Idemitsu Chemicals (Hong Kong) Co. Ltd v. Brilliant One Shipping Co Ltd

HCA 148/2020

[2021] HKCFI 1175

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 148 OF 2020

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BETWEEN

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Before:  Deputy High Court Judge MK Liu in Chambers

Date of Hearing:  26 April 2021

Date of Decision:  26 April 2021

Date of Reasons for Decision:  28 April 2021

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REASONS FOR DECISION

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1.By a summons filed on 7 January 2021 (“the Summons”), the 10^th defendant (“D10”) made an application (“the Discharge Application”) for an order to discharge an injunction order (“the Injunction”). The substantive hearing of the Discharge Application took place before me on 26 April 2021. At the end of the hearing, I dismissed the Discharge Application with costs to the plaintiff (“P”) forthwith. These are my reasons for the decision.

BACKGROUND

2.On 6 February 2020, P commenced these proceedings and obtained an ex parte injunction against the 1^st and the 2^nd defendants (“D1” and “D2”).  On 14 April 2020, P joined the 3^rd – 23^rd defendants in these proceedings and obtained an ex parte injunction (which is the Injunction targeted by the Discharge Application) against the 3^rd – 23^rd defendants until 24 April 2020.  On 24 April 2020, Coleman J continued the Injunction until a further order made by the court.  On 7 January 2021, D10 took out the Summons.

3.As between P and D10, there is no dispute that P is a victim of a fraud.  According to P, the circumstances of the fraud are as follows:

(1)  P is a wholly owned subsidiary of Idemitsu Kosan Co Ltd (“Idemitsu HQ”), a public listed company on the Japanese Stock Exchange.  Mr Takagi was P’s managing director from July 2019 to March 2020.

(2)  On 15 January 2020, one or more unidentified person(s) (“the Fraudster”) telephoned Mr Takagi and fraudulently claimed to be Mr Shunichi Kito (“Mr Kito”), the President, Representative Director and Chief Executive Officer of Idemitsu HQ.  In the phone call, the Fraudster instructed Mr Takagi to work with a Mr Martin Zelner (“Mr Zelner”) to make payment for a merger and acquisition transaction under Idemitsu HQ on behalf of Idemitsu HQ.  The Fraudster said that Mr Zelner was the lawyer handling the merger and acquisition transaction. The Fraudster then asked Mr. Takagi to send an email to an email account (“the Fraudster’s Email Account”) to request for further information on payment.

(3)  On 15 January 2020, the Fraudster impersonating as Mr Zelner sent Mr Takagi a document titled “Full Authority to Act/Ryozo Takagi” with a signature purportedly signed by Mr Kito, which purportedly stated that Mr Kito authorized Mr Takagi to act on behalf of Idemitsu HQ in all manners relating to application for authorization, including signing, activation and processing to payment.  Mr Takagi was then told to, and Mr Takagi did transfer US$2,978,000 to the bank account of D1 and US$2,990,000 to a bank account (“Zhigang Account”) of D2 maintained with Bank of China (Hong Kong) Limited (“BOCHK”).

(4)  On 17 and 20 January 2020, the Fraudster impersonating as Mr Kito (on phone) and Mr Zelner (via the Fraudster’s Email Account) instructed Mr Takagi to make further payments.  Mr Takagi did transfer US$3,977,000 to the Zhigang Account in the morning of 17 January 2020, and US$2,226,000 and US$3,978,000 to the Zhigang Account on 20 January 2020.

(5)  On 3 February 2020, the Fraudster impersonating as Mr Kito told Mr Takagi on phone that Idemitsu HQ would send US$100 million to P, and instructed Mr Takagi to negotiate overdraft facilities with the bank to enable P to make further payments.  The Fraudster impersonating as Mr Zelner then used the Fraudster’s Email Account to send a document titled “Fund Transfer /Ryozo Takagi” purportedly signed by Mr Kito dated 3 February 2020, which stated that Idemitsu HQ would transfer to P of US$100 million on 6 February 2020 (“the Forged Statement”).  After Mr Takagi submitted the Forged Statement to the bank, the Forged Statement was subsequently forwarded to Idemitsu HQ.  It was around this point in time that the fraud perpetrated on P was discovered.  Idemitsu HQ confirmed that Mr Kito did not sign the Forged Statement, was not handling any merger and acquisition transaction, and did not give any instructions to Mr Takagi in the last few weeks.

(6)  On 5 February 2020, the matter was reported to the Hong Kong Police Force.  On 6 February 2020, P commenced these proceedings against D1 and D2.

