Ling Weixian v. Tsoi Ai Tong

DCCJ 4246/2021

[2022] HKDC 967

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4246 OF 2021

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Before:  Deputy District Judge Rebecca Lee in Chambers

Date of Hearing:  22 August 2022

Date of Decision:  16 September 2022

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DECISION

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Background

1.Pursuant to the summons dated 25 April 2022, the plaintiff applies for summary judgment under Order 14 of the Rules of the District Court (Cap 336H) against the defendant for, inter alia,

(a)  a sum of USD$350,000 (or its Hong Kong dollar equivalent) (the “Sum”);

(b)  a declaration that the defendant holds the Sum and/or its traceable proceeds on constructive trust for the plaintiff;

(c)  a declaration that the plaintiff has full beneficial ownership and proprietary rights in the Sum and/or its traceable proceeds which are held be the defendant;

(d)  an Order directing the defendant to release or transfer the sum held on trust for the plaintiff and/or the assets representing their profits, benefits or traceable proceedings/assets, to the plaintiff;

(e)  tracing and/or all necessary accounts and inquiries against the defendant as constructive trustee and/or for the purpose of tracing;

(f)  payment and delivery up of what is found due upon the taking of such accounts and the making of such inquiries; and

(g)  equitable compensation, or alternatively, damages to be assessed.

2.The plaintiff’s case as pleaded in the Amended Statement of Claim dated 21 January 2022 and the Reply dated 21 February 2022 (the “Reply”) is as follows:-

(a)  the plaintiff became acquainted with a person claiming to be a male “Chen Shuo” (“Chen”) via WeChat who claimed to be familiar with trading of cryptocurrencies and invited the plaintiff to open an account at an online exchange platform called GDEX to trade USDT;

(b)  procured and induced by Chen’s representations, the plaintiff opened an account at GDEX. With the mistaken belief that the plaintiff was making genuine investments in USDT, the plaintiff acted upon the instructions given by alleged online customer service at GDEX, transferred from her bank account held at HSBC account number 047-862933-833 a total of USD$350,000.00 and deposited into the defendant’s bank account 604-500-4356-6 maintained with CMB Wing Lung Bank (“defendant’s Account”) on 11 January and 12 January 2021 (USD$50,000.00 and USD$300,000 respectively);

(c)  on 20 January 2021, the plaintiff planned to sell the USDT up to a value of RMB$3,000,000.00 and applied to withdraw her investment from GDEX but was unsuccessful;

(d)  becoming suspicious on GDEX in a failed attempt to withdraw her investments therein and subsequently realized that she might have become a victim of fraud, the plaintiff reported the matter to Shenzhen police on 21 January 2021;

(e)  the plaintiff contacted HSBC attempting to cancel the deposits of the Sum to the defendant. However, the plaintiff was notified that the defendant did not agree to return the Sum;

(f)  the plaintiff reported to the Hong Kong Police Force on 22 February 2021 who soon notified the plaintiff that they had conducted investigation against the defendant and had then frozen the defendant’s Account; and

(g)  Chen blocked the plaintiff’s contact on WeChat since late January 2021 after the plaintiff reported the matter to the police.

3.The pleaded case is repeated in the plaintiff’s Affirmation dated 25 April 2022 in support of the summons.

4.It is the plaintiff’s case that the defendant, whom she did not know and had no previous dealings with, has been unjustly enriched by the said Sum of USD$350,000.00 and is liable to repay and make restitution of the Sum. Alternatively, the payment of the Sum by the plaintiff to the defendant gives rise to constructive trust in favour of the plaintiff and the defendant is liable to return the said Sum to the plaintiff.

5.The defendant filed a Defence dated 29 October 2021 (the “Defence”) and an affirmation dated 9 June 2022 in opposition to the plaintiff’s application.

