64.Actually, it was not even clear whether the land that the Site Visit was carried out on was that covered by the Lots stated in the Memorandum.  The “Lot Index Plan” referred to in clause 2 and said to be attached to the Memorandum at “Appendix 1” was stated to be “Plan of Crown Land Licence No S 12021 DD 219”[10], which did not appear to be related to the Lots.  It was in any event not the Lot Index Plan, as a copy of the Lot Index Plan of Lot 138SC of DD 230 was produced by P himself as  “NF-4” in P’s 1^st affidavit[11].  

65.P had said there was no movement on the Development Scheme because Zenia had not presented to him any further information in her communications with him and that nothing could be seen on the Lots.  When asked as to what he was expecting, P had said that he would expect that the 1^st step was to fence around the Lots.  However, according to him, Zenia already told him she was owner of the Lots during the Site Visit, but there was no fencing nor mention of any fencing of the Lots at the time.  He also said when he asked Zenia about the progress, her answer was that nothing so far and that she was working on it.  As P said “kick-off” was after the government approval being obtained for the change of the zoning and the use, there was no reason as to why Zenia would have fenced off the Lots prior to the government approval.  P was also asked whether it had occurred to him that maybe Zenia was right and that she was waiting for the government approval, and P’s answer was “sure” which meant he agreed it was possible.  He was also asked whether it had occurred to him that when he found out the Lots were owned by Lo Lo Louisa, this Lo Lo Louisa could be holding the Lots on behalf of Zenia, and P’s answer was he did not know.

66.I agree with Mr Cheung that the word “so” in clause 7 was probably a typing error and should have read “sole” but even if it was not, the sum of HKD 2.8m was Party B’s benefits once the Development Scheme was “kick-off”, subject only to the “criterion of refund” provided in clause 5.   

67.The term “kick off” was not clearly defined.  P’s evidence was that the Development Scheme was to kick off only after the government approval for the change/transfer of the zoning and the use of the Lots.  However, there was no express provision in the Memorandum that the sum of HKD 2.8m was to be stakeheld or to be set aside or to be applied by Zenia or by Great Birch solely towards/for the Development Scheme.  In fact, on the contrary, it was stated in clause 7 that the amount was not to be accounted in the sharing of the costs, and clause 6 provided specifically what costs had to be paid upon government approval being granted and there was no account for the sum of HKD 2.8m.  I will come back to this point later in this judgment.

68.Anyway, notwithstanding that P had said that on the 2^nd Occasion Zenia had claimed that she owned the Lots, it was clear from the Memorandum that she was not, and that it was Great Birch which was said to be the owner.  It was P’s evidence in his 1^st affidavit filed in support of his application for the 1^st Injunction Order, that during the 2^nd Occasion, Zenia noted that for tax purposes, the Lots should be owned by a company[12].  In his witness statement, he had said that for tax purposes, Zenia recommended that a corporate vehicle should be used to own and hold the properties and that P’s explanation was that although it was stated in the Memorandum that Great Birch was the owner of the Lots and not Zenia, he did not raise any queries regarding Zenia’s ownership of the Lots because Zenia had told him that the Lots were better off held in the name of a corporate vehicle for tax purposes.

69.It was not P’s evidence that prior to signing the Memorandum, P had sought any clarification from Zenia as to why it was stated that Great Birch was the owner and not Zenia herself, or whether it was for tax purposes that Great Birch was used. Further, it was not even clear what tax purposes P was referring to.  Further, if it was represented to him by Zenia during the Site Visit that she was the owner, then it did not seem to make sense as to why she should incur additional costs to transfer the Lots from her to Great Birch.  In any event, I find there was no reasonable basis for P to assume that Great Birch was the corporate vehicle used by Zenia for tax purposes to own the Lots.

70.P had also said in his witness statement that neither he nor his wife had any say in the drafting of the Memorandum, but there was no explanation as to why they could not have taken the draft to a solicitor to seek advice first before signing.  There was no suggestion, nor any evidence that there was any rush in the signing of the Memorandum on 8 May 2013 the day P and his wife were shown the draft.

71.To summarise, I do not find P’s evidence in respect of the circumstances leading to his signing the Memorandum inherently probable or credible.  His evidence was vague as to what was actually discussed between him and Zenia in relation to the Development Scheme and how the agreement to pay HKD 2.8m was arrived at prior to the signing of the Memorandum, and in any event, at the time of signing, he was clearly aware that Zenia was not the owner of the Lots. 

D.4   Payment of the sum of HKD 2.8m

72.P’s evidence in his witness statement was that after signing the Memorandum on 8 May 2013, later the same day he and his wife stayed with Zenia in Sushi Tenku to celebrate and that they spent about 2 or 3 hours at the restaurant and that before leaving, P asked Zenia about the account details of Great Birch, and that Zenia wrote the number of the HSBC Account on a separate, small piece of paper and gave it to him.

73.It was P’s evidence that the following day, 9 May 2013, he went to the HSBC Kwun Tong branch and transferred the sum of HKD 2.8m from his personal HSBC account  to the HSBC Account, and he had produced a copy of the deposit advice[13] (“Transaction Advice”).

74.During the trial, P maintained that Zenia did not tell him that the HSBC Account was held by Digital, and that she told him that it was an account of Great Birch.

75.However, under the “Remarks” section of the Transaction Advice, it was stated “GREAT BIRCH LTD JOINT RES DEV”, which must have been stated by him.  If P indeed believed that the HSBC Account was held by Great Birch, one would have thought there was no need to state under the “Remarks” section the words “GREAT BIRCH LTD”, and all he needed to state would be “JOINT RES DEV”.  In any event under the “Account No” section of the Transaction Advice, underneath the account number of P’s personal account and the number of the HSBC Account, it was clearly stated “D F T L T/A TKI”.  DFTL were the initials of Digital Finance Technology Limited, and Mr Cheung had pointed out to P that “D F T L T/A TKI” was referring to Digital trading as Ten Ku Izakaya[14]. According to a business registration certificate obtained by P among the Digital’s bank documents, Digital operated the restaurant Ten Ku Izakaya at the same address of Sushi Tenku.  In other words, Digital would appear to be the company trading as and holding the Sushi Tenku Restaurant.  Even if at the time of transferring the sum of HKD 2.8m into the HSBC Account P had no knowledge of the existence of Digital, those initials under the number of the HSBC Account on the Transaction Advice should have alerted him that the account was not that of Great Birch.

76.There was no reason why Zenia would not have told P that the HSBC Account was held in the name of Digital in order for P to deposit the amount.  It did not make sense since if P had gone to the bank and told the bank that he was transferring the sum into an account of Great Birch, no doubt he would have been told by the bank that he was mistaken and he would have found out then and there the HSBC Account was not held by Great Birch.  As I have said earlier, if P indeed had thought the account was Great Birch, there was no need to state the name again under the “Remarks” section.  I do not find P’s evidence credible in this respect, and it is my finding that he did know the HSBC Account was held in Digital’s name prior to the deposit of HKD 2.8m. Even if he did not know of Digital at the time, he would have found out the HSBC Account was not held in the name of Great Birch upon his being provided with the Transaction Advice.  I also do not find that there was sufficient evidence that he would not have deposited the sum of HKD 2.8m into the HSBC Account at the time had he known that the account was held by Digital, as on his own evidence, it could also be a corporate vehicle used by Zenia for tax purposes. 

D.5    Loans from P to Zenia

77.As seen in the Demand Letter to Zenia[15], there were in fact 3 loans made by P to Zenia after the P’s payment of the sum of HKD 2.8m  (collectively “3 Loans”), as follows:

(i)  On about 26 November 2013, 6 months after P transferred the HKD 2.8m to Zenia, P lent her HKD 1,072,500, and the principal and interest of HKD 210,000 totalling HKD 1,282,500 was to be repaid by Zenia in 2 months’ time, namely by end of January 2014 (“1^st Loan”);

(ii)  On or about 3 March 2014, P lent Zenia a sum of HKD 1,300,000 (“2^nd Loan”), of which the principal and interest was to be repaid one month later;

(iii)  On or about 5 March 2014, P lent Zenia the sum of HKD 200,000 of which the principal and interest was to be repaid a month later on 5 May 2014 (“3^rd Loan”).

78.When asked why the 1^st Loan was of an odd figure, P’s evidence during the trial was that Zenia first discussed the loan with P’s wife at the Aqua Plus and then they went to P.  P was told by Zenia that a British man wanted to buy a house, and that Zenia knew the owner, and that the British man needed a loan to buy the house, and P agreed to provide the financing for the British man, and that the amount of HKD 1,072,500 was exactly what was needed.  According to P, when the 1^st Loan was made, it was agreed that Zenia would repay the principal and interest, totalling HKD 1,282,500 by end of January 2014, which Zenia failed to do.

79.As for the 2^nd Loan and the 3^rd Loan, P’s explanation during the trial was that in early March 2014, he and Zenia had agreed to a loan of HKD1.5m, but he misunderstood and thought it was HKD 1.3m which he lent her on 3 March 2014 and Zenia then called and asked where was the HKD 200,000, and thus on 5 March 2014, he lent her the HKD 200,000 and that it was on 5 March 2014, she agreed to repay HKD 1.7m, being HKD 1.5m plus interest of HKD 200,000.

80.The interests of (i) HKD 210,000 for 2 months for the 1^st Loan of HKD 1,072,500 and (ii) of HKD 200,000 for 1 month for the 2^nd and 3^rd Loans of HKD 1,500,000 were agreed between P and Zenia at the time of lending.  P accepted during the trial that the interests set out in (i) and (ii) would respectively exceed 60% per annum. 

81.Lending at an interest rate exceeding 60% interest per annum is an offence under section 24 of the MLO. 

82.As set out in the Demand Letter, the principal and interests of the 3 Loans which should be repaid by Zenia totalled HKD 2,982,500.  On 2 April 2014, Zenia provided P with a cheque for HKD 1,282,500 (“1^st Cheque”) and on 3 April 2014, Zenia provided P with a cheque for HKD 1,700,000 (“2^nd Cheque”). 

83.Subsequently, on 14 April 2014, both cheques were dishonoured. 

84.P agreed during the trial that in April 2014 he was concerned in April 2014 when Zenia’s cheques were dishonoured, but he maintained that he was not concerned over the sum of HKD 2.8m as it was a different matter and that he took it as a short term financial problem which Zenia had. 

85.As set out in the Demand Letter, 14 months after the cheques were dishonoured, in or about June 2015, Zenia and P (and his wife) signed a memorandum of loan statement (“Loan Statement”) in which, amongst other things Zenia acknowledged her indebtedness to P and his wife, and that she promised to come back to them by latest 19 June 2015 with a repayment plan of the outstanding amount and further interests.  However, apart from a partial repayment of HKD 260,000 on or about 30 June 2015, Zenia did not make any further repayments.  It was thus alleged by P in the Demand Letter that Zenia was in serious and repudiatory breach of the terms in the Loan Statement.

86.By about February/March 2015, Aqua Plus had closed down and Zenia had already failed to repay the 3 Loans and her two cheques had been dishonoured.  P was thus cross examined as to why he was still not concerned over the sum of HKD 2.8m by June 2015, and further entered into the repayment plan with Zenia.  Yet, P maintained that in June 2015, he was still not very seriously concerned over Zenia’s finances.  I have to say I do not find what P said made sense.

D.6    Other transactions

87.Under cross examination, P had said that there were no other transactions between him and Zenia, apart from the sum of HKD 2.8m paid pursuant to the Memorandum and the 3 Loans.

88.However there was another cheque dated 23 August 2013 for HKD 440,000 written by Zenia issued to “Schebek Fuerstenberg M” which was also returned with words “payment countermanded by drawer” on 26 August 2013[16]. When P was first asked about this cheque, he claimed he did not know and could not recall and that it could only because of the 3 Loans.  Later, on re-examination, he said the cheque was issued to his wife and not to him, and that he had no idea as to what happened or why the cheque countermanded. 

89.P admitted during the trial that his wife was registered as a shareholder of a company registered in Hong Kong, but said that the company was owned by his wife only, and not jointly with him.  He had also admitted that his wife’s company was involved in the purchase of a Culture Raft months prior to he and his wife entering into the Memorandum with Great Birch, and that the Culture Raft was sold to his wife by Zenia and that his wife paid about HKD 2m.  P also admitted that he became a director of his wife’s company in about 2015/2016.

90.The evidence seemed to indicate that P and his wife had been involved in various other financial transactions with Zenia between 2013 to 2015 whether before or after the Development Scheme and there were no allegations of fraud by P against Zenia in relation to any of those other transactions.  In any event, it was not P’s case that Zenia had avoided P and his wife after defrauding them of HKD 2.8m, but on the contrary, they had been in constant contact until late 2015/early 2016. 

