Create Together Technology Co Ltd v. Welltec Industrial Equipment Ltd

HCA 659/2024

[2024] HKCFI 2819

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 659 OF 2024

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BETWEEN

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J U D G M E N T

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INTRODUCTION

1.By summons dated 16 April 2024 (“Continuation Application”), the Plaintiff in this matter sought the continuation of an ex parte proprietary and Mareva injunction that had been granted against the Defendant by Deputy High Court Judge Kent Yee on 9 April 2024 and continued by Deputy High Court Judge KC Chan on 19 April 2024 (“Injunction Order”).

2.The Injunction Order prohibits the Defendant from disposing of its assets in Hong Kong in any way representing the Plaintiff’s claim of US$3,450,000 (“Sum”)  or its equivalent in Hong Kong dollars as transferred by the Plaintiff on 6 November 2023, 13 December 2023, 14 December 2023 and 28 December 2023 to the Defendant’s account, and also provides for spending on business and legal expenses.

3.The present hearing concerned the Continuation Application.  I am given to understand that there will also be a hearing in December 2024 wherein the Defendant’s application for discontinuance of the Injunction Order and, in the alternative, variation thereof will be heard.

4.At the hearing, the Plaintiff was represented by counsel Mr Chan Yip Hei and the Defendant was represented by counsel Mr Tony Ko.

BACKGROUND

5.By three contracts dated 30 November 2023, 13 December 2023, and 22 December 2023 (“Purchase Contracts”), the Plaintiff agreed with a company by the name of 同元万升（福建）衣业科技有限公司(“TY “)  to purchase display cards for US$3.75 million.

6.The remittances were duly made, but not to TY.  Instead, it is the Plaintiff’s case that it was represented to the Plaintiff by a Mr 李錦桐 (“Mr Lee”)  purportedly of TY, that inter alia:

(1)  The Defendant would receive the payments from the Plaintiff for TY and help TY exchange the payment into Renminbi;

(2)  The Defendant was a subsidiary of Welltec Machinery Limited (“WML”), which was itself a subsidiary of Cosmos Machinery Enterprises Limited (“CMEL”), and the Plaintiff was led to believe that these were two trustworthy and large corporations in the industry “holding” / “behind” the Defendant, and hence that the payment to the Defendant would be safe and reasonable;

(3)  The remittances made would be used to pay the owner and/or suppliers of the display cards ordered, and that the goods would be delivered accordingly.

7.Based on the above, remittances totalling US$3.75 million were made to the Defendants’ account with DBS bank.

8.There is no dispute that the display cards were not delivered (and by the time of the hearing before this court still have not been delivered).

9.On 17 January 2024, the Plaintiff issued three written demands to TY.

10.On 2 February 2024, the Plaintiff reported the matter to the Hong Kong police, alleging fraud.

11.On 4 February 2024, Mr Lee signed on three written guarantees promising to refund the amounts. However aside from a partial amount of US$300,000 which was remitted to the Plaintiff’s account from a Bank of Communications account held by the Defendant, no further sums were remitted back to the Plaintiff.

12.In or about March 2024, the Plaintiff was told by the Hong Kong Police that a no-consent-letter was in place freezing the Defendant’s accounts.

13.On 2 April 2024, the Plaintiff instructed its solicitors to issue letters to DBS and Bank of Communications.

14.On 5 April 2024, the Plaintiff instructed its solicitors to issue a letter to Fubon Bank.

15.On 9 April 2024, the Plaintiff applied for ex-parte relief, which ultimately led to the granting of the Injunction Order.

OUTLINE OF PARTIES’ CASES

The Plaintiff

16.As set out in the Statement of Claim dated 30 April 2024 and the evidence in support of the injunction filed by the Plaintiff, there are two primary bases upon which the claim is based, namely deceit/fraudulent misrepresentation and/or unjust enrichment.

17.It is alleged that there has been a fraud perpetrated against the Plaintiff.  Specifically in relation to the payment of the deposit, it is said that the fraud was perpetrated along the lines of the matters set out in paragraph 6 above.  No goods were ever delivered.  It was subsequently discovered by the Plaintiff that WML and CMEL had no relation to the Defendant.