6.It is the defendant’s case that:-

(a)  The defendant was and is a self-employed business woman and a business partner of Grand Come Limited (“Grand Come”), a licensed money service operator;

(b)  the defendant authorized Grand Come to use the defendant’s Account to operate money service for remittance purpose since in or about September 2020;

(c)  it is the common practice of money service operator in Hong Kong to arrange RMB remittance through agents in Hong Kong and in the Mainland China;

(d)  the defendant received the Sum via the defendant’s Account upon request by a lady called Apple, who alleged that it was the plaintiff who required the money remittance services. Upon receipt of the Sum, the defendant informed Grand Come to arrange remittance of the corresponding RMBs to various bank accounts in PRC at an agreed rate as between the defendant and Apple;

(e)  the defendant has no knowledge of Grand Come’s agents in the Mainland China;

(f)  the defendant (and Grand Come) were doing legitimate business dealings of money remittance service and had no knowledge, whether actual or constructive, of fraud/mistake/misrepresentation as alleged by the plaintiff when the transactions were carried out.

7.It is not disputed that the Sum was deposited into the defendant’s Account. The defendant admitted that she did not know the plaintiff and had no previous dealings with her.

8.In a nutshell, the defendant’s case is that she and Grand Come were doing legitimate business dealings and had no knowledge, whether actual or constructive, of the fraud or mistake or misrepresentation, that they are bona fide purchaser(s) of the Sum. By payment of the Sum in RMB to various bank accounts in the Mainland China, their position had changed.

Order 14: The Principles

9.The principles as contained in the following paragraphs in the Hong Kong Civil Procedure 2021 Vol 1 are well established:-

“14/4/1:

The underlying policy of the summary procedure is to prevent a defendant from delaying the plaintiff from obtaining judgment in a case in which the defendant clearly has no defence to the plaintiff ’s claim: Man Earn Ltd v. Wing Ting Fong [1996] 1 H.K.C. 225. …… it is for the defendant to show that there is a triable issue or an arguable defence if he is to be allowed his day in court. To deny him his day in court, if he shows a triable issue or an arguable defence, is indeed a fearful injustice. On the other hand, if he has no defence and he obtains leave to defend, equally, there is injustice to the plaintiff” (Manciple Ltd v. Chan On Man [1995] 3 H.K.C. 459 at 466, per Mortimer J.A.).

14/4/8:

When the Judge is satisfied not only that there is no defence but no fairly arguable point to be argued on behalf of the defendant it is his duty to give judgment for the plaintiff. ……once the court concludes that there is no triable issue or question or that for some other reason there ought to be a trial, it will ordinarily give judgment for the plaintiff. …… Where the application is in respect of the whole or part of one of several claims included in the writ, judgment may be given for that claim or part, leaving the residue to be tried. In such event, it may be convenient for directions to be given as to such residue.

14/4/9:

He has to satisfy the court that he has a “real or bona fide defence” or “a fair probability or reasonable grounds that a bona fide defence exists” (see Toy Major Trading Co. Ltd v. Plastic Toys Ltd [2007] 3 H.K.L.R.D. 345 at [12], per Ma C.J.H.C.). If he makes an allegation, it must be credible or believable in the light of the evidence placed before the court. As Bokhary J.A. said in Re Safe Rich Industries Ltd (unrep., CACV 81/1994, November 3, 1994, [1994] H.K.L.Y. 183): “The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognized—because failure to recognize it would create a debt-dodger’s charter—that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as [is] either undisputed or beyond reasonable dispute. …… Unless it is obvious that the defence put forward by the defendant is “frivolous and practically moonshine, O.14 ought not to be applied”: Codd v. Delap (1905) 92 L.T. 510 at 511, per Lord Lindley. “Order 14 is for clear cases; that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise.... The procedure is entirely inappropriate where the plaintiff’s entitlement to recover any sum is the subject of any serious dispute, whether of law or fact. …… Where the point at issue is at heart a short one the court will recognize the fact and act accordingly no matter how bulky its outer garments: Crown House Engineering v. Amec Projects Ltd (1990) 6 Const. L.J. 141 at 154, per Bingham L.J.

14/4/11

Leave to defend should be given where the defendant raises any substantial question of act which ought to be tried (Saw v. Hakim (1889) 5 TLR 72); or there is a fair dispute to be tried as to the meaning of the document on which the claim is based (Bowes v. Caustic Soda etc Synd (1893) 9 TLR 328; Lindsay v. Martin (1889) 5 TLR 322; Ironclad etc Co. v. Gardner (1892) 4 TLR18.” (emphasis added)

Discussion

10.In short, the plaintiff’s case is premised on (1) unjust enrichment; (2) knowing receipt. The Defence of bona fide purchaser and change of position are defeated by illegality.

