張侃 v. 尚品滙(香港)國際貿易有限公司

CACV 388/2022, [2023] HKCA 996

On Appeal From [2022] HKDC 731

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 388 OF 2022

(ON APPEAL FROM DCCJ NO 4405 OF 2019)

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J U D G M E N T

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Hon Chu VP:

1.I agree with the judgment of G Lam JA.

Hon G Lam JA:

Introduction

2.The plaintiff was asked by the director of a company to advance money to the company and did so by bank transfer.  It turned out that the director acted without any authority.  On the next day, before anyone in the company knew about the money deposited into its bank account, the director, again without authority, caused the money to be paid out to certain entities for his own purposes.  Neither the director nor those entities can now be traced.  Should the plaintiff or the company bear the loss?  This is in essence the question raised by the present appeal by the plaintiff. 

Factual background

3.The defendant is a Hong Kong company that carried on the business of apparel trading.  At all material times up to August 2016, it had four shareholders who were also the directors, namely, (i) Ruan Mianshe (“Ruan”), (ii) Ruan’s nephew, (iii) Chen Hongfu (“Chen”), the third party in these proceedings, and (iv) Jun Wei.  Ruan and his nephew who held the shares on trust for him together held 45% of the shares.  Chen and Jun Wei held 32.5% and 22.5% respectively.  Chen was at the time responsible for the day-to-day operations of the defendant.

4.The plaintiff is a businessman resident in Shenzhen.  He ran a factory in Shenzhen but also had connections with an unincorporated business in Hong Kong called Mingbo Furniture Manufacturer Co (“Mingbo”).

5.The plaintiff became acquainted with Chen in 2014 through introduction by mutual friends, and had been accompanied by Chen on visits to the defendant’s offices in Hong Kong.  On 25 March 2015, Chen told the plaintiff the defendant needed a loan of US$300,000.  The plaintiff agreed to lend the money with interest, and caused Mingbo to pay US$300,000 into the defendant’s bank account by CHATS transfer.[1]  At the time Chen gave the plaintiff a written acknowledgment of the loan stamped with the defendant’s round chop (not its company seal) and signed by Chen between the stamped words “For and on behalf of S.P.H. (Hong Kong) International Trading Co., Limited” and “Authorised Signature(s)”.

6.On the next day, 26 March 2015, Chen, via online banking facilities, caused the whole amount (less bank charges) to be transferred out of the defendant’s account to three entities that were known neither to the defendant (other than Chen) nor to the plaintiff,[2] namely, (i) a Mainland company called Ningbo Tengyuan Electronic Appliance Co Ltd; (ii) a Hong Kong firm called Echee Co; and (iii) a Hong Kong company called China Enviro Ltd.  The defendant only had a credit balance of US$368.84 in its USD sub-account both immediately before the plaintiff’s remittance and immediately after the three withdrawals. 

7.About a year after the money was advanced, on 22 March 2016, Chen caused the defendant to repay US$200,000 to the plaintiff.  The defendant had not repaid the remaining US$100,000.

8.It transpired that the other directors of the defendant did not know about the loan or the partial repayment.  According to Ruan, when he came to Hong Kong and questioned Chen with regard to the defendant’s accounts in around June 2016, they had a quarrel, and Chen had since disappeared.  The money transferred to the three payees on 26 March 2015 has been presumed irrecoverable from them since, on the evidence, the Ningbo company was put on an “abnormal business list” by Mainland authorities in July 2016; Echee Co ceased business in May 2016; and China Enviro Ltd was struck off and dissolved in April 2016.

9.On 16 December 2016, the plaintiff brought the action below against the defendant for the remaining US$100,000 and accrued interest.  The defendant filed a defence and counterclaimed for the return of the US$200,000 paid to the plaintiff in March 2016.  The defendant also brought third party proceedings against Chen though he had not taken any steps in them or appeared in the trial.

The parties’ pleaded cases

10.The plaintiff’s pleaded claim was for US$100,000 as a debt, or in restitution on the basis that the US$300,000 was paid to the defendant by mistake or for no or failed consideration or was money had and received by the defendant.

11.The defendant raised a number of defences, including that (i) Chen had no authority, actual or apparent, to act for the defendant in entering into the loan agreement; (ii) the whole amount paid to the defendant was transferred out on the next day so that there was a change of position on its part; and (iii) the defendant’s receipt of the money was merely ministerial.  The defendant counterclaimed for US$200,000 on the ground that the payment of that sum to the plaintiff in March 2016 was caused by Chen without authority or was made by the defendant’s staff under mistake and was received by the plaintiff without consideration.