D.7   The 4 Actions

91.According to P’s witness statement, he became increasingly suspicious about the genuineness and authenticity of the Development Scheme given Zenia’s evasive attitude during his telephone call with her in or around March 2016.  P then found out, amongst other things, the 4 Actions, which were:

(1)  HCA 2279/2014

The above action was commenced on 11 November 2014 by one Tse Kam Tak Winfred against Zenia over a dishonoured cheque relating to the sales and purchase of land situated in Lot No 457 in DD 226 in Sai Kung[17].  The actual amount of the cheque was not stated in the general endorsement on the writ.  P had produced an article downloaded from the Target Newspapers TOLFIN website titled “Golden Hammer Awards” which set out a list of the highest-value cases filed in the High Court and the District Court for the month of November 2014 (“TOLFIN List”), the action concerned land and the amount stated was HKD 46,307,718.53[18].

However, subsequently, upon Zenia being absent, the charging order nisi was for a sum of HKD 1,080,000 only and interest and costs was made absolute on 12 February 2015.  The charging order was made against two properties (i) 2^nd floor and roof of Lot no 1969 in DD 221 in Sah Kok Mei Village in Sai Kung registered in Zenia’s sole name (“DD 221 Property”) and (ii) a piece of land in Sai Kung known as Lot No 457 in DD 226 together with erections and building erected thereon (if any) (“DD 226 Property”).

(2)  HCA 335/2015

This action was commenced on 13 February 2015 by the plaintiff Sohn Kyong Hee, and the defendants were (i) Zenia, (ii) a company called Sonho Trading (HK) Co Ltd which was believed by the plaintiff to be the holding company through which Zenia operated a fish farming business and which was said to be Zenia’s alter ego (“Sonho”), (iii) a company called Yac Limited and (iv) Digital.  The plaintiff was said to be a housewife and as said to have entered into a partnership agreement with Zenia in respect of several business ventures, in particular 2 property-related ventures and 1 noodle shop venture between 17 November 2010 and 23 March 2012[19].  The plaintiff’s claims were (i) against Zenia and Sonho jointly and severally, in relation to the 2 property-related ventures, a total of HKD 5,805,000 being the return of HKD 5,166,600 in respect of the plaintiff’s capital contributions and the “Unpaid Balance” of HKD 638,400 acknowledged by Zenia to be due and payable to the plaintiff, totalling HKD 5,805,000; (ii) a return of HKD 392,000 being the plaintiff’s investment in the noodle shop venture, and an account to be taken in respect of that business.

(3)  DCCJ 4176/2015

The plaintiff in the above action was one Stephen Waldo Ho (“Ho”), and the action was a debt claim of HKD 480,000[20].  According to the plaintiff, he and Zenia entered into an agreement and guarantee dated 17 December 2013 for which the plaintiff paid Zenia a sum of HKD 690,000 as investment into a business, and the investment sum together with a profit of HKD 70,000 was to be repaid by Zenia to Ho on or before 30 January 2014.  Zenia only made a partial repayment to Ho in the sum of HKD 280,000, with HKD 480,000 outstanding.

There was a judgment dated 11 December 2015 granted to Ho for HKD 480,000 with interests and costs as no notice of intention to defend had been given by Zenia[21]. The judgement was presented to the Land Registry for registration against Zenia’s DD 221 Property, but the registration was withheld/stopped, as seen in the Land Registry record dated 9 March 2017[22], for reasons unclear.

(4)  DCCJ 4945/2015

This was an action in which the plaintiff was one Wong Sin Man Zikey and in the absence of Zenia, a charging order nisi was made absolute for a sum of HKD 300,000 with interest and fixed costs pursuant to a judgment of the District Court of 9 December 2015.  The charging order absolute was made against the DD 221 Property and was duly registered against that property on 18 January 2016[23].

92.It would appear that P relied on the 4 actions, in particular HCA 335/2015 to support his claim that Zenia had defrauded him.  In his witness statement P had said some of the allegations contained in the statement of claim in HCA 335/2015 were “almost identical to the fraudulent scheme perpetrated against [him] by [Zenia], ie the formation of a partnership to invest in certain real estate and [Zenia’s] diversion of the funds contributed for the ventures.”

93.P had obviously read and studied the statement of claim in HCA 335/2015 when he prepared his own witness statement, in that the 1^st sentence of paragraph 4 and the last sentence of paragraph 15 of his witness statement[24] seemed to be almost identical to the 1^st and last sentence of paragraph 5 of the statement of claim in HCA 335/2015[25]. 

94.According to the plaintiff in HCA 335/2015 action, for the 1^st property-related venture, the plaintiff’s contribution was for the alleged purchase of 4 “Blue City Lots” (2 purchased in Zenia’s name, 1 purchased in Madam Law’s name and 1 purchased in the plaintiff’s name) which were said to be subsequently sold, and notwithstanding the plaintiff’s allegation that the purchases did not take place, nor the sales thereof, she was only  claiming the return of her capital contribution of HKD 2,166,600 for the 1^st venture.  As for the 2^nd property-related venture, according to the plaintiff, a company incorporated with her as 50% shareholder and Madam Law being the other 50% shareholder[26] entered into a “subscription agreement” with the 3^rd defendant YAC Limited to purchase “Waterfront Properties” and she made capital contributions totalling HKD 3,000,000 to Digital as instructed and directed by Zenia, and notwithstanding the plaintiff’s allegation that YAC Limited was not at any material time the owner (either legal or beneficial) of all or any part of “Waterfront Properties”, she was again only claiming the return of her capital contributions from Zenia and other defendants.  As for the 3^rd venture, ie the noodle shop venture, this was an investment in a restaurant.

95.It was submitted on behalf of P by Mr Brown that the similarities in the HCA 335/2015 case were manifest and that it was clear that Zenia had previously played the “fake development” card in respect of property that she claimed to own, but did not own and suggested that, like many other fraudsters, Zenia had an identifiable modus operandi.

96.It was further submitted by Mr Brown that the “partnership agreement” in the statement of claim in HCA 335/2015 was much like the Memorandum.  However, according to the statement of claim in that action, under the “partnership agreement”, what Zenia was to do was to actively research, investigate and identify potential property and it was only upon Zenia identifying a potential property-related investment and upon agreeing with the plaintiff therein to pursue such investment, then each would contribute 50% of the necessary capital.

97.In the HCA 335/2015 case, in respect of the 2^nd venture, the fact that Zenia had instructed the plaintiff therein to pay her 50% capital contribution to Digital would in fact support my earlier finding that there was no reason as to why Zenia would not tell P in the present case that the HSBC Account was Digital’s account and there was no sufficient evidence that P would not have paid had he known that the HSBC Account was not Great Birch’s account. 

98.As for the other similarities alleged by P, it was in fact not clearly pleaded in the statement of claim in the HCA 335/2015 that the 3^rd defendant YAC Limited was Zenia’s company, nor was it clearly pleaded that Zenia had represented that YAC Limited was the owner of the Waterfront Properties.  In so far as I can see, it was first pleaded that (i) Zenia told the plaintiff that she had a business relationship with the owner of the Waterfront Properties[27], then (ii) Zenia held herself out as an authorised person of 3^rd defendant YAC Limited, and (iii) Zenia represented and held out to the plaintiff to be the owner of the Waterfront Properties[28], namely Zenia was the owner.  Thus, from the pleadings, it was not clear whether YAC Limited was represented to be the owner or not, even though it was subsequently pleaded that YAC Limited was not at any material times the owner (either legal or beneficial) of all or any part of the Waterfront Properties[29].

99.In any event, it was not clear what evidence the plaintiff had in the above case when it was averred that no application was in fact made by Zenia, as representative of YAC Limited, to the Lands Department for the “building licence”[30]. Further, notwithstanding the alleged similarities, the plaintiff in the HCA335/2015 did not allege fraud on the part of Zenia.

100.In so far as HCA 2279/2014, the TOLFIN List only stated that the nature of claim was land and the amount was HKD 46,307,718.53, and it did not state that the amount of the dishonoured cheque was HKD 46,397,718.53. In fact, the amount of HKD 46,397,718.53 appeared to be exactly the same amount as the unrelated action HCA 2278/2014, which was just above HCA 2279/2014, which would seem to suggest that the amount for HCA 2279/2014 could be a typing error.  In any event, as said earlier and as seen in the charging order absolute registered against DD 221 Property, the amount due from Zenia to the plaintiff in that action on the Final Judgement of the High Court dated 5 January 2015 was only a sum of HKD 1,080,000 with interest and fixed costs[31].

101.To summarise, there were no allegations of fraud made against Zenia in the 4 Actions, and not even in HCA 335/2015, which involved the largest amount claimed against Zenia and which P claimed there were similarities in that case with his case.

D.8    No criminal action against Zenia

102.When P was asked during the trial why he did not make a report to the police in relation to him being defrauded by Zenia, P had said that upon legal advice, he decided to issue a civil claim first.  P then also mentioned a “police raid” on Zenia and that Zenia was arrested but later she was granted bail, and he had an exchange with his friend Jonathan Veitch (“Jonathan”), who was allegedly defrauded by Zenia as well and that Jonathan told P that he had made a report to the police in October 2015.  P’s explanation appeared to be that since Jonathan had already made a report, there was no need for P to do so.

103.Jonathan had made an affidavit on 9 June 2017 in support of P’s application for the 2^nd Injunction Order.  When cross examined as to why he did not ask Jonathan to be his witness or give evidence in this action, P said he could not answer this, and he then said Jonathan was not a close friend and he did not personally contact Jonathan. 

104.Mr Brown then explained on P’s behalf that they did not plan to call Jonathan as Jonathan’s affidavit was on another transaction and that was not relevant to the present case.  However, at the time of Ps application for the 2^nd Injunction Order, his solicitor Mr Adam Paul Clermont had filed an affidavit in support of P’s application, and he had referred to paragraphs 8-28 of Jonathan’s affidavit and that Mr Clermont said he believed that Jonathan and his wife were defrauded HKD 1,100,000 in total by Zenia and that that HKD 500,000 might have ended up in the D1 Account.

105.According to Jonathan, in mid October 2013, his wife was taken by Zenia to inspect a piece of land called the Tai Chung Hau Property (which later Jonathan knew to be DD 217) and that his wife was told that the Tai Chung Hau Property was available for development and the Government Land Licence could be obtained for HKD 5,500,000.  According to Jonathan, Zenia said she could buy and control the licence to occupy the land and the buildings on it.

106.Jonathan said in his affidavit that he and his wife decided to purchase a “20% share of the rights to the [Government] Land Licence of the Tai Chung Hau Property” for HKD 1,100,000, which was paid by two instalments to Digital, namely HKD 600,000 on 17 October 2013 and HKD 400,000 on 22 October 2013, and that the sum was paid pursuant to the agreement between him (and his wife) and Zenia, to (i) develop a business at the Tai Chung Hau property earning profits from running the business or (ii) renting it out, or (iii) alternatively to sell the licence to develop, to a third party.

107.Jonathan had produced (i) a copy of the Government Land Licence and (ii) a Chinese document dated 22 October 2013 which stated that the Land Licence holder transferred the property on Lot 217 to Zenia who was to manage the property and who was free to use the property.  On this Chinese document, Zenia had allegedly written on 26 April 2014 words to the effect that she certified that 20% of the property was owned by Jonathan’s wife, and Zenia had allegedly signed on it.

108.According to Jonathan, by early 2014, it was agreed between him (and his wife) and Zenia to sell the licence to develop the Tai Chung Hau Property to a third party for profit and that according to Jonathan, Zenia was to find buyers.  Thereafter, there was no tangible progress and that he grew increasingly concerned, and eventually on 29 October 2015, Jonathan made a report to the police.

109.Although Jonathan said he witnessed Zenia being arrested by the police in late 2016, he had also said as at the date of his affidavit, ie 9 June 2017, he was still waiting for further update from the police on their investigation into his complaint[32].

110.First, although Jonathan’s evidence was relied on by P at the time of his application for the 2^nd Injunction Order, namely that it was believed that Jonathan and his wife were defrauded by Zenia, it was not Jonathan’s evidence that what was stated on the Chinese document that Zenia had the right to manage or to use the property on DD 217 was false and in so far as I can see, there was no actual allegation of fraud in Jonathan’s affidavit against Zenia. 

111.Second, save that Jonathan’s statement to the police had included a complaint concerning the development agreement between him (and/or his wife) and Zenia, it was not quite clear whether Jonathan’s complaint was relating to any fraud on part of Zenia or not since there seemed to be other transactions between him and Zenia, as evidenced by a Standard Chartered Bank cheque dated 22 November 2013 from Zenia in favour of Jonathan and produced by P in his supplemental list of documents[33].  There seemed to be no evidence that Jonathan and/or his wife had issued any writ or made any civil claim against Zenia and/or Digital.  

112.Third, it was not clear whether Zenia’s alleged arrest was by reason of Jonathan’s complaint or not. 

