Axht Company Ltd v. Wing Wo Lung Company Ltd and Others
Read the full judgment text of HCA 2980/2015 on BabelCite. This High Court CFI judgment was delivered on 20 December 2024.
1. These proceedings arose from a mortgage fraud which, as alleged by the plaintiff, AXHT Company Limited (“P”), was perpetrated by the 2 nd defendant, Soe Kin Fai (“D2”). In short, D2 produced to P a set of forged documents which purportedly showed that he was the sole director and shareholder of the 1 st defendant, namely, Wing Wo Lung Company Limited (“D1”) that held a valuable property in Hong Kong, in reliance of which P agreed to and advanced two loans to D1. D2 further opened an accoun
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HCA 2980/2015 [2024] HKCFI 3678 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2980 OF 2015 ________________________ BETWEEN
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________________________ J U D G M E N T ________________________ A. INTRODUCTION 1.These proceedings arose from a mortgage fraud which, as alleged by the plaintiff, AXHT Company Limited (“P”), was perpetrated by the 2nd defendant, Soe Kin Fai (“D2”). In short, D2 produced to P a set of forged documents which purportedly showed that he was the sole director and shareholder of the 1st defendant, namely, Wing Wo Lung Company Limited (“D1”) that held a valuable property in Hong Kong, in reliance of which P agreed to and advanced two loans to D1. D2 further opened an account with DBS Bank (Hong Kong) Limited (“the DBS Account”) purportedly in the name of D1 to receive the loan funds. The funds in the DBS Account were subsequently transferred to various recipients, including, inter alia,D3 and D10 (defined below). 2.In these proceedings, P sought to recover funds paid into the DBS Account and transferred to various recipients, on the bases of a proprietary claim and a claim in unjust enrichment. 3.With P’s claims against all other defendants having been concluded or settled, the only live claims at trial are those against the 3rd defendant, Giant Majesty Limited (“D3”) and the 10th defendant, Mr Lam Choi Ming (“D10”). D10, who has been legally represented since around late 2022, attended the trial to give evidence. D3 was absent from trial and did not call any witness to give evidence. Despite its absence, P is still required to prove its case against D3. 4.It should be noted that whilst there is no information that P’s alleged fraud had been formally proved against D2 or that D2 had been convicted of any offence, there is no dispute between P and D10 that “D2 is a fraudster and [a] wanted criminal” as set out in their agreed Summary of Facts. As between P and D10, the core issue is whether D10 is entitled to retain a sum of HK$945,000 paid by D2 (“the D10 Sum”) as a bona fide purchaser for value without notice, given that the D10 Sum was part of the deposit payment made by D2 to D10 pursuant to a provisional sale and purchase agreement (“the PSPA”) entered into between them for D2’s purchase of the D10 Properties (defined below). D10 also relies on the defence of change of position as a defence to P’s restitutionary claim which will be further explained below. B. THE PARTIES 5.P is a company incorporated in Hong Kong and is a licensed money lender under the Money Lenders Ordinance (Cap 163). 6.D1 is a Hong Kong-incorporated company which at all material times held a property at 228 Des Voeux Road West, Hong Kong (“the D1 Property”). 7.As mentioned above, there is no dispute between P and D10 that D2 is a “fraudster and [a] wanted criminal”. In fact, none of the relevant materials suggests otherwise. 8.The 3rd to 9th defendants (“D3 to D9”) are companies incorporated in Hong Kong. D5 was an investment services provider. D10 was at all material times D5’s client and has held a securities trading account with D5 (“the D10 Account”) since around 14 July 2014. 9.D10 is a Hong Kong permanent resident and a native of Dongguan, Mainland China. I shall return to the background of D10 below. C. PROCEDURAL HISTORY 10.P commenced the present proceedings on 16 December 2015. Since then:
11.On the first day of the trial, upon hearing counsel for P and D10, and with P taking a neutral position, I made an order in terms of D10’s summons dated 25 October 2023 to admit the supplemental witness statement of D10. D. BACKGROUND FACTS D1. D2’s mortgage fraud 12.On around 23 October 2015, D2, who purported to be D1’s sole director and shareholder, approached P to apply for a loan on behalf of D1. D2 produced to P a set of forged documents, including the purported share transfer agreements, the purported board resolutions of D1, as well as the purported bought and sold notes and instruments of transfer of shares. Those documents appeared to show that D2 was the sole director and shareholder of D1. 13.On the strength of those documents, the following acts were carried out:
14.Upon the execution of the above documents, P advanced to D1 a loan of HK$25,000,000 (“the Loan”). D2 further opened the DBS Account purportedly in the name of D1 to receive the loan funds. 15.Subsequently, D2 has failed to pay any payment to P as required under the Loan Agreements. Since late November 2015, D2 has become and remained incommunicado. 16.The fraud was revealed in December 2015 when D1’s solicitors, Messrs William Sin & Co., wrote to P pointing out that D2 was unknown to D1 and that D2 had filed forged documents with the Companies Registry appointing himself as the director and another person as secretary of D1. In the same letter, D1’s solicitors also informed P that the matter had been reported to the Police. 17.Thereafter, P also reported the matter to the Police and started to take steps to recover the monies advanced to D2 pursuant to the Loan Agreements. 18.As between P and D1, P’s position is that where it believed it was dealing with D1 rather than D2, but D1 was not aware of and never consented to entering into the deal, there was no consensus ad idem and the instruments purportedly entered into on behalf of D1 were void. Accordingly, by an order of DHCJ Saunders dated 6 June 2016, the Loan Agreements, the Mortgage, and the Assignment of Rentals were, as agreed between P and D1, declared null and void. 19.While neither D3 and D10 has pleaded a positive case vis-à-vis the existence of the fraud perpetrated by D2 on P, it has not been seriously disputed that D2 is a fraudster. As referred to above, this is also the position as between P and D10. Hence, I will proceed on the basis that P was defrauded by D2 into advancing the Loan purportedly to D1, which further led to monies being transferred to the DBS Account opened by D2. D2. D3 Sum and D10 Sum 20.By an order of To J dated 27 May 2016, P was granted copies of all account opening documents and copies of all bank statements, cheques, deposit slips, withdrawal slips, debit and credit vouchers, transfer application forms pertaining to the DBS Account. Based on the cheques and vouchers obtained, it was discovered that D2 had caused or procured the funds in the DBS Account to be transferred to various defendants in the present proceedings. 21.Amongst the transactions between 28 October 2015 (i.e. the date of the account opening) and 6 November 2015 (i.e. the date of the last recorded transaction), the following are relevant to D3 and D10:
D3. PSPA 22.The PSPA lies at the heart of D10’s defences of bona fide purchaser and change of position. Hence, it is necessary to set out in some detail D10’s evidence as to his background, how he came to know D2 and the circumstances under which the PSPA was entered into. I will turn next to the terms of the PSPA and the subsequent developments. D3a. Background of D10 and Lee Loi 23.D10, a Hong Kong permanent resident and a native of Dongguan, Mainland China, was educated to the level of secondary school in Mainland China. He does not know English. He is a businessman and has been involved in the businesses relating to catering, food and drink, and operating guesthouses. 24.D10 was at all material times the registered owner of the following properties (collectively “the D10 Properties”):
25.At all material times, D10 was the majority shareholder and controller of Lee Loi Holdings Development Limited (“Lee Loi”), which was established in 1997. It appears that Lee Loi only held Flat 3A, Mascot House, 746-748 Nathan Road, 52-54 Bute Street, Kowloon (“the Lee Loi Property”), and had no operations or employees. Its business registration certificate has not been updated since 2012. D3b. Introduction to Mr Zheng 26.In 2014, D10 became acquainted with a woman called 楊美然 (“Ms Yeung”) in a clansmen association (同鄉會) in which D10 served as the vice-president and the secretary-general. Ms Yeung claimed that she would introduce a man involved in financial investment to D10. Thereafter, Miss Yeung brought a 鄭君豪 (“Mr Zheng”) to the clansmen association and introduced him to D10. 27.From time to time, D10, Ms Yeung and Mr Zheng would have meals together, during which they would discuss various topics related to investment. One of the topics concerned investment in the property market. During these conversations, D10 disclosed to Ms Yeung and Mr Zheng that he held three properties under his name (i.e. the D10 Properties) and an additional property in the name of Lee Loi (i.e. the Lee Loi Property). 28.Subsequently, Mr Zheng told D10 that it was a good time to sell real properties, as the economy was not doing well and property prices could fall in the near future. Mr Zheng suggested that D10 should sell his properties at a high price and then repurchase them while the property prices drop in order to earn a profit. D10 told Mr Zheng that he would be willing to sell if the price was right. D3c. Introduction to D2 and the Oral Agreement 29.Later, Mr Zheng introduced D2 to D10, and persuaded D10 to sell the D10 Properties under his name to D2 at a price of HK$30,000,000. Both Mr Zheng and D2 represented to D10 that D2 was purchasing on behalf of a fund, but they thought that the consideration for the three D10 Properties was too low. In light of this, Mr Zheng claimed that he held a 10% share in a development project in Wu Kai Sha and a 49% share in 6 village houses in Cheung Chau (collectively, “the Ownership Interests”), and that the total selling price for the Ownership Interests was HK$30,000,000. D2 and Mr Zheng tried to persuade D10 to sell the D10 Properties, together with Mr Zheng’s Ownership Interests, to D2 at a total consideration of HK$60,000,000. 30.D10’s case is that an oral agreement (“the Oral Agreement”) was reached at this point between D10 and D2. The Oral Agreement, subsequently recorded in a PSPA, reflected the above proposal by Mr Zheng to D10, which provides for the sale of the D10 Properties and the Ownership Interests to D2 for HK$60,000,000. According to D10, it was agreed between the parties that:
31.It was, according to D10, also agreed between him and Mr Zheng that after he received the consideration of HK$60 million, he would pay HK$30 million to Mr Zheng as value for the Ownership Interests. 32.It is D10’s case that prior to D2’s payment of the Initial Deposit:
33.The evidence suggests that thereafter on 11 May 2015, D2 paid D10 the Initial Deposit partly by cash (HK$82,225.33) and partly by a bank deposit (HK$962,074.67), which amount to HK$1,044,300 in total. At D2’s instructions, D10 transferred HK$962,074.67 to a bank account of Messrs Cheung & Choy for legal expenses and the balance of the mortgage debt due to Chiyu Bank. D3d. The terms of the PSPA 34.D10’s evidence is that on 29 May 2015, D10, D2 and Mr Zheng attended the office of Messrs B.C. Chow & Co. to sign the PSPA. D10 said that it was D2 who took out the draft PSPA, which was a home-made document that only consisted of one page. In the absence of any legal advice, D10 (as vendor), D2 (as purchaser) and Mr Zheng (as witness) signed the PSPA. 35.The PSPA contains, inter alia, the following clauses:
36.It is of note that in the PSPA, there is a line drawn over Clause 3 (which contains the words “3. 生意轉讓：香港烏溪沙白鷺居独立屋發展計劃10%股權，長洲 Lot No. 847 六幢村屋 49%股權”). D10 explained in his evidence that the line was not there when the PSPA was entered into in May 2015. According to D10, it was drawn by him subsequently in around August 2016 when he was making a statement in the police station, after finding out D2’s fraud perpetrated on him in circumstances further set out below and subsequently reporting the matter to the Police. D10 explained that he drew the line with a pen out of anger in the police station with a ruler given to him by the Police, in order to indicate that the Ownership Interests did not actually belong to him. 37.Separately, while Clause 5A of the PSPA states that the Initial Deposit had already been paid on 15 April 2015, the evidence shows that D2 paid the Initial Deposit to D10 only on 11 May 2015. In this regard, D10’s case is that prior to the signing of the PSPA on 29 May 2015, the parties did not bother to ensure this was reflected in the PSPA, as there was no longer any dispute regarding the Initial Deposit which had already been paid. 38.D10 also said that initially he did not intend to sell 3D Mascot House as he was applying for a licence to run a hostel there. It is D10’s evidence that it was only upon D2’s persuasion and representation regarding the fund’s requisite investment scale that he reluctantly agreed to include 3D Mascot House, but he insisted that 3D Mascot House should remain registered in D10’s name. I will return to this below. D4. Payment of Initial Deposit and partial settlement of Further Deposit 39.As stated above, in performance of the PSPA, D2 paid the Initial Deposit to D10 on 11 May 2015. 40.It is D10’s case that the PSPA requires the Further Deposit to be paid on or before 29 June 2015. However, D2 did not settle the Further Deposit by the prescribed deadline. According to D10, upon his demands, D2 represented that he was short of cash and needed more time to pay the Further Deposit. Labouring under the impression that D2’s cash flow problem was only temporary, D10 waited for D2 and only chased him for payment orally from time to time. 41.As explained by D10, under this backdrop, in late October 2015, D2 handed over to D10 a cheque payable to Lee Loi in the sum of HK$945,000, and told D10 that he could only give D10 that much for the time being and that he would pay the outstanding balance very soon. D10 then went to bank in the cheque into Lee Loi’s bank account with Bank of China, but was told by the bank staff that it cannot be deposited thereto as the said account had not been used for a long time. The cheque was ultimately not deposited into any bank account and was returned to D2. 42.On 2 November 2015, D2 provided D10 with a cashier’s order for the sum of HK$945,000 (i.e. the D10 Sum). On D10’s case, the D10 Sum was deposited into the D10 Account in partial settlement of the Further Deposit. D5. D2’s scheme to deploy the D10 Properties 43.It is also part of D10’s case that D2 devised a scheme to fraudulently deploy the D10 Properties. D10’s evidence is as follows:
44.The Purported Powers of Attorney apparently conferred on D2 the powers to inter alia sell, dispose of and mortgage the three D10 Properties on such terms, and for such consideration, as D2 deemed fit. However, the Purported Powers of Attorney did not authorise or give D2 any power to obtain loans or sign on loan agreements on behalf of D10. 45.On around 15 to 17 June 2015, D2, relying on the Purported Powers of Attorney, entered into various loan agreements and mortgage agreements (collectively “the Credit One Agreements”) with Credit One Finance Limited (“Credit One”), another money lender in Hong Kong. 46.The Credit One Agreements purportedly provided that (1) Credit One agreed to grant loans in the sums of HK$2,600,000, HK$4,000,000, and HK$2,800,000 to D10, and (2) the D10 Properties were mortgaged to Credit One as security for such loans. 47.It is D10’s case that all of such loan funds were paid to D2, not D10. D6. Discovery of the fraud 48.Since late 2015, D2 has become incommunicado. The PSPA did not proceed to completion, and no sale and purchase of the D10 Properties and/or the Ownership Interests was concluded. 49.On 8 January 2016, Credit One commenced HCA 51/2016 against D10 for the recovery of a purported loan of HK$4,000,000 plus interest, and the enforcement of a purported mortgage over 5C Mascot House (“the Credit One Proceedings”). 50.It is D10’s evidence that in early 2016, he found out he was sued by Credit One in the Credit One Proceedings. It was only further through the efforts of his lawyers that he discovered he had been defrauded by D2 and Mr Zheng, and that the documents he signed on 15 June 2015 were in fact three Purported Powers of Attorney. D10’s position is that the Credit One Agreements were obtained by D2’s fraud as he never consented to those agreements and/or the loans, and D2 had no authority from D10 to sign on those agreements, which should all be null and void and of no legal effect. 51.Apart from the above, D10 also discovered that forged records of Lee Loi had been filed with the Companies Registry by D2 without his knowledge and/or consent, such that the existing directors, shareholders and company secretary of Lee Loi were removed and replaced by D2. 52.On 15 August 2016, D10 reported the matter to the Police. 53.In these circumstances, in breach of the PSPA, D2 failed to pay the balance of the Further Deposit and proceed with the PSPA as required. Therefore, D10 forfeited the Initial Deposit and part of the Further Deposit paid (including the D10 Sum) under the PSPA. E. PARTIES’ RESPECTIVE CASES E1. P’s claims 54.P relies on two causes of action against D3 and D10, namely restitution of unjust enrichment and a proprietary claim in respect of the D3 Sum and the D10 Sum. P also seeks declaratory relief to the effect that D3 and D10 hold the two sums on trust for P respectively. 55.As regards the unjust enrichment claim against D3, in broad terms, P submits that:
56.As regards the unjust enrichment claim against D10, P submits that the arguments in §55 above apply mutatis mutandis. 57.As regards the trust claims, P submits that equity imposes a constructive trust on property obtained by fraud: citing Essilor Manufacturing (Thailand) Co Ltd v G. Doulatram and Sons (HK) Ltd & Ors [2020] HKCFI 2489 at §§64-65. From the moment the Loan was disbursed to the DBS Account under D2’s control, P submits that the Loan has been held on trust for P and that P is entitled to follow its monies into the D3 Sum and D10 Sum which originated from the Loan. 58.P also seeks declarations that the D3 Sum and the D10 Sum were held on trust for P by D3 and D10 respectively and that P is entitled to trace and follow such sums and what has become of the same. For these declaratory reliefs, P submits that it has a real interest in the subject matter, that there is a genuine need for such relief to secure P’s proprietary claim, and that D3 and D10 are the proper contradictors: citing Convoy Global Holdings Ltd & Anor v Kwok Hiu Kwan & Anor [2020] 4 HKLRD 222 at §§52-53. 