Felix Tschudi v. Million Miles Global Ltd

HCA 318/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 318 OF 2013

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BETWEEN

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D E C I S I O N

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Introduction

1.There are two summonses taken out by the Defendant dated 3 June 2013 before the court.  By its first summons, the Defendant applies to discharge the ex parte Mareva injunction ordered by Fung J on 19 February 2013 and continued by this court on 22 February 2013 or alternatively to vary the terms of the injunction to allow the Defendant to spend up to $660,000 on legal advice and representation; and for a fortification of the Plaintiff’s undertaking as to damages.  By its second summons, the Defendant applies for security for costs against the Plaintiff.

2.The Plaintiff is the victim of a multi-jurisdictional boiler house style fraud.  Between 29 March and 8 November 2012, he was lured into paying US$7.39 million into four bank accounts at the direction of the fraudster in the belief that he was purchasing shares.  One of those four accounts was held under the name of EU Trade Limited (“EU Trade”) with Citibank.  When the fraud was discovered, the Plaintiff was able to trace a sum of €89,989.90 to the account of the Defendant with Hong Kong & Shanghai Banking Corporation in Hong Kong.  The Plaintiff therefore asserted a direct proprietary claim over that sum and a general damages claim against the balance of the monies held in that account to compensate his loss.

The discharge application

3.The Defendant did not appear at the inter parte hearing on 22 February 2013 when I continued the injunction order.  It now applies to discharge the Mareva injunction on the grounds: (1) that the Plaintiff’s claim against the Defendant is unmeritorious and speculative; and/or (2) there is no evidence to demonstrate any risk of dissipation of the Defendant’s asset.

4.Mr Lane, solicitor for the Plaintiff, argued that as Fung J and this court had reviewed the evidence and were satisfied that the Plaintiff had demonstrated a sufficient and arguable case of fraud in granting and continuing the injunction; and as Poon J and Pang DHCJ, as she then was, had similarly reviewed the evidence when granting the disclosure orders, this issue should not be re-visited.  In my view, since the orders of Fung J, Poon J and Pang DHCJ were all made on ex parte application and the Defendant did not attend at the inter parte hearing when the Mareva injunction was continued, fairness would require that this court should re-visit the issue of merit.

5.Mr Lung, counsel for the Defendant, criticised the Plaintiff’s case as being supported only by his solicitor’s affidavit and not by the Plaintiff’s.  The Plaintiff is not resident in Hong Kong.  The injunction application has to be made urgently.  Understandably, affidavit evidence by its solicitors is acceptable.  Mr Lane has sworn that he was authorized to make the affidavit on behalf of the Plaintiff and did so on the basis of knowledge and information made available to him by the Plaintiff in his conduct of this action.  He has sworn that the facts to which he deposed are within his own knowledge; are true; or have been derived by him from information provided to him by the Plaintiff or otherwise received in the conduct of this litigation; and are true to the best of his knowledge information and belief.  He also exhibited supporting documents.  In the circumstances, Mr Lung’s criticism could take the matter no further. 

6.Mr Lung attacked the merit of the Plaintiff’s case for lack of particularity.  He complained that although fraud is alleged in the statement of claim, it contained no particulars as to how it was said that the Defendant was a participant of the alleged fraud, apart from the mere fact of its receipt of the Plaintiff’s money.  He also argued that the statement of claim confusingly alleged that the money was paid by the Plaintiff under a mistake, which is inconsistent with allegation of fraud.

7.Mr Lane did not shy away from the lack of particularity.  As often is the case, the victim of a fraud has little knowledge of the fraud practised on him.  To ensure the money deceived from him will not be removed out of the jurisdiction of the court, he has to urgently invoke the court’s jurisdiction in granting freezing order and disclosure order to enable him to chase the money.  In a case alleging fraud, Mareva injunction will be granted if the plaintiff has demonstrated a sufficient and arguable case of fraud and adduced evidence linking the defendant to the fraud. Particulars as to how a defendant participated in the fraud may be supplemented later when evidence becomes available as a result of disclosure.  The statement of claim may then be amended.  