18.For the purposes of the present hearing, the Plaintiff’s core allegation is that the Defendant was a 1^st-tier recipient who had received the US$3.75 million and provided no consideration therefor, and in circumstances where it had no dealings or connection with the Plaintiff.  The claim is thus also premised on money had and received / unjust enrichment.

19.In addition thereto, there are pleas of knowing receipt and/or dishonest assistance.  However, those were not relied on for the purposes of the present hearing and thus are not discussed further.

The Defendant

20.In answer, the Defendant puts forward a defence of change of position, saying inter alia that it has legitimate business operations that have been ongoing for many years.

21.It admits the receipt of the US$3.75 million.  It also admits the transfer of the US$300,000 back, said to be on the instructions of TY.

22.Despite the statements from WML and CMEL, it avers that it was and/or is related thereto.

23.It admits that no consideration had been provided to the Plaintiff.

24.It avers that it had no knowledge of any fraudulent scheme.

25.It denies unjust enrichment, relying on its ministerial capacity and change of position, asserting that the funds had already been onward transferred to TY’s nominated recipients, the said transfers totalling RMB23,482,713 and USD425,000 respectively.  However, whilst it is able to identify onward payments that it itself made (essentially to 2^nd layer recipients, set out in Annex 1 of its Defence), it is unable to demonstrate the exact route by which these amounts reached the alleged final recipients supposedly specified by TY (Annex 3 of its Defence).

NEW EVIDENCE SUMMONS

26.By Summons dated 11 September 2024, the Defendant sought to file further evidence which exhibits (i)  tax demand notices sent by the Inland Revenue Department (“IRD”)  to the Defendant from 2007 onwards, (ii)  the latest management account of the Defendant, and (iii)  a joint venture agreement signed between the Defendant and a third party, said to demonstrate the need for the Defendant to continue normal operations and utilize assets to invest into the project.

27.As proposed by counsel during the hearing, I initially referred to this evidence de bene esse.  I will make an order admitting the evidence as it does appear to be relevant to the issues in question, and the contents thereof are relatively uncontroversial (viz. IRD tax statements and the accounts are prima facie unlikely to be disputed; insofar as the joint venture agreement is concerned, its veracity is not central to the issues in dispute in any event).

RELEVANT LEGAL PRINCIPLES

28.The relevant principles are trite.

Injunctive Relief

29.In order for a proprietary injunction to be continued, the plaintiff must show that:

(1)  There is a serious issue to be tried in relation to a proprietary claim over property that is bona fide the subject matter of the cause or action;

(2)  The balance of convenience is in favour of granting the injunction, and it is just and convenient to grant the injunction, and the court will readily find that the balance of convenience favours the preservation of the funds pending trial; and

(3)  While there is no need to show a real risk of dissipation, something ought to be done for the security of the property, and damages may not be an adequate remedy.

See Heitkamp & Thumann v Living Profit Trading [2018] HKCFI 1006 (“Heitkamp (CFI)”)  at §§55-58 per DHCJ Marlene Ng (affirmed by the Court of Appeal in [2019] HKCA 119 at §32).

30.In order for the Mareva injunction to be continued, the plaintiff must show that:

(1)  There is a good arguable case on the merits;

(2)  There are assets within the jurisdiction;

(3)  There is a real risk of dissipation of assets; and

(4)  The balance of convenience is in favour of the grant.

(HKCP 2024 at §29/1/65; see also Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd and Ors (HCA 3023/2016, 2 May 2017)  at §§36-42.)

31.I have borne the above principles in mind when considering the parties’ submissions and evidence.

Unjust enrichment

32.As to the primary cause of action relied upon by the Plaintiff at this hearing (viz. unjust enrichment), there does not appear to be substantial dispute on the principles either.

33.Unjust enrichment is a receipt-based cause of action, and it does not depend on proving fault on the part of the defendant.  Irrespective of whether the Defendant still has the assets in question, the Plaintiff may have a personal claim against the Defendant.  The Defendant’s personal accountability will not be dependent upon proof of fault or “unconscionable” conduct on his part; his accountability, in this regard, will be “strict”: see Criterion Properties plc v. Stratford UK Properties LLC [2004] 1 WLR 1846 at §4.