11.Mr Wong for the plaintiff submitted that the defendant had provided no consideration for the Sum (ie the US$50,000.00 and US$300,000.00) and the defendant must have known that she had no entitlement to the Sum.

12.The exchange of the Sum in RMB and the transfer of the equivalent amount of RMB in the Mainland China were “underground banking transactions” which is illegal under PRC law. The defendant cannot be considered to have acted bona fide or to have provided any value for the Sum, or the defendant had changed her position in good faith.

13.Mr Chung for the defendant argued that the defendant was only acting as a receiving agent for Grand Come, and the Sum received in the defendant’s Bank Account has been paid over to Grand Come, and equivalent amount in RMB has been paid to the plaintiff’s designated persons through Grand Come’s agents in Mainland China.

14.In the circumstances, the defendant was a bona fide purchaser and the position of the defendant had been changed by payment of funds in RMB to various bank accounts in Mainland China in reliance on the Sum paid to the defendant’s Bank Account.

15.Mr Chung submitted that “illegality” is an issue that ought to go to trial.

16.Pausing here, as pointed out by Mr Wong, which I agreed, the defendant’s case is a non-admission as to what happened between the plaintiff and Chen (and GDEX). It is not disputed that the Sum were deposited into the defendant’s Account and the defendant has no knowledge of and no previous dealings with the plaintiff.

17.The plaintiff has prima facie established her claim for the purpose of O 14 application.

18.The question for the court is whether the defendant has raised a real or bona fide defence.

Bona fide Purchaser

19.The legal principles are well established. Mr Chung did not have any real issue with Mr Wong’s submission in this regard.

20.A victim of fraud would prima facie have a claim in money had and received and may assert a proprietary claim against a recipient insofar as the fraudulently obtained funds are traceable into his hands, unless the recipient can establish that he is a bona fide purchaser for value without notice: Ferrari North America Inc v Changhon International Energy Co Ltd & Ors [2018] HKCFI 1603 at §12 per Wong J.

21.The burden is on the defendant to prove that she is a bona fide purchaser : Chan Chun Chung & Anor v PBM (Hong Kong) Ltd (2004) 7 HKCFAR 178 at 183-184; and lack of constructive knowledge: Papadimitriou v Credit Agricole Corpn and Investment Bank [2015] 1 WLR 4265 at 4277. The defence can be defeated if:-

(a)  a reasonable person with the attributes of the defendant should either have appreciated on facts available to him that a proprietary right probably existed; or

(b)  he should have made inquiries or should have sought advice which would have revealed the probable existence of such a right.

Change of Position

22.Again, the parties have no real dispute over the law in this respect.

23.To raise the defence of change of position, it is for the defendant to prove:-

(a)  There was a causative link between the receipt of the benefit and his change of position, so that, but for the receipt of the benefit, the defendant’s position would not have changed, either because the defendant no longer has the benefit received or because he has changed his position in some other way in reliance on the receipt of the benefit; and

(b)  the defendant’s position must have changed in circumstances which make it inequitable for him to make restitution to the plaintiff.

24.However, the defence of change of position would not be available to someone who has changed his position in bad faith or to a wrongdoer or if the change was unlawful.

Illegality

25.Mr Wong submitted that the defendant would not be able to rely on the defence(s) of bona fide purchaser and change of position if act(s) of illegality is involved, unless the illegality was so minor as to be ignored on the de minimis principle.

26.It is argued on behalf of the plaintiff that the exchanges and transfers of the USD$50,000.00 and USD$300,000.00 in RMB in Mainland China involved illegalities as the transactions were performed through “underground banking” with a view to circumvent foreign currency exchange controls under the laws of PRC and are thus illegal under PRC law.

27.In support of the contention of “illegality”, the plaintiff has, pursuant to O 38 r 7 RDC, given notice of her intention to adduce in evidence findings or decisions on a question of PRC law by virtue of s 59 of Evidence Ordinance (Cap 8), on whether the arrangement and/ or transactions as pleaded in the Defence are illegal:-

(a)  DBS Bank (Hong Kong) Ltd v Pan Jing [2020] HKCFI 268;

(b)  Americhip Inc v Zhu Hongling [2021] 4 HKLRD 490; and

(c)  TTI Global Resources HK Ltd v Hong Kong Myhone Technology Co Ltd [2021] HKCFI 306.