8.There is no dispute that the Plaintiff is a victim of a boiler house style fraud.  The Defendant does not dispute that it received the said sum of €89,989.90 directly from EU Trade which was sourced from the Plaintiff.  The defence is that the Defendant is a bona fide purchaser for value without notice of the fraud.  The issue is therefore whether there is evidence that the Defendant was part of that design or a knowing recipient of the proceeds of the fraud.  In most of this type of cases, it is a matter for inference rather than direct evidence.  At this interlocutory stage, as distinct from a full blown trial, in determining merit the court can look at the Plaintiff’s and the Defendant’s case and ask itself if such inference could reasonably be drawn.

9.The Defendant’s case is supported by the affirmation of its director, Yeoh.  Yeoh is a Malaysian businessman who has a number of businesses in Malaysia, including financing, money lending and trading. In mid 2012, he and his brother incorporated the Defendant in Hong Kong as an off-shore re-invoicing intermediary so as to mitigate Malaysian tax liability. The Defendant’s case is that its receipt of the money arose out of a genuine settlement of trade debt from its debtor, Carrey Private Supply, (“CPP”) under a trade custom. 

10.According to the Defendant, CPP bought computer goods from the Defendant in the amount of RM352,706 on 17 October 2012.  A few days later, CPP sold some other computer goods to Yauni Exports (“YE”) in the amount of RM373,860.  Then, the Defendant alleged there was a trade custom to ask customers to make payment, in full or in part, to suppliers so as to take advantage of the potentially better exchange rates and lower remittance charges.  Based on that trade custom, CPP requested YE to pay a deposit of RM22,953.52 to CPP, leaving an outstanding balance of €89,976.02 to be paid by YE to the Defendant direct.  Then, upon receipt of the deposit from CPP and later the balance of €89,989.90 from EU Trade, CPP delivered the goods. The Defendant assumed the difference between the invoice balance and the actual amount received was due to difference in exchange rate.  He entertained no suspicion though the balance was paid by EU Trade instead of by CPP and did not raise any issue with CPP why it was not the paying party.

11.There was another similar set of transactions.  On 19 October 2012 CPP bought goods from the Defendant in the amount of RM375,613 and sold some other goods to YE in the amount of RM381,447 on 23 October 2012.  Likewise, it instructed YE to pay a deposit of RM6,791.45 to CPP and the balance of €96,312.48 to the Defendant.  Again, the balance was paid to the Defendant by EU Trade instead of by CPP.

12.The Defendant relied on the affirmation of Jayasiri, a director of CPP who entered into the above transactions with YE, in support of its case of trade custom and bona fide receipt of the payments by EU Trade. According to Jayasiri, he instructed Shamsudeen of YE, to pay the Defendant but he did not know why the payment was not made by YE but by EU Trade.  He said that he was still in contact with Shamsudeen.  That is the totality of the Defendant’s evidence as to its receipt of the two sums of Euros from EU Trade. It is immediately apparent that it was EU Trade who paid the Defendant and not YE.  Jayasiri was unable to explain why.  There is a total break in the Defendant’s chain of evidence leading to its receipt of the money from EU Trade. The best person who can give that evidence to complete that chain is Shamsudeen of YE with whom CPP transacted.  YE is a Hong Kong company.  There is nothing to suggest that no one from YE is now available to give that evidence.  Indeed, according to Jayasiri, he could still contact Shamsudeen. Yet, in the face of Jayasiri’s inability to explain why the payment was made by EU Trade and that Shamsudeen could be contacted in Hong Kong, the Defendant and its legal team were contented to leave the state of evidence as it is and made no attempt to adduce any evidence from Shamsudeen.  No explanation has been given for this deficiency.  The gap in the Defendant’s case remains. The Defendant is caught with unexplained possession of two sums of Euros sourced from the Plaintiff.  One of those sums is the subject matter of the Plaintiff’s proprietary claim. The Defendant bears the burden of proving it is a bona fide purchaser.  In my view, in the absence of evidence from YE, Jayasiri’s affirmation is not sufficient to support the Defendant’s case. 