34.As identified in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004)  7 HKCFAR 79, at 104, a useful framework for approaching such claims involves asking for questions: (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? and (d) are any of the defences applicable? (see further Predicine Holdings Ltd v. Bianchi (Hong Kong)  Ltd and Others (18/01/2021, HCA1195/2020)  [2021] HKCFI 123 at §§77-78).

35.Once defrauded funds are traced into the Defendant’s hands, the burden is then on the Defendant to prove it has changed position and in good faith. (Chan Chun Chung v PBM (Hong Kong)  Ltd (2004)  7 HKCFAR 178 at §14).

36.In answer to the above, the Defendant does not deny the receipt of the Sum, but rather raises an interesting point of law. The central proposition is that where there is a binding contract, there is little room for a claim on unjust enrichment to arise, relying on inter alia Barton v Morris[2023] AC 684 and Yew Sang Hong Ltd v Housing Authority [2008] 3 HKLRD 307.  These cases, and the point raised by the Defendant, are discussed further below.

Fraud / Deceit

37.Insofar as the plea of fraud / deceit is concerned, the Plaintiff must show that (Clerk and Lindsell on Torts (24^th edn 2023 at §17-01):

(1)  The Defendant made a false representation;

(2)  The Defendant knew of, or was reckless to the falsity of such representation;

(3)  The Defendant intended that the Plaintiff should act in reliance on such representation; and

(4)  The Plaintiff suffered loss in so acting.

DISCUSSION

38.Taking a step back and surveying the overall picture of matters which are undisputed and/or not readily disputable:

(1)  There is no dispute that the US$3.75 million has been transferred to the Defendant who acknowledges that the sum was received for and on behalf of TY (said to be in a ministerial capacity, with alleged onward payments made accordingly).

(2)  The Defendant’s case on onward transfers (said to be in pursuit of its role as currency exchange facilitator)  is evidentially incomplete in that it is unable to trace the route by which the onward transfers eventually reached the final recipients supposedly specified by TY. In this regard, there is a degree of mismatch in both timings and amounts.

(3)  There is no dispute that the display cards have not been delivered by TY.

(4)  There is no other apparent reason for the Defendant to be holding the Sum independently of TY. In fact, in its own pleading, the Defendant acknowledges the lack of consideration to the Plaintiff.

(5)  No written agreement or other documentation between the Defendant and TY has been exhibited to support the alleged ministerial capacity and/or relationship between them. The defence in essence rests on the assertions in the affidavit evidence.

(6)  As against that, the Defendant says that it has been operating a business of its own, unrelated to TY, for a considerable length of time. This is somewhat supported by inter alia the new evidence sought to be filed (such as the tax returns and the accounts).

39.On the basis of the above, I consider it apparent that there is at the very least a serious issue to be tried that the Defendant has been unjustly enriched.

40.In answer thereto, the primary argument raised by the Defendant rests on the cases of Barton (supra) and Yew (supra), the key proposition being that the Plaintiff’s claim rests on the three Purchase Contracts, which are said to be binding, and that therefore, in such circumstances, there is little room to assert unjust enrichment.

41.It is helpful at this juncture to trace the development of the case law insofar as it relates to this argument.

(1)  In Shanghai Tongji, Ribeiro PJ had distinguished between two categories of situation: (i)  where the plaintiff makes payment to the defendant pursuant to a subsisting contractual obligation owed by him to the defendant; and (ii)  where the plaintiff makes payment to the defendant pursuant to a contractual obligation owed by the plaintiff to a third party (at §89). In the latter type of case, there was some debate as to whether the right to restitution was excluded altogether (see §100).