28.The plaintiff has also filed the affirmation of Jiang Taowei, a PRC lawyer, who gave an opinion in relation to the present case.

29.As summarized by Mr Wong, Mr Jiang’s opinion is that:-

(a)  the PRC impose restrictions on foreign exchanges and all such transactions must be conducted in authorized institutions. No private/disguised trades are allowed;

(b)  the fact that the receipt of foreign currency occurs outside the PRC does not mean the whole transaction would not be governed by the relevant laws in the PRC: see Article 4 of 中華人民共和國外匯管理條例 (“the Regulations”). Upon receiving the foreign currency outside PRC, if one illegally uses bank accounts in the PRC held by some other third parties to conduct currency matching transfers, such transactions will also fall foul into the category of “foreign individuals engaging in foreign exchange trading” under Article 4 of the Regulations.

30.Applying the above to the arrangement/transactions of the present case, it is Mr Jiang’s opinion that:-

(a)  neither the defendant nor Grand Come conducted the transaction in respect of USD$350,000.00 received in authorized financial institution. They used bank accounts in the Mainland held by some individuals to transfer a total sum of RMB$2,258,000.00 to personal bank account(s) in the Mainland as designated by Apple, such arrangements would be a disguised trade of foreign currency exchange;

(b)  The defendant and Grand Come provided foreign currency/remittance service for individuals within the Mainland China. Such service is governed and regulated by the Regulations and is in breach of the Regulations as well as other related regulations: Article 32 of [結匯受匯及付匯管理規定], Article 30 of [個人外匯管理辦法]; Article 4 and 45 of the Regulations;

(c)  The transactions constituted “illegal trading of foreign currency”.

31.As such, Mr Wong submitted that:-

(a)  the arrangements as pleaded by the defendant in the Defence are in breach PRC law; and

(b)  by virtue of the current law as it stands now, the effect of the illegality would mean that the defendant would not be able to say that the defendant is a bona fide purchaser and the defendant would also not be able to rely on the change of position defence.

32.Mr Chung indicated that the defendant never agreed that the transactions are illegal under the PRC law. Yet, no evidence is filed by the defendant in that regard.

33.Mr Chung submitted that the said USD$50,000.00 and USD$300,000.00 transactions may have some arguments in respect of their legality, which involved triable legal issues and were inappropriate to be resolved in summary judgment proceeding without full argument at trial: cf DHCJ Victor Dawes SC in Lesnina H DOO v Wave Shipping Trade Co Ltd [2022] 2 HKLRD 727.

Effect of Illegality

34.I shall first deal with the question of “illegality”.

35.Mr Wong submitted that in Hong Kong “illegality” is governed by the dicta in Tinsley v Milligan [1994] 1 AC 340, that a claimant to an interest in property, whether legal or equitable, was entitled to recover if he was not forced to plead or rely on illegality. The reasoning is adopted in Barros Mattos Junior v General Securities & Finance Ltd [2005] 1 LWR 274, where Laddie J held that, subject to a de minimis threshold, the court must always disallow the change of position defence in accordance with the maxim ex dolo malo non oritur action “an action does not arise out of fraud”:-

“[43] …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 minims principle. This is not the case.”

36.The position in Hong Kong is clarified by Mr Justice Chow in Arrow ECS Norway AS v M Yan Trading Ltd [2018] HKCFI 975:-

“26. There have been some attempts to argue that the decision of Laddie J in Barros Mattos Junior is wrong (see, for example, Kathleen Margret O’Neil v. Faye Gale [2013] EWCA Civ 1554 at paragraph 26 and 27; DBS (Hong Kong) Limited v. Tian Wen Quan, 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 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 [P#17], Cheung JA (with whom Yeung VP and Kwan JA agreed) said at paragraph 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 paragraph 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.