113.Finally apart from violations of the MPF statutory requirements by Zenia and L&D for which it would appear from a press release issued on 8 February 2011 that Zenia (as an officer of L&D) was fined a total of some HKD 9,500[34], there was no evidence that Zenia was ever formally charged or convicted of any other criminal offences, in particular any offences in relation to any fraud or dishonesty, prior to her death.

114.In any event, as mentioned earlier, Jonathan did not provide any witness statement to support P’s case and/or to confirm his evidence in his affidavit.  He was not called as a witness during the present trial.  Thus, his affidavit was of little weight.

115.Anyway, the reason why P did not make a complaint to the police regarding Zenia at the time was, as P had maintained, after obtaining legal advice, he had decided to go for the civil claim first. There was no reasonable explanation as to why after P had commenced the present action, he could not then make a report to the police.  In answer to Mr Cheung’s follow on question as to whether after the trial, he would consider reporting to the police, P had said “sure”.  However, as Zenia had died in May 2018, P’s answer did not seem to make any sense.

116.There was no reason why after P had lodged a civil claim, he could not then make a report to the police.  Mr Brown had submitted that if it was a fraud, then it remained so whether reported to the police or not and that nothing was to turn on whether P reported the fraud to the police.  I accept this save that a report to the police by P would result in the police conducting investigations into those allegations made by P and into Zenia’s claims regarding the Lots and whether there was indeed a fraudulent development scheme being carried out by Zenia, and if so, no doubt Zenia would be prosecuted, and this would in fact support P’s claims in this action.  

117.I therefore find it odd as to why P did not make a report to the police, and in any event, I do not find P’s explanations as to why he did not do so convincing.

D.9    No civil claims against Zenia/Great Birch/Digital

118.According to P, the advice he received from his legal advisors was to issue a civil claim against Zenia.  However, when it was pointed out that he did not actually sue Zenia, P then explained as he had to invest more money in suing Zenia, and that as she had no money, he and his legal advisors decided to trace the money he paid Zenia and sued the recipients. When he was asked why he did not sue Great Birch, he had said because his legal advisors and he thought there was also nothing to get out of Great Birch. 

119.P had said under cross examination that after the Demand Letter, Zenia had sent him text messages suggesting that they met, but he did not respond, and his explanation was that as he had sent a solicitors’ letter, she should contact his solicitors.  He said that before his solicitors sent the Demand Letter, he would have talked to Zenia and to give her a chance to explain but after his solicitors sent the Demand Letter, she had to contact his solicitors.

120.P was asked to check his mobile phone to see whether he could still find the text messages sent by Zenia.

121.During re-examination, P said he had found out from his mobile telephone that Zenia had sent him 2 text messages on the same day, ie 13 February 2017, which P read out.  In the 1^st one, she had said words to the effect “Nick, can we meet” from her telephone number 6796 4750, and in the 2^nd one, she had said words to the effect “Hi, this is Sandy.  Can we meet”.  Zenia’s request to meet was in fact after the issue of the writ on 27 January 2017.    

122.On re-examination, P had summarised the following to be his reasons for not suing Zenia:

(1)  Zenia never replied and never responded to his calls at all;

(2)  Last personal contact was end of 2015, and she then changed telephone number and not contactable at all;

(3)  In one of the law suits against her, she did not appear at all;

(4)  Although she owned a flat, it was encumbered;

(5)  It was clear to P that she had no money or hiding somewhere.

123.P then further said Zenia had died of cancer.

124.As P had received text messages from Zenia seeking a meeting, Mr Cheung submitted that had there been a meeting, Zenia could have explained to P what happened to the Development.  Although any meeting might not have resolved the matter, those messages which were received after the issue of the writ in the present action showed at least Zenia was not trying to avoid P.  There was no reason why P could not have replied to suggest a meeting at his solicitors’ office, but it would appear that he chose not to respond at all.

125.It was not disputed that there were no civil claims made against Zenia, or Great Birch, or Digital.  There was also no claim made against Zenia’s brother, Derek, who was present during the Site Visit with Zenia, and who at the material times was the sole shareholder of Great Birch and one of its two directors.

126.Mr Brown submitted that nothing turned on this point and that P was not under any obligation or necessity to sue any other parties in order to proceed against and succeed in a claim against those parties who received P’s funds from Zenia or Digital, and that there was no procedural bar.

127.P had also mentioned that Zenia did not appear in the other actions.  It would appear that Zenia did not give notice to defend and/or she did not appear at the hearing when the charging orders were made absolute in at least 2 out of 3 of the 4 Actions.  However, there were no allegations of fraud against her in the 4 Actions.  The allegations in the present action were different, and had she been named as a defendant, she would have been at least given an opportunity to defend herself against allegations of fraud and if she chose not to, P could apply for default judgment.  Now that she had died, she had no opportunity to do so. 

128.Further, as no proceedings had been brought against Great Birch (and/or Derek) and Digital (and/or Madam Law), it was not clear whether they would have defended or not.

129.In his 1^st affidavit filed in support of the 1^st Injunction Order, P had explained that he had not joined Zenia in this action because he believed she had no assets given her history with bankruptcy, the fact that he knew of two court proceedings had been commenced against her and the fact that her company L&D applied to be struck off the Companies Register and be dissolved in or around September 2014, and he also explained that he did not join Digital because, among other things, its bank statements showed it had no cash balance[35].

130.Mr Brown submitted that P’s reason for electing to proceed against D1 and D2 directly was commercially sensible, as there was simply no point engaging in protracted proceedings with Zenia and her related companies “that would end in the Pyrrhis victory of an empty judgment”. However, there was no need to issue separate proceedings as Zenia and her related companies could have been made parties in the present action, and if P’s argument was that it would be a default judgment any way, then the costs involved would not be that high.  Further, it was submitted that if Ds wished to prove that there was no fraud by Zenia contrary to the documented evidence, then they were each free to call her as a witness.

131.The burden was on P to prove that there was fraud, and not on Ds to prove that there was no fraud. I accept that there was no procedural bar in P not suing Zenia/Great Birch (and/or Derek) /Digital (and/or Madam Law), the fact is that as Zenia was not sued (and now she is dead and cannot give evidence), nor were her related companies (nor her brother Derek or Madam Law) sued, the Court will only have P’s version of events, apart from documented evidence, as to what happened.

D.10  Discussion

132.Mr Brown submitted that the Memorandum set out verifiable false statements by Zenia inducing P to make payment of the HKD 2,800,000 and that P relied on Zenia’s following 3 representations in the Memorandum (collectively “3 Representations”), which turned out to be false:

(1)  Representation that Zenia was owner of Great Birch – 1^st Representation;

(2)  Representation that the Lots were owned by Great Birch (see clause 2) – 2^nd Representation;

(3)  Representation that the sum of HKD 2.8m was to be deposited to Great Birch (see clause 3) – 3^rd Representation.

133.In so far as the 3^rd Representation is concerned, I have already found earlier that prior to his deposit of HKD 2.8m, P did know that the HSBC Account was held in Digital’s name.

134.In relation to the 1^st Representation, Great Birch was incorporated on 5 July 2011 by a nominee secretarial company with a share capital of HKD 10,000 divided into 10,000 shares of HKD 1.00 each, with one share taken up by the nominee secretarial company as founder member.  On 1 August 2011, the one share held by the nominee secretarial company was transferred to Derek, and a further 9,999 shares of HKD 1 were allotted to Derek, and on the same day, Derek was appointed one of two directors of the company and the registered office of Great Birch was changed to what appeared to be the residential address of Derek’s, namely Room C, 6/F, Block 1, Sai Kung Garden[36].  A company secretary Chan Wing Yee was also appointed on 1 August 2011.  Then on 22 August 2013, a notification of change of address of the registered office was filed which showed that the registered address of Great Birch was changed to Shop 47, Ground floor, Commercial Complex, Sai Kung Town Centre, 22-40 Fuk Man Road Sai Kung effective from 5 July 2012[37] and this address appeared to be the address of Chan Wing Yee as at 18 May 2013 when she first resigned as the company secretary[38] although the formal notification (Form D4) was only filed by the company on 23 August 2013[39]. 

135.According to P’s evidence in his witness statement, he obtained a company search on Great Birch in or around March 2016[40].  P had produced a bundle of documents obtained from the company search[41] but it would appear that but there were no annual returns among those documents and it appeared that since 1 August 2011 up until March 2016, there had been no annual returns filed by the company. 

136.It was not disputed that as at 1 August 2011, Zenia was not registered as a shareholder of the company.  However, even though she was not registered as a shareholder of the company as at 1 August 2011, this does not necessarily mean that she was not the shareholder or the owner on 8 May 2013.  As there had been no annual returns available, I do not find that there was sufficient evidence to say whether Zenia was or was not the owner of Great Birch as of 8 May 2013.

137.Further, the 1^st Representation is relied on by P as being a false and fraudulent representation, but this was not even mentioned in the Demand Letter.  In the Demand Letter, all P alleged was that he discovered that, in serious and repudiatory breach of the Memorandum, the statement in clause 2 of the Memorandum that Great Birch was the owner of the Lots was “utterly false” and that Great Birch was not and had never been the owner of the Lots[42], and that P accepted the repudiation as bringing the Memorandum to an immediate end[43]. It was not P’s case in the Demand Letter that the statement that Zenia was the owner of Great Birch was false or it resulted in any repudiatory breach.

138.As for the 2^nd Representation, it was not disputed that Zenia was not the registered legal title owner of the Lots, nor was Great Birch.   As mentioned earlier, he was asked during cross examination whether it had occurred to him that when he found out the Lots were owned by Lo Lo Louisa, this Lo Lo Louisa could be holding the Lots on behalf of Zenia, and P’s answer was he did not know.

139.P did not raise any queries regarding why the Lots were owned by Great Birch instead of Zenia prior to signing the Memorandum, and he said that he thought it was for tax purposes that Great Birch was used.  As I have found earlier, there was no reasonable basis for him to assume that Great Birch was the corporate vehicle used for tax purposes by Zenia to hold the Lots.

140.P was also asked during cross examination whether it had occurred to him that maybe Zenia was right and that she was waiting for the government approval, and P’s answer was “sure”.  The fact was that there was no sufficient evidence as to the efforts, if any, which had been made by P to find out whether Zenia had made any applications to the District Lands Office for planning approval to change the zoning and the use of the Lots or for the modification of the lease conditions of the Lots.

141.Further, as seen earlier, in Jonathan’s case, there was a Chinese document by which the property was transferred by the Land Licence holder to Zenia, which did not appear to have been registered in the Land Registry and further as seen later, in Zenia’s transactions with D1, interests in her DD 221 Property were first acquired by Zenia through a subscription agreement which was not registered in the Land Registry.  Thus, it was not improbable that there could have been documents signed by with Lo Lo Louisa whereby Zenia and/or Great Birth acquired certain rights and interest in respect of the Lots and which were not registered in the Land Registry.  In other words, I do not find that the fact that Zenia or Great Birch was not the legal title owner was sufficient evidence that the 2^nd Representation was false.

142.In any event, on P’s own evidence, Zenia’s representation that she owned the Lots was made on the 2^nd Occasion.  It was also P’s evidence that during Site Visit that Zenia had talked about her vision and plans as to how the Lots would be developed, and Zenia’s brother Derek, the sole shareholder and a director of Great Birch, was also present during the Site Visit.  As said earlier, it was during the Site Visit that P and his wife made the decision to enter into the Development Scheme and agreed to pay the HKD 2.8m which they found reasonable.

143.As I had said earlier, there were no other witnesses called by P as to what was said during the Site Visit which led to P and his wife deciding and agreeing to invest HKD 2.8m in the Development Scheme, and in any event this was prior to the signing of the Memorandum.  Even after P found out that the Lots were registered in the name of Lo Lo Louisa, there were no allegations of fraud on part of Zenia made in the Demand Letter at all, and P only claimed was that P claimed that Zenia was in serious and repudiatory breach of the Memorandum, and that Great Birch was not and had never been the owner of the Lots.

D.11  Conclusion on Issue 1a

144.Fraud is a serious allegation and as pointed out on behalf of D1 by Mr Cheung, cogent evidence is required to establish an allegation of fraud.   When the Demand Letters were sent to Zenia and Great Birch, there were no allegations of fraud on part of Zenia even though by then P knew clearly that Zenia was not the registered shareholder nor director of Great Birch and neither Zenia, nor was Great Birch the registered legal owner of the Lots, and that the 1^st and the 2^nd Representations in the Memorandum were said to be false.

145.Having considered all the evidence of this case, I am not satisfied that P has discharged the burden on him in establishing that there had been fraud on the part of Zenia, or that he was a victim of fraud committed by Zenia.  I find that he was only disgruntled about his investment in the Development Scheme which had turned sour due to Zenia’s subsequent deteriorated and poor financial conditions.