13.Mr Lung argued that in respect of the receipts from EU Trade, the Defendant is a bona fide purchaser for value without notice.  He submitted that the suggestion that the Defendant should have been alerted or felt suspicious and made enquiries when the paying party was not YE but EU Trade would be imposing an unduly heavy burden on the Defendant.  I respectfully disagree.  The Defendant is operating an off-shore re-invoicing intermediary which also carries on trading activities.  It must be its routine duty to check and ensure that its payments, receipts and invoices match not only in terms of amount stated in the invoices but also in terms of the identity of the payees and payers.  The Defendant’s case that because the amount received seemed to tally with the balance due under a certain transaction it then assumed it was paid by the particular debtor under that transaction.  This is not what one would expect how a businessman would conduct his business, particularly one involving re-invoicing business.  It is at least strongly arguable that the Defendant has not shown it is a bona fide purchaser without notice in respect of the two sums of Euros it received from EU Trade.

14.Mr Lung argued that the Defendant’s bank account subject to the injunction will strike any objective bystander as a running business account with regular debits and credits before and after the material time in October 2012.  He asked rhetorically why, if the Defendant were a party to the alleged fraud, it would ever allow deposits to be made into the account after October 2012.  He also drew the court’s attention to an associated investment account showing the Defendant’s investment in a unit trust at the material time.  He submitted that the maintenance of this account hardly fit into what may be expected from a fraudster or money launderer.

15.There is some force in that argument.  However, boiler house style fraud is a long term fraud which takes some time to boil and some more time before it is discovered.  The Defendant was incorporated in mid 2012.  Its bank account was apparently opened on 17 October 2012 during the currency of the fraud.  As at 14 December 2012 when Mr Lane made his affidavit in support of the Plaintiff’s application for disclosure order, the Plaintiff had not alerted the fraudsters of his suspicion and the fraudsters were still suggesting the Plaintiff to “invest” more money with them.  In the circumstances, if the Defendant is a party to the fraud, there were understandable reasons for them to keep the account on-going for some time.  These circumstances take away some of the force of Mr Lung’s argument.

16.What is more damaging is, as the Defendant’s bank account shows, that apart from EU Trade, it had received funds from at least one other party connected with the fraud.  In that incident, it received a sum of $1,499,835 from Wah Tung Trading Company (“WT”) which is a further recipient of funds from EU Trade, sourced from the Plaintiff.  Yet, the Defendant denied any connection with WT and offered no explanation for the receipt of that sum.  Denial and lack of explanation of the receipt of funds from WT in the face of such incontrovertible facts enable adverse inference that the Defendant was intricately associated with EU Trade in its fraudulent design against the Plaintiff to be drawn. 

17.The Defendant’s case is inchoate with a fatal broken link in the evidence which it sought to adduce before the court.  There is no dispute that EU Trade is the perpetrator of the fraud practised on the Plaintiff.  There were at least two unexplained sums received by the Defendant direct from EU Trade and another unexplained sum received through an intermediary from EU Trade sourced from the Plaintiff.  In the circumstances, the fact that the Defendant has maintained an active bank account weighs little in the overall picture.  Viewed in the round, adverse inference that the Defendant is a participant of the fraudulent design together with EU Trade against the Plaintiff may well be drawn. 

18.Another ground for discharging the Mareva injunction raised by Mr Lung is that there is no evidence of improper dissipation of assets to justify the issue of the Mareva injunction.  On the face, the Defendant’s account is a normal operating business account with a substantial balance and payments in and out which do not suggest they were other than transactions in the ordinary course of business. 

19.Though without alleging low commercial morality on the part of the Defendant, Mr Lane suggested that the onward transmission of funds from the account of EU Trade to the Defendant is the second stage of a layering exercise in a sophisticated high value fraud.  There is no doubt that EU Trade had been practising a fraud on the Plaintiff and the Defendant is the direct recipient of the proceeds of that fraud from EU Trade and also other funds indirectly from EU Trade through WT.  The Defendant denied it had any business dealing with WT.  It also gave an inchoate explanation for the funds it received from EU Trade and failed to explain its failure in calling evidence from YE to explain its receipt from EU Trade.  It has already transferred the Plaintiff’s money received through EU Trade to another unknown account.  Those transfers were made along with other transfers in very large and robustly round sums.  The assets in the Defendant’s bank account are very liquid and can easily and quickly disappear overnight.  Viewed in the round and against a backdrop of the fraud practised by EU Trade, despite Mr Lung’s forceful argument, I am satisfied that the Plaintiff has demonstrated a real risk of dissipation.