The judgment below

12.At the trial of the action Deputy District Judge Gary C C Lam heard evidence from the plaintiff and Ruan.  In his judgment dated 26 July 2022 (“Judgment”),[3] the judge held that Chen did not have actual authority to borrow the loan from the plaintiff on behalf of the defendant, even though he was in charge of the operation and business of the defendant.  While Chen could withdraw money from the defendant’s bank account, he was entrusted with the power to do so only for the purpose of paying the defendant’s expenses.[4]

13.The judge also held that Chen did not have apparent authority to borrow on the defendant’s behalf.  The fact that Chen was permitted to use the defendant’s round chop (which was placed at the front desk at one of its shops) and that he managed in unknown circumstances to get hold of the defendant’s “authorised signature(s)” chop was not sufficient to clothe him with authority given that, inter alia, the borrowing would be the first loan between the parties, it was not within the usual course of dealings between them, and it was for a significant amount.[5]  The judge also took the view that even if Chen had apparent authority, the plaintiff could not rely on it for it was irrational or reckless for him to lend the money without conducting a search to see if there were other directors or insisting on a board resolution.[6] The judge rejected the plaintiff’s reliance on the “indoor management rule”[7] and section 117 of the Companies Ordinance (Cap 622).[8]  It follows that the plaintiff’s claim in debt failed, for there was no loan contract binding on the defendant.

14.On the plaintiff’s claim in restitution, the judge held that the defendant received the loan as Chen’s agent and its receipt as such was ministerial and did not attract restitutionary liability.[9]  The claim in restitution therefore also failed.  For completeness the judge also considered the defence of change of position, as the money had been transferred out, but his Honour held that the change of position could not have been bona fide given that Chen’s knowledge was attributable to the defendant, the context being a claim by a third party (here the plaintiff) against the defendant as opposed to a claim by the defendant against Chen.[10]

15.Since there was no loan contract, and the defendant’s receipt was merely ministerial so that the defendant itself was to be regarded as having never received the money, the judge held that the defendant had a valid counterclaim for the US$200,000 which Chen had caused the defendant to pay the plaintiff without any proper basis.[11]

16.The plaintiff sought leave to appeal on broadly these grounds: (1) there was no sufficient pleading of the ministerial receipt defence which was therefore not open to the defendant; (2) there was insufficient evidence for finding that the defendant was merely in ministerial receipt of the money; the fact that Chen had directed the plaintiff to make payment into the defendant’s account and caused the amount paid in to be withdrawn and that there was no basis for the plaintiff reasonably to believe that he was lending money to the defendant does not support the existence of an agency relationship or otherwise a duty to account; (3) the defence of ministerial receipt should fail because of lack of good faith; (4) the judge erred in holding that Chen did not have apparent authority to enter into the loan agreement on the defendant’s behalf; and (5) the judge erred in holding that the plaintiff acted irrationally or recklessly in relying on Chen’s apparent authority.  The judge granted leave to appeal only in respect of ground (3) above.[12] The plaintiff’s renewed application to the Court of Appeal for leave to appeal on the other grounds was unsuccessful.[13]

17.By its respondent’s notice, the defendant seeks to uphold the Judgment on these additional grounds: (1) the defendant’s change of position was suffered without any voluntary act or mental element on its part and should be accepted as a defence; (2) Chen’s knowledge ought not to be attributed to the defendant; (3) the judge had effectively found the loan to be one made by the plaintiff to Chen, and the only party liable thereunder was Chen; and (4) there was no operative mistake on the plaintiff’s part when he paid US$300,000 as directed by Chen.

Analysis

18.In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67, Ribeiro PJ set out the four questions relevant for examining a restitutionary claim based on principles of unjust enrichment as follows:

“ A useful framework for approaching such claims which was adopted by both parties involves asking four questions:

(a) Was the defendant enriched?

(b) Was the enrichment at the plaintiff’s expense?

(c) Was the enrichment unjust?

(d) Are any of the defences applicable?”

19.In the present case there is no dispute that the money was remitted into the defendant’s account and the defendant was thereby enriched (subject to the defences which may also be interpreted as denial of enrichment and are dealt with later).  Nor has it been disputed that the enrichment was at the plaintiff’s expense even though the money was advanced via Mingbo.