E.    Issue 1 – whether Zenia held the sum of HKD 2.8m on trust for P

E.1    Whether constructive trust

146.It was submitted that the sum of HKD 2.8m was held by Zenia on constructive trust for P by virtue of Zenia’s unconscionable conduct defrauding P into paying the sum into the HSBC Account, and that victims of fraud have a prima facie claim in money had and received and may assert a proprietary claim against the recipients insofar as the fraudulently obtained funds are traceable into their hands, unless the recipients can establish the defence of bona fide purchaser for value without notice: Leonard Koutsoimhalis & Anor v Aki Enterprises & Anor unrep HCA 2509/2014, 16 June 2015 per Chow J at paragraph 22.

147.In light of this Court’s earlier finding that there was no sufficient evidence of fraud on part of Zenia in making those 3 Representations, there was no sufficient evidence of any unconscionable conduct on part of Zenia, the constructive trust would not arise.

E.2    Whether resulting /Quistclose trust

148.Mr Brown had argued that even if the Court were to come to the view that the Memorandum or the Development Scheme was an investment gone wrong, Zenia still held the funds for P on resulting trust.

149.As pointed out by Mr Brown, it was specifically named in the Memorandum by Zenia (who was the drafter of the Memorandum) that the sum of HKD 2.8m was a deposit and that P was entitled to a return of that deposit at the end of 4 years if there was no development per the terms of the Memorandum.

150.The Memorandum was a “homemade” one and Mr Brown submitted that reading both clause 5 and clause 7 together, two points became clear:

(i)   P was entitled to a refund of the deposit, not merely damages in the sum of HK$2.8M; and

(ii)  The only sensible reading of clause 7 is that until the Joint Development Scheme was “kicked-off” the deposit was being held on trust by Ms Li and was not available to her to use as part of her own funds.

151.As said earlier, the term “kick-off” in clause 7 was not clearly defined, nor was it clear as to what was meant by “no development”.  When P was asked that whether before expiration of 4 years, there was no restriction on how Zenia was to use the money so long as she repaid it after 4 years, P said his understanding was different and that HKD 2.8m was to pay for the transfer of the Lots from agricultural to residential and that this would take 3 or 4 years, and if not, she would return the money to P, but he agreed that there was no provision in the Memorandum that the sum was to be held in any stakeholder’s fund.  As said earlier, P’s evidence was that the “kick-off” would be after the government approval of the transfer of the zoning and the use of the Lots from the agricultural land to residential land use.

152.When it was pointed out to him, that when Zenia went to apply for change of zoning, professional fees might be incurred, and P said he guessed normally but Zenia said she was the expert and that she had the connection. 

153.It can be seen that under clause 6 of the Memorandum, there were “Planning Consultancy Fees” payable in seeking government approval for rezoning, except that according to the Memorandum, they were only payable by P on success basis. This would not however mean that Zenia did not have to pay some fees in advance, whether she was the expert or had the connection or not.

154.It was however P’s case that as nothing in terms of the Development Scheme had been completed, the sum of HKD 2.8m did not convert into Ms Li’s own funds and that there was a Quistclose trust, as it was P’s evidence that he believed that the sum was going to be held by Zenia for the sole purpose of converting the Lots from agricultural zoning to business/residential zoning.  

155.It was thus submitted by Mr Brown that the sum of HKD 2.8m did not convert into Ms Li’s own funds.   

156.The term “Quistclose trust” derives its name from the decision in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.  It was held in that case by the House of Lords, that there is no difficulty in recognizing the co-existence in one transaction of legal and equitable rights and remedies: when money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose and when the purpose has been carried out, the lender has his remedy against the borrower in debt, but if the primary purpose cannot be carried out, the question arises if a secondary purpose (ie repayment to the lender) has been agreed, expressly of by implication, and if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor’s assets) then there is the appropriate remedy for recovery of a loan[44].

157.The principles have been followed by the Court of Appeal in Hong Kong in Typhoon 8 Research Ltd v Seapower Resources International Ltd[2002] 2 HKLRD 660.  In the Typhoon 8 Research case, the Court of Appeal applied the principles to a rental deposit.  There, the rental deposit was paid directly to the holding company of the landlord.  It was held that even assuming the holding company to be the landlord’s agent, it was not open to it to contend that, as agent, it was not subject to the same trust.  This was because the holding company, who negotiated the lease, could not deny knowledge of the terms upon which the deposit was held[45].

158.It was thus argued by Mr Brown on behalf of P that even assuming the Memorandum were a genuine agreement, the sum of HKD 2.8m clearly fell within the Quistclose principles as P’s evidence was that the sum was paid for a specific purpose of rezoning the Lots and until this was achieved Zenia was not free to use the fund for any other purpose.

159.In the Typhoon 8 case, Le Pichon JA, as she then was, had pointed out that although there was no loan in that case but the rental deposit was paid over for a specific purpose and the landlord had covenanted to “hold” the same “throughout the currency of the lease”, to deduct therefrom for specific purposes only and subject thereto, to refund the deposit to the plaintiff and those were all the hallmarks of a Quistclose trust.

160.In the Sanctuary Systems case[46], Au-Yeung J had referred to  Twinsectra Limited v Yardley & Ors [2002] 2 AC 164 in which Lord Millett (dissenting on a point immaterial to the present discussion) explained the necessary intention required of the lender and borrower:

“73 A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly, payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case.

74 The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100 per Lord Mustill. His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose …

…

75 ... Equity’s intervention is more principled than this. It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v Conard (1884) 54 LJ Ch 439, 440:

‘it is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.’

The duty is not contractual but fiduciary. It may exist despite the absence of any contract at all between the parties, as in Rose v Rose (1986) 7 NSWLR 679; and it binds third parties as in the Quistclose case itself. The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust.

...

98 ... The settlor’s motives must not be confused with the purpose of the trust; the frustration of the former does not by itself cause the failure of the latter. But if the borrower is treated as holding the money on a resulting trust for the lender but with power (or in some cases a duty) to carry out the lender’s revocable mandate, and the lender’s object in giving the mandate is frustrated, he is entitled to revoke the mandate and demand the return of money which never ceased to be his beneficially.

99… There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other’s money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. …”

161.As set out earlier, Clause 3 of the Memorandum states that “Party A has agreed to deposit HK$ 2.8m (HK$2,800,000.00) to Great Birch Limited for joining the [Development Scheme] as proposed by Party B and [Zenia] being the guarantor”.  Although in the Memorandum, the sum of HKD 2.8m has been described as a “deposit”, even on P’s evidence, and as I have found earlier, it was a “joining fee” or a “participation fee” in the Development Scheme.

162.In paragraph 14-04 of Goff & Jones, The Law of Unjust Enrichment, 9^th Ed, pg 480, “part payments” was distinguished from “deposits”, and the factor determining whether a payment is a deposit or a part-payment is what the parties have agreed should happen to the payment.

163.The sum of HKD 2.8 was clearly not a part-payment for acquisition of any interests or ownership in the Lots, nor part-payment of any consideration for the acquisition of any interest or ownership in the Lots. In my view, it was not of the same nature as a rental deposit which is paid by a tenant to the landlord to secure the tenant’s obligations under the tenancy agreement and that the tenant is entitled to have the security back in full or in part at the end of the tenancy subject to deductions which the landlord is entitled to make.  Here, the sum of HKD 2.8m was not expressed to be paid to secure P’s obligations under the Memorandum and it was expressly stated in the Memorandum that the sum of HKD 2.8m was not to be accounted in the sharing of the costs of the Development Scheme and the said sum was the [sole] benefit of Zenia, save that if there was no development after the Deadline, the sum was to be refunded without interest.

164.As mentioned earlier, there was no express provision or requirement that Zenia or Party B had to set aside the sum during the term of the Memorandum, or that the Zenia could not use or apply the sum or any part of it whether towards the Development Scheme or not.  In fact, there was no sufficient evidence that Zenia did not use the sum or part or it whether towards the Development Scheme.

165.In any event, on my reading of the provisions of the Memorandum, Zenia was free to use it for whatever purposes, save that after the Deadline, if there was to be no development, she had to refund it to P as provided in the Memorandum.  P’s evidence that the understanding he had with Zenia that the sum was to be used solely towards the Development Scheme was not supported by the terms of the Memorandum although he did refer to the Development Scheme under “Remarks” section in the Transaction Advice.  There was further no evidence from P as to how the sum was to be used towards the Development Scheme by Zenia.

166.Even if P did not know of the existence of Great Birch prior to the signing of the Memorandum, according to P’s own evidence, he must be aware of the existence thereof at the time of signing.  It was in fact not quite clear as to whom “Party B” in the Memorandum referred to.  Although it would appear that Zenia was Party B in her personal capacity as seen in “the parties” to the Memorandum and also in the signatory part of the Memorandum, “Party B” referred to Great Birch in clause 2 of the Memorandum, and in clause 5, Zenia was described as the guarantor, and clause 3 referred to “Party B” and Zenia being the guarantor, which seemed to indicate that Zenia was only a party in her capacity as a guarantor.

167.Further, according to clause 3 of the Memorandum, Party A agreed to deposit HKD2.8m to Great Birch, and that Party A had the absolute right to demand the refund of the sum from Party B with Zenia as guarantor.  Thus, on my reading of the Memorandum, the primary obligation to return the Deposit would be “Party B”, which appeared to be Great Birch, and Zenia was only the guarantor.

168.Having considered all the above, I am not satisfied that Zenia held the sum of HKD 2.8m on trust for P.

F.    Issue 2 – Whether P has a prima facie claim in constructive trust, unjust enrichment/money had and received, and/or restitution against Ds

169.Having regard to all said above, I am not satisfied that Ds held that part of the funds received respectively by them and traceable to the sum of HKD 2.8m on trust for P.  In the circumstances, P has not been able to establish a prima facie restitution claim against Ds based on trust, unjust enrichment and/or money had and received.

G.    Issue 3 – Generally

170.Notwithstanding my above findings, I will continue to consider Issue 3, in the event that P were to be able to establish fraud, and/or a prima facie case that Ds did hold that part of the sum of HKD 2.8m received by them respectively on trust for P or that P had a restitutionary claim against Ds.

171.There was no dispute that if it were established that the sum of HKD 2.8m was P’s property (whether as a result of a fraud by Zenia or in the alternatively, by application of Quistclose principles), then the burden of proof would shift to Ds to prove that they were bona fide purchasers for value without notice of P’s claim to the sum.

172.Ds accepted that the funds respectively received by them were paid to them by Digital and that those funds were originally paid to Digital by P, but their case was essentially they were bona fide recipients for value without notice.  It would appear that they were also relying on a change of position defence, although this was not specifically pleaded on the part of D1.  As for D2, as throughout he had acted in person, neither defence was clearly pleaded by him.

173.In Seridom Servicios Integrados Idom S.A.U. and Heng Wen Trade Co Limited and Others HCA 1631/2017, unrep, 21/01/19, Madam Justice Marlene Ng cited[47] paragraphs 41-117 of Lewin on Trusts 19^th ed :

“If trust property is wrongfully transferred to a purchaser taking with notice of the trust then, whether such notice is actual, imputed or constructive and whether or not he gave full value, and whether or not he acquired a legal estate, he is bound to the same extent and in the same manner as the person from whom he bought. The rule applies not only to trusts properly so called but also to purchasers with notice of any equitable incumbrance … But a bona fide purchaser for value of a legal estate without notice of the trust defeats the equitable interest of the beneficiaries, and so enables the purchaser and the successors in title to defend both proprietary and personal claims in relation to property transferred in breach of trust. The following requirements need to be satisfied:

(1) there is a purchase for value;

(2) of the legal estate in property;

(3) in good faith;

(4) without notice;

(5) at the time or transfer of the legal estate.”

174.As seen above, one of the requirements is that the purchaser/recipient has acted “in good faith”.  In Grupo Pacifica Incorporada v Worldwide Marine Product Limited & Ors, unrep HCA 2640 of 2014, 24.09.18 [2018] HKCFI 1930, it was noted by Recorder Houghton SC, in relation to a change of position defence, a lack of good faith could be demonstrated by showing that a defendant failed to act in a commercial acceptable way and dishonesty is not required[48].

175.With the above principles in mind, I turn to the present facts.

H.    Issue 3a – In respect of whether D1 was a bona fide purchaser without notice

H.1    D1’s pleaded case in his defence

176.D1’s defence was in essence that the sum of HKD 1.7m transferred to the D1 Account by Digital was repayment from Zenia to him, a Ms Yeung Suk Man (“Yeung”) and Ho[49]. According to D1, Yeung was and still is his girlfriend, and Ho is his childhood friend.