20.On the state of the evidence now before me, I remain satisfied that the Plaintiff has demonstrated a sufficient and arguable case of fraud and risk of dissipation of assets against the Defendant. The balance tilts heavily in favour of maintaining the injunction than discharging it.  Accordingly, I refuse the Defendant’s application to discharge the Mareva injunction.

The variation application – provision for legal advice and representation

21.The Defendant applies, in the alternative, to vary the Mareva injunction to the extent of allowing it to spend up to $660,000 towards legal advice and representation up to and including the case management conference stage and for fortification of the Plaintiff’s undertaking for damages.

22.Mr Lane had no objection in principle to vary the order to make provision for the Defendant to withdraw funds for the purposes of legal advice.  However, he maintained that the injunction should remain in place for the full value of the Plaintiff’s personal and proprietary claims against the Defendant.  The Defendant’s assets in the account being restrained have a total value of about $2 million.  The Plaintiff’s total claim is in the sum of US$7,356,643, including a proprietary claim in the sum of €89,989.90. In addition, there is evidence from the Defendant’s own bank statement that it had also received $1,499,835 from WT, which itself had received more than €750,000 from EU Trade sourced from the Plaintiff.  Mr Lane suggested that in due course WT will be joined as a defendant to this action when investigation is completed and submitted that the prudent course would be to maintain the injunction in its current form until such time as the Plaintiff has completed its investigation of this matter.

23.The Plaintiff has at least a strong proprietary claim in the sum of €89,989.90 against the Defendant; a strong personal claim in the sum of €96,312.48;  and possibly another one in the sum of $1,499,835 received from WT.  The first two of these sums well exceed the value of the Defendant’s assets being restrained.  The Defendant has no other assets in Hong Kong.  It does not even have a substantive office in Hong Kong.  It only utilizes the offices of a company secretarial provider as its registered office.  Huge sums were paid into the Defendant’s account, from which large and robustly round sums were paid out into accounts yet to be discovered.  The Defendant is an off-shore company belonging to its director, Yeoh.  There is nothing to suggest that Yeoh will be unable to provide the Defendant with financial support for this litigation.  On the state of the evidence now before me, the Plaintiff has a strong claim against the Defendant and for reason as already explained the Defendant’s defence is inchoate.  Having regard to the likely size of the claim, the state of the evidence and the likely prejudice to the parties of refusing or allowing the variation, I agree with Mr Lane that the prudent course would be to maintain the injunction in its current form until such time as the Plaintiff has completed its investigation of this matter. 

24.Accordingly, I refuse the application for variation to provide for legal advice and representation.  In view of the conclusion reached, there is no need for me to consider the issue of quantum.  But, in the face of the Defendant’s evidence now presented before me, I agree with Mr Lane that the amount claimed as provision for legal costs is grossly excessive.   

The variation application - fortification

25.The Defendant also requested for fortification of the Plaintiff’s undertaking as to damages in the amount of $300,000.  The grounds relied on by Defendant are that the Plaintiff is resident abroad and its case is merely arguable at best.  Mr Lung submitted that the amount is realistic given the upper limit of the injunction is over $57 million and the likely damage it might cause to the Defendant’s operation.  Mr Lane opposed the application.  He submitted that there is no evidence of actual or potential damage to support the application and the sum proposed is wholly arbitrary.

26.The legal principles applicable to fortification are well settled.  The court has a general power to order fortification where it appears just and proper to protect the defendant by making such an order[1].  Usually, merit of the parties’ case is not a necessary consideration.  However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant.  The burden of showing the need for fortification and the appropriate quantum falls on the party seeking fortification[2], in this case, the Defendant.  He must show the likelihood of a significant loss arising as a result of the injunction, and demonstrate why he believes the other party will be unable to make good that loss[3]. The court will approach these issues by taking a broad view of the evidence, usually without the need of a detailed enquiry[4]. Whilst there is no obligation on the plaintiff to give full and frank disclosure of his own financial means, circumstances might arise where the absence of financial disclosure by a plaintiff might entitle adverse inference as to his ability to meet his cross-undertaking in damages to be drawn [5].