4.P was granted a bankers’ books order against BOCHK on 6 February 2020.  With the benefit of the bankers’ books order, P ascertained that US$300,000 was transferred from the Zhigang Account to a bank account of D10 (“D10’s Account”) maintained with OCBC Wing Hang Bank Limited (“OCBC”) at 16:22 on 17 January 2020.  As said in the above, P had transferred US$3,977,000 to the Zhigang Account in the morning on 17 January 2020.

5.D10 admitted that it received a sum of US$300,000 (“the Sum”) at D10’s Account.  However, D10’s case is that it is a bona fide purchaser without actual or constructive knowledge of the fraud. D10 is also relying upon the defence of change of position.  D10 is saying that it received the Sum from the Zhigang Account on 17 January 2020 as part of the sales proceeds of a vessel PL Hau Laam (“the Vessel”) to a company called King Chuen International Investments Limited (“King Chuen”).  It is asserted that the sale of the Vessel was made pursuant to a Memorandum of Agreement dated 7 January 2020 purportedly entered into between D10 and King Chuen (the Sale and Purchase Agreement, “the SPA”).

6.P’s position is that the Injunction should be continued as a Mareva injunction.  P says that according to the bank statement of D10, after D10 received the Sum on 20 January 2020, most of the funds in D10’s Account were withdrawn, leaving a balance of US$24,063.16 on 31 January 2020.  As such, P is not seeking to justify the continuation of the Injunction on proprietary grounds.  However, D10 still has another vessel called PL Yui Laam, funds in D10’s Account, and some funds in two other bank accounts.

THE PRINCIPLES

7.The principles concerning Mareva injunction are not in dispute.  In order to have a Mareva Injunction, the plaintiff has to demonstrate:[1]

(1)  That it has a good arguable case on a substantive claim which the court has jurisdiction.

(2)  There are assets within the jurisdiction.

(3)  There is a real risk of dissipation of assets which would render the plaintiff’s judgment to no effect.

(4)  That the balance of convenience is in favour of granting the injunction.

(5)  The plaintiff has to comply with the strict duty of full and frank disclosure.

8.Mr Austin Yiu, counsel for D10, submits that the Injunction should be discharged by reason of the following:

(1)  P has failed to show a good arguable case.

(2)  The balance of convenience is in favour of discharge of the Injunction.

(3)  The Injunction should be discharged by reason of material non-disclosure by P at the ex parte stage.

9.With respect, for the reasons set out below, I am of the view that none of these grounds has been made out.

GOOD ARGUABLE CASE

10.The true meaning of “good arguable case” in the context of a Mareva injunction has been clearly set out by DHCJ Eva Sit SC recently in Natural Dairy (NZ) Holdings Ltd (in provisional liquidation) v Chen Keen and Others^[2].  In that case, the learned judge said:

“80. The threshold of “a good arguable case” is much higher than “a serious issue to be tried” under the American Cyanamid principles. While the plaintiff need not go so far as to persuade the court that it is likely to win, it needs to show a case which is more than barely capable of serious argument, albeit not necessarily one that the judge believes to have a better than 50% chance of success. The existence of a good arguable defence does not necessarily negate a good arguable case ……”

11.Mr Yiu submits that the burden of proof is on P and the sole issue is whether P can prove that D10 was not a bona fide purchaser for value or had actual or constructive knowledge of the fraud.  With respect, as submitted by Mr Leon Ho, counsel for P, this has over-simplified the matter.  Where a defendant raises a defence of bona fide purchaser for value without notice or defence of change of position, the plaintiff will unlikely have any personal knowledge on the purported defence.  These are matters known to the defendant only.  The court can only look at the defendant’s version of events and form a broad-brush view as to its credibility based on inherent probabilities and whether it is supported by the contemporaneous materials which have been (or which should have been) disclosed by the defendant.[3]

12.The pleaded defence of D10 is that prior to the execution of the SPA, D10 was the legal and beneficial owner of the Vessel, and it assigned the legal and beneficial interest of the Vessel to King Chuen when accepting the Sum without any notice of impropriety.

13.Based upon the evidence before me, it is doubtful whether D10 received the Sum as a bona fide purchaser without notice of the fraud.  It is also doubtful whether D10 may rely upon change of position as a defence.

The purported business of D10

14.D10 was incorporated on 5 August 2019, around 5.5 months before it received the Sum.  Mr Yau Kin (“Mr Yau”) was and is the sole director who held 9,999 out of 10,000 shares of D10.  The other shareholder of D10 is a company limited, the name of which suggests that it is a nominee.