(2)  The case of Yew concerned a series of back-to-back construction contracts. The Housing Authority had appointed a main contractor, and on the Housing Authority’s instructions, the main contractor had entered into a contract with a subcontractor. Upon the main contractor becoming insolvent, the subcontractor claimed directly from the Housing Authority the monies owed by the main contractor for the work already done, relying on restitution. The Housing Authority applied to strike out the subcontractor’s claim, and was successful at first instance. On appeal, Reyes J considered that:

“19. … I am prepared to accept as a first premise that restitution will not always be excluded in cases falling within the second category.

20. At first instance, Burrell J pointed out (at judgment para.16)  that in the dictum just quoted Ribeiro PJ was not apparently dealing with a "leapfrogging" situation. Here Yew Sang wishes to "leapfrog" over Dickson (the "immediate enrichee" of Yew Sang's efforts)  by suing the Authority (the "indirect enrichee" which received the benefit conferred by Yew Sang on Dickson). In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd, however, Casil was the "immediate enrichee" of a benefit obtained at Tongji's expense. See Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd at paras.72-73.

21. But let me assume as a second premise that Ribeiro PJ intended his dictum to apply more generally, including to leapfrogging situations.

22. It seems to me that, even given the two premises just identified, [the plaintiff’s] pleading is still in difficulty.

23. This is because, in my view, Ribeiro PJ was merely pointing out that restitutionary relief will not automatically be excluded from operating just because a case falls within the second category. One must examine each situation. Where allowing restitution would subvert a contractual (or statutory)  regime whereby risks have been allocated in a particular manner, restitution will be excluded as matter of principle. However, where no relevant regime of risk allocation can be identified, there may well be scope for the grant of restitution.

24. [The plaintiff] therefore must still show that Yew Sang's claim does not cut across contractual or statutory regimes allocating the risk of Dickson's insolvency in a particular way.” (emphasis added)

(3)  The underlying rationale, therefore, was that restitution would be excluded where this would cut across a regime (whether contractual or statutory)  that had already allocated risks in a particular way.

(4)  Mr Ko then relies on Barton as further supporting this proposition, citing the following dicta of Lady Rose (at §§88-92):

“88. HHJ Pearce records at para 169 of his judgment that during closing submissions he raised with Counsel the decision in MacDonald Dickens & Macklin v Costello [2012] QB 244 (“Costello”). He regarded that case as establishing a principle that the parties’ mutual obligations in a case in which they concluded a contract should be limited to the obligations which they have defined and allocated in the course of negotiating that contract, and that the court should uphold those contractual arrangements (see para 190). In Costello, the claimant builders contracted with a company owned by the defendants for the construction of buildings on land owned by the defendants. The defendants had informed the claimant that for tax reasons they were using their company, Oakwood, to enter into the contract rather than contracting themselves. Oakwood paid the claimant’s first few invoices in full but then stopped paying. The claimant brought a claim in unjust enrichment against the Costellos personally. Etherton LJ (with whom Patten and Pill LJJ)  agreed said that there could be no doubt that Mr and Mrs Costello had benefited from, or, in restitutionary terms, had been enriched by, the work carried out by the claimants on the site. He described the point of principle that arose in the following terms:

'21 The second point of principle is whether a restitutionary claim should be allowed to undermine the contract between Oakwood and the claimants, that is to say, the way in which the parties chose to allocate the risks involved in the transaction. The parties arranged the transaction as one in which legally enforceable promises were made only between Oakwood and the claimants, even though the benefit of the contract was to be conferred on Mr and Mrs Costello. The obligation to pay for the claimants' services, and so the risk of non-payment, was contractually confined to Oakwood. If a claim was permitted directly against Mr and Mrs Costello it would shatter that contractual containment. It would also alter the usual consequences of Oakwood's insolvency, which was one of the risks assumed by the claimants in contracting with Oakwood, since a direct claim against Mr and Mrs Costello would improve the claimants' position over Oakwood's other unsecured creditors.’

89. Etherton LJ held that the unjust enrichment against the Costellos must fail: (para 23)

'The general rule should be to uphold contractual arrangements by which parties have defined and allocated and, to that extent, restricted their mutual obligations, and, in so doing, have similarly allocated and circumscribed the consequences of non-performance. That general rule reflects a sound legal policy which acknowledges the parties' autonomy to configure the legal relations between them and provides certainty, and so limits disputes and litigation. The following cases support its application to the present case.’