27.It is true that the Defendant’s assets of about $2 million is being restrained.  But a balance of that magnitude has always been maintained in the account, suggesting that the Defendant has no immediate use of the funds represented by the assets in that account.  Apparently, those funds are surplus working capital. 

28.Though the upper limit of the injunction is over $57 million, the assets subject to the restrain is only about $2 million.  That limit is not determinative of the quantum for fortification or reflective of the loss likely to be suffered by the defendant as a result of the injunction.  The likely loss is the loss of use of the asset frozen which may be quantified as the interest payable over a loan of that size, provided that the defendant can prove he has the need for use of the asset frozen.  If it cannot, his loss would be limited to the loss of interest which he would otherwise earn by depositing the money in the bank.  In the present case, the interest for a loan of $2 million would be about $100,000 per year only.  The Defendant has not adduced any evidence that those funds were committed for any particular purpose or that it will suffer loss if those funds are not made available.  There is no evidence that the Defendant has to raise a loan as a result of the loss of use of the money.  Furthermore, the assets frozen are, in any event, interest earning.  Not only that the quantum suggested is excessive, the Defendant has also failed to show the likelihood of significant loss. 

29.Furthermore, the Defendant has not advanced any argument why it believes the Plaintiff will be unable to make good that loss. On the evidence, the Plaintiff is obviously very resourceful, being able to invest over US$7 million in the fraudulent scheme.  The only likely prejudice that the Defendant may suffer if fortification is not ordered is the inconvenience of having to enforce the undertaking in a foreign jurisdiction, in the event that the Plaintiff loses the action and refuses to honour his undertaking.

30.Taking a broad view of the evidence now before me, I am not satisfied that the Defendant has discharged the burden of showing the likelihood of a significant loss arising as a result of the injunction.  I do not consider it appropriate to order fortification, and refuse the application.

The security for costs application

31.The Defendant also makes a separate application for security for costs.  The court has power to order security for costs under Order 23 rule 1 of the Rules of the High Court.  The power is discretionary.  It will be exercised if having regard to all the circumstances of the case the court thinks it just to do so.  This involves balancing between what would be too oppressive to the plaintiff by requiring him to pay security and what would give the defendant a measure of security[6]. A plaintiff resident abroad is usually required to give security, but this is not a matter of course.  A major consideration is the bona fide nature of the claim and the likelihood of the plaintiff succeeding[7].  No security will be ordered if it can be demonstrated clearly that the plaintiff has a high degree likelihood of success at trial[8]. If the case of the plaintiff is genuine and strong, no order for security would be granted[9]. Conversely, if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial[10], an order for security would usually be granted.

32.There is no dispute that the Plaintiff is not ordinarily resident in Hong Kong, being a resident of Switzerland.  The thrust of the Defendant’s application is that the Plaintiff’s case is arguable at best.  For reasons as I have already explained, I do not agree with that assessment of the strength of the Plaintiff’s case.  In my view, the Plaintiff has a genuine case and a good chance of success, at least, in respect of his proprietary claim of €89,989.90.  The Defendant’s defence of bona fide purchaser is inchoate or incomplete.  It has failed to adduce evidence from YE to explain its receipt of the above sum, when the Defendant’s own evidence suggests that such evidence could be made available.  The amount of security sought is also grossly excessive.  On balance, I am satisfied that the Plaintiff has demonstrated he has a genuine claim and a high degree likelihood of success at trial.  Accordingly, I dismiss the Defendant’s application for security for costs.

Conclusion

33.For the above reasons, both of the Defendant’s summonses are dismissed with costs.

Mr Jeff Lane, of King & Wood Mallesons, for the Plaintiff

Mr Vincent Lung, instructed by S T Cheng & Co, for the Defendant