20.It is convenient to deal first with the third and fourth points raised by the respondent’s notice, both of which relate to the third question in the restitutionary analysis.  By the third point, Mr Chain seeks to argue on the defendant’s behalf that the plaintiff knowingly made a loan to Chen, which Chen directed to be paid to the defendant.  The basis of this argument, says Mr Chain, is that the judge found that the plaintiff knew the defendant was not the real borrower and was merely an agent of Chen.  I have no hesitation in rejecting this argument.  It is clear from the Judgment that despite the use of the loose language that the plaintiff “knew or ought to have known … that the real borrower was not the defendant”,[14] the judge did not find that the plaintiff actually knew Chen was the real borrower, which was not even pleaded by the defendant.  Nor was there any hint that the judge found that the plaintiff knew that the written loan acknowledgment was false and was knowingly putting forward a false claim that he had lent money to the defendant.

21.The fourth point is also to be rejected. Isolated from the third point, the argument is that the plaintiff did not respond reasonably to the doubts over Chen’s authority and should bear the risks of his own error (see Globenet Droid Ltd v Hong Kong Hang Lung Electronic Co [2016] 3 HKLRD 863 at §43; Goff & Jones on Unjust Enrichment (10^th ed, 2022), §§9-30 to 9-31) and that the plaintiff made a “misprediction”, not a mistake.  I do not think that the plaintiff was labouring under a misprediction, in the sense of “a present belief or assumption about a future state of affairs which is subsequently falsified”.[15] The plaintiff was under a positive mistake about a present matter: Chen’s authority to act for the defendant.  Nor is the question of doubts relevant, since although the judge considered that objectively the plaintiff was careless in not verifying Chen’s authority, he did not find that the plaintiff himself had any doubt whatever that he was making a loan to the defendant.  In general, a plaintiff will not be denied restitution of money paid by mistake merely because he has been negligent: see Goff & Jones (10^th ed), §9-34.

22.This brings me to the fourth question and, in particular, the two defences that have been raised in this case: ministerial receipt and change of position.

Ministerial receipt (or payment over)

23.In general, where money is paid (for example by mistake) to an agent, he has a defence of “ministerial receipt” to a restitutionary claim brought by the payer if he has accounted to the principal without notice of the claim.  Many of the cases on this defence were decided on the basis that the agent had paid the money over to the principal, or done something equivalent, without notice of the claim.  The defence has, however, been put on a wider basis in Goff & Jones (10^th ed), §28-02, where the editors state:

“ On another view, which we prefer, an agent who receives a benefit for which he must account to his principal should be able to resist a claim in unjust enrichment whether or not he pays the value of the benefit to his principal, and whether or not he takes good title to property which he then uses as his own, because his obligation to account means that he never takes the value of the benefit for himself, and that the principal alone is enriched by the transaction.”

24.It is unnecessary to express any view whether this wider version of the defence should be preferred, for in this case the money was paid out to third parties on the instructions of the principal – which is something equivalent to payment over to the principal, if Chen was regarded as the principal.

25.For my part, however, I find it difficult to see how the defendant could rely on the agency defence.  Agency is generally a relationship based on mutual assent: Bowstead & Reynolds on Agency (22^nd ed), §1-001.  There is here no evidence of any consensual act making the defendant Chen’s agent.  Chen simply caused the plaintiff to pay money into the defendant’s bank account and caused the money to be paid out to his selected payees the next day, without the knowledge of anyone within the defendant except Chen himself.  While it can be said that Chen effectively used the defendant as a conduit, I do not think an agency sprang into existence from the defendant’s receipt of the money or the defendant thereby became obliged to account to Chen for the money received. 

26.Furthermore, even if there was an agency, it was undisclosed, and the plaintiff did not know that the defendant was receiving the money as agent.  It has been said by Lord Millett that the agency defence does not avail the agent of an undisclosed principal, though under the modern law such an agent would be able to rely on a change of position defence: Portman Building Society v Hamlyn Taylor Neck (a firm) [1998] 4 All ER 202, 207g-h; Agip (Africa) Ltd v Jackson [1990] 1 Ch 265, 288D; Millett, Tracing the Proceeds of Fraud (1991) 107 LQR 71, 76-77; see also Virgo, The Principles of the Law of Restitution (3^rd ed), p 675.  The contrary view that the defence applies to undisclosed, as well as disclosed, agents is stated in Burrows, A Restatement of the English Law of Unjust Enrichment (2012), p 124, but it is unnecessary and undesirable, as the point was not argued, to express any opinion in this case as to which view should be adopted.

