MICHAEL CHEN KANG HUANG AND ANOTHER v. PETER LIT MA

      HCA 218/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 218 OF 2005

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REASONS FOR JUDGMENT

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1. On 2 July 2009 I gave judgment to the plaintiffs against the defendant as follows:

(1)  to the 1^st plaintiff against the defendant for payment of the sum of US$164,500;

(2)  with interest on the said sum from date of writ 3 February 2005 to judgment at 1% above the best lending rate of HSBC and thereafter at judgment rate until payment;

(3)  to the 2^nd plaintiff against the defendant for payment of the sum of US$805,500;

(4)  with interest on the said sum from date of writ 3 February 2005 to judgment at 1% above the best lending rate of HSBC and thereafter at judgment rate until payment.

(5)  granting the following declarations in favour of the plaintiffs:

(i)     a declaration that the defendant is the constructive trustee of a trust in the sum of US$164,500, in respect of the 1^st plaintiff, and US$805,500, in respect of the 2^nd plaintiff;

(ii)   a declaration that the plaintiffs are entitled to trace any funds paid out of Hang Seng Bank Prestige Account No. 773-101324-888 (“the defendant’s bank account”) up to a maximum sum of US$970,000 and recover such funds subject to any competing rights to be asserted and resolved in DCMP 3519 of 2007.

(6)  costs of the action to the 1^st and 2^nd plaintiffs against the defendant.

2. I indicated at the time that written reasons in writing would be given.  This I now do.

3. The plaintiffs’ primary claim against the defendant is for the repayment of monies paid over to the defendant by the plaintiffs as a result of fraudulent misrepresentations made by the defendant.  The plaintiffs’ claim is for the return of the sums paid over by them as well as declaratory relief.

4. Pursuant to a bankruptcy petition presented by the plaintiffs against the defendant, a bankruptcy order was made against the defendant on 24 December 2007 and the Official Receiver (“the OR”) was appointed the trustee in bankruptcy of the defendant.

5. As a result of the bankruptcy order made against the defendant these proceedings were stayed by my order made on 8 January 2008.

6. By a letter dated 3 December 2008 from the OR the plaintiff’s solicitors were informed that the OR would not take up the defence of the defendant in this action.

7. By a consent order made on 17 December 2008 in Bankruptcy Proceedings No. 9070 of 2007 Master Hui made an order that leave be granted to the plaintiffs to proceed with and restore this action against the defendant subject to the conditions mentioned in the order.

8. By a letter dated 13 February 2009 the plaintiffs’ solicitors were informed that Chu J gave leave to the plaintiffs to fix a date for the trial of this action before me.  Chu J also gave leave to the plaintiffs to rely on the five affirmations of the 1^st plaintiff as evidence at the trial and that the attendance of the 1^st plaintiff at the trial was to be dispensed with.

9. The plaintiffs relied on the five affirmations of the 1^st plaintiff as evidence at the trial on 2 July 2009.  The defendant did not appear and did not give evidence before me.

The facts

10. I accept the evidence of the 1^st plaintiff in the five affirmations.

11. On the evidence which I accept I am satisfied that the facts set out below have been proved.

12. At all material times the 1^st plaintiff was a United States citizen resident in the USA.  He was the sole shareholder and director of the 2^nd plaintiff, a company incorporated in the British Virgin Islands.

13. On 20 July 2004 one Mr Anthony Luu (“Luu”) invited the 1^st plaintiff to invest in the issuance of a standby letter of credit to be arranged by the defendant to finance the building of a pharmaceuticals laboratory in Guangzhou. 

14. Luu told the 1^st plaintiff that he and the defendant had been able to make a lot of money investing funds for the issuing of standby letters of credit and that an opportunity had become available to invest in a standby letter of credit.  The 1^st plaintiff was told that a standby letter of credit in the sum of US$2.5 million would be issued by Deutsche Bank New York to secure a loan from HSBC Guangzhou to the pharmaceutical company.  Luu told the 1^st plaintiff that the defendant was to arrange for the issuing of the US$2.5 million standby letter of credit and that he would receive a high return of 23.5% of the value of the standby letter of credit amounting to US$587,500.

15. The 1^st plaintiff agreed to invest and on 23 July 2004 he paid the sum of US$164,500 into Luu’s bank account with HSBC in Hong Kong in order to invest in the issuing of a standby letter of credit to finance the pharmaceutical laboratory in Guangzhou.  This sum was then paid over by Luu to the defendant.

16. The 1^st plaintiff was introduced to the defendant by Luu in Hong Kong on 29 July 2004.  At a meeting at a restaurant the defendant made a number of representations to the 1^st plaintiff as pleaded:

(1)  that he had been arranging the issue of standby letters of credit for commission for many years;

(2)  that he worked for a company called North America Consultants & Management Group (“NACM”) which had lines of credit and a close relationship with many banks;

(3)  that those banks could issue standby letters of credit for NACM on payment of fees of only 23.5% of the value of the standby letters of credit.