15.D10 applied to OCBC to open a bank account, ie D10’s Account on, on 4 October 2019.  Mr Yau signed the account opening form himself.  As per the account opening form that:

(1)  D10 offered the service of “Frozen Meat Trading”;

(2)  the source of funds was come from the business owner;

(3)  the anticipated number of transactions and turnover per year would be 200 transactions and HK$50,000,000 respectively;

(4)  Mr Yau claimed to be the 99% beneficial owner of D10; and

(5)  Mr Yau’s residential address and correspondence address are the same, which is a unit in a public rental housing estate (“Yau’s Address”). 

16.Mr Yau was 32 years old when D10 was incorporated.  Since Mr Yau is living in a public rental housing, his income and wealth should not be substantial.  As Mr Yau claims to be the 99% beneficial owner of D10 and the source of funds of D10 is from Mr Yau, D10 cannot be more resourceful than Mr Yau, especially when D10 was only incorporated on 5 August 2019.

17.If D10 runs a legitimate business, D10 should have prepared at least the following documents:

(1)  Audited financial statements of D10;

(2)  Tax returns and/or other financial documents submitted to the Inland Revenue Department;

(3)  Salary slips, employer’s return and mandatory provident fund records, applications to the Employment Support Scheme showing that D10 has real employees[4];

(4)  Sales records evidencing that D10 has real business.

18.None of the above has been produced by D10. There is no other document produced by D10 showing that D10 has a real business.  In my view, it is doubtful whether D10 is a company having real business.

Vessels purportedly owned by D10

19.Mr Yau claims that he has worked as a manager of the logistics department of Po Lun Group, the parent company of Po Lun Logistics Company Limited (“PLL”) since 2016, until he pursued his own business in August 2019, ie D10.  According to a salary slip of Po Lun Shipping (HK) Company Limited (“Po Lun Shipping”), Mr Yau’s monthly salary was HK$60,000.

20.On 10 August 2019, D10 purportedly purchased the Vessel from PLL at a consideration of US$1 million.  Also on the same day, D10 purportedly purchased another second hand container vessel, ie PL Yui Laam, from Po Lun Shipping at a consideration of US$3 million.  Therefore, according to D10’s case, D10 should have two vessels, ie the Vessel and PL Yui Laam, since August 2019, and D10 would still have one vessel, ie PL Yui Laam after the purported sale of the Vessel.

21.Initially, Mr Yau claimed that “at all material times”, D10 “is in the charge of a fleet of one cargo vessel responsible for shipping 1900 containers on average each month”[5].  However, Mr Yau later changed his evidence and said[6]:

“…… since [D10] incorporated in August 2019, never did it ever reach shipping 1900 containers on average each month due to the sluggish economy in the last quarter in 2019, and hence PL Hau Laam was sold in January 2020. At the time of filing of my first Affirmation on 16th June 2020, PL Hau Laam was already sold, and the one cargo vessel was meant to be PL Yui Laam. One cargo vessel could at most be responsible for 1,900 containers on average each month, however [D10] had never reached 1,900 containers ever since its incorporation due to the deteriorated economy ever since the global pandemic in January 2020.”

22.As said in the above, D10 claims to have purchased the Vessel and PL Yui Laam with a total consideration of US$4 million on 10 August 2019.  There is no satisfactory evidence explaining how D10 could have afforded such purchase.

(1)  As to the Vessel, Mr Yau claimed that due to his good relationship with PLL, D10 could repay the purchase price in un-fixed number and un-fixed amount of instalments after delivery of the Vessel.

(2)  However, as to how the purchase of PL Yui Laam (involving US$3 million) was done by D10, Mr Yau is silent on this point.  According to the purported Memorandum of Agreement concerning PL Yui Laam between Po Lun Shipping as the seller and D10 as the buyer dated 10 August 2019, D10 was required to pay a 10% deposit, ie US$300,000, within 3 days after the signing of the agreement, and to pay the remaining 90% balance, ie US$2.7 million, not later than one banking day prior to the expected day of delivery of PL Yui Laam.  It is unknown how D10 could purchase PL Yui Laam, especially when D10’s Account was only opened on 4 October 2019.

23.As rightly pointed out by Mr Ho, if the transactions to sell the Vessel and PL Yui Laam to D10 were genuine and arms-length dealings, then D10 would have the financial obligation of US$4 million.  For the reasons set out below, there is no evidence showing that D10 has any real revenue generating activity.  Even if it is assumed that D10 can take out loans, since Mr Yau’s monthly salary would only be HK$60,000 and D10’s funds would be from Mr Yau, D10 would need over 40 years to repay the principal of US$4 million.  D10 would also need to repay the interest accrued.  Taking all these into account, it is unlikely that there would be a lender willing to provide such loans to Mr Yau or D10 in the commercial world.