27.In my respectful opinion, the real defence that arises for consideration in this case is change of position.  On the assumption the agency defence was engaged, I would however agree with Mr Wong SC, who appeared for the plaintiff,[16] that the judge was wrong not to consider the question of the defendant’s good faith in that context, which was a pleaded issue (though I should say, in fairness to the judge, that it was not focused upon by counsel at trial), and that if Chen’s knowledge could be attributed to the defendant, the defence must fail for Chen plainly had notice of the facts underlying the plaintiff’s rights.  It follows, however, from my conclusion on the question of attribution discussed in the context of change of position below, that Chen’s knowledge is not to be attributed to the defendant, and that accordingly the only ground in respect of which the plaintiff was given leave to appeal fails.

Change of position

28.It is not in dispute that to establish the change of position defence, which is raised by the first point in the respondent’s notice, the defendant must prove (1) that there was a causative link between the receipt of the benefit and its change of position, so that but for the receipt of the benefit, its position would not have changed; and (2) its position has changed in circumstances which make it inequitable for it to be required to make restitution to the plaintiff.  But the defence is not available to someone who has changed his position in bad faith.  See TTI Global Resources Hong Kong Ltd v Hongkong Myphone Technology Co Ltd [2021] HKCFI 306, §55. 

29.For this defence the defendant relies on the fact that the money was paid out the next day to three entities that were unknown to and had no previous dealings with the defendant.  No point has been taken on the ground that reliance by the defendant on the receipt is necessary,[17] and I therefore proceed on the common ground that it is not.  The only issue raised on this defence below and in this appeal is whether the change of position was made in good faith.[18]  Holding that the defendant did not act in good faith because it was imputed with Chen’s knowledge, the judge stated in his Judgment as follows:

“  44. The defendant is a corporate entity.  It does not have knowledge on its own.  It acquires knowledge through its agents like directors and sometimes employees.  Here, Chen’s knowledge was that the Loan was borrowed without proper authority and the Loan should therefore not be transferred to those unknown parties for no apparent reasons.  Chen in fact exercised fraud against the defendant, in that he knew that he did not have the authority or was reckless as to his lack of authority.  

45. The question would be whether or not Chen’s such knowledge should be attributed to the defendant.  The law is clear: where the defendant claims against Chen for loss and damage as a result of this fraud, knowledge would not be attributed to the defendant, but where a third party (the plaintiff here) claims against the defendant, Chen’s knowledge would be attributed to the defendant: see Moulin Global Eyecare Trading Ltd v CIR (2014) 17 HKCFAR 218 at §§77-79, 106; Bowstead & Reynolds on Agency (22^nd ed) at §8-209(c).

46. In the circumstances, Chen’s knowledge should be attributed to the defendant.  The change of position suffered by the defendant with such knowledge cannot in any sense be bona fide.”

30.I am, with respect, unable to agree with this analysis. The passages in Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 from which the judge derived his conclusion and to which Mr Wong directed our attention in this appeal are principally §106(4) & (6) in the judgment of Lord Walker of Gestingthorpe NPJ, which read as follows:

“ (4) The underlying rationale of the fraud exception is to avoid the injustice and absurdity of directors or employees relying on their own awareness of their own wrongdoing as a defence to a claim against them by their own corporate employer: Gluckstein v Barnes at pp 247 and 249; Houghton at pp 14 and 19; Belmont at pp 261-262; Beach at para 22.30; Duke at paras 619 to 622; McNicholas at para 56; Morris at para 114; Bilta at paras 36 to 45.”

“ (6) But the exception does not apply to protect a company where the issue is whether the company is liable to a third party for the dishonest conduct of a director or employee: El Ajou at p 702 (see para 75 above); Meridian at p 511 (see para 79 above); Duke at para 629; Morris at para 114; Bilta at para 34.”