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)

37.Mr Chung relied heavily on DHCJ Dawes SC’s judgment in Lesnina, supra, and submitted that it is high time for the Court to adopt a “proportionality test” rather than the more rigid approach as laid down by Tinsley. It is submitted that the illegality argument involves triable issues of law which are inappropriate to be resolved by way of summary judgment. At the very least, there are conflicting authorities as to which test should be applied.

38.DHCJ Dawes SC held:-

“51. The absolute approach in Barros Mattos and Pan Jing that all kinds of illegality (save for de minimus ones) would preclude reliance on the change of position defence and the bona fide purchaser for value without notice defence has been criticised for being over rigid and involves conflicting legal authorities.

52. I have been helpfully referred by counsel for the 10^th Defendant to Ryder Industries Limited (formerly Saitek Limited) v. Chan Shui Woo [2015] 18 HKCFAR 546, where Lord Collins NPJ said at §56-57:

“56. It has been suggested (obiter) that a contract which is valid by the governing law of the forum, English law, or in this case, Hong Kong law, may be refused enforcement if it has been “performed in such a way that one party (or both parties) commits a legal wrong”: Barros Mattos Jnr v MacDaniels Ltd [2004] EWHC 1188, [2005] 1 WLR 247, [30] (Laddie J). But, as Johnston, Conflict of Laws in Hong Kong, para 5-012, text at note 80, rightly points out, this obiter suggestion states the principle much too widely. Thus in Re O’Connor’s Bill of Costs [1993] 1 Qd 423 a Queensland solicitor was entitled to recover on his bill of costs although he had done some of the work in New South Wales where he was not entitled to practise, and where therefore his work was illegal (and must have been contrary to an implied term of the retainer). But he was entitled to recover because the contract did not require an illegal mode of performance and he did not seek to enforce any illegal mode of performance by the client.

57. There may nevertheless be cases in which a sufficiently serious breach of foreign law which reflects important policies of the foreign state or separate law district may be such that it would be contrary to public policy to enforce a contract. But there is no basis in authority or principle for holding that every breach of foreign law would come into this category.” (Emphasis Added)

53. The passage in The Conflict of Laws in Hong Kong (2^nd edition), Graeme Johnston (at §5-012) approved by Lord Collins NPJ states that “a more flexible approach having regard to the seriousness of the foreign illegality is required to determine whether public policy and comity really require enforcement of the contract to be denied”. I note that the Ryder decision was not referred to or considered in Pan Jing.

54. Similarly, it is argued in A Restatement of the English Law of Unjust Enrichment, Andrew Burrows (at p.121), that the better view is that the defendant should only be disqualified from the defence by illegality where the criminality is significant and not trivial:

“The criminality may be relatively trivial (and yet more than de minimis) so that denying the defence may impose too harsh a sanction. The better view therefore is that the defendant should only be disqualified from the defence by illegality where the criminality is significant and not trivial. The word ‘significant’ allows some flexibility; and it may be that the courts will in due course move to the preferable position of applying a ‘proportionate’ response to the illegality taking into account the various policies in play”.

55. The absolute approach in Barros Mattos is also at variance with suggestions in the authorities that a due sense of proportionality is needed on questions relating to illegality. In Gray v. Thames Trains Ltd [2009] UKHL 33 at 30, Lord Hoffmann said that: “the maxim ex turpi causa expresses not so much a principle as a policy. Furthermore that policy is not based upon a single justification but on a group of reasons which vary in different situations”. And in Patel v. Mirza [2017] AC 467, Lord Toulson stated that:

“So how is the court to determine the matter if not by some mechanistic process? In answer to that question I would say that one cannot judge whether allowing a claim which is in some way tainted by illegality would be contrary to the public interest, because it would be harmful to the integrity of the legal system, without (a) considering the underlying purpose of the prohibition which has been transgressed, (b) considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and (c) keeping in mind the possibility of overkill unless the law is applied with a due sense of proportionality. We are, after all, in the area of public policy.”

56. I note that, David Donaldson QC in O’Neil v. Gale [2013] EWHC 644 (Ch) at §67 recognized that Barros Mattos is “somewhat light on reasoning” although, on appeal, Vos LJ giving the judgment of the English Court of Appeal, remarked that “A consideration of that question must await another case”.