Any real revenue generating activity by D10?

24.According to Mr Yau:

(1)  He left Po Lun Group’s employment to pursue his own business in August 2019.

(2)  D10 “carried on the business of shipping and carriage of goods in Asia”, “is a company with good connections with the shipping industry”.[7]

(3)  D10 also paid (or had the obligation to pay) the US$4 million for the purpose of purchasing the Vessel and PL Yui Laam.

25.In accordance with common and commercial sense, after purchasing the Vessel and PL Yui Laam, Mr Yau should have plans to generate revenue with the Vessel and PL Yui Laam as soon as possible.

26.As pointed out by P, it is doubtful whether D10 has a real business.

(1)  D10 claimed that it had to pay salary to a few employees who were purportedly employed in 2014 and 2018, ie long before the incorporation of D10.  However, none of the usual documents that an employer is expected to prepare[8] has been produced by D10.  Mr Yau then changed his evidence and said that the employees were from Po Lun Group and D10 “utilized” them.  Mr Fung, a “marine consultant of Po Lun Group and all its subsidiary companies” also assisted in D10’s business as a marine consultant.  Thus, there was not a single person employed by D10.[9]

(2)  D10 has not adduced any documentary evidence showing how D10 derived profits from its purported business.  None of the usual documentary evidence that a real business entity should prepare for record and tax purposes has been disclosed by D10.[10]

(3)  Mr Yau told OCBC that the business of D10 was frozen meat trading, not transporting frozen meat.  It is not known how the vessels owned by D10 can be used to conduct D10’s business.

D10’s purported change of plan to sell the Vessel

27.According to Mr Yau, “[a]fter purchasing the Vessel from PLL, the market and economical conditions deteriorated rapidly worldwide and it was foreseen no significant improvement would occur in the near future.”[11]. Therefore, D10 “approached various potential buyers in the hopes of selling the Vessel since December 2019”[12], including King Chuen[13].  Mr Yau emphasized that “due to the deteriorating economy worldwide and a global slowdown in shipping operations combined with the large expenditures involved in maintaining the Vessel and its crew, I had no other alternatives but to sell [the Vessel]”[14].

28.However, Covid-19 only hit Hong Kong in late January 2020 and became a pandemic worldwide in the first quarter in 2020.  Mr Yau’s decision to sell the Vessel was made in December 2019.  There is no explanation of what events that took place after August but before December 2019 that might cause any rapid deterioration of economic condition worldwide.

King Chuen, the purported purchaser of the Vessel

29.King Chuen was incorporated on 27 December 2019. King Chuen’s registered office is in an industrial building (“the Industrial Building”) in San Po Kwong (“King Chuen’s Address”).  The sole shareholder of King Chuen was and is Asia Secretaries Limited.  Shum Kam Wah was the first sole director of King Chuen.  On 28 December 2019, 黃進龍 (“Huang”) replaced Shum Kam Wah and became the sole director of King Chuen.  In this connection, Mr Yau said there was a staff of King Chuen called Huang Jin Long[15].

30.P has produced evidence showing the following:

(1)  According to the records filed with the Companies Registry, Asia Secretaries Limited is a licensee of trust or company service provider.  Asia Secretaries Limited is probably a company providing company secretarial services.

(2)  On 23 July 2020, P’s investigator went to the Industrial Building to verify King Chuen’s Address.  However, it is found that King Chuen in fact cannot be contacted at the King Chuen Address.

31.I agree with Mr Ho that Mr Yau’s description of King Chuen and Huang, to say the least, is misleading:

(1)  Mr Yau claimed that he knew of King Chuen by way of a previous transaction of sale and purchase of shipping vessels via the business of PLL and Po Lun Group, and that PLL has previously sold a vessel to one of King Chuen’s substantial shareholder[16]. However, King Chuen was incorporated on 27 December 2019, and only had one shareholder, Asia Secretaries Limited.  It is wholly implausible that PLL sold a vessel to a company providing company secretarial services.

(2)  Mr Yau claimed that he knew of the existence of King Chuen and maintained friendly relations with King Chuen[17]. As King Chuen was incorporated on 27 December 2019, it is difficult to see how Mr Yau could have known of the existence of King Chuen, let alone maintain friendly relations with King Chuen.

(3)  In or about December 2019, Mr Yau contacted King Chuen at its Hong Kong office via telephone.  A Mr Fong said King Chuen would revert, and did so on or about 12 or 13 January 2020[18]. However, King Chuen in fact could not be contacted at King Chueng’s Address. At the very least, there could be no Hong Kong office of King Chuen before it was incorporated.