31.These passages deal with the scope of applicability of what has been known as the “fraud exception” to the attribution of an agent’s knowledge to the principal.  Whilst Lord Walker referred to the principle as the fraud “exception”, he also alluded at §83 to Bowstead & Reynolds on Agency that regarded it not so much as an exception to a rule of imputation as part of the question whether imputation arises.  Moulin was decided by the Court of Final Appeal after the English Court of Appeal’s decision in Bilta (UK) Ltd v Nazir (No. 2) [2014] Ch 152 but before the UK Supreme Court’s decision in that case: [2016] AC 1.  In the Supreme Court’s decision, it was pointed out that the exception was not limited to cases of fraud, and that it may be regarded as part of the general rule instead of an exception: see §§9, 45, 71, 181.  Lord Neuberger, with whom Lords Clarke and Carnwath agreed, suggested the expression “the fraud exception” should be abandoned (§9), and Lord Sumption preferred to call it the “breach of duty exception” (§71).  While Lord Sumption proceeded on the basis it is an exception based on public policy to the rules of attribution derived from the law of agency (§86), the other members of the Court appear to have preferred the view that it is not so much an exception to a general rule as part of a general rule (§§9, 44-45, 181).  Leaving aside these differences in nuances, there appears to me no inconsistency relevant for present purposes between Lord Walker’s judgment in Moulin and the Supreme Court’s decision in Bilta.  In fact the former was described in the latter as “illuminating” and as containing an “admirable analysis of the law” (§§22, 201).

32.Clear and insightful though the distinction drawn in §104(4) & (6) of Moulin may have been, the flaw in the judge’s reasoning, as it seems to me, is to regard those passages on the fraud exception as constituting the entire relevant test and focus on them exclusively.  Instead, whether one treats the principle as an exception to the ordinary rules of attribution or as part of a unitary exercise in deciding whether an act or a state of mind is to be imputed, there needs to be a wider inquiry as to whose act or state of mind should for the purpose of the substantive rule in question be taken as that of the company.  Whereas it is well-established that a director’s knowledge of his wrongdoing cannot be attributed to the company as a defence to a claim brought by the company against him, it does not follow that as between a third party and a company such a director’s knowledge is always to be attributed to the company irrespective of the context and circumstances.

33.It is by now well established that the question of attribution has to be approached having regard to the content, purpose and policy of the relevant substantive rule, and the context and purpose in and for which attribution is invoked: HKSAR v Luk Kin Peter Joseph (2016) 19 HKCFAR 619, §41; Moulin, §§41, 77, 78; Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500; Bilta (UK) Ltd v Nazir (No. 2) [2016] AC 1, §§41, 191, 202.  The context, in particular, includes not only the factual and legal background, but also the nature of the proceedings in which the question of attribution arises: Moulin, §113; Bilta, §202.

34.In the present case, the question is whether Chen’s knowledge of the facts giving rise to the plaintiff’s rights is to be attributed to the defendant in determining whether its position was changed in good faith in having the money paid out of its account, such that it is not precluded from relying on the defence of change of position to the plaintiff’s claim in unjust enrichment.

35.At first sight it might be thought that this is a “liability case”, where a company is being sued by a third party, as opposed to a “redress case”, where a company is seeking to make its own delinquent director accountable for loss caused – a classification referred to in Moulin at §§12, 113, 131.  But unlike cases such as El Ajou v Dollar Land Holdings Ltd [1994] 2 All ER 685 which are referred to there as examples of “liability cases”, the defendant in this case is not being sued on the ground that it is responsible for wrongful conduct on the part of its director.  The cause of action here is not based on Chen’s conduct or fault in procuring the loan.  Indeed the judge had held that that conduct was not binding on the defendant.  The relevant claim is based simply on the fact that the defendant had received money from the plaintiff by mistake or for no consideration.  It is in the context of a potential defence to this claim that the question of attribution has instead arisen.  As shown by §§133-134 of Moulin, there may be cases which cannot comfortably be fitted into either category.  It would be a mistake, in my view, to think that because the defendant company is being sued by a third party rather than suing its own director, that director’s knowledge is necessarily attributed for all purposes to the company.

36.Change of position is recognised as an available defence to an action for restitution on the principle that the recipient’s position may have been so changed that it would be inequitable in all the circumstances to require him to make restitution: Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, 580F.  This signals “a broad approach based on practical justice”: Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm) 193, §36. 