177.It was D1’s pleaded case that in about March 2013, Zenia represented to him that there was a short-term risk-free and profitable investment in the aquaculture industry in marine fish (“the Investment Project”), an industry she was experienced in[50], and in reliance on the said representation and assurance by Zenia, D1, invited Yeung and Ho to join together, and they invested a total sum of HKD 1,500,000 into the “Investment Project” on 9 April 2013 and that Zenia’s share of the investment was supposed to be HKD 1,500,000[51]. In exchange, Zenia provided the Guarantee that a sum of HKD 1,666,667 would be returned to D1, Yeung and Ho on 2 May 2013 together with 3 post-dated cheques dated 2 May 2013 (“3 Post-Dated Cheques”).

178.The 3 Post-Dated Cheques were later dishonoured, and on 9 May 2013, Zenia informed D1 that a sum of HKD 1,700,000 was deposited to the D1 Account through a company called Digital as repayment from Zenia to D1, Yeung and Ho[52].

179.Thus, it was not D1’s pleaded case that the “Investment Project” or the April 2013 Investment was in fact the actual purchase and sale of 4 Culture Raft/s or the rights of Licence 4341 (defined below).  Further, it was his then pleaded case that the share in the April 2013 Investment of D1 (with Yeung and Ho) was the same as Zenia’s share namely HKD 1.5m each side and they were equal investors.

H.2    The Guarantee

180.The Guarantee was made between D1, Yeung and Ho as “Investors” on the one part and Zenia as the “Guarantor” on the other part[53]. 

181.As set out in the 1^st paragraph in the Guarantee, upon request of the Guarantor, the Investors agreed to invest HKD1.5m and together with Zenia’s own investment fund of HKD 3m for the “venture of sale and purchase of Culture Rafts at Kai Lung Wan Fish Culture Zone in Sai Kung” (reference made to original Fish Culture Licence 4341 of Serial No 031323 shown in Drawing No FC-15 of Revision 64) (“Licence 4341”)[54] and that Zenia, as the “Guarantor”, had guaranteed punctual payment to the “Investors” of the principal amount of HKD 1.5m (“Principal”) plus a “due reward of HKD 166,667” (“Reward”) on or before 2 May 2013.  It was also provided that should the full payment of the Principal and the Reward totalling HKD 1,666,667 fail to be paid by Zenia on or before 2 May 2014, Zenia agreed to pay a compensation of HKD 7,250 per day starting from 2 May 2013 until the date of full payment (“Compensation”).

182.Pausing here for the moment, according to the Guarantee, what the “Investors” agreed to invest was for the “venture of sale and purchase of ‘Culture Rafts’ at Kai Lung Wan Fish Culture Zone in Sai Kung”.  Although “reference” was made to Licence 4341, it was not in fact clearly specified in the Guarantee that the venture the “Investors” agreed to invest in was for the actual purchase and sale of the Culture Rafts under Licence 4341.  In fact, in D1’s 1^st and 2^nd affirmations in relation to the Injunction Orders, there was also no mention that the “venture” in the Guarantee was for the actual purchase and sale of the Culture Rafts under Licence 4341, or that they were to be purchased at HKD 4.5m and sold at HKD 5m nor was there any mention in D1’s witness statement.  D1 only referred to what was pleaded in his defence[55].   

183.Further, as said earlier the contribution of Zenia as stated in the Guarantee appeared to be HKD 3,000,000, and not HKD 1,500,000 as pleaded in the defence.

184.Anyway, in addition to Zenia personally guaranteeing the payment of the Principal, the Reward, and the Compensation, (i) Zenia had executed an irrevocable power of attorney dated 8 April 2013[56] in favour of D1 in the presence of a solicitor and in the office of the solicitors’ firm Messrs Katherine YW Or & Co, in relation to a subscription agreement dated 5 March 2012 regarding the DD 221 Property (“Subscription Agreement”)[57] and (ii) Zenia’s other brother Lee Kin Hon Eric (“Eric”) had also executed an irrevocable power of attorney dated 8 April 2013[58] in favour of D1 in the presence of the same solicitor and at the same solicitors’ office in relation to the rights and interest of Licence 4341 which was dated 26 September 2012.

185.D1 had produced a copy of the Subscription Agreement during the trial[59], which was in effect an agreement made between the previous owner of the DD 221 Property and Zenia, for Zenia to buy the DD 221 Property and make payments prior to the completion and transfer of legal title of the DD 221 Property to Zenia.  It appeared in the Subscription Agreement that although the previous legal title owner of Lot 221 Property had obtained government approval for the commencement of the construction of a 3 storey high village house (or Small House) on the land, prior to the government approval being obtained for sale after completion of construction, the property could not be legally transferred to Zenia and the Subscription Agreement provided for payments by Zenia by various stages pending the final government approval being obtained.  The Subscription Agreement was signed by the manager and attorney of the owner as vendor, and Zenia as purchaser and witnessed by a representative of L&D.  The irrevocable power of attorney was to enable D1 to transfer Zenia’s rights and interests under the Subscription Agreement and to sell the DD 221 Property to anyone D1 thought fit, in the event that Zenia failed to pay to the “Investors” the sum of HKD 1,666,677 on or before 2 May 2013.

186.As for Licence 4341, this was a licence to engage in culture of marine fish within a specified fish culture zone issued by the Hong Kong Government under the Marine Fish Culture Ordinance, Cap 353 (“Fish Culture Licence”) for the period 4 September 2012 to 3 September 2012 and the area of the Culture Rafts permitted under the licence was stated therein. Similarly, the irrevocable power of attorney in relation to Licence No 4341 was to enable D1 to transfer Eric’s rights and interests under the licence and to sell Licence No 4341 in the event of default that Zenia failed to pay to the “Investors” the sum of HKD 1,666,677 on or before 2 May 2013.

187.Although the two irrevocable powers of attorneys were prepared by solicitors and executed in the presence of a solicitor at the solicitors’ office on 8 April 2013, the Guarantee was executed only the next day, ie 9 April 2013, and according to D1, the Guarantee was prepared by him.

H.3    Whether the Guarantee was a legitimate transaction

188.D1’s evidence that he had personally known Zenia since about March 2007 and that they became friends since then and that she impressed him as being reliable and a person of integrity.  When he was asked during the trial why she gave him such impression, he had said Zenia never disclosed information about herself or her investors although he would like to know what other investors she had in her investments, she had never told her.

189.D1 had also said Zenia had been a business woman focusing on, amongst others, Sai Kung properties and Culture Rafts business for a long time, and that she had participated in various property and other investments, restaurants, bars, foot massages, Japanese restaurants and the property agency company L&D.

190.It was further D1’s evidence that Zenia had some prior experience and involvement in the aquaculture industry and marine fish farming, and she was the Chairman of the “Hong Kong Fishing Rafts Association”[60].  D1’s evidence during the trial was that he and Zenia had made some similar joint investments in Culture Rafts over the years as the April 2013 Investment.  He had also said that the last joint investment he made with Zenia was in December 2013 over a Culture Raft and there was an outstanding sum from Zenia which she failed to repay to D1 after repeated attempts by D1 to chase her up.  D1 said thereafter their relationship became less close than before but he was still able to find her at Sushi Tenku Restaurant or Aqua Plus.  He could not recall when he last had contact with Zenia but gradually contact with her became difficult. 

191.D1 was asked whether he had asked Zenia to give evidence for him, he said he did not nor did he need to, as Zenia had told him that she would explain in full to P and that the investment she made with P was totally different from the investments she made with D1.  D1 also said he did not know about Zenia being arrested at end of 2016 although he had heard some one mentioning it, he was not able to verify whether it was true or not.  He said in 2016, he had stopped chasing after Zenia for repayment as there was no point.  D1 also mentioned that Zenia owed his friend Ho a sum HKD 480,000 and Ho was suing her but later Ho told him that Zenia had died of cancer. 

192.In fact, whether prior to the April 2013 Investment or after, there had been many monetary transactions between D1 (with or without others) on one part and Zenia on the other, some of which had been disclosed by D1 in his affirmation and some of which were disclosed by D1 during the trial.  I set out hereunder a chronological table of some 11 transactions (“Table”), insofar as I could gather from the documents produced:

Date/Document	Purpose	Signing parties	Payment amount (HKD) and date	Repayment amount (HKD) and date
03.03.10 Chinese handwritten agreement[61]	For sale and purchase of Culture Raft (no details of Culture Raft/s provided)	Signed by Zenia only	$600,000 04.03.10	$660,000 by cheque dated 12.03.10 from Sonho to D1 15.03.10
21.04.10 Chinese handwritten confirmation[62]	For investment in Culture Raft/s in Hebe Haven (no details provided)	Signed by Zenia only	$110,000 21.04.10	$125,000 15.06.10
10.03.11 agreement[63]	For investment fund paid by D1 to Digital (no details provided)	Signed by Zenia (personal capacity), Zenia on behalf of Digital as party A	$190,000 10.03.11	$190,000 + $30,000 if used in agreed investment 04.04.11
		D1 as party B
07.10.11 promissory note of personal loan[64]	For personal loan from D1	Signed by Zenia	(principal amount and date of loan unknown)	$220,000 13.10.11
31.10.12 agreement and guarantee (“31.10.12 Agreement”)[65]	To invest in a fund for the venture of sale and purchase of  Culture Rafts in Kai Lung Wan  ( no details of Culture Raft were stated in the 31.10.12 Agreement save that it was stated that  the information of the Culture Rafts was to be provided by the “guarantor” but  attached to the 31.10.12 Agreement was a Chinese agreement dated 30.10.12, in relation to the purchase of a Culture Raft under licence number 4442 by Zenia, with completion date 27.12.12)	Signed by D1 as investor (party A) and Zenia as guarantor (party B)	$245,000 01.11.12	$285,000 27.12.12
The April 2013 Investment in present action (09.04.13)	For investment for venture of sale and purchase of Culture Rafts (reference made to Licence 4341)	D1, Yeung and Ho as Investors (party A) and Zenia as guarantor (party B)	$1.5m 09.04.13	$1,666,667 01.01.13
21.05.13 Agreement and guarantee[66] (“21.05.13 Agreement”)	To invest in the sale and purchase of Fish Raft(s) business  (no particulars of Culture Rafts set out in the “Schedule 1”	D1, Yeung and Ho as Investors and Zenia as Guarantor	$1,500,000 21.05.13	$1,680,000 05.07.13
31.07.13 agreement and guarantee[67] (“31.07.13 Agreement”)	To invest in the sale and purchase of Culture Raft(s) business and under “Schedule 1” licence no 5054, and a drawing no FC-15 attached (showing position of the Culture Rafts, size and size )	D1. Yeung , Ho as investors and Zenia as guarantor	$1,600,000 30.07.13	$1,780,000 18.09.13
19.11.13 agreement and guarantee[68] (“19.11.13 Agreement”)	To invest in the sale and purchase of Culture Raft(s) business and  (licence  no 4648 and size set out, but plan was stated to have been sent by email  and received on 20 November 2013)	D1 as investor and Zenia as guarantor	$380.000 19.11.13	$460,000 10.12.13
17.12.13 agreement and guarantee[69] (“17.12.13 Agreement”)	To invest in sale and purchase of Culture Raft(s) business (no details provided)	D1, Yeung and Ho as investors and D2 as guarantor	$1,380,000 18.12.13	$1,520,000 30.01.14
20.11.14 loan receipt[70]	Loan from D1	Zenia	$130,000 20.11.14	$130,000 24.11.14

193.There were altogether some 8 agreements including the Guarantee which were related to the sale and purchase of Culture Raft/s between D1 and Zenia.  As seen in the Fish Culture Licenses, there was no legal title to these Culture Rafts, except that the holder of a valid Fish Culture Licence would be entitled to use those Culture Rafts stated in the licence for the culture of marine fish.  This Court was informed during the trial that it was common at that time that people would “buy” such Culture Rafts for swimming, or fishing or otherwise for their own enjoyment, rather than for culture of fish.  As I understand it, the way to “transfer” the rights or entitlement to the Culture Raft/s would be to transfer the Fish Culture Licences at a consideration.  One example of transfers was by way of the Chinese agreement dated 30.10.12 attached to the 31.01.12 Agreement seen in the Table.

194.As mentioned earlier, it was D1’s evidence that the Guarantee  was said by D1 to be drafted by him, but the 21.05.13 Agreement, which was about 6 weeks later, was drafted by a firm of solicitors Messrs Yung, Yu and Yuen and D1 had produced copies of the relevant invoice and the receipt from the solicitors’ firm[71]. Thereafter, the 31.07.13 Agreement, the 19.11.13 Agreement and the 17.12.13 Agreement all seemed to follow the same template as the 21.05.13 Agreement (“YYY Template”)

195.In particular, in the YYY Template, it was stated that :

(i)    in paragraph (3) of the Recital – the “guarantor” had informed the “investors” that she intended to purchase the Culture Raft/s (with particulars set out in a schedule 1) and was certain that the Culture Raft/s could be sold on or before a certain date (ie the repayment date) at a profit;

(ii)   as an additional security there would be an irrevocable power of attorney giving the “investors” the power to sell all of the benefits, rights and interests of the “guarantor” in the DD 221 Property should there be default on the part of the “guarantor”;

(iii)  In the event of any surplus from the sale proceeds, the surplus belonged to the “investors”;

(iv)  The “investors” were entitled to charge interest of the investment and the share of profit on the delay and/or default of the repayments, and the interest was to be at 48% per annum or the maximum rate allowed under the relevant law in Hong Kong calculated from the repayment date until actual date of payment.