Payments under the SPA

32.According to Mr Yau, King Chuen’s business and staff are substantially based in various cities in Mainland China[19]. It is claimed that Huang was living in Shantou.  Before the signing of the SPA, Mr Yau was told by Huang that King Chuen would be responsible for remitting funds from the Mainland for the purchase of the Vessel.  Mr Yau then said that[20]:

“24. Based on my own knowledge of dealing with Chinese companies and traders and by way of Mr. Huang informing me that King Chuen intends to remit the purchase price from Mainland China, I am aware that the transaction would be subject to the limitation of capital controls and necessitate the involvement of middlemen. Since the amount of US dollars a Chinese company or trader can freely acquire each year by exchanging RMB is likely insufficient for business needs, as such, when dealing with Chinese companies or traders, one often sees their utilizing of the services of remittance and currency exchange agents to pay and remit funds from China to Hong Kong. Therefore, it was known to [D10] that in paying for the Vessel, the procedure involved would have King Chuen pay RMB to these middlemen remittance and currency exchange agents in Mainland China and they would then arrange for US Dollars to be paid into [D10]’s bank account in Hong Kong.” (Emphasis added)

33.After the Injunction was granted, in its Defence, D10 claimed that it made enquiries with King Chuen and confirmed the following:

“8.22.1 Due to capital controls in the PRC, the amount of US dollars a Chinese company or trader can freely acquire each year by exchanging RMB is insufficient for business needs. As King Chuen did not have enough funds in Hong Kong, King Chuen had to arrange remittance of the funds from Mainland China to Hong Kong through middlemen.

8.22.2 To do so, King Chuen had to utilize the services of remittance and currency exchange agents to pay and remit the Purchase Price and Replenishment Costs from China to Hong Kong.

8.22.3 King Chuen does not have any direct business dealings with the 2nd Defendant. King Chuen had deposited RMB into the agent’s nominated account and that consequentially, USD will be deposited into the OCBC Bank Account in accordance with their agreed exchange rate.” (Emphasis added)

34.Both in Mr. Yua’s affirmation and in D10’s pleading, it has been admitted that the payment by King Chuen to D10 was effected through middlemen because it was necessary to do so to circumvent the capital controls in Mainland China.

35.P has adduced expert evidence from Mr Ma Chen (“Mr Ma”), a Mainland lawyer, on the legal implications in the use of middlemen agents to facilitate currency exchange under Mainland Chinese law.  Mr Ma’s opinion is that:

(1)  The conversion of RMB into US dollars and the remittance of the Sum to D10’s Account are illegal under the Mainland law because D10 did not conduct such foreign exchange transactions through an authorized financial institution holding necessary financial permits in Mainland China.

(2)  Pursuant to Article 24 of the PRC Foreign Exchange Regulations, a company in the Mainland wishing to purchase foreign exchange and remit that to Hong Kong must conduct such transaction through one of such authorized financial institutions.

(3)  Article 45 of the PRC Foreign Exchange Regulations prohibits, inter alia, “trading of foreign exchange in a disguised manner” (變相買賣外匯).  In particular, the Supreme People’s Court and the Supreme People’s Procuratorate issued an interpretation of Article 45 of the PRC Foreign Exchange Regulations, and stated the following:

“資金跨國（境）兌付是一種典型的變相買賣外匯行為。跨國(境)兌付型地下錢莊，不法分子與境外人員，企業，機構相勾結，或利用開立在境外的銀行賬戶，協助他人進行跨境匯款、轉移資金活動。這類地下錢莊又被稱為「對敲型」地下錢莊，即資金在境內實行單向循環，沒有發生物理流動，通常以對賬的形式來實現「兩地平衡」。”

(4)  King Chuen’s affiliate exchanged foreign currency by transferring RMB into a bank account of an underground bank in the Mainland (“the Underground Agent”), which in turn caused the Sum to be delivered to D10’s Account as designated by King Chuen.  This constituted illegal trading of foreign currency in a disguised manner, and therefore contravened Article 45 of the PRC Foreign Exchange Regulations.

(5)  King Chuen, King Chuen’s affiliate (the entity that transferred RMB to the Underground Agent), the Underground Agent, D2 (the entity responsible for transferring the Sum to D10) and D10 are all participants in the illegal trading of foreign exchange in a disguised manner. Therefore, all of them are violators of the PRC Foreign Exchange Regulations and are subject to administrative penalties.