37.It is quite clear in this case that the defendant’s position was changed the day after the receipt of money, with the result that it no longer had the benefit of that receipt.  In procuring the plaintiff to pay the defendant and causing the money to be paid out to his order the next day, it may readily be inferred that Chen was acting with a view to taking the benefit of the loan proceeds himself, and that from the outset he intended to use the defendant as a mere conduit-pipe.  The judge found that Chen had practised a fraud in that he knew he did not have authority or was reckless as to his lack of authority.[19]  His dealings with the plaintiff purportedly on behalf of the defendant were found by the judge to lack any authority, actual or apparent, from the defendant.  Chen was only entrusted with the power to withdraw money from the defendant’s bank account to pay the defendant’s own expenses.[20] His act of withdrawal of the money obtained from the plaintiff was, vis-à-vis the defendant, as unauthorised as the act of entering into the loan and procuring the payment of the “loan proceeds” into the defendant’s account.  Mr Wong stresses that the defendant placed Chen in a position where he could by himself transfer money away from its bank account without the concurrence of any other director.  But to my mind the fact that the money had originated from a loan which Chen purported to borrow in the defendant’s name and which the judge held was wholly unauthorised by and not binding on the defendant is a feature of cardinal importance.  The whole scheme was not one conducted in the ordinary course of the defendant’s business or in its interests.  It had nothing to do with the defendant other than the use of its bank account.

38.This is a very different case from one where the director in question was entrusted to act in relation to a transaction of the company as, for example, in El Ajou (discussed in Moulin at §§73-75) in which knowledge was imputed based on the concept of “directing mind and will”.  In that case the English Court of Appeal found that Mr Feldman, a director of the defendant company, was the company’s authorised agent to sign the relevant documents and agreements in relation to the transactions by which the company received assets representing proceeds of fraud.  The court considered that Feldman’s knowledge could not be imputed to the company on agency principles (though that conclusion is doubted in Bowstead & Reynolds on Agency (22^nd ed), §§8-211 & 8-215, taking the view that rules of agency could have resulted in imputation of knowledge in that case, and in Bilta at §197, Lords Toulson and Hodge said they saw force in that suggestion).  Nevertheless the court held that Feldman was to be treated as the company’s “directing mind and will” in relation to the transaction in question and that on that basis his knowledge was to be treated as its knowledge.

39.Mr Wong submits that as Chen was the sole person responsible in the defendant for the transaction in this case, he should likewise be treated as its directing mind and will.  But as discussed above, Chen did not represent the defendant in any way in dealing with the plaintiff or the loan proceeds.  He was acting on his own scheme for his own benefit.  The fact that he managed and controlled this scheme which exploited the defendant’s bank account does not, in my view, make him its directing mind and will for the purpose of this transaction.  In any event, Lord Walker has said in Moulin at §106(2) that it “might be better if [the ‘directing mind and will’ concept] were to fade away as a general concept”, and Lords Toulson and Hodge have said in Bilta at §202 that a finding that a person is the directing mind and will of a company, “when it is not merely descriptive, is the product of a process of attribution in which the court seeks to identify the purpose of the statutory or common law rule or contractual provision which might require such attribution in order to give effect to that purpose.”

40.To attribute Chen’s knowledge to the defendant in the circumstances of this case would mean that the company is treated as liable for having received a benefit even though before anyone within it (other than the delinquent director) knew about the receipt it was within a very short time misappropriated and withdrawn by that director.  That would not, it seems to me, further the policy of justice underlying the defence.  We need not decide generally whether the change of position defence would always be available if money that has been received by a company in circumstances giving rise to a restitutionary liability is subsequently misappropriated by a director or employee.  In this particular case where, as the facts indicate, the company was intended in the scheme to be used as a mere conduit for money to be obtained from the plaintiff for Chen’s use, I do not think the company should be imputed with Chen’s knowledge and thus denied the defence of change of position for lack of good faith.

41.Mr Wong also submits, relying on art. 95(3) of Bowstead & Reynolds on Agency (22^nd ed), that the defendant was put on inquiry and under a duty to investigate and should thus be imputed with the knowledge of Chen, its director.  But this category of cases, as discussed in Bowstead and El Ajou at pp 702h-703c, concerns the situation where the principal has a duty to investigate and has employed an agent to discharge such a duty, which does not arise in this case.  To the extent it is argued that the defendant had itself failed to investigate the source of the unexpected income in its bank account and was blameworthy for not preventing the withdrawal and therefore not acting in good faith, this was not a point taken below.  In any event the money was in the account for only a short time before it was withdrawn.  The judge accepted Ruan’s evidence that he only discovered the deposit and withdrawal after receiving the plaintiff’s demand letter in September 2016.[21] In the absence of evidence that any other person in the defendant had notice of the deposit before the withdrawal, I do not think this gave rise to a lack of good faith. 