57. There is much to be said for the suggestion that Laddie J’s approach in Barros Mattos involved an overly blunt application of the maxim ex turpi causa non oritur action, and a preferable approach would be one that measures the gravity of the defendant’s criminal conduct against the impact of allowing the defence of change of position3, and in my view the point applies to the bona fide purchaser defence as much as it does to the change of position defence.

58. As I had said in G H Holdings Limited v. Able Profit Investment Limited [2018] HKCFI 2480 at §§26 & 35, where the applicability and/or force of foreign law is in dispute, the Court cannot determine the summary application on assumed facts and would need to resolve the expert evidence before the Court can decide whether, as a matter of public policy, to enforce the specific transaction in question, this is a matter that will have to be considered at trial.

59. I also draw guidance from the more recent case of Solyda S.R.L. (A Company Incorporated in Italy) v. Wu Ge and Another [2021] HKCFI 1825, where DHCJ Le Pichon took the view that the issue of whether foreign illegalities would preclude reliance on a change of position defence involved conflicting legal authorities and therefore it was inappropriate for the issue to be decided in a summary manner, stating at §§35-36: “Barros has also been criticised for being overly rigid due to its absolute approach that all kinds of illegality (save de minimus ones) would deny the defence: see Andrew Burrows, A Restatement of the English Law of Unjust Enrichment (at p. 121) stating that the better view is that the defendant should only be disqualified from the defence by illegality where the criminality is significant and not trivial. Given the state of the authorities, it is hardly appropriate for this issue to be decided in a summary manner.”

60. For the above reasons, I find that the illegality argument raised by the Plaintiff involves triable legal issues, which are inappropriate to be resolved in summary judgment proceedings without full argument and should be fully ventilated at trial.”

39.Mr Wong in his reply referred to the speech of Chief Justice Ma in Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544 (which is also considered in Lesnina) which seemingly disapproved the application of a “proportionality test”:-

“….Like Lord Collins, I believe that the outcome can be determined by reference to applicable conflict of laws principles (for we are here concerned with a foreign illegality). It is not necessary to discuss the matter in the context of a domestic illegality. As Lord Collins points out, the lower courts determined the case on the basis of the principle contained in Tinsley v Milligan [1994] 1 AC 340 and also applied the proportionality test contained in ParkingEye Ltd v Somerfield Stores Ltd [2013] QB 840. Since the decisions of the lower courts, there have been important developments in the law in this area and reference is made below to the decisions of the UK Supreme Court in Hounga v Allen [2014] 1 WLR 2889, Les Laboratoires Servier v Apotex Inc [2015] AC 430 and Bilta (UK) Ltd v Nazir (No 2) [2015] 2 WLR 1168. It is not necessary, as I have said, to discuss illegality in the domestic context and I would accordingly leave open any detailed discussion of the applicable principles for a case in which the point arises. I would like, however, to make this point. Both the lower courts applied a proportionality test, this being the test advocated by both parties based on their reading of ParkingEye. I am not in favour of applying this test as the applicable test for illegality since it appears to suggest that some kind of judicial discretion to be exercised. It seems to me that the question of illegality must be based on firmer principle and policy, although I accept that the facts in any given case will inevitably differ. However, as I have indicated, it is not necessary to go into this aspect in the present appeals.

40.Obviously different approaches were adopted in the Court of First Instance in Arrow and Lesnina. However, Arrow decision stems from the reasoning in Tinsley which is adopted by the Court of Appeal, and approved by the CFA in Ryder.

41.I agree with Mr Wong that the law as it now stands is the strict approach based on Tinsley and this court is bound to follow.

42.I also find assistance from the judgment of Sir William Blair in DBS Bank (Hong Kong) Ltd v Pan Jing [2020] HKCFI 268:-

“66. In giving summary judgment, Chow J applied Barros Mattos, noting that the effect of the illegality in that case was based on the majority view in Tinsley v Milligan [1994] 1 AC 340 (c.f. Patel v Mirza [2017] AC 467), which has been adopted in Hong Kong – see Kan Wai Chung v Hau Wun Fai [2016] 5 HKC 585 at paragraph 8.7 (Cheung JA, with whom Yeung VP and Kwan JA agreed). On that basis, if the recipients’ actions of changing position were treated as illegal, which they had been, the court could not take them into account, unless the illegality was so minor as to be ignored on the de minimis principle.

67. The defendant seeks to distinguish Barros Mattos and Arrow ECS Norway v Yang Trading on various grounds. It is said that unlike the defendants in Barros Mattos who were directly involved in changing the currency into Nigerian currency which rendered their actions illegal, the defendant himself did not commit any offence but relied on Mr Xu. He was not involved in any way in the fraud. Knowledge of the illegal conduct must be required to bar the defence, otherwise, the bank would also be debarred from making its restitution claim as it assisted in the fraudulent act by transferring the money.

68. It is correct that the facts are different, in that the defendants in those cases were the parties that received and distributed the stolen funds in the course of a business, whereas the defendant in this case received the funds as the final leg of the exchange transaction. But otherwise, the cases are indistinguishable, because the courts refused to allow a change of position defence where the relevant acts were illegal, as they are in this case. The defendant’s submissions fail for the same reasons that ruled out the bona fide purchaser defence, namely that it is not necessary for the bank to show that the defendant knew of the fraud because the money was transferred pursuant to a transaction that was itself illegal, and the evidence does not support the proposition that the defendant did not know how the exchange would be effected. I conclude that the court should follow the decisions in Barros Mattos and Arrow ECS Norway v Yang Trading.

69. I would have followed the result of these decisions even if (as some commentators consider) the judge in Barros Mattos put the test too high in suggesting that if the recipient’s actions in changing position are treated as illegal, the court will more or less automatically refuse to contemplate a change position defence. Whether or not this is correct, in my view, the result is justified on the basis of public policy considerations regarding breach of exchange control regulations (see Virgo, cited above, at p 693), which apply equally, if not more so, in the present case.”

43.Further, it is clearly stated by DHCJ Dawes SC in paragraph 58 of Lesnina that:-

“As I had said in GH Property Holdings Ltd. v Able Profit Investment Ltd. [2018] HKCFI 2480 at [26] & [35], where the applicability and/or force of foreign law is in dispute, the Court cannot determine the summary application on assumed facts and would need to resolve to expert evidence before the Court can decide whether, as a matter of public policy, to enforce the specific transaction in question, this is a matter that will have to be considered at trial.”

44.Here, despite Mr Chung’s oral submission that the defendant never agreed that the arrangement is illegal under PRC law, the defendant has not filed any evidence to contradict the evidence filed by the plaintiff, which includes the decisions of DBS Bank (Hong Kong) Ltd v Pan Jing [2020] HKCFI 268, Americhip Inc v Zhu Hongling [2021] 4 HKLRD 490, TTI Global Resources HK Ltd v Hong Kong Myphone Technology Co Ltd [2021] HKCFI 306, adduced pursuant to O 38, r 7 RDC and s 59 of the Evidence Ordinance (Cap 8), as well as the affirmation of Jiang Taowei, a PRC lawyer.

45.The plaintiff’s unchallenged evidence is that:-

(a)  under PRC law, all foreign exchange transactions must be conducted in authorized institutions and no private or disguised traders are allowed.

(b)  the fact that the receipt of foreign currency occurs outside the PRC does not mean that the whole transaction would not governed by PRC law.

(c)  the defendant the Grand Come provided foreign currency remittance service for individuals in the PRC and such service is governed and regulated by the relevant regulations and it is in breach of the regulations.

46.The defendant chose not to adduce evidence for the court’s consideration. This does not automatically create a triable issue.

47.In the circumstances, unlike what DHCJ Dawes SC has envisaged in GH Property Holdings and Lesnina, there is no actual dispute over the applicability and/or force of PRC law in the present case (that the arrangement relied on by the defendant is illegal under PRC law).

48.As such, the court would not allow a change of position defence, assuming that there was sufficient causative link between the receipt of the benefit and the change of position.

49.For the same reason, even if the defendant herself did not commit any offence and did not involve in the fraud, it is not necessary for the plaintiff to show that the defendant knew of the fraud because the money was transferred pursuant to a transaction that was itself illegal. The bona fide purchaser defence would also fail.

Are the defendant’s Assertion Believable

50.My decision in relation to “illegality” sufficiently disposed of the plaintiff’s summons.

51.I would briefly discuss the evidence of the defendant in opposing the plaintiff’s application.

52.The defendant’s evidence is that she is a “self-employed business woman” and is a “business partner” of Grand Come.

53.In this respect, the defendant produced a copy of the Licence for Operating Money Service granted by C&E to Grand Come (“TAT-1”) and her written authorization to Grand Come to use the Account (“TAT-2”) in support.

54.As stated in TAT-2, the defendant authorized Grand Come to use her account “unconditionally” for remittance purpose and she disclaimed any liability and risk related to the use of her account by Grand Come.

55.Other than that, there is no documentary evidence as to the defendant’s “business” and the so-called “partnership” with Grand Come.

56.As pointed out by Mr Wong, the details of bank accounts used for operating the money service must be disclosed under Part 7 of Form 1 of the application for a Money Service Operator Licence, and no such evidence has been adduced by the defendant.

57.No reason is offered by the defendant as to why Grand Come, a licensed money service operator, has to use the defendant’s Account (which is in her sole name) for its business. There is no affirmation from Grand Come in this respect.

58.I also note that there is discrepancy between the license number of Grand Come in TAT-1 and TAT-2.

59.In TAT-1, the licence number stated there under is “17-12-02263”.

60.In TAT-2, Grand Come is identified by its business registration number “67886310-000”, and its license for operating money service number “17-12-02264”.

61.It could have been a typo or it might be that Grand Come holds another licence.

62.No explanation is given in this respect.

63.Further, I agreed with Mr Wong’s observation that:-

(a)  Apart from the alleged production of a copy of the plaintiff’s passport (in the form a photograph rather than a proper photocopy: TAT-6), it is difficult to see why the defendant can be certain that it was the plaintiff who needed the alleged money remittance service, also Apple (as supposed to the plaintiff) would be in a position to provide these names and bank accounts in PRC to the defendant;

(b)  the time lag between the receipt of the plaintiff’s monies and the instructions regarding the remittance of RMB to beneficiaries are unusual and was not explained by the defendant:-

(i)  the defendant received USD$50,000.00 from the plaintiff at 12:00 noon on 11 January 2021. It was not until 7.5 hours later (ie, 7:30 pm the same day) when the defendant received instructions from Apple regarding the beneficiary in respect of the corresponding RMB. The remittance to those beneficiaries took the form of multiple transfers. There is no explanation as to why a single transfer would not suffice;

(ii)  regarding the sum of USD$300,000.00 (RMB equivalent RMB$1,935,000.00) is concerned, it was received at about 2:00 pm on 12 January 2021. However, as shown on TAT-11, it took more than 24 hours for Apple to relay the whole instructions on how the RMB$1,935,000.00 are to be remitted; and

(iii)  multiple bank account(s) in the PRC, of different banks, are used to remit RMB to the same beneficiary. No explanation as to why such arrangement is necessary.

64.As submitted by Mr Wong, there are a number of loopholes in the evidence relied upon by the defendant which the defendant (and/or Grand Come) should be in a position to fill up but has not done so, cf Tang Yuan Yi v Tokyo International Investment Ltd [2020] HKCFI 1133.

65.Again, the fact that the defendant chose not to adduce evidence for the court’s consideration does not automatically create triable issues.

66.I am not satisfied that the defendant has raised a real and bona fide Defence as the defendant’s assertions are not believable in the circumstances.

Conclusion

67.I therefore give judgment in favour of the plaintiff in terms of paragraph 1(a) to (g) of the plaintiff’s summons dated 25 April 2022. The plaintiff is entitled to pre-judgment interest of 1% plus prime rate on the judgment sum of USD$350,000.00 (or its Hong Kong Dollar equivalent) up to judgment, and thereafter at judgment rate until payment.

68.On a nisi basis, I order the defendant do pay the plaintiff’s costs of the summons and the action, with certificate for counsel, to be taxed if not agreed. The order shall be made absolute unless the parties apply to vary within 14 days.

69.I am grateful for counsel’s helpful assistance.

Mr Wong Hok Yan, instructed by Patrick Mak & Tse, for the plaintiff

Mr Chung Hylas Yuen Foo, instructed by Joseph C.T. Lee & Co., for the defendant