90. An earlier warning against relying on unjust enrichment in circumstances where there is a subsisting contract came from an impeccable source in Pan Ocean Shipping Co Ltd v Creditcorp Ltd (“The Trident Beauty”)  [1994] 1 WLR 161. In that case, Pan Ocean, the time charterer of the vessel was seeking to recover an instalment of the time charter hire because the vessel had been off hire for the whole period in respect of which the relevant hire instalment was paid. The claim was brought not against the shipowner but against an assignee of the shipowner’s debt. Lord Goff of Chieveley (with whom Lord Lowry agreed)  referred to the “usual practice” in the administration of time charters that where a vessel was off hire from time to time, an adjustment would be made to the next instalment of hire which fell due. Most time charters include express provision for the repayment of hire but if necessary a term would be implied into the contract to that effect. He said at p 164E:

‘All this is important for present purposes, because it means that, as between shipowner and charterer, there is a contractual regime which legislates for the recovery of overpaid hire. It follows that, as a general rule, the law of restitution has no part to play in the matter; the existence of the agreed regime renders the imposition by the law of a remedy in restitution both unnecessary and inappropriate. … It follows that, in the present circumstances and indeed in most other similar circumstances, there is no basis for the charterer recovering overpaid hire from the shipowner in restitution on the ground of total failure of consideration.’

91. Lord Goff held that the position was no different as regards a claim against an assignee who was a stranger to that contract. He said later (p 166D)  that he was well aware that writers on the law of restitution have been exploring the possibility that in exceptional circumstances a plaintiff may have a claim in restitution when he has conferred a benefit on the defendant in the course of performing an obligation to a third party. He went on:

‘But, quite apart from the fact that the existence of a remedy in restitution in such circumstances must still be regarded as a matter of debate, it is always recognised that serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract.’

92. The same principle was applied by the Court of Appeal in Dargamo cited earlier. There, the parties entered into a written agreement for the transfer of certain assets under a share purchase agreement for a consideration of US$950 million. The assets were transferred and the consideration paid but the claimants sought to recover a proportion of the purchase price on the basis that the parties’ common understanding when they entered into the contract was that they would subsequently enter into an agreement to transfer other substantial assets, for which some of the US$950 million was intended to be an advance payment. That subsequent contract was never concluded and the additional assets were never transferred. The claim in unjust enrichment was dismissed. Despite the common understanding, there had been no failure of basis amounting to an unjust factor and so no trigger to an entitlement to a payment. The parties must be held to the express terms of the contract into which they chose to enter. They had both complied fully with those terms and the law of unjust enrichment did not provide a means of subverting that agreement.” (emphasis added)

(See also §§189-193, and 226; as well as Goff and Jones: The Law of Unjust Enrichment (10^th ed.)  at §3-12).

42.Relying on the above, the core argument by the Defendant is that since the Purchase Contracts were binding, there is little or no room to argue for restitution / unjust enrichment.

43.Whilst the point is certainly an interesting one, I do not consider the present stage the appropriate juncture at which to determine the argument with the degree of finality which the Defendant is inviting the Court to do so:

(1)  The cases referred to by Mr Ko were not cases involving interlocutory relief. Rather, they were all either situations involving facts and arguments which were finally determined. The Yew case concerned a strike out application.

(2)  In order for the Defendant to persuade the court that the principle applies with certainty in the present case, the underlying premise must be that the situation surrounding the transfers of the Sum and the Purchase Contracts were genuine and not fraudulent. It is not, in my view, possible to make such a determination based on the current materials.

(3)  Mr Ko argues that the pleading of the fraud is woefully deficient, and that the way in which the case is currently framed means that there is insufficient basis for the Plaintiff to found a case on the fraudulent nature of the contracts. Whilst I agree that the pleading in the Statement of Claim is somewhat unclear, once the matter is considered with reference to the totality of the evidence as filed, as well as the undisputed matters summarized at paragraph 39 above, the situation is certainly not so open and shut as to determinatively say that there is no basis for asserting fraud insofar as the Purchase Contracts are concerned.