196.When D1 was asked during the trial whether he knew the approximate price of a Culture Raft in April 2013, his response was that Zenia had told him that the market price of the type of Culture Rafts mentioned in the Guarantee was about HKD 1,000 per sq ft and that the size of the Culture Rafts in the Guarantee was about 400 square meters as stated in Licence 4341, which would be about 4,306 square feet (@1 sq m=10.764 sq ft) and the price would be about HKD4.3m.  D1 said Zenia did not tell him specifically the exact selling price but according to his understanding, the Culture Rafts would be transacted at HKD 5m and that he was given this figure before the signing of the Guarantee, that HKD 5m was the price the Culture Rafts would be sold for, and that it would cost HKD 4.5m to purchase.

197.However, it would appear from those documents produced by D1 that the prices of these Culture Raft/s varied.  D1 did try to explain that it would also depend on the size and the location.

198.As said earlier, attached to the 31.10.12 Agreement there was a Chinese agreement dated 30.10.12 for the sale and purchase of a Culture Raft of 84.5 sq m (or approximately 910 sq ft) in Kai Lung Wan under Fish Culture Licence 4442, with Zenia as a purchaser and the sale price was stated to be HKD 700,000, which would be approximately HKD 770 per sq ft. 

199.Then, under the Guarantee, according to D1’s evidence the price would be about HKD 1,045 per sq ft (ie HKD 4.5m÷4,306 sq ft).

200.There was no Fish Culture Licence number stated in the 21.05.13 Agreement, nor was a copy of the licence produced.  There were no particulars, or the areas, of the Culture Raft/s provided, nor was a copy of the relevant licence provided.

201.However, in relation to the 31.07.13 Agreement, the Culture Raft in the 31.07.13 Agreement was a single one of 249.92 sq m in Kai Lung Wan (or approximately 250 sq m, or about 2,690 sq ft )[72] and held under Fish Culture Licence 5054.  As seen in the drawing of the position of the Culture Raft under Licence 5054, it was not that far away from the 4 Culture Raft/s under Licence 4341[73], and although the 4 Culture Rafts totalled some 4,300 sq ft, they were individually smaller.  The transaction in the 31.07.13 Agreement was less than 3 months from the transaction in the Guarantee and at the market price of HKD1,000 per sq ft, the purchase price of the Culture Raft under the Licence 5054 should be almost HKD 2.7m and yet the sum invested by the “investors’ was only HKD 1.6m under the 31.07.13 Agreement.  When D1 was cross examined over this, he then denied any ability to be able to estimate the approximate value of the raft or any knowledge of the purchase or sale price.

202.Then for the 19.11.13 Agreement, the total area of the Culture Raft was stated to be 54 sq m, or about 581.26 sq ft, held under Fish Culture Licence 4648 stated to be in Kai Lung Wan Fish Culture Zone, and at HKD 1,000 per sq ft, this should cost some HKD 581,000, and yet the sum invested by the “investor” was only HKD 380,000.

203.Thereafter for the 17.12.13 Agreement, no details of the Culture Raft were provided.

204.Having considered the above, I find that the prices of those Culture Raft/s appeared to be rather arbitrary, and that there was no sufficient evidence that the investment sum stated in each of those agreements (including the Guarantee) was based on any proper valuation of the Culture Raft/s purported to be bought or sold.

205.Coming back to the Culture Rafts under Licence 4341 in the Guarantee, D1 said it was Zenia’s intention to sell on or before 2 May 2013 at a profit.  It was pointed out to him that it was strange that Zenia would purchase from Eric, her own brother, and yet 23 days later, to sell it to earn a profit, and that she was making money from her own brother, but D1 said it could be that Eric was wanting to cash out.  When asked whether he was curious to find out whether Zenia did buy the Culture Rafts from her brother or not, after Zenia’s cheque to him was dishonoured, D1’s answer was evasive and he said he did ask Zenia whether the purchaser had completed the transaction or not but her response was that the purchaser would complete a few days later. 

206.Further, as pointed out by Mr Brown, this part of D1’s evidence was not mentioned in his witness statement, nor did he mention the sale price of HKD 5m in his witness statement.  

207.It was D1’s evidence during the trial that before signing the Guarantee, he had visited the Culture Rafts with Yeung at the invitation of Zenia on 27 March 2013, and it appeared to be his explanation that at that time, as it was the biggest investment D1 was involved in, the visit to the Culture Rafts was part of his “due diligence”, and the rest of his “due diligence” included obtaining various documents which were produced by him, namely (i) the Licence 4341 and (ii) location plan at Kai Lung Wan[74]; (iii) receipt dated 26 September 2012[75]; (iv) letter dated 26 September 2012 from the Agricultural and Fisheries Department to Eric[76]; (v) the licence holder’s (Eric’s) HKID card[77]; (vi) 7 photographs taken by him on 27 March 2013[78].  D1 said Ho did not go to visit the Culture Rafts that day and that he spoke to Ho after the visit.

208.The 7 photographs did not in fact bear any date on them and were only disclosed in D1’s 3^rd Supplemental List of Documents filed on 15 October 2019, ie about 3 weeks before the trial. In any event, I find there was no sufficient evidence that they were taken on 27 March 2013 as alleged by D1.

209.As seen in the Table, the Guarantee appeared to be the 1^st investment agreement involving a substantial investment sum of HKD 1.5 m.  It also was the only investment agreement in relation to Culture Raft/s when in addition to the security over Zenia’s interests in the DD 221 Property, there was the security by Eric executing an irrevocable power of attorney in relation to his rights and interests of Licence 4341.

210.As set out earlier, it was provided in the Guarantee that in case of default on the part of Zenia, D1 would be entitled to transfer the rights and interests of BOTH the DD221 Property and Licence 4341 into his name and to sell it to anyone he thought fit to recover the amount of the Principal and Reward and the sale amount was to belong to the Investors and the Guarantor was not to have any further action to claim or to enforce against the Investors whatsoever.

211.This additional security over Licence 4341 did not seem to make sense as it was the Culture Rafts covered in Licence 4341 which were supposed to be purchased by the “Investors” and Zenia for onward sale, and yet Eric was offering Licence 4341 (including the Culture Rafts) as security to guarantee Zenia to pay back the Principal and the Reward to the “Investors”. 

212.D1 had said the arrangement was fine as Eric was already selling to Zenia as a profit and Zenia would then profit on the further sale.  According to D1’s evidence at the trial, upon executing the Guarantee, Zenia was to pay to Eric a total of HKD 4.5m (ie the Investors’ HKD 1.5m together with her own HKD 3m) to purchase the 4 Culture Rafts held under Licence 4341.  As seen earlier, this was not in fact his pleaded case in the defence, which was a total of HKD 3m only.

213.Anyway, if this were indeed the case, again it did not seem to make any commercial sense why Eric would agree to execute the irrevocable power of attorney in favour of D1 to enable D1 to sell the Culture Rafts prior to the signing of the Guarantee and receiving his HKD 4.5m.  Since Eric went to the solicitors’ office to execute an irrevocable power of attorney in order to enable D1 to sell the Culture Rafts and Licence 4341 in case of Zenia’s default, there was no reason why Eric, Zenia and D1(and/or the others of the Investors) could not have all met up at the solicitors office either the same day or the following day on 9 April 2013, for Eric to receive the HKD 4.5m before executing the irrevocable power of attorney in favour of D1 as security since according to D1, at the time of signing the Guarantee on 9 April 2013, Zenia had said that she already had the potential end purchaser in mind and that she was able to sell the Culture Rafts by 2 May 2013 .

214.Further, as pointed out by Mr Brown, Eric could have simply sold to the end purchaser direct and then paid Zenia any profit/commission/ introduction/arrangement fee, and this would not necessitate Zenia having to find investors to cover a period of 23 days (ie between 9 April and 2 May 2013), or to share profits with any investors.

215.Also as the purchase price of the Culture Rafts was said to be HKD 4.5m, and the sale price was said to be HKD 5m, Eric’s irrevocable power of attorney would have been more than sufficient to cover the HKD 1.5m paid by the Investors, and it did not seem to make any commercial sense as to why Zenia would need to execute another irrevocable power of attorney over her own DD 221 Property, as additional security.  The total security offered by Zenia would be in the region of HKD 4.5m-HKD 5m plus Zenia’s rights and interests in the DD 221 Property as at 8 April 2013[79].  It further did not seem to make sense as to why in the event of default by Zenia, D1 (and the other Investors) could then sell the Culture Rafts which were worth HKD 4.5m to HKD 5m, and to keep  all the sale amount, ie the sale proceeds when they only paid out HKD 1.5m and entitled to receive a total of HKD 1,666,667 back, and even if there was to be Compensation at HKD 7,250 per day, that was no reason as to why there should not be any provision for the Zenia to be entitled to any balance of the sale amount since on D1’s case, she had contributed HKD 3m towards the purchase of the Culture Rafts and the Licence 4341.

216.It was D1’s case that HKD 1.7m transferred to him from the Digital Account on 9 May 2013[80] was the payment by Zenia to him for the sums under the Guarantee, and as that was not sufficient, on 13 May 2013, there was another HKD 11,667 transferred into his account by Zenia.  According to D1, the delay in repayment after 2 May 2013 was 6 days, and that the Compensation at HKD 7,250 per day, this would be HKD 43,500 and rounded up to HKD 45,000 and thus the total amount the “Investors” received back was HKD 1,666,667 plus HKD 45,000, totalling HKD 1,711,667.

217.As pointed out by Mr Brown, it seemed to make little sense that the “Investors” having received the return of their investment, not without difficulty, as the post-dated cheques were dishonoured and Zenia was late with the payments, then less than two weeks later, D1 then entered into the 21.05.13 Agreement with Zenia.  However, this time, notwithstanding that the investment was also HKD 1.5m, D1 did not go and view the Culture Raft/s and in fact, the details of the licence were not even stated in the 21.05.13 Agreement.

218.This was notwithstanding that this time, as mentioned earlier, D1 went to consult another firm of solicitors namely Messrs Yung, Yu, Yuen to have the agreement drafted by solicitors.  D1 had said he saw the solicitors the first time more or less around 20 May 2013 and so the whole transaction seemed to be rather rushed. 

219.Mr Cheung had argued that there was no incentive for D1 to involve his girlfriend or his childhood friend in a money lending scheme which might expose them to criminal sanctions.  However, it could equally be argued that if it was indeed an investment with HKD 500,000 quick guaranteed profit and with more than adequate security, why would D1 want to share it with Yeung and Ho.  During the trial, D1 had said that Zenia also knew Yeung and that Zenia also persuaded Yeung to participate.

220.Anyway, when asked during the trial why he asked Yeung and D1 to join, according to D1, Zenia suddenly mentioned that the investment was HKD 4.5m which was a big amount, and that he did not want to invest on his own, and that was why he invited Ho to join and to have a half share. It was clear that whether it was a loan or investment, simply, D1 did not wish to come up with all the funds on his own, even if he had the money.  As reflected in the Table, it was only those transactions of or over HKD 1.5m that Yeung and Ho were involved.  In any event, if it was D1’s intention to dress up the loan as an investment, the intention would be clearly to avoid criminal sanctions and thus, it would not have been his belief or intention to expose Yeung and Ho to criminal sanctions.

221.Mr Cheung also argued if HKD 1.5m paid to Zenia under the Guarantee was a loan, why was there any need to break it into 5 loans of short duration from April 2013 until January 2014, and that one single loan in April 2013 would be sufficient to serve the purpose with accrued interest to be paid periodically.  However, this was a question only Zenia could answer as it could be that it was Zenia who wanted to borrow for a short term only and further as seen in the Guarantee, apart from the interest, upon expiry of the term, the lenders would be entitled to the Compensation at a daily rate.  Mr Cheung further argued why Zenia would want to borrow from D1 at a higher interest rate since she had borrowed HKD 2.23m from D2 just one day before the Guarantee, ie on 8 April 2013, at no interest.  Again, this would be a question only Zenia could answer.  Further, as seen later, D2 had said Lam did not agree to lend Zenia more than HKD 2.23m.   