17. On 15 August 2004 Luu informed the 1^st plaintiff that HSBC Guangzhou was not prepared to accept the wording endorsed on the standby letter of credit but that it might be possible to arrange a replacement credit from Bank of China.

18. However, on 18 August 2004 the defendant and Luu made a joint telephone call to the 1^st plaintiff during which both of them told the 1^st plaintiff that Bank of China was taking too long to obtain final approval on the wording of the standby letter of credit.  He mentioned that there was another project involving the construction of a major shopping centre in Shanghai and the issuing of a standby letter of credit to secure funding for that construction offered much better prospects than the pharmaceuticals laboratory.  The 1^st plaintiff was asked to agree to his US$164,500 being transferred to the funding for the project for the shopping centre.

19. The 1^st plaintiff was told by the defendant and Luu that the Shanghai real estate developer behind the construction of the shopping centre had obtained a US$100 million line of credit from Shanghai Pudong Development Bank (“Pudong Bank”) on condition that this credit line was fully secured by a standby letter of credit and real estate.  He was also told that Pudong Bank had agreed to accept as collateral standby letters of credit issued by one of the banks with which the defendant had connections.  He was further told that the defendant and Luu would travel to Shanghai and negotiate with the real estate developer to obtain agreement that the 2^nd plaintiff could fund the issue of standby letters of credit for the highest amount possible in return for payment of a large portion of the loan proceeds as commission.

20. On 21 August 2004 Luu informed the 1^st plaintiff that the Shanghai real estate developer was Zhenda, of which a Mr Zhu was Chairman.  Luu said that the defendant had been able to negotiate with Zhenda which required a standby letter of credit for US$30 million to secure Zhenda’s funding and that it would pay an issuing fee of US $7.05 million for that.  The 1^st plaintiff was told that Zhenda required three standby letters of credit each to the value of US$10 million which would be issued by Bank Winter in Austria after Bank Winter had received an issuance fee of 23.5% of the value of the credit and that Zhengda would instruct its Hong Kong affiliate Cecil Enterprises Corporation (“Cecil”) to wire the agreed-upon funds to the 2^nd plaintiff once Pudong Bank extended its line of credit to Zhengda after receiving the standby letter of credit from Bank Winter.

21. On 22 August 2004 Luu told the 1^st plaintiff that the defendant had told him that the applicant for the standby letters of credit to be issued by Bank Winter would be a Cyprus company CPTO Ltd (“CPTO”) which had lines of credit with many of the banks with whom the defendant dealt.  The 1^st plaintiff was told that in order to purchase the first standby letter of credit of US$10 million from Bank Winter, an issuance fee of US$2.35 million would have to be paid to this bank.  Luu told the 1^st plaintiff that US$822,000 was already available.  This consisted of the 1^st plaintiff’s US$164,500 already wired to Luu’s account on 23 July 2004 and US$657,500 of Luu’s own money.  He was told that these amounts had already been paid to the defendant and that a further US$1.528 million was needed.

22. The 1^st plaintiff then went about raising funds from friends and relatives to invest in the issuance of the standby letters of credit.  A total of US$670,000 was raised by the 2^nd plaintiff from individual investors.

23. The 1^st plaintiff was informed by Luu by email dated 23 August 2004 that the funds raised by him were needed by 1^st or 2^nd September 2004.  He was told that the funds should be wired to the defendant’s personal account which the defendant would pass onto the issuing bank from his own account.

24. On 26 August 2004 the 1^st plaintiff asked Luu to get the defendant to provide a bank letter to show that Zhengda had paid the defendant the issuance fee of US$7.05 million in respect of the standby letter of credit for US$30 million to address the concerns of the 2^nd plaintiff’s largest investor.   To address this, on 28 August 2004 the defendant faxed to the 1^st plaintiff a purported print out from a Hang Seng Bank internet site showing that he had a credit balance of US$6,002,239.13 in his account.

25. On 27 August 2004 the defendant told the 1^st plaintiff that the funds had to be paid by no later than 2 September 2004.  The defendant stated that the bank had changed from Bank Winter to North-West Private Bank Inc.

26. On 29 August 2004 the 1^st plaintiff decided to increase his own investment from US$164,500 to US$300,000.  He informed Luu that the most that he and his investors could raise was US$805,500.

27. On 30 August 2004 Luu informed the 1^st plaintiff that the defendant had agreed to invest a total of US$252,500.  He said that the defendant’s investment, together with his own investment of US$675,000 and the contributions from the 1^st plaintiff totalled US$1.88 million which Luu said was sufficient to issue a standby letter of credit of US$8 million.

28. On 1 September 2004 the defendant told the 1^st plaintiff that he needed the 2^nