Toyota Boshoku Europe N.V. v. Kingsville (HK) Enterprises Ltd and Others
Read the full judgment text of HCA 452/2022 on BabelCite. This High Court CFI judgment was delivered on 4 May 2023.
1. This is the substantive hearing of the ex parte injunction order granted by Madam Justice B Chu on 22 April 2020 (“the Injunction”) against the 8 th defendant, Hong Kong Shun Yuen Import and Export Limited (“D8”) as varied and continued by the order of Madam Justice Cheng on 29 April 2022. At the conclusion hearing, the Injunction was continued until further order. My reasons appear below.
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HCA 452/2022 [2023] HKCFI 1393 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 452 OF 2022 ____________________ BETWEEN
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___________ R E A S O N S F O R D E C I S I O N ___________ 1.This is the substantive hearing of the ex parte injunction order granted by Madam Justice B Chu on 22 April 2020 (“the Injunction”) against the 8th defendant, Hong Kong Shun Yuen Import and Export Limited (“D8”) as varied and continued by the order of Madam Justice Cheng on 29 April 2022. At the conclusion hearing, the Injunction was continued until further order. My reasons appear below. Background facts 2.The Plaintiff is the victim of a large-scale fraud in which approximately HK $500 million was paid to various companies as a result of unknown individual(s) impersonating the CEO and President of the Plaintiff’s parent company, and causing the Plaintiff’s general manager of finance to believe that the funds were required for a secret and urgent acquisition. 3.The Plaintiff has already obtained interlocutory proprietary and Mareva injunctions against 48 defendants in HCA 2091/2019 (“HCA 2091”) comprising “1st layer”, “2nd layer” and “3rd layer” recipients of the Plaintiff’s funds (collectively referred to as “ADs” and individually as “ADX”). 4.The Defendants in this action (“the Defendants”) are the “next layer recipients” of the Plaintiff’s funds from ADs identified from the banking documents obtained in HCA 2091. 5.This hearing concerns D8 only, a “3rd layer recipient” who received 2 sums of the traceable proprietary funds totalling USD 274,986.08 (“the Funds”) on 19 August 2019 and who is opposing the Plaintiff’s application for the continuation of the Injunction. 6.D8’s upper layer recipients are
Procedural history 7.On 8 April 2021, the Plaintiff obtained default judgments against both AD 5 and AD 27. Banking documents obtained from a section 21 banker’s disclosure order revealed that the Funds were paid into the D8’s account. 8.As against the Defendants whose immediate upper layer recipient was a defaulting defendant, the Injunction granted was both a proprietary and a “top up” Mareva injunction. This applied to D8 since both AD 5 and AD 27 were defaulting defendants. 9.On 29 April 2022, the Injunction was varied to include ancillary disclosure orders with the added disclosure of the proprietary funds. While D8 indicated its opposition to the continuation of the injunction, it did not oppose the ancillary disclosure order or the section 21 banker’s disclosure order. Legal principles 10.The principles governing the grant of a proprietary injunction and those for the grant of a Mareva injunction are well-established. For present purposes, it suffices to highlight the following differences between the 2 types of injunctions:
11.Where a party opposes the continuation of the injunction at the interlocutory stage, the burden is on him to put up a defence and evidence of sufficient cogency so as to water down the merits of the applicant’s claim to an extent that it no longer amounts to a serious issue to be tried (for a proprietary injunction) or a good arguable case (for a Mareva injunction). In such a case, the injunction would be discharged. 12.The Court is not to resolve disputes of fact and difficult points of law on an interlocutory basis: per Au-Yeung J in Toyota Boshoku Europe NV v Hong Kong Longshenyuan International Trade citing DBS Bank (Hong Kong) Limited v Tian Wen Quan, unrep., HCA 3228 of 2016, 12 October 2017 at §13; and Pacific Rainbow International Inc v Shenzhen Wolverine Tech Limited & Ors, unrep., HCA 3023 of 2016, 2 May 2017 at §40 citing Derby & Co Limited v Weldon [1990] 1 Ch 48 at 58. Except in a clear case, those matters are to be resolved at trial. 13.However, the existence of a “good arguable defence” does not necessarily negate a “good arguable case”. It is entirely possible to have, at the interlocutory stage, both the claim and the defence being more than barely capable of serious argument and not necessarily having a better than 50% chance of success. 14.For a Mareva injunction, there is no requirement that the applicant must show that he has a “much better” case or argument then the opposing party: Pacific Rainbow at §42 citing Kazakhstan Kagazy plc v Arip [2014] EWCA Civ 381 at §25. D8’s defences 15.D8 opposes the continuation of the injunction. Its pleaded defence is that (A) it is a bona fide recipient of the Funds through a transaction conducted in its wholesale wine business; and/or (B) it has so changed its position by making part payment for wine purchased from its supplier that it would be inequitable in all the circumstances to require it to make restitution. 16.Mr Toby Brown and Mr Jeremy Yau, counsel for the Plaintiff, highlighted the fact that the burden of proof is squarely on D8 to show that it is a bona fide purchaser without notice and/or that it has so changed its position to render it inequitable to require it to make restitution. With that in mind, I turn to consider the defences raised. (A) Bona fide purchaser without notice
17.Mr Brown submitted that the court’s task is to look at D8’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 should have been) disclosed by D8, citing the observations of DHCJ D Lam in Pacific Rainbow at §50. 18.The court was reminded that D8 was not under time constraints for filing its affirmation in opposition. The Injunction was granted just over a year ago and hence it has had ample time to marshal and adduce the necessary evidence to discharge its burden of proof, sufficient to meet the high standard required in order to establish that it is running a bona fide business and the transactions in question are legitimate. 19.The transactions cannot be looked at in isolation but in the more structured context of the running of a legitimate business generally, whether the particular line of business in question is legitimate (in the present case, trading in wine) and the specific transactions involved. 20.The Plaintiff submitted that at this stage of the proceedings, when there has been no discovery, witness statements or cross examination, it is important to see whether the bigger picture holds together based on the available evidence.
21.D8 is a Hong Kong incorporated company in October 2016 whose sole shareholder and director was and is Ms Li Ho Lin (“Ms Li”). It is said to be engaged in the wholesale trade in frozen meat and, at some point, also in wine. 22.Prior to the incorporation of D8, Ms Li was employed as a clerk by a trading company. Upon gaining “some experience and contacts” from her employment, she started her own wholesale trading business. It was small-scale trading business, largely a “one-man band”, utilising her contacts to import goods from abroad and then resell them to purchasers in Hong Kong and mainland China. Her evidence is that business is largely developed by word of mouth: D8 eventually came to accumulate repeat customers but it also accepted ad hoc/one-off orders from new customers: see the 2nd affirmation of Ms Li dated 22 July 2022 (“Li 2nd”) at §§7-8. 23.Upon the incorporation of D8, Ms Li caused D8 to open a bank account with the Nanyang Commercial Bank (“NCB”). In March 2017, it opened a USD savings account (“the NCB Account”) for its wholesale trading business in addition to HKD current and savings accounts D8 maintained with NCB. 24.According to D8’s Reports and Financial Statements certified by its auditors for the financial years ending 31 December 2018 and 2019 (respectively “the 2018 accounts” and “the 2019 accounts”), its principal ‘activities’ consisted of “wholesale of frozen meat”. 25.For the first 18 months of its business activity, D8’s only line of business appeared to be confined to trading in frozen meat. On 24 September 2018, the NCB bank statement shows a remittance out of over USD 924,110 to QuintMas SDN BHD (“QuintMas”), a Malaysian trading company, said to be D8’s only wine supplier. 26.The transactions whereby the Funds were paid into D8’s account related to 2 orders for wine of USD 140,000 and USD 135,000 respectively, placed by Guolong Trade Limited (“Guolong”) on consecutive days, namely on 13 and 14 August 2019, for a total of 2130 cartons of wine. 27.The invoice for the order placed on 13 August 2019 contained the following particulars:
28.The invoice for the order placed on 14 August 2019 contained the following particulars:
29.D8 relies on the following matters to show that it was operating a legitimate wholesale trading business:
30.As earlier noted, D8 opened its account with NCB in November 2016, at about the time of its incorporation. NCB closed D8’s accounts on 10 December 2019 “for reasons unknown[3]”. 31.In late 2019, Ms Li received a call from a staff member of NCB who simply informed her that NCB would close the 3 bank accounts D8 held with NCB. Ms Li was not given a reason nor did she enquire as she thought it was “not uncommon for companies involved in the trading business, which often have large sums going through their accounts[4]”. 32.Mr Brown submitted that there are 2 possibilities: either NCB’s employee could not divulge the reason, for example, if the Joint Financial Intelligence Unit (“JFIU”) was involved, or Ms Li was not disclosing the real reason. 33.The notion that a bank would suddenly close a business account that has been active for several years and which maintained a positive balance throughout without giving any reason for so doing is difficult to accept and appears to be contrary to common sense. 34.Be that as it may, in so far as it is suggested that “since then” D8 has switched to other banks (including Dah Sing Bank and Standard Chartered Bank), there is no evidence as to when accounts with the other banks named were established: no bank statements from those banks showing the date the relevant account was opened have been produced. 35.No composite NCB monthly bank statement is available from March 2019 onwards. The financial history transaction list for the period commencing 1 April 2019 to 31 March 2020 provided to D8 on 3 May 2022 shows that the cash balance of USD 4825.03 in the NCB Account was converted into HKD on 10 December 2019, leaving the NCB Account with a zero balance but there is no evidence as to what happened to the converted balance, whether it was withdrawn in cash or transferred to an account with another bank. 36.In those circumstances, it has not been shown that upon the closing of the NCB Account, D8 had extant bank accounts with other banks. That fact renders it even more inexplicable that NCB was not pressed for an explanation.
37.The 3 leases have identical provisions apart from the year of commencement. Each is for a period of 2 years commencing 1 July to 30 June at a monthly rent of HK $122,121, terminable upon 3 months’ prior notice in writing. It provided for reimbursement by D8 of water and electricity charges according to the meter readings and that it was incumbent on D8 to manage the Container Yard. It contained no other provisions. 38.The relevance of each lease lies in its treatment in the 2018 and 2019 accounts provided: see §§41-43 below. 39.It should be noted that the leases make no reference to or mention of any refrigeration equipment/facility being provided in the Container Yard. This is relevant to the evidence adduced to show that D8 was carrying on a legitimate wholesale trade in frozen meat[5].
40.These relate to the period from July 2021 to June 2022 and are irrelevant when determining whether during the period in question (August 2019) D8 was carrying on a wholesale trading business. It is to be noted that no employment contract for any employee is in evidence.
41.Mr Brown invited attention to the entries in the 2018 and 2019 accounts which show that for the years ended 2017, 2018 and 2019, the amount of rent paid for the Container Yard is shown as HK $336,000 when the annual rental payable under the relevant lease exceeds $1.46 million per annum. 42.There is no explanation given in the accounts for this serious discrepancy which necessarily undermines the reliability, accuracy and credibility of the accounts produced. 43.That matter apart, it is odd that no trade receivables and/or no trade payables are shown for the year ended 2018. Ms Valerie Tang, counsel for D8, submitted that that is of little consequence when trade receivables[6] and trade payables[7] are shown in the 2019 accounts but it is far from clear why that should be so. After all, it is not the case that D8 only commenced trading in the course of 2018. The statements for the NCB Account show transactions commencing April 2017. 44.Both sets of accounts state D8’s principal ‘activities’ as “wholesale of frozen meat”. However, for the year ended 2018, of the cost of purchases (in round terms) of HK $40.3 million, approximately HK $7.2 million or just under 18% of the total cost was attributable to the purchase of wine made in September 2018. 45.So far as concerns 2019, D8 placed orders with QuintMas in May and July 2019 (invoices SY 1004-1011) totalling approximately HK $7.7 million and representing over 18% of the total value of purchases made by D8 in 2019. 46.In those circumstances, to describe D8’s principal ‘activities’ as confined to frozen meat trading is inaccurate if not also misleading. 47.To substantiate D8’s wholesale trading business, only 21 pages of documents[8] (relating to 3 transactions conducted in 2021 and 1 transaction conducted in 2022) are exhibited to Li 2nd. None of the transactions presented took place in 2019 when the transfer of the Funds occurred. 48.Unless a complete set of documents for a particular transaction is provided, it would not be possible to trace through the entire transaction to ensure that everything tallies. A complete set has been provided for only one[9] of the 4 transactions presented as representative of the trading carried on. 49.That aside, the following matters require comment:
50.In short, the four matters relied on by D8 in support of its legitimate operation of a wholesale trading business are entirely unsatisfactory and the evidence presented falls far short of what is required. 51.Even assuming (which is not accepted) that D8 was carrying on a wholesale trading business in frozen meat, it does not follow that it would automatically legitimise its trading in wine. Trading in wine 52.From Ms Li’s account of why D8 came to be incorporated (see §22 above), one would expect her “experience and contacts” to have been derived from the work she had to carry out for her previous employer. Not only is there no evidence about the nature of the work she carried out as a clerk or the duration of her previous employment, nothing is known about the type(s)/line(s) of wholesale trading in which her previous employer was engaged, the size of the operation and the number of employees working there. 53.D8’s reasons for suddenly placing an order for wines, as it were, out of the blue, are not disclosed. Pausing here, trading in wines is not for the uninitiated and is certainly not an undertaking one would embark on or dabble in without being conversant with the wine trade. The absence of any explanation for suddenly branching out into the wine trade absent evidence of Ms Li’s knowledge and experience in that field is inexplicable and inevitably raises a red flag as to the legitimacy of that line of wholesale trading. 54.The value of the very first order for wine placed with QuintMas in September 2018 was not insignificant, representing almost 18% of D8’s total purchases for 2018. The circumstances precipitating that order are not disclosed nor its particulars. 55.Ms Li’s evidence is that she received a phone call from a representative of Guolong, a trading company with which she had had no previous dealings, who placed 2 orders. As the invoices issued bear consecutive dates and are not numbered sequentially, one would expect that 2 separate orders[11] were placed on separate days by separate phone calls rather than in a single phone call but all that is unclear. 56.That D8 did not maintain a log or chronological record of incoming orders for wine is surprising since one would have thought that such records would have to be kept for accounting purposes. 57.The particulars given in the invoices do not specify the vintages of the wines ordered which is remarkable as different vintages are differently priced. The explanation given that D8 had in fact only ever purchased one type of vintage for each of the wines sold to Guolong. 58.That does not explain how Guolong came to know that was the case or what vintages to order. As is acknowledged, D8 has no internet footprint showing the particular wines it carries and their vintages. It is not suggested that there were advertisements or such like that disseminated that information. 59.D8 relies on word-of-mouth. But how that would actually operate in practice (at least as regards the very first order for which payment was made in September 2018), remains a mystery. 60.It is remarkable that D8 does not appear to maintain records of its customers, be they repeat or one-off customers. The invoices in question specify the name of the purchaser but without any address or contact number. While the invoices contain important information (such as the name of the beneficiary and details of the bank account into which payment should be made), surprisingly, the terms of payment are nowhere specified which, putting it mildly, is somewhat odd. 61.D8 was at pains to stress that an address was unnecessary as Guolong picked up the 2130 cartons of wine that were ordered from the Container Yard. Had delivery been required, there would have been an additional charge and it is clear from the invoices issued that they do not state any additional charge. 62.However, that does not explain how the invoices were delivered to Guolong for settlement since it is hardly likely that Guolong had been allowed to collect the wine ordered before making payment. That is a glaring gap in the evidence. 63.Much was made of the fact that complete sets of the wine orders placed with QuintMas in May and July 2019 (totalling in excess of 21,000 cartons of wine) are before the court. A curious and inexplicable feature of purchases from QuintMas is the absence of any terms for making payment. D8’s written submissions[12] refer to it being able to enjoy the credit extended, there being no specific deadlines for full payment to QuintMas. How a legitimate business (assuming QuintMas to be such) could be conducted on such a basis for payment is bizarre and beyond comprehension. 64.The fact that the particular wines Guolong ordered happened to be carried by D8 is neither here nor there. As no records of stock maintained by D8 are in evidence, bearing in mind that D8 apparently sold wine to customers other than Guolong, it is impossible to tell whether or not D8 had sufficient stock of each of the 4 types of wine ordered. 65.For the foregoing reasons, I remain unconvinced and unpersuaded that D8 was carrying on a bona fide business of wholesale trading in wine. (B) Change of position in good faith 66.D8’s alternative defence is that it had altered its position in good faith since the receipt of the Funds in that the Funds have been applied in partial payment for the wines D8 ordered in July 2019. 67.The defence of change of position is set out in the following passage in Lipkin Gorman (a firm) v Karpnale Limited [1991] 2 AC 548, 580.
68.That test was applied by Marlene Ng J in Seridom Servicios Integrados Idom SAU v Heng Wen Trade Code Ltd & Ors [2019] HKCFI 85 at §75. 69.What D8 has done in the present case is to make a payment in the ordinary course of business. That does not come within the defence of a change of position as explained by Lord Goff in Lipkin Gorman. D8 cannot show that as a result of receiving the Funds, it engaged in some extraordinary expenditure: D8’s liability for the July order had already arisen before it received the Funds from AD 27 on 19 August 2019. The proprietary injunction 70.It is D8’s submission that for the proprietary injunction to be continued, the Plaintiff needs to show that the Funds or its traceable proceeds are held by or under the control of D8. Its case is that after receipt of the Funds on 19 August 2019 into the NCB Account, the Funds together with D8’s own funds were used to pay QuintMas for the July 2019 wine order. 71.The Funds are clearly traceable into the wine stock. The fact that D8 resold that wine to other customers must mean that D8 would have been paid by those customers. As D8 was required to disclose the current location of those assets and there is no evidence that D8 did something else with payments received from its customers, the same continues to be traceable into the proceeds of sale held by D8. 72.A further objection raised by D8 to the continuation of a proprietary injunction relates to the principles concerning adequacy of damages and balance of convenience. Thus, in Essilor Manufacturing (Thailand) Co Limited v G Doulatram and Sons (HK) Ltd & Ors [2021] HKCFI 30 at §59 that:
73.Mr Brown submitted that there is evidence to suggest that D8 would have difficulty to meet the award. The 2019 accounts state a profit of over HK $700,000 (projected to increase), but even as of this date, there are no accounts available for the year ended 31 December 2020. As earlier noted, the annual rental for the Container Yard has been grossly understated (by over $1 million per annum) and the discrepancies would probably be more than sufficient to offset any profit. 74.It is no excuse to refer to the fact that D8’s accountant appears not to be able to submit accounts until 2 years and 9 months after the end of the relevant financial year. It would mean that D8 has been in breach of section 429-431 and 610 of the Companies Ordinance. 75.Ms Tang referred to D8’s disclosure of assets as of 6 May 2022 which comprise a van and stocks of red wine with an aggregate value of over HK $9 million. It is to be noted that there were no stocks of frozen meat when wholesale trading in frozen meat was its principal activity and the Injunction was imposed only a month earlier. Ms. Li evidence is that she is now borrowing money to sustain the business which strongly suggests that D8 may not be in a position to meet the award. 76.It was open to D8 to make a payment into court of the amount enjoined so that the balance of its assets could be released for its business pending this hearing and/or the trial of this action but that did not happen. The Mareva injunction 77.D8 submitted that the Plaintiff has failed to demonstrate a real risk of dissipation citing Universal Entertainment Corporation v Kazuo Okada [2020] HKCFI 1406 at §37 where the relevant considerations are summarised. Of relevance to the present case are those mentioned in subparagraphs (4) and (9) which state that the purpose of the freezing order is not to prevent a corporate defendant from dealing with its assets in the normal course of business provided that such dealing and conduct are legitimate and an assessment of the risk of dissipation necessarily involves an evaluative and predictive judgment. The evidential burden can be satisfied by drawing proper inferences from a holistic consideration of all the circumstantial materials that are indicative of risk. 78.As was recognised in Universal Entertainment[14], each case is fact specific and the relevant factors must be looked at cumulatively. 79.In the present case, D8 sought, but failed, to justify its receipt of the Funds on the basis that it was carrying on a legitimate wholesale trading business and that the Funds were received in the normal course of its business. Had a bona fide and legitimate business been established, no question of a risk of dissipation would arise for consideration. 80.For the reasons set out, the court found D8’s evidence wanting in many fundamental respects and rejected its case of being a bona fide purchaser, there having been a lack of transparency and an absence of full disclosure. The transactions with Guolong are concerning. 81.The Funds said to have been received in the course of carrying on a legitimate business stem from a fraud. Where the legitimacy of the business being carried on is itself in issue, taking into account all the evidence that led the court to reach that conclusion, I consider that a risk of dissipation could be inferred in all the circumstances. Conclusion 82.Accordingly, I ordered that the Injunction be continued.
Mr Toby Brown and Mr Jeremy Yau, instructed by C. P. Lin & Co., for the Plaintiff Ms Valerie Tang, instructed by Wan Yeung Hau & Co., for the 8th Defendant [1] The number appearing denotes the number of cartons of wine, each carton containing 6 bottles of 75 cl. [2] NCB Bank statements for all 3 bank accounts held by D8 from November 2016 to February 2019 have been produced. For the period of 1 April 2019 to 31 March 2020, there is only a financial history transaction list of the NCB Account. [3] See D8’s written submissions at §30 (3). [4] Li 2nd at §16. [5] See§50(b) below. [6] See Note 8 to the 2019 accounts. [7] See Note 9 to the 2019 accounts. [8] Exhibits LHL 8 -11 to Li 2nd. [9] See exhibit LHL 10. [10] It seems inconceivable that a certificate of wholesomeness would remain valid indefinitely. [11] See §§ 27-28 above. [12] At §38 [13] Wason Holdings Ltd v BHP International Markets Ltd [2018] HKCA 113; CACV 83/2015, at [38] per Barma JA. [14] At subparagraph (13). |
Cases cited in this judgment
Further hearings and rulings under HCA 452/2022