222.It was D1’s evidence during the trial that he had made loans to Zenia without charging her interests.  However, as seen in in the Table, the 07.10.11 promissory note only stated Zenia was to repay HKD 220,000 to D1, and there was no loan principal stated.  The loan from D1 personally to Zenia on 20 November 2014 of HKD 130,000 was for only 4 days and thereafter there was daily interest at the “highest rate” plus the mortgage of the DD 221 Property and in addition a pair of jade bangles as security.  Although D1 also mentioned one or two small amounts of loans to Zenia with no interest, there was no documentary evidence provided by him in respect thereof.

223.As Mr Cheung pointed out, the drafting of the investment agreement by D1 (if it was a loan) would be for his own protection, and he asked the question why D1 would want to disguise the loan as an investment if Zenia, as the borrower could always raise the usury and illegality point under the MLO to escape from her obligations to repay. However, this would be exactly the reason why D1 had sought the irrevocable powers of attorney of Licence 4341 and of the Subscription Agreement of DD 221 Property as security to enable him to enforce the security immediately upon default.  In any event, after he sought advice from Messrs Yung, Yu, Yuen, it could be seen in the YYY Template that the interest was stated to be 48% per annum or the maximum rate allowed under the law.  Further, disguising the Loan as an investment and notwithstanding the frequency of transactions, the “lender” would be stated to be an “investor”.

224.Mr Cheung also submitted that D1’s investments with Zenia in the Culture Rafts prior to the Guarantee also strongly supported his case that those were genuine investments, and in particular, Mr Cheung referred to the 31.10.12 Agreement.  However, first of all, the amount of investment of D1 was HKD 245,000 and Zenia’s was said to be “in same amount”, and therefore what was submitted by Mr Cheung that the ratio of 1/3 (D1) and 2/3 (Zenia) as in the Guarantee[81] was not correct, and further as seen in the Table, there were no details of the Culture Rafts stated in the 31.10.12 Agreement, and only a Chinese agreement was attached.  The completion date of the purchase of the Culture Raft under Licence 4442 was 27 December 2012, which was in fact the repayment date of the principal to D1, and the most that could be said of that agreement was the total amount of HKD 500,000 could be for the purchase of the Culture Raft.  There was no sale involved.  In fact, as seen later, the Culture Raft under Licence 4442 was used for security for the loan from Lam to Zenia through D2, as seen in the 08.04.13 Loan Receipt (defined later), which meant there was no sale by then.

225.Mr Cheung submitted that D2’s evidence that Zenia was desperate to sell a Culture Raft to his friend Lam, and that when that fell through, Zenia then initially sought a loan of HKD 3m from Lam, and that this was consistent with the term in the Guarantee pursuant to which Zenia was to provide HKD 3m for her share of the investment in the purchase and sale of Licence 4341.  There was in fact no sufficient evidence that Zenia did come up with HKD 3m for her share under the Guarantee to pay to Eric for the purchase of Licence 4341.  D1’s evidence was that he did not know whether she paid Eric or not.  Further, as said earlier, D1’s pleaded case was that Zenia’s share was only HKD 1.5m.  Thus, D1’s case was inconsistent.  There was also no evidence that the loan of HKD 2.23m from Lam on 8 April 2013 was in fact, Zenia’s share and used to pay Eric for the purchase of Licence 4341.  

226.Mr Cheung further argued that the identity and particulars of the Culture Rafts were identified in the Guarantee.  However, as seen earlier, the terms of the Guarantee were vague and unspecific and did not clearly state it was for the purchase and sale of the Culture Rafts and only “reference” was made to the Licence 4341.  Whether the return on the “investment” was described as “reward” and not “interest” was irrelevant was if the transaction was dressed up to be an investment, there would not be any mention of interest.  Even though the “Reward” or the rate of “Reward” for each transaction seemed to be different, this would not mean that they could not have been loans.  

227.That D1 then instructed Messrs Yung, Yu, Yuen to prepare and draft the 21.05.13 Agreement after the Guarantee was in my view to ensure that those so-called investment agreements would not fall foul of the law, and thus in the 21.05.13 Agreement and the subsequent 31.07.13 Agreement, the 19.11.13 Agreement and the 17.12.13 Agreement, there was a clause 11 entitling the “Investors” to charge interest at 48% pa or the maximum rate allowed under the law.  Further, the investment fund was expressed to be for the sole purpose of purchasing the Culture Rafts.  Thus instead of “Reward” in the Guarantee, in the 21.05.13 Agreement, it was expressed as “share of profit” and there was a guarantee that the Culture Rafts were to be sold on or before the “Repayment Date”, and “Compensation” at the daily rate in the Guarantee was expressed as interest. 

228.Having considered all the above, I have come to the conclusion that those investment agreements/guarantees were no more than loan agreements entered into between D1 (and/or others) and that D1 (and/or others) were providing short-term loans to Zenia whether on a revolving credit or otherwise, and they were not really in relation to any alleged investment fund for the venture of sale and purchase of Culture Raft/s.  In other words, I find that the Guarantee was in fact a loan agreement disguised as an investment and it was not a legitimate transaction.

H.4    Whether the Guarantee was an illegal transaction

229.The rate of interest under the Guarantee being approximately 175% was not disputed to exceed 60% per annum.  As stated in s 24(2) of the MLO, no agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of such an agreement or loan shall be enforceable.

230.As a result of s 24 of the MLO, the Guarantee would be unenforceable against Zenia and it was an illegal transaction.

H.5    Whether D1 was a bona fide recipient for value without notice

231.Mr Brown had referred the Court to DBS Bank (Hong Kong) Limited v Tian Wen Quan unrep, HCA 3228/2016, 12.10.17, in which Anthony Chan J had considered, in relation to a proprietary claim based on the cause of action of money had and received by a third party which does not require a guilty knowledge on the third party, the only two defences available to the proprietary claim namely, (i) bona fide purchaser and (ii) change of position[82].  In the case, the defendant had received funds traceable to the plaintiff as a result of a currency exchange transaction arranged by his friend, a Ms Li without knowledge of the fraud on the plaintiff.  The currency exchange transaction was an underground money exchange transaction to circumvent the exchange control of the Mainland China.  The funds were then used to purchase shares on behalf of Ms Li and the shares remained in the defendant’s account.  Anthony Chan J concluded that he could see “no answer to the illegality point, which would defeat [the defendant’s] Bona Fide Purchaser claim”[83].  

232.Mr Brown also referred the Court to Grupo Arbulu S.L. v City Apex Holdings Limited unrep, HCA 2390 of 2017 [2018] HKCFI 1351, 15.06.18, in which the defendant received traceable proceeds of part of the sums defrauded from the plaintiff and the decision was in relation to whether an injunction order obtained by the plaintiff should be discharged. DHCJ K Yeung, as he then was, had referred to Virgo: The Principles of the Law of Restitution (3^rd ed, 2015) in which, citing Lipkin Gorman (a firm) v Karpnale [1991] 2 AC 548, it is explained by the author at page 659, in the context of the defence of bona fide purchase for value without notice, that :

“The defendant cannot be considered to have provided value for the property if it was transferred pursuant to an illegal transaction.”

233.As pointed out by DHCJ K Yeung, the defendant’s counsel in the case had submitted that the illegality of the underground foreign exchange transaction was no bar to a finding that the defendant was a bona fide purchase for value without notice and there was no unjust enrichment and the defendant had a complete defence to the plaintiff’s claim.  As can be seen in the decision, there was expert evidence produced by the plaintiff to show that the underground foreign exchange transactions were illegal and thus the defence of bona fide purchase for value had to be viewed and considered in that light.  As further pointed out by the Judge, 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 purchase for value can be regarded as such, will no doubt have to be canvassed further during any trial in that action, but he considered that at that interlocutory stage, a good arguable case had been made out by the plaintiff[84].

234.In his decision, DHCJ K Yeung also referred to this Court’s decision in BR Cat International Co Ltd v Hong Kong Proof Import and Export Trading Co Limited & Others unrep, HCA 1023/2014, 22.09.17.  As pointed out by the then Deputy Judge, there was no expert evidence in that case before this Court on the illegal nature of the underground foreign exchange system in Mainland China and the issue of whether the illegality of the underground foreign exchange system would defeat the defence of a bona fide purchase for value was not in fact raised.

235.In any event, in the present case, we are not dealing with receipt of funds through the underground foreign exchange system.  As it is my earlier finding that the Guarantee was in effect a loan agreement and as the interest rate was excessive under s 24 of MLO, it was thus an illegal transaction.  I am of the view that this would prevent D1 from maintaining a defence of bona fide purchaser for value.

H.6    Whether there was a change of position

236.The change of position defence was not expressly pleaded by D1 and this was already pointed out by Lisa Wong J in her decision in relation to the 1^st Injunction Order.  Yet D1 failed to amend his defence.  In D1 Closing Submissions, Mr Cheung argued that although the change of position defence was not expressly pleaded, the material facts had been pleaded in that on the same day that D1 received the sum of HKD 1.7m from Digital, he transferred to Ho his entitlement of HKD 833,333 and on 13 May 2013, he transferred to Yeung her share of HKD 416,667. 

237.However, Mr Brown disagreed that material facts had been pleaded to support a change of position defence and he referred to there being no plea of how D1 changed position or the causal link between the funds received and the change of position. In this respect, he referred to  Ferrari North America Inc v Changhon International Entergy Co Limited and others [2019] HKCFI 2318, HCA 852/2017, unrep 25.09.19 in which Mimmie Chan J had stated as follows[85] :

“21. As the court held in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at p 580F-G, for a claim of change of position:

‘… the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress how whether that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should called upon to pay, because the expenditure might in any event had been incurred by him in the ordinary course of things. I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions.’

22. To establish a change of position defence, a defendant must show that as a result of the receipt of money, it has incurred “extraordinary expenditure”. As the editors of Goff & Jones: The Law of Unjust Enrichment (9^th Ed) observed at para 27-08:

‘This might appear to be a rule about the type of detriment that a defendant must have suffered, but in fact it is a rule about causation.  The defendant need not show that he spent money on something that other people might think unusual, nor that he spent in a way that he had never spent money before.  The test is whether he entered the transaction that he would not have entered but for his enrichment.’”

238.In the present case, that it was a joint investment by three investors, namely D1, Yeung and Ho was not really challenged and D1 had given evidence how the funds were paid to Zenia and the sum of HKD 1.7m received by him was received by him on behalf of 3 persons. However, there was no evidence from D1 as to why he would not be able to recover from Yeung and Ho the payments respectively received by them.  I am of the view that the lack of pleadings and the lack of evidence in this respect would prevent D1 to now rely on a change of position defence.

239.Further, in the DBS Bank case earlier mentioned, after considering the bona fide purchaser defence, Anthony Chan J had gone on to consider the change of position defence, and he had held that the defendant’s friend Ms Li had paid RMB 3 million into a Mainland account in return for the funds paid to the defendant, and this constituted a change of position that would defeat any bare proprietary claim based on money had and received.  Subsequently, by a decision dated 7 December 2017, the Judge granted leave to the defendant to appeal in relation to the issue whether in light of the illegality of the 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[86].  On 1 February 2018, the Court of Appeal allowed the defendant to proceed with the appeal based on that ground.  It is not clear what happened to the appeal.

240.At this stage, suffice to say, the burden was on D1 to satisfy this Court that the defence of change of position was available to D1 notwithstanding this Court’s finding that the Guarantee was a loan agreement with excessive interest rate and illegal under the MLO and he was not able to discharge the burden.

I.    Issue 5 – In respect of whether D2 was a bona fide purchaser without notice

241.D2 denied in his defence that the sum of HKD 500,000 received by him from Digital on 9 May 2013 was any part of proceeds of crime, and that it was D2’s pleaded case that the sum was a part repayment made by Zenia towards a loan of HKD 2,230,000 borrowed by Zenia from his friend a Mr Lam Wai Man (“Lam”) through D2.

242.It can be seen in D2’s bank statements that on 9 May 2013, after receipt of HKD 500,000 from Digital, on the same day D2 wrote a cheque dated 9 May 2013 for HKD 480,000 to Madam Wong^[87].

243.Although at the time of the opening of D2’s Account, it was stated in his account opening form on 6 November 2007[88] that he was not then employed, in his witness statement, he had said he had been working as a property agent for over 20 years in Sai Kung.  It was his evidence that he had worked since 1989 for Canaan Property Agency Limited and that since 2000, he had contributed to a mandatory provident fund run by HSBC.  It can be seen in the available statements of D2’s Account, he did maintain a mandatory provident fund at HSBC between 5 June 2013 and November 2016.

244.It was D2’s evidence in his witness statement that he had known Zenia for 20 odd years and that they were good friends and that he introduced Zenia to Lam to borrow a loan of HKD 2,230,000 from Lam.  At the trial, he said he introduced Zenia to Lam in January 2013, and that he had known Lam for about 8 years by January 2013. 