(6)  The foreign exchange transactions were carried out pursuant to an underlying agreement involving King Chuen and the Underground Agent.  Pursuant to Article 52 of the PRC Contract Law, such agreement is void because of illegality.  Pursuant to Articles 56 and 58 of the PRC Contract Law, a void agreement is void ab initio and any funds paid should be returned.

Good arguable case shown

36.For the reasons set out in the above, the veracity of D10’s case is in doubt.  I am of the view that P has a real prospect of success in obtaining a judgment rejecting D10’s case at the trial.

37.Importantly, Mr Yau admitted that D10 was fully aware that any funds used to purportedly purchase the Vessels, including the Sum, were channelled through the underground banking system.  For this reason alone, the defences of bona fide purchaser for value without notice and change of position would not be open to D.  The case on the point is DBS Bank (Hong Kong) Ltd v Pan Jing[21], a decision by DHCJ Blair.  In that case:

(1)  The plaintiff was a victim of fraud, and substantial amount of funds went to various second-level recipients. The defendant, who had bank accounts in the Mainland and in Hong Kong, transferred RMB 1,025,000 to his friend’s bank account in the Mainland.  In return, his friend arranged USD 150,000 to be transferred to the defendant’s bank account in Hong Kong.  It turns out that the USD came from the primary recipient of the fraud.  The defendant raised the defence of bona fide purchaser and the defence of change of position.

(2)  The learned judge considered the expert opinion of Mr Ma (who also gave the same opinion in this case) and held that the defendant’s exchange transaction breached the Mainland law, rendered him liable to an administrative penalty, albeit none has been imposed.  The plaintiff contended that the defendant cannot be considered to have provided value for the currency because the exchange transaction was illegal, alternatively that the illegality of the exchange transaction itself goes to negative good faith on the defendant’s part.  The learned judge agreed.  The learned judge held that it is not credible to suppose that the defendant, an experienced business person, did not know that the foreign currency exchange would be illegal.  Accordingly, the defence of bona fide purchaser for value without notice failed.

(3)  As to the defence of change of position, the learned judge referred to the proposition in Barros Mattos Junior v General Securities & Finance Ltd[22] that “the court refused to allow a change of position defence where the relevant acts were illegal”[23]. In Barros Mattos Junior, Laddie J held at [43] that:

“There is no room for the exercise of any discretion by the court in favour of one party or the other. If the recipient’s actions of changing position are treated here as illegal, the court cannot take them into account. The recipient cannot put up a tainted claim to retention against the victim’s untainted claim for restitution. It may be, as Mr Briggs suggests, that in some cases the illegality will be so minor as to be ignored on the de minimis principles. This is not such a case.”

(4)  The learned judge held that the result would be justified on the basis of public policy considerations regarding breach of exchange control regulations[24].

38.Mr Yiu, relying upon some earlier cases in Hong Kong and Patel v Mirza[25], submits that a more flexible approach should be applied when illegality is involved.  With respect, as submitted by Mr Ho, I am unable to accept this approach, for this court is bound to apply the approach as set out in Tinsley v Milligan[26]. As said by Chow J in Arrow ECS Norway AS v M Yang Trading Ltd & Ors[27]:

“26. There have been some attempts to argue that the decision of Laddie J in Barros Mattos Junior is wrong (see, for example, Kathleen Margaret O’Neil v Faye Gale [2013] EWCA Civ 1554, at paras 26 and 27; DBS (Hong Kong) Limited v Tian Wen Quan [2017] HKCU 3191, HCA 3228/2016, 7 December 2017). I have not, however, been referred to any case authority which holds that the decision of Laddie J is wrong.

27. Similar to the argument advanced on behalf of the defendants in Barros Mattos Junior, Ms Lee argues that the effect of illegality on the defence of change of position is ‘subject to unsettled development at this stage’, and that the said decision of Laddie J is based on Tinsley v Milligan but that has effectively been overruled by the UK Supreme Court in Patel v Mirza [2017] AC 467.

28. I accept that the correctness of the decision in Tinsley v Milligan may well be open to review in view of Patel v Mirza, but such review cannot be undertaken by the Court of First Instance. This is because in Kan Wai Chung v Hau Wun Fai [2016] 5 HKC 585, Cheung JA (with whom Yeung VP and Kwan JA agreed) said at para 8.7 that ‘this Court [ie, the Court of Appeal] is bound by the decision of the Court of Appeal which adopted the majority view of Tinsley’, and referred to the observation of Tang VP (as he then was) in Loyal Luck Trading Ltd v Tam Chun Wah [2008] 4 HKLRD 681, at para 48, that the potential conflict between Tinsley v Milligan and Nelson v Nelson could only be resolved by the Court of Final Appeal. If the Court of Appeal is bound to apply Tinsley v Milligan, so must the Court of First Instance.” (Emphasis added)

29. In the circumstances, I consider that I am bound to accept Tinsley v Milligan as correctly stating the law in Hong Kong. It follows that I should also accept the correctness of the decision of Laddie J in Barros Mattos Junior, because that is the logical consequence of the application of the principle established in Tinsley v Milligan.” (Emphasis added)

39.As a result of all these discussions, I am of the view that P has clearly shown a good arguable case.