42.I am fortified in the above conclusion by the decision of this court in Hua Rong Finance Ltd v Mega Capital Enterprises Ltd [2001] 3 HKLRD 623.  There, one of the three directors of the defendant company forged the signatures of the other two on a board resolution authorising the obtaining of a loan from the plaintiff, and obtained a loan in the sum of $1.5 million paid into the company’s bank account which could be operated by the delinquent director’s signature alone.  Within eight minutes of the deposit, the money was withdrawn by that director.  It was held that the loan was not binding on the company, and that the plaintiff’s claim against it in unjust enrichment also failed.  Rogers VP, with whom Le Pichon JA and Sakhrani J agreed, stated (at §34) as follows after referring to the authorities:

“ In my view the judge below was correct in dismissing the plaintiff’s claim in respect of unjust enrichment. As noted above the 1st defendant neither sought nor used the plaintiff’s money in any way nor did it retain or seek to retain the benefit of that money. The money remained only in the 1st defendant’s bank account for a very short period as part of the 2nd defendant’s personal actions which amounted to fraud. The 1st defendant’s bank account was used, to the ignorance of the 1st defendant, as a conduit in the 2nd defendant’s scheme.”

Although the question of attribution was apparently not argued there, the court’s conclusion based upon facts comparable to those of the present case seems to me entirely consonant with the analysis above and inconsistent with the plaintiff’s submissions here.

43.I may also mention that it is stated in Bowstead & Reynolds on Agency (22^nd ed) at §8-200 that:

“ Liability will not arise in respect of receipts of money paid by an agent into a principal’s bank account then withdrawn where the agent had no actual or apparent authority to pay the money into the account.”

This may also be explained by the analysis above through the route of change of position.

44.For the above reasons, I would hold that the plaintiff’s claim fails because the defendant has established a defence of change of position. 

Conclusion

45.In summary, in my view the defendant’s arguments that its enrichment at the plaintiff’s expense was not unjust because the plaintiff knowingly made a loan to Chen which was deposited with the defendant or because the plaintiff did not respond reasonably to his doubts over Chen’s authority, are unmeritorious.  The plaintiff would have a restitutionary claim, subject to any applicable defence.  The real defence that is engaged is change of position, not ministerial receipt.  On the assumption that ministerial receipt is relevant, I agree with the plaintiff that the judge was wrong not to have considered the question of good faith in that context.  Disagreeing with the plaintiff, however, I consider that the judge was also wrong to find that Chen’s knowledge was attributable to the defendant such that it should be regarded as not acting in good faith.  Accordingly, I concur in the judge’s conclusion that the defendant is not liable in restitution to the plaintiff.  It follows that I would dismiss the appeal with a costs order nisi that the plaintiff pays the defendant the costs of the appeal to be taxed if not agreed.

Hon Chow JA:

46.I agree with the judgment of G Lam JA.

Mr William Wong SC & Mr Keith Tam instructed by Yuen & Partners, for the Plaintiff

Mr Benjamin Chain instructed by Pansy Leung Tang & Chua, for the Defendant

[1]  The precise amount paid into the defendant’s account was US$299,998.06 but for convenience the sum will be referred to as US$300,000.

[2]  Judgment, §38.

[3]  [2022] HKDC 731.

[4]  Judgment, §12-16.

[5]  Judgment, §§17-27.

[6]  Judgment, §28.

[7]  Judgment, §29.

[8]  Judgment, §§30-37.

[9]  Judgment, §§39-42.

[10]  Judgment, §§43-49.

[11]  Judgment, §§51-53.

[12]  Decision on leave dated 20 September 2022: [2022] HKDC 997.

[13]  See the Judgment of the Court of Appeal (Kwan VP and Chow JA) dated 13 January 2023: [2023] HKCA 65.

[14]  Judgment, §41.

[15] See Goff & Jones on Unjust Enrichment (10th ed., 2022), §9-07.

[16]  together with Mr Tam.

[17]  It was held by Recorder Eugene Fung SC in Credit One Finance Ltd v Yeung Kwok Chi [2021] 1 HKC 598 at §§65-77 that reliance is not always a necessary ingredient of the defence of change of position.

[18]  Judgment, §43.

[19]  Judgment, §44.

[20]  Judgment, §§9 & 15.

[21]  Judgment, §38.