245.D2’s evidence during the trial was that in or about February 2013, Zenia had suggested to D2 to buy Culture Rafts allegedly owned by Zenia and the price was about HKD 2.3m, and D2 asked Lam whether he was interested, and although Lam had expressed interest initially, about a week later he turned it down.  D2 said that the failure in the proposed sale resulted in Zenia’s urgent need to raise funds and she was seeking a short term loan, she sought a loan of HKD 3m.  With D2’s assistance, Zenia was granted a loan of HKD 2,230,000 by Lam on 8 April 2013.  

246.D2 had produced a loan receipt in Chinese dated 8 April 2013 signed by Zenia with D2 as witness as evidence of the loan HKD 2,230,000 (“08.04.13 Loan Receipt”)[89].  D2 explained as he was authorised by Lam to lend on his behalf the sum to Zenia and that was why D2 signed as a witness on the 08.04.13 Loan Receipt.  According to D2, apart from this transaction, the previous transactions he had with Zenia was as a middle man for her (either as vendor or purchaser) in buying or selling real properties, and that his previous transactions with Lam was also as an agent in real property transactions.

247.As seen on the 08.04.13 Loan Receipt, Zenia had agreed to provide as security for the loan (i) her pre-completed DD221 Property and also (ii) two Fish Culture Licences numbers 4442 and 4359.  During the trial, D2 admitted that at the time of the signing of the 08.04.13 Loan Receipt, the DD 221 Property was still under construction, but he said Zenia had showed him a copy of the sale and purchase agreement.  D2 had said he was not sure whether Zenia provided a power of attorney for Lam to sell her entitlement/ interests in the property or in the two licences in case of default or not. 

248.According to D2, the amount of HKD 2,230,000 was transferred from Lam to D2 as follows:

(i)  by Lam’s personal cheque dated 8 April 2013 for HKD 230,000[90];

(ii)  by a cheque issued by Superior Motors Company Limited for HKD 1.5m[91];

(iii)  by Lam through his mother Wong Sim Luen (“Madam Wong”) of a transfer of HKD 500,000 from Madam Wong’s account at Bank of China into D2’s Hang Seng bank account[92].

249.D2 said he had no idea of the connection between Lam and Superior Motors Company Limited , but upon his receipt of the cheques and the transfer mentioned above from Lam, he had asked Zenia to sign on a copy of the two cheques and a copy of the BOC advice[93] and further an acknowledgment of the receipt of the loan amount[94] (“Acknowledgment”).  In the Acknowledgment, Zenia had also authorised D2 to handle and to transfer a sum of HKD 2 m on her behalf to other/s.

250.It was further D2’s evidence that upon receipt of the sum of HKD 2,230,000 and before releasing the same to Zenia, Zenia had issued a Standard Chartered Bank cheque in the amount of HKD 2,230,000 post-dated to 8 May 2013 in favour of Lam for repayment[95], and that the original copy of the cheque was kept by Lam.  D2 said out of the loan amount of HKD 2,230,000 he then handed over HKD 230,000 in cash to Zenia, and deposited HKD 2m by way of cashier order to the bank account and recipient nominated by Zenia.

251.During the trial, when asked by Mr Brown, D2 had maintained that both Lam and Zenia had wanted D2 to act as intermediary as they were unfamiliar to each other and that Lam insisted on the loan funds passing through D2 as D2 knew Zenia.

252.According to D2, on 9 May 2013, Zenia told him she would repay HKD 500,000 first and because she did not know Lam personally, she requested to transfer the money into D2’s Account.  D2 said he did not know the money was transferred from the HSBC Account held by Digital. Upon receipt of the sum of HKD 500,000 from Digital on 9 May 2013, with Lam’s consent, D2 said he kept HKD 20,000 as a repayment to himself as he had also previously lent Zenia money, and he that on the same day, he  issued a cheque in favour of Lam’s mother Madam Wong for HKD 480,000[96], and also transferred a sum of HKD 10,000 to his friend “Ester” because D2 was lending the money to her.

253.D2 had denied that his friend “Ester” was the same Ester Chan Hui Ying, who was a shareholder and director of L&D together with Zenia, as alleged by P.  D2 explained in his witness statement that his friend’s full name was Esther Chan Yuen Ling.  I do not find there was sufficient evidence that it was the same “Ester” who was the shareholder/director of L&D as suggested by P.

254.According to D2, he had lent money to Zenia 2 or 3 times totalling about HKD 200,000 long time in about 2000 and before she was declared bankrupt and that she did make some partial repayments of about HKD 100,000 before her bankruptcy, but there was still some HKD 100,000 odd outstanding.

255.In his witness statement, D2 had also set out a table of the sums which Zenia/Digital had transferred into D2’s Account[97], which according to D2, these sums transferred by Zenia or Digital were for repayments of what Zenia owed, and that after the repayment of HKD 500,000 from the HSBC Account held by Digital, she had continued to make repayments through Digital to Lam by transferring various sums to D2’s Account, as set out in the table.  However, it was also D2’s case that for each repayment, he had retained part of the amount before paying Lam the balance. 

256.Mr Brown had prepared a schedule of the payments by Zenia to D2 (whether direct or through Digital or another unverified account)[98] which showed that the total amounts received by D2 from Zenia was HKD 2,518,000, whereas the amounts D2 paid to Lam were a total of HKD 1,044,000, and to Wong was a total of HKD 993,000, and that D2 had kept HKD481,000 (which included a sum of HKD 50,000 on 20 November 2013 which D2 said he was not sure whether it was paid over to Lam or not).

257.During the trial, D2 had said that when Zenia repaid only HKD500,000 on 9 May 2013, Lam was quite angry and they all got together to discuss, and Zenia had offered to pay Lam interest which was later agreed by Lam at approximately 30% per annum, and that Lam then told D2 that he would pay D2 20% out of the 30% interest and after Zenia had fully repaid, then he and D2 could then work out the account and make further adjustment, and that D2 could keep some money for the HKD 100,000 odd which Zenia owed to him.  D2 had also said that later there had indeed been an adjustment between him and Lam and that he had paid Lam maybe HKD 200,000 in cash in 2 tranches to balance the account between them.

258.What D2 said was rather confusing, since as he had retained HKD 481,000, this would mean that what he alleged to be the outstanding amount from Zenia of HKD 100,000 odd should have been fully repaid, and it was not clear why D2 said in his witness statement that as of that date, Zenia still owed him money.  When D2 was asked, he then said Zenia had asked him for further loans later. 

259.In his witness statement, D2 had disclosed that there was in fact a 2^nd loan of HKD 990,000 which Zenia borrowed from Lam through D2 on 28 May 2013 and he had produced a loan receipt signed by Zenia and by D2 as witness (“28.05.14 Loan Receipt”), and according to D2, Lam agreed to the 2^nd loan on condition that HKD 240,000 out of the loan amount was to be used for repayment of the 1^st loan. The balance of the loan amount of HKD 750,000 was to be paid by D2 transferring HKD 550,000 to Zenia’s account and later Lam would give D2 HKD 200,000 for him to hand over to Zenia.  For this loan, as security, Zenia had provided two Fish Culture Licences of numbers 4201 and 4349, and Zenia also provided a post-dated cheque of 30 June 2014[99] as seen in the 28.05.14 Loan Receipt[100].  Copies of the licences showed that licence no 4201 dated 16 September 2013 was held by Sonho and licence no 4349 dated 30 January 2014 was held by a company called Harrison Limited.

260.However, D2 had originally said at the trial that the 1^st loan of HKD 2,230,000, which was originally due on 8 May 2013, was fully repaid in April 2014, and that the due date was changed because of the interest agreement.  This would not be consistent with his evidence in his witness statement that out of the 2^nd loan of HKD 990,000, a sum of HKD 240,000 was deducted to pay the remaining outstanding amount of the 1^st loan.  When asked, D2 then said that HKD 240,000 was still outstanding at the time of the 2^nd loan.

261.It was D2’s evidence that the interest for the 2^nd loan was the same as the 1^st loan, ie 30% per annum, but there was nothing to reflect this in the 28.05.14 Loan Receipt.  The post – dated cheque given by Zenia was for HKD 990,000 and there appeared to be no interest added.

262.D2 did not mention anything in relation to the repayment of the 2^nd loan and D2 had said up to the date of his witness statement (17 January 2018) Zenia owed money to both him and Lam. However, it was D2’s evidence at the trial that Lam had been paid back in full for the 2^nd loan and that the original Fish Culture Licences were returned to Zenia, and it would appear from his evidence during the trial that all this would have taken place just before Zenia died on 1 May 2018, although it was not made quite clear.

263.D2 did not call either Lam or Madam Wong to give evidence on his behalf.  Although D2 had said Lam was a good friend, and that he had asked Lam to be a witness, he said Lam was unable to do so.  There was however no doubt that Lam and/or Madam Wong existed since their names were reflected in some of the bank cheques issued by D2[101]. 

264.It was submitted on behalf of P that D2 did not really give any “value” to receive the sum of HKD 500,000 in that the loan provided to Zenia was from Lam and/or Madam Wong, in that the loan did not come from D2’s own funds.  

265.In my view, the transaction has to be looked at as a whole.  First, I find more probable than not that there was a loan transaction of which HKD 500,000 was part of Zenia’s repayment towards a loan from Lam/Madam Wong; Second, I accept D2’s evidence that the loan was advanced by Lam in the manner described earlier; Third, I find that D2 was probably the intermediary between the “lender” and the “borrower” and he acted as a conduit, and although it was D2’s evidence that with the consent of Lam, he had deducted HKD 20,000 as a “repayment” to him for previous loans Zenia owed to D2, I find it more probable than not that the sum was a fee payable to the intermediary; Fourth, the sum of HKD 500,000 was received by D2 on behalf of Lam and/or Madam Wong; and Fifth, out of HKD 500,000, on the same day HKD 480,000 was immediately transferred to Madam Wong.

266.Mr Brown pointed out that although D2 was not himself lending any money to Zenia, he had received HKD 481,000 from Zenia, and that he also received HKD 65,000 from Lam for which no reasons were put forward at all.  Even if there had been unrepaid previous loans from D2 and Zenia, on D2’s evidence, he had received more than the previous outstanding loans.  I accept D2’s explanations as to why he had retained HKD 481,000 out of the total repayments by Zenia to Lam did not seem credible in that although Zenia had repaid HKD 2,518,000 by 9 April 2014, Lam received only HKD 1,044,000 and Madam Wong received only HKD 993,000, totalling HKD 2,037,000, and leaving an outstanding amount of HKD 193,000 out of the 1^st loan, and yet HKD 481,000 (and possibly an addition HKD 65,000) was received by D2. 

267.The sum of HKD 481,000 was about 21.5% of the principal of the 1^st loan of HKD 2,230,000.  There was no suggestion that the sum of HKD 481,000 was interest of the loan principal, but even if it was, it was not in excess of the statutory limit in the MLO.  In any event, I find there was no sufficient evidence that it was retained by D2 without the authorisation of Lam (and/or Wong), or Zenia.  Notwithstanding Mr Brown’s submissions, I am not satisfied that the retention of the amount of HKD 481,000 would be sufficient to say that D2 was not acting bona vide towards Lam or Zenia.

268.I do not find there was sufficient evidence that the 08.04.13 Loan Receipt was not legitimate transaction or that the loan was illegal.  Having considered all the above, I am of the view that D2 would be able to discharge the burden on him that he was a bona fide recipient for value of the sum of HKD500,000.

J.    Conclusion

269.To summaries, as found earlier, I am of the view that there was no sufficient evidence that there was fraud on the part of Zenia in entering into the Memorandum with P in respect of the Development Scheme, or that P was a victim of a fraud committed by Zenia.  I also do not find that there was sufficient evidence that Zenia had held the sum of HKD 2.8m paid to her by P on trust for P.  

270.In the above circumstances, P fails in his restitution claims and/or proprietary claims, based on trust, money had and received and/or unjust enrichment against D1 and D2.

271.In the event that P were able to establish that he was a victim of fraud and/or Zenia held the sum of HKD 2.8m on trust for him, then, as found earlier, it is my finding that D1’s defence of a bona fide purchaser or recipient for value without notice would fail.  As for D2, as said earlier, I find that he would be able to prove that he was a bona fide purchaser or recipient for value.   

272.In light of the above, I dismiss P’s claims against D1 and D2.

273.As for costs, as against D1, even though P has not succeeded in his claim against D1, D1 was not able to satisfy this Court that he was a bona fide purchaser/recipient for value without notice, and further I find he was involved in an illegal transaction.  I am of the view that there should be no order as to costs as between P and D1.

274.As between P and D2, D2 was acting in person throughout.  I make no order as to costs as between P and D2.

275.The above costs orders are orders nisi, which shall be final in 21 days. 

Mr Toby Brown, instructed by Payne Clermont Velasco, for the plaintiff

Mr Lawrence Cheung, instructed by Leung Tam & Wong, for the 1^st defendant

The 2^nd defendant appeared in person