BALANCE OF CONVENIENCE

40.The balance of convenience is clearly in favour of continuation of the Injunction.

(1)  Without the Injunction, PL Yui Laam may leave Hong Kong and money in D10’s bank accounts can be withdrawn by D10 at any time.  If these matters occur but P succeeds at the trial, the judgment obtained by P against D10 may well be an empty judgment.

(2)  On the other hand, there is no evidence showing the continuation of the Injunction would not cause irreparable damage to D10.

(a)  D10 has not adduced any satisfactory evidence showing that it has operated any real shipping business.

(b)  There is no documentary evidence showing that D10’s business has been damaged by the Injunction.

(c)  The Injunction does not bind Mr Yau, who is the sole director and effectively the sole shareholder of D10.  If D10 needs bank accounts to facilitate any real business activities, D10 can use Mr Yau’s bank accounts instead.

MATERIAL NON-DISCLOSURE

41.D did not raise any complaint based upon material non-disclosure in the Summons or in the evidence filed in support of the Summons.  The complaints concerning material non-disclosure are only raised in Mr Yiu’s submissions.  For the reasons set out below, I am of the view that there is no substance in these complaints.

D10’s shareholder and director located in Hong Kong

42.Mr Yiu submits that P has made misleading description as to the location of D10’s shareholder and director in P’s written skeleton arguments placed before the court in the ex parte hearing on 14 April 2021 (“the Ex parte Written Submissions”).  Mr Yiu says that the misleading descriptions as set out in the Ex parte Written Submissions are as follows:

(1)  “…damages would be an inadequate remedy as most of the directors and shareholders of the Second Tier Round 1 Defendants[28] do not have an addresses in Hong Kong and the Court has no territorial jurisdiction over them.”[29]

(2)  “The fact that most of the directors and shareholders of the Second Tier Round 1 Defendants are ordinarily residents out of the jurisdiction also suggests that the Second Tier Round 1 Defendants will likely dissipate their assets out of jurisdiction once they are aware of the Plaintiff’s legal proceedings.”[30]

43.In my view, P has not made any misleading description relating to D10 in the ex parte hearing.

(1)  In the Ex parte Written Submissions, P did not say that all the shareholders and directors of the Second Tier Round 1 Defendants are not in Hong Kong.  In fact, in [33(2)] of the Ex parte Written Submissions, P expressly referred to [14] of the 2^nd Affirmation of Sacha Man Cheong (“Cheong’s 2^nd Affirmation”), and exhibit “SMC-14” in that affirmation.  In [14] of Cheong’s 2^nd Affirmation, there is a table, in which it has been clearly set out that D10’s shareholder and director are in Hong Kong.

(2)  Cheong’s 2^nd Affirmation only consists of 18 pages.  Digesting that affirmation would not be a difficult task, and the table is in a prominent place in the affirmation.

44.There is no merit in this complaint.

No enquiries before making the ex parte application

45.Mr Yiu submits that P has failed to make proper inquiries with regard to the nature of D10’s business before the ex parte application, which should be part of the duty of full and frank disclosure.  Had it done so, it would have discovered that D10 was an active shipping company with significant assets such as the Vessel and PL Yui Laam under its name at the material time.  These are material facts pointing against a risk of dissipation, which should have been made known to the judge at the time of the ex parte application.

46.With respect, I am unable to agree with Mr Yiu:

(1)  Having obtained the information concerning D10 as a result of the bankers’ books order, P has to proceed to apply for an injunction against D10 by an ex parte application, for there is urgency and secrecy in the matter.  In view of the urgency and secrecy at that time, it would not be realistic to suggest that P should have conducted a detailed investigation of D10’s business before making the ex parte application.  Obviously, P could not write to D10 to ask D10 to provide information concerning its business at that time.

(2)  In fact, in the Ex parte Written Submissions, Mr Ho stated:

“Full and frank disclosure

42.  [P] is duty bound to disclose two matters that may be prejudicial to [P]’s claim.