59.P’s pleaded claims for knowing receipt and dishonest assistance against D4 and D7 are no longer relevant as final judgment had been entered against them. E2. D3’s case 60.D3, in its Defence dated 25 April 2018, makes no admission to the receipt of the D3 Sum. 61.D3 also asserts that had it received the D3 Sum, it is not liable to P, as it purportedly transferred the D3 Sum away in the course of business carried on by a licenced money service operator (which, on its case, is not operated by D3 but by one “Madam Leung trading as panda company”) in good faith and without notice of any interest of P in the D3 Sum. It further contends that it was the agent of its money service customer(s) and its receipt and handling of the D3 Sum amounted to a ministerial receipt. E3. D10’s case 62.In his Defence dated 16 May 2023, D10 contends that he was not connected to, nor involved in, and had no knowledge of the alleged fraud or wrongdoing perpetrated by D2 on P. Hence, while D10 admits having received the D10 Sum, no admission is made to the alleged fraud of D2 as pleaded by P. 63.D10 submits that it is incumbent upon P to prove to the satisfaction of the Court that D2 held the D10 Sum on trust for P, that the D10 Sum was paid to D10 in breach of trust, and that D10’s enrichment was unjust in the relevant sense. In this regard, D10 has pointed out that P has not pleaded any unjust factor. 64.More fundamentally, in respect of the D10 Sum, D10 raises two defences:
65.In response to D10’s bona fide purchaser defence, P makes essentially the following points:
66.D10 has complained that P’s argument on the validity of the PSPA has not been pleaded. There are some other pleading issues in relation to P’s case which will be discussed below. 67.As to D10’s change of position defence, P argues, inter alia,that:
F. P’S UNJUST ENRICHMENT CLAIM AND TRUST CLAIM F1. Unjust enrichment claim 68.The elements of a claim in unjust enrichment were set out by the Court of Final Appeal in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at §67, namely: (1) Was the defendant enriched? (2) Was the enrichment at the plaintiff’s expense? (3) Was the enrichment unjust? (4) Are any of the defences applicable? 69.I am satisfied, based on the evidence before me, that D3 and D10 were enriched as recipients of the funds in the DBS Account, and that such enrichment was at the expense of P as the funds came from the Loan advanced by P to D2. 70.In particular, it should be pointed out that in order to establish enrichment at P’s expense, it is not necessary to show a direct transfer from P to D3/D10: AXHT §41. This is a clear case where the intervening transaction forms part of a set of related transactions and it would be unrealistic to view them separately: AXHT §43. It is pertinent that there is a close proximity in time between D2’s opening of the DBS Account purportedly in the name of D1 on 28 October 2015, P’s advancement of monies into the DBS Account on 29 and 30 October 2015, as well as D2’s transfers of the D3 Sum and the D10 Sum from the DBS Account on or around 31 October and 2 November 2015 respectively. In the circumstances, the opening and use of the DBS Account was no more than a conduit pipe for the transfers to, inter alia, D3 and D10. 71.Turning to the unjust factor, while P made it clear in its opening submissions that the unjust factor it relied upon is mistake of fact, there are some merits in D10’s criticism that this was not clearly pleaded by P. Rather, at paragraph 21E of the Re-re-re-Amended Statement of Claim, P pleaded that D3 and D10 had “no ostensible and/or legitimate purpose for the Transactions” as the basis of the unjust enrichment claim. However, in the context of its restitutionary claim, P’s pleaded case relies on the fact that the transfers of the D3 Sum and the D10 Sum were procured by D2’s fraud. Whether such fraud would constitute an unjust factor, either in the form of an operative mistake of fact or otherwise, boils down to an analysis of the evidence. In any event, D10, instead of strictly taking a pleading objection at trial, indicated in his opening submissions that his position is to leave it to P to discharge its burden to prove that D10’s enrichment was unjust in the relevant sense. After all, the parties’ battleground is primarily drawn at the applicability of various lines of defence, which will be analysed in turn below. F2. Trust claim 72.Also subject to any of defences available, applying the principles in Essilor Manufacturing at §§64-65, I am satisfied that the D3 Sum and the D10 Sum, being properties transferred as a result of D2’s fraud, were held on constructive trust for P from the moment the Loan was disbursed to the DBS Account, so that such monies are recoverable and traceable in equity, and P is entitled to follow the D3 Sum and the D10 Sum into the hands of D3 and D10 respectively: Foskett v McKeown [2001] 1 AC 102 at 127B-C (Lord Millett). 73.However, P’s beneficial interest in the property would be extinguished if the recipient is able to show that it is a bona fide purchaser for value without notice: Lewin on Trusts (20th Ed.) at §44-119. 74.I will now turn to consider the defences raised by D3 and D10 below. G. DEFENCES OF D3 75.As noted above, the main thrust of D3’s defence is that it had transferred the D3 Sum away in the course of business carried on by a licenced money service operator, i.e. one “Madam Leung trading as panda company”, and that its receipt and handling of the D3 Sum as the agent of its money service customer(s) amounted to a ministerial receipt. 76.While further assertions were made in the two witness statements filed on behalf of D3 to the effect that the “panda company” referred to in its Defence was “short of bank accounts” and had to use D3’s bank account to operate its business, there is however no documentary evidence available before the Court as to the operation of this “panda company” and/or its alleged use of D3’s bank account since 2014. Nor is there evidence before the Court to support, inter alia, the assertions of one of D3’s witnesses to the effect that D3, upon receipt of the D3 Sum, converted the same into Renminbi and made various onward remittances as instructed by D2. Significantly, D3 was absent from trial and neither of D3’s two witnesses attended trial to give evidence and be cross-examined by P. As D3 has failed to discharge the burden of establishing its pleaded defences, I allow P’s unjust enrichment and proprietary claims against D3. H. BONA FIDE PURCHASER DEFENCE OF D10 H1. Legal principles 77.To establish the defence of bona fide purchase (“BFP Defence”), a defendant should demonstrate (1) a purchase for value, (2) of the legal title in property, (3) in good faith, (4) without notice, (5) at the time of transfer of the legal title: Lewin on Trusts (20th Ed.)at §44-119. 78.It is well-established, and as accepted by P’s counsel during his oral opening submissions, that the BFP Defence is available not only to a claim asserting title to property, but also to defeat a claim to recover the traceable proceeds of property or a personal claim in unjust enrichment: JSC BTA Bank v Ablyazov [2019] BCC 96 at §60 (Leggatt LJ, as he then was); DBS Bank (Hong Kong) v Pan Jing [2020] 4 HKC 395 at §45 (DHCJ Blair). 79.The test of notice was set out by Lord Clarke in Papadimitriou v Credit Agricole Corp and Investment Bank [2015] 1 WLR 4265 at §13:
80.At §14, Lord Clarke set out three circumstances relating to notice:
81.Dealing with the third category, Lord Clarke added at §20 that:
82.As Lord Sumption put it at §33:
83.The analysis in Papadimitriou was adopted by Louis Chan J in Loandepot.com, LLC v Yingcai Tech Ltd & Ors [2018] HKCFI 2172 at §§184-185. 84.Further, although “bona fide” and “without notice” are in principle distinct elements of the BFP Defence, it is difficult to envisage a situation in reality where a defendant is found not to have notice and yet still to have acted in bad faith: Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156 at §121 (DHCJ Morris QC (as he then was)). It would be rare for an absence of bona fides to prevent the purchaser of the legal estate without notice from asserting priority over a prior equitable interest: Serious Fraud Office v Litigation Capital Ltd [2021] EWHC 1272 (Comm) at §136 (Foxton J). 85.As to the requirement of consideration, it must be valuable, not nominal, and have been executed. The satisfaction of an existing debt is a valuable consideration for the purposes of this defence: Heydon, Leeming and Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th Ed.) at §8-250. 86.Having set out the relevant principles, I turn to the disputed issues under the BFP Defence. I deal with them in the following order:
H2. Issue 1: Bona fides of the PSPA 87.Whether the PSPA was entered into bona fide is closely related to the issue of whether D10 had notice – actual or constructive – of the existence of a proprietary claim over the D10 Sum. 88.On the question of actual notice, D10’s evidence is that he had no knowledge of the fraudulent scheme perpetrated by D2 on P or that the D10 Sum represented the proceeds thereof. P however contends that D10 was “tainted with actual notice” when he decided to forfeit the D10 Sum in 2016 after his discovery of D2’s fraud perpetrated on D10 himself. 89.At the outset, it should be pointed out that P’s argument in this regard has not been properly pleaded but was only made in the course of its closing submissions at trial. This is unacceptable. In any event, such argument is without merit. I accept the submissions of D10’s counsel, citing Lewin on Trusts at §§44-119 and 44-137, that for the purpose of the BFP Defence, lack of notice should be assessed at the time of transfer of the legal estate, and in this case, the payment of the D10 Sum into the D10 Account in 2015. In my judgment, D10’s forfeiture of the D10 Sum in 2016 only served to confirm his entitlement to retain the D10 Sum paid by D2, but it does not alter the fact that the legal estate of such sum had already been transferred earlier in 2015. Thus, D10’s state of knowledge in 2016 should not impact on the Court’s analysis in this regard. 90.Further, having examined the evidence as a whole (including even D10’s state of knowledge in 2016 for completeness), I am not satisfied that D10’s discovery of D2’s fraud on D10 himself in 2016 is tantamount to any notice – actual or constructive – of the separate and distinct fraud perpetrated by D2 on P and, by extension, the proprietary right of P over the D10 Sum paid by D2 to D10 back in 2015. In my view, even though D10 found out in 2016 that he was misled into signing certain documents which further led to his properties being mortgaged for securing loans, it is a quantum leap for P to contend that D10 acquired constructive notice and should have made enquiries of all the monies (including the D10 Sum) paid by D2 to D10 hitherto, on the basis that they were likely or probably the proceeds of fraud or over which a third party’s proprietary right likely or probably exists. 91.Although the legal or persuasive burden rests on D10 to prove the BFP Defence, having raised the specific allegations to undermine that defence, P bears the evidential burden with respect to the same. On the evidence available before the Court, I am not satisfied that because of D10’s discovery in 2016 of D2’s fraud perpetrated on D10 himself, a reasonable person with D10’s attributes would have realised that there probably was a proprietary right in the D10 Sum paid by D2 earlier in 2015 (category 2), or that D10 knew any facts which should have led him to make enquiries that would have revealed the probable existence of such right (category 3). This is not to mention that P also failed to plead and particularise what precise enquiries that allegedly should have been made by D10 on the D10 Sum received back in 2015. 92.In its Reply to the Defence of D10, P pleaded the following factors to contend that the PSPA was not a bona fide transaction:
93.D10 takes the preliminary objection that these “particulars” are not averments that D10 had prior notice (whether actual or constructive) of the alleged fraud and/or P’s alleged beneficial interest in the D10 Sum. D10 relies on the proposition that allegations of fraud or dishonesty must be sufficiently particularised, and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: JSP International SRO v Alacrity Ltd & Ors [2022] HKCFI 977 at §28 (Cheng J). 94.Insofar as P is relying on those particulars in support of its allegation that D10 had reasons to suspect that the D10 Sum was proceeds of D2’s wrongdoing or that the sum was subject to a proprietary interest, this involves no direct imputation of fraud or dishonesty (but is more pertinent to the issue of actual notice, which I have held D10 did not possess). The principle regarding the need to sufficiently particularise allegations of fraud and dishonesty is not engaged when one is concerned with the issue of constructive notice. 95.Before I turn to the specific factors pleaded by P, three matters should be borne in mind in determining if D10 had constructive notice:
96.With the above in mind, I turn to the factors pleaded by P as set out in §92 above. 97.First of all, I would attach limited weight to the purchase price of the D10 Properties. P has furnished no evidence to substantiate its claim that the D10 Properties were grossly overvalued. Nor is there any evidence before me as to their proper valuation at the material times in 2015. Even assuming that the D10 Properties were sold at above their market value, this is not necessarily something suspicious in the eyes of D10, who, after all, wished to profit from this transaction and certainly would be keen to have his properties sold at a higher price. In the circumstances, the purchase price would not per se have put D10 of notice in relation to the propriety of the transaction. 98.Further, D10 has provided some explanation of the unique features of the PSPA. As mentioned above, given that the PSPA was home-made, some of the aspects do not appear natural or sophisticated. However, I do not think that they would affect the defence run by D10. I would like to set out some examples as follows:
99.Overall, I accept that there may be oddities with certain aspects of the PSPA, and one cannot gainsay the fact that the PSPA is not well-drafted. For example, although the bottom of the PSPA expressly recorded that a sum of HK$962,074.67 was received by D10 by way of an HSBC cheque, it did not also mention the cash portion received by D10 on 11 May 2015. For the handwritten Clause 9 about D2’s proposed use of the D10 Properties to obtain a mortgage loan, the figure of HK$400,000 as agreed by D10 was also not expressly recorded in the PSPA. Having said that, as P also acknowledged, the Court need not place undue weight on the niceties of the contractual language, as the PSPA was obviously a home-made document not prepared by lawyers. More fundamentally, I do not consider that any of the oddities referred to by P could go so far as to establish that the PSPA is a sham or that the transaction is fictitious. Nor do I see anything inherently problematic in recording a substantial transaction in a home-made agreement. 100.Moreover, in determining whether the oddities in the PSPA are sufficient to put D10 on notice, I also bear in mind that D10 did not strike me as a sophisticated person, notwithstanding that he has had experience in the business and property transactions. He only received secondary education, and I accept his evidence that he does not know English. 101.Further, any oddities should be understood against the backdrop of the relationship between D10 and Mr Zheng who introduced D2 to D10. According to the evidence of D10, which I accept, D10 and Mr Zheng had regular meals together since they had met each other in the clansman association in 2014. This is not a typical commercial transaction where two parties negotiate professionally at arm’s length. 102.I have addressed the pleaded factors, which go primarily to the purchase price of the D10 Properties and the terms of the PSPA. However, during the course of arguments, P has traversed beyond those factors and made a multitude of points concerning the circumstances before and after the conclusion of the PSPA which are said to cast doubt on the bona fides of the transaction. 103.D10 has made a preliminary objection to these submissions on the basis that they have again not been properly pleaded, and no application was made by P to amend its pleadings. While P submits that some points only surfaced during D10’s oral evidence, it is clear that a number of P’s arguments are actually founded on matters and documents available to P well before trial. In any event, out of deference to counsel’s submissions, I shall briefly address those points. 104.For instance, P criticises D10 for initially using Lee Loi to receive the D10 Sum, when D10 had not used Lee Loi’s bank account with Bank of China for a long time. However, it is not immediately apparent to me how the use of Lee Loi’s bank account reflects adversely on the bona fides of the transaction. There is no dispute that D10 was at all material times the proprietor of Lee Loi. The same also applies to D10’s deposit of the D10 Sum into the D10 Account, which is D10’s own securities trading account maintained with D5. Insofar as P now seeks to insinuate that D10 did not use his personal HSBC bank account to receive the D10 Sum because he knew there was something suspicious, such allegation was not put to D10 and also does not have any factual foundation. 105.Another strand of P’s criticisms is that D10 ought to have questioned the bona fides of Mr Zheng when the D10 Sum was received. However, I am not satisfied that a reasonable person with D10’s attributes would, because of Mr Zheng’s involvement, have realised that there probably was a proprietary right in the D10 Sum, or that D10 knew facts which should have led him to make enquiries that would have revealed the probable existence of such right:
106.Separately, P also relies on the alleged inconsistencies between D10’s evidence and what he told the Police:
107.In any event, even if there are any alleged inconsistencies in relation to the identity of the operator of the hostel business or the exact amount of cash paid by D2 to D10, it is plain that they are peripheral in nature and immaterial to the issue of whether the PSPA was entered into bona fide by D10 without notice. 108.P also seeks to discredit D10 by pointing to D10’s evidence in the Credit One Proceedings:
109.With no disrespect to counsel, I do not find it necessary to dwell on these arguments in detail (which I have considered), but I do not think it is fair or meaningful to microscopically compare D10’s evidence here and that in the Credit One Proceedings. Having carefully considered and analysed the factual evidence available before the Court, in my judgment, the fact that inconsistencies exist between incidental aspects of evidence in the two cases is not necessarily or sufficiently indicative of the lack of bona fides on the part of D10 in entering into the PSPA or receiving the D10 Sum from D2. 110.For all these reasons, I find that the PSPA was entered into by D10 bona fide without notice. H3. Issue 2: Whether the PSPA is a legally binding agreement 111.P, in its opening submissions, for the first time contended that the PSPA is not a legally binding agreement. 112.I agree with D10 that P should not be allowed to run this point as there is no plea or averment in P’s pleading that the PSPA is invalid, void or of no legal effect for the following reasons:
113.In any event, even assuming (for the sake of completeness) P is allowed to argue that the PSPA is invalid, I would reject this argument for the following reasons:
H4. Issue 3: Was D10 entitled to retain and forfeit the D10 Sum 114.As noted above, it is D10’s position that the D10 Sum was received by D10 as part of the Further Deposit and earnest money under the PSPA. As D2 failed to pay the balance of the Further Deposit and proceed with the PSPA as required, D10 was entitled to retain and forfeit the D10 Sum as a matter of construction and/or by implication of term. 115.On the other hand, P contends that D2’s obligation of paying the Further Deposit of HK$4,955,700 pursuant to Clause 5B of the PSPA was conditional upon a formal sale and purchase agreement being signed. Since no formal sale and purchase agreement had been signed, the sum of HK$945,000 (i.e. the D10 Sum) was only paid as partial payment towards the consideration under the PSPA, in which case there is no right of forfeiture upon the termination of the PSPA and the D10 Sum should be refunded to D2. 116.It is noteworthy that P’s arguments above were not pleaded in P’s Reply to D10’s Defence in response to D10’s plea of his entitlement to forfeit the D10 Sum. In any event, I wish to set out my views on the parties’ differences in this regard. 117.The nature of deposits and its distinction with part payments were considered by the Court of Final Appeal in Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234. As Ribeiro PJ held:
118.Ribeiro PJ explained the rationale of deposits at §69:
119.As also made clear in other authorities, where a sum of money is paid under a contract and the contract is not completed, the right of the payer to claim the return of the money depends on the construction of the particular terms of the contract. If the sum is called a “deposit” and if nothing is said expressly about the conditions governing it, it will be taken to be required as a security for the completion of the contract by the payer and will be forfeited to the other party if the payer fails to perform his side of the contract: Chitty on Contracts (34th Ed.) at §32-074; and Howe v Smith (1884) 27 Ch D 89 at 98. Hence, it has been said that forfeiture of deposits does not depend on an express forfeiture clause: Simply Power Ltd v Billy Chua [2023] HKCFI 944 at §234. 120.For the following reasons, I am satisfied that D10 was entitled to retain and forfeit the D10 Sum. 121.Beginning with the natural and ordinary meaning of the terms, Clauses 5A and 5B of the PSPA expressly provide that the sum of HK$1,044,300 and HK$4,955,700 payable by D2 to D10 constituted “deposits” (namely, “臨時訂金” and “訂金” respectively). Although nothing more was said in the PSPA about the nature of such “deposits”, the established line of authorities since Howe v Smith suggests that according to the ordinary interpretation of the businessmen, such “deposits” amount to security for the completion of the purchase, which are forfeitable. 122.Further, in relation to the Further Deposit specifically, I am unable to accept P’s argument that there was no obligation to pay the Further Deposit when the formal agreement has not been signed:
123.P further argues that even if there was an obligation on D2’s part to pay the Further Deposit, the D10 Sum should be characterised as a mere partial payment towards the consideration under the PSPA, such that there is no right of forfeiture upon the termination of the PSPA. Its arguments run as follows:
124.I do not accept these submissions:
125.Having considered and analysed the evidence before the Court, including D10’s evidence as set out in §§40-42 above which I accept, I find that D2, upon D10’s repeated chasers, paid the D10 Sum of HK$945,000 to D10 in November 2015 for the purpose of demonstrating, or leading D10 to believe, that he wished to proceed with the transaction and was still trying to get together the funds to complete the transaction very soon. As the prescribed timeframe under the PSPA for the signing of the formal agreement and for completion had then already passed, D2’s payment was clearly meant to be an earnest for keeping the transaction alive and on hold for a while longer, rather than merely as the partial payment towards the consideration under the PSPA. The payment should be treated as partial discharge of the Further Deposit still due and owing by D2 under Clause 5B of the PSPA and liable to be forfeited. There is no basis to suggest that such payment was intended by the parties to be refundable. 126.By reason of the matters aforesaid, it is unnecessary for me to decide whether it is an implied term of the PSPA to the effect that (1) the Initial Deposit and the Further Deposit are paid as earnest money to bind the bargain so entered into; and (2) if the PSPA is not performed by D2, the Initial Deposit and the Further Deposit shall remain D10’s property and/or are liable to be forfeited by D10 (“Implied Term”). 127.Had it been necessary for me to do so, I would have found that the Implied Term is established on the strength of Polyset at §64, which quoted Fry LJ’s analysis in Howe v Smith at 101. I agree that it is necessary to give business efficacy to the PSPA and so obvious it goes without saying that those payments are treated as security for completion liable to be forfeited, especially in Hong Kong where the real property market can be volatile. 128.For these reasons, D10 was entitled to retain and forfeit the D10 Sum. H5. Issue 4: Consideration for the D10 Sum 129.D10 submits that he provided valuable consideration to D2 for the D10 Sum. The consideration consists of (1) the discharge of part of the Further Deposit due under the PSPA and (2) the contractual arrangement that D10 would make the D10 Properties available for sale to D2 upon completion. 130.In relation to (1), at the time when the D10 Sum was paid, D2’s obligation to pay the Further Deposit to D10 pursuant to Clause 5B of the PSPA remains due and owing. I agree that D10’s partial discharge of D2’s liability in this regard on account of the receipt of the D10 Sum constitutes sufficient consideration. As D2’s said obligation to pay is not contingent upon D10’s declaration of the PSPA as having come to an end, I do not accept P’s submissions that D10 had not provided valuable consideration until such time he treats the PSPA as having been terminated. 131.Further, I am satisfied that (2) constitutes sufficient consideration. As Ribeiro PJ stated in Darton Ltd v Hong Kong Island Development Ltd [2002] 1 HKLRD 145 at §12:
132.This is consistent with the analysis in Thomas v Brown (1876) 1 QBD 714 which concerned an unsuccessful attempt by a purchaser to recover from the vendor a deposit paid pursuant to a contract for the purchase of a property. As held by Quain J (at 723), the fact that the vendor stood ready and willing to complete the transaction was sufficient consideration:
133.In the present case, I accept D10’s evidence that prior to the termination of the PSPA, he did not sell the D10 Properties to a third party or seek an alternative purchaser. I find that D10 stood ready and willing to proceed with the transaction in honour of his contractual obligations as the vendor. In my judgment, D10 provided valid and sufficient consideration for the D10 Sum. H6. Credibility of the witnesses 134.The relevant issues in the present case can be determined on the basis of the documents and also the circumstantial evidence which is largely not in dispute. Insofar as credibility of the witnesses is still relevant, I only wish to summarise the following points. 135.I have heard the evidence from Mr Li Kin Wai (“Mr Li”), a manager of P, and from D10 himself. As mentioned above, D3 was absent from the trial and also called no witness to testify on its behalf. 136.In evaluating the witnesses’ evidence, I have borne in mind the following guidance in Hui Cheung Fai v Daiwa Development Ltd (HCA 1734/2009, 8 April 2014) (DHCJ Eugene Fung SC, as he then was):
137.In general, I find the evidence of D10 credible. 138.D10 is a businessman who was 65 years of age at the time of the trial. He received secondary education in Mainland China and does not know English. I find D10 to be a witness who generally tries to assist the Court with some degree of enthusiasm. At times, he gave lengthy answers and did not always follow counsel’s questions. That said, I do not consider him evasive or opportunistic as P suggests, even though he might have appeared confused and uncertain on some occasions. 139.P criticises D10’s account in various aspects. For example, P argues that D10 gave different versions of events as to who was responsible for operating his hostel business, whether he took certain preparatory steps in advancement of the Oral Agreement before receiving the Initial Deposit, and whether he knew which money lender the two individuals he saw on the day of the signing of the PSPA represented. However, as I have discussed above, these attacks relate to somewhat peripheral matters. I do not consider that they cast material doubts on D10’s credibility, particularly when any such discrepancies did not touch upon the core issues. As analysed above, the fact that discrepancies exist is not necessarily or sufficiently indicative of the lack of bona fides on the part of D10 in entering into the PSPA or receiving the D10 Sum from D2. Some other attacks mounted by P on the quality of D10’s evidence have already been dealt with above and shall not be repeated here. I also bear in mind the fact that the material events took place in 2015, some 8 years before the trial. Any inconsistencies in witnesses’ evidence must be viewed in this light. 140.As to the evidence of Mr Li, it was largely uncontroverted as his evidence largely pertains to the circumstances surrounding D2’s fraud. For the present purposes, little turns on his evidence. H7. Conclusion on BFP Defence 141.For the above reasons, I am satisfied that D10 has established the BFP Defence. Any beneficial interest of P in the D10 Sum has been extinguished. I. CHANGE OF POSITION DEFENCE OF D10 142.As D10 has already made out his BFP Defence against P’s claims, it is unnecessary for me to decide whether D10 has also established its defence of change of position. Had it been necessary to do so, I would have also decided in favour of D10 for the following reasons. 143.The principles on the change of position defence were summarised by DHCJ Sit SC in AXHT Co Ltd v Freeway Finance Co Ltd [2020] 4 HKLRD 133 :
144.The change of position defence is applicable to both personal and proprietary claims in unjust enrichment: DBS Bank (Hong Kong) Ltd v Tian Wen Quan (HCA 3228/2016, 12 October 2017) at §§39-40 (Anthony Chan J). 145.In the present case, the gist of D10’s change of position defence is that he had committed to the PSPA and had thereby put the D10 Properties off the market. 146.For the following reasons, I find that D10 had changed his position:
147.In the premises, I hold that D10 has made out a defence of change of position. J. CONCLUSION 148.Accordingly, I conclude that D10 has established the BFP Defence and the change of position defence against P’s claims. P’s claims against D10 are therefore dismissed. I make an order nisi that D10’s costs in this action be borne by P, to be taxed if not agreed, with certificate for two counsel. 149.As regards D3, I am satisfied that P has established a claim in unjust enrichment and a proprietary claim against the D3 Sum which P is entitled to trace and follow. I make the following orders:
150.I also make an order nisi that the costs incurred by P in this action as against D3 be borne by D3, to be taxed if not agreed, with certificate for two counsel. 151.The above orders nisi shall become absolute unless an application to vary the same is made within the next 14 days.
Mr Edward Tang and Mr Ryan Chan, instructed by Waller Ma Huang & Yeung, for the plaintiff The 3rd defendant was not represented and did not appear Mr Alan Kwong and Mr Howard Wong, instructed by L & L Lawyers, for the 10th defendant [1] While the obligation to sign a formal sale and purchase agreement seems to arise again under Clause 5C (after the same obligation is stated under Clause 5B), P has accepted that the words “簽署正式買賣合約” in Clause 5C could be construed as referring to the documents which would need to be executed upon completion, such as the assignments of the D10 Properties. [2] Clause 5B of the PSPA reads: “正式合約：2015年6月29日或之前須簽署正式買賣合約及買方須付訂金 HK$4,955,700” (emphasis added). [3] E.g. Wise Think Global Ltd v Finance Worldwide Ltd [2013] 1 HKLRD 513, Health Link Investment Ltd v Pacific Hawk Investment Ltd [1995] 1 HKC 249 and Tse Ping Shun David & Anor Lai Ho Man Shan Grace & Anor (HCA 105/2006, 23 March 2009). |
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