44.As such, I do not consider that this argument raised by the Defendant sufficiently counters or detracts from the serious issue to be tried as raised by the Plaintiff.

45.Having said that, on the other hand, I do consider that because there are deficiencies in both the pleading and evidence (viz. within the entirety of the Statement of Claim, it is never expressly pleaded that the Purchase Contracts were fraudulent, it is only alluded to by reference to the failure of TY to deliver the goods and the police reports as made by the Plaintiff), it is more difficult to say with conviction that the Plaintiff is able to demonstrate a good arguable case in respect of the fraudulent nature of the Purchase Contracts.

46.In the circumstances, I consider that whilst there is merit in continuing to explore whether the proprietary injunction ought to be continued, the Mareva falls at the hurdle of good arguable case.

47.Moving on then to consider the balance of convenience, it is readily apparent that the preservation of the status quo is desirable insofar as the funds remaining in the Defendant’s accounts which had originated from the Plaintiff.  In so saying, I have taken into consideration:

(1)  There are funds that can be traced flowing from the Plaintiff’s account to the Defendant’s account by way of the initial transfers, and which remain in the said account; and

(2)  The fact that the Defendant appears to have some ongoing business, which entails ongoing debts and potential obligations (including inter alia loans owing to HSBC and Bank of Communications, litigation from third parties and the like). Whilst it is important for the Defendant to operate whatever business it has insofar as is possible, this ought not to be allowed to disturb or jeopardize those funds to which the Plaintiff has raised a proprietary claim over, particularly where the Defendant may be exposed to significant debts or claims from other parties.

48.It is thus rational to ringfence those specific funds which remain within the Defendant’s accounts.  In answer to inquiries made at the hearing, I was informed that the funds that would be captured in a proprietary injunction are those amounts as set out in the hearing bundle at B2/521.  The parties are directed to frame and agree a form of injunction order which reflects the above and adequately safeguards those particular funds.

49.In view of the above, it is unnecessary to delve in detail into the arguments made as to risk of dissipation.  I would simply mention that the matters raised by the Plaintiff in its skeleton do appear to support the concern that there could be a risk of dissipation.  Briefly:

(1)  The Defendant is unable to demonstrate clearly how its alleged arrangements with TY as to foreign exchange assistance played out insofar as the final recipients are concerned. If, as suggested, it was helping to facilitate transfers of funds to these ultimate recipients, one would have expected that there ought to be a more complete paper trail available to the Defendant that could be provided to the Court.

(2)  Despite there having been ancillary disclosure orders made, there has been lack of clarity and various instances of belated disclosure by the Defendant of the various bank accounts which it holds in Hong Kong.

(3)  There have been some withdrawals from the Defendant’s accounts after the granting of the Injunction Order which remain unexplained. Counsel for the Defendant did not seek to address these allegations at length, essentially relying on the new evidence to substantiate the Defendant’s position that the Defendant is a legitimate business. The silence on these allegations is, in itself, telling.

(4)  There were other matters canvassed by the Plaintiff in its detailed submissions, but the above are the key factors which would have gone into this court’s consideration of the risk of dissipation.

50.Finally, I would mention that based on the materials currently before me, I do not consider that fortification is necessary in the present case.  Given the Injunction Order is continued only in respect of the proprietary basis, the Defendant will be free to operate any legitimate business as it is able with funds and facilities that it would typically have access to.  There is no obvious detriment to be suffered by the Defendant, particularly when it has acknowledged that it received the Sum in the first place in an agency capacity and for no consideration.

51.As to costs, I make a costs order nisi that the Plaintiff is to have its costs in any event, subject to a 20% discount to reflect the failure to progress the case on the Mareva limb.

52.Parties are directed to file a draft order within four weeks hereof framing the proprietary injunction along the lines as set out above.

53.I thank counsel for their assistance.

Mr Chan Yip Hei, instructed by Ivan Tang & Co., for the Plaintiff

Mr Tony Ko, instructed by Patrick Mak & Tse, for the Defendant