43.  First, there may be potential defences such as (1) funds in the Second Tier Round 1 Accounts belong to innocent third parties, (2) the Second Tier Round 1 Defendants can rely on a defence based on change of position or bona fide purchaser without notice, and (3) there were legitimate business dealings between Zhigang and the Second Tier Round 1 Defendants. However, none of the potential defences can be ascertained now.”

(3)  In any event, even based upon the evidence before the court now, I am not satisfied that D10 has any real and substantial business.  Even if there is any non-disclosure on this point, I would not regard this as material.

D10’s account in China Citic Bank International Limited (“CITIC”)

47.In his 2^nd Affirmation dated 26 August 2020 at [6], Mr Yau said that on or around 19 June 2020, D10 discovered that its account at CITIC (“the CITIC Account”) was frozen due to copies of the Injunction were served on the bank by P.  The CITIC Account was not an account set out in the Injunction.  Mr Yiu submits that P has to disclose the correspondence between P and CITIC.

48.With respect to counsel, the events concerning the CITIC Account cannot be used as a ground to say that P has committed any material non-disclosure in the ex parte hearing, for those events occurred at a time more than 2 months after the ex parte hearing.

49.As submitted by Mr Ho, the reason for P serving the Injunction on CITIC is simple and straightforward.  The 11^th and the 12^th defendants have accounts at CITIC, and those accounts are covered by the Injunction.  For this reason, P has served the Injunction on CITIC.

No evidence concerning P’s financial status in the ex parte hearing?

50.Mr Yiu submits that P has not provided evidence concerning its financial status in the ex parte hearing.  With respect, this is incorrect.  The evidence concerning P’s financial status is contained in Mr Takagi’s Affirmation dated 6 February 2020.  That affirmation was placed before the court in the ex parte hearing.  The following has been mentioned in the affirmation:

(1)  P was and is a wholly owned subsidiary of Idemitsu HQ, a company listed on the Tokyo stock exchange.

(2)  P had the ability to utilize funds in the pool of funds in the Singapore subsidiary of Idemitsu HQ.

(3)  In January 2020, P transferred over US$35 million funds as a result of the fraud.  As a result, on 2 February 2020 there was insufficient balance in P’s bank account.

(4)  P had the ability to negotiate overdraft facilities with the Hong Kong branch of MUFG Bank Ltd.

Discretion in favour of the Injunction in any event

51.For the reasons set out in the above, I am of the view that none of the complaints made by D10 concerning material non-disclosure has been made out.

52.If I were wrong in the analysis concerning material non-disclosure as set out in the above and D10 had in fact made out a case of material non-disclosure against P, I would be prepared to exercise my discretion against the discharge of the Injunction.  Further, if I were again wrong and the Injunction should be discharged as a result of the material non-disclosure, I would be prepared to exercise my discretion to re-grant an injunction to P, the terms of which would be same as the Injunction in substance.  My reasons are as follows:

(1)  P does not only have a good arguable case.  In fact, based upon the evidence before me, it is highly likely that D10 would not succeed in its defence, and P would succeed at the trial.

(2)  For the reasons set out in the above, D10’s case may well be untrue.  I am of the view that in the absence of a Mareva injunction, there would be a real risk of dissipation of assets by D10.

(3)  The balance of convenience is clearly in favour of having the Injunction in place.

COSTS OF THE DISCHARGE APPLICATION

53.By reason of the aforesaid, my conclusion is that the Discharge Application must be dismissed and the Injunction must be continued.

54.As to the costs of an application concerning an interlocutory injunction, I have set out the principles in Zhao Zhi Qiang v Zhao Zhiguang and Another[31].  In essence, it is wrong to say that costs of an application concerning an interlocutory injunction should be in the cause of the proceedings unless there is justification for departure therefrom.  The court should look at the merits of the application as at the time of the application, which do not necessarily depend on the outcome of the trial.  There are numerous post-CJR cases in which the court ordered continuation of the interlocutory injunction and ordered that costs be to the plaintiff.

55.By making the Discharge Application, D10 has vigorously opposed the continuation of the Injunction and sought an order to discharge the Injunction.  D10 failed.  Much costs have been incurred as a result of D10’s unsuccessful challenge.  In these circumstances, I am of the view that costs of the Discharge Application (including all costs reserved, if any) should be paid by D10 to P forthwith.  I therefore made an order awarding costs of the Discharge Application to P at the end of the substantive hearing.

DISPOSITION

56.For the aforesaid reasons, I made the order as set out in [1] above.

57.Lastly, it remains for me to thank counsel for the assistance rendered to the court.

Mr Leon Ho, instructed by K & L Gates, for the plaintiff

Mr Austin Yiu, instructed by Hau, Lau, Li & Yeung, for the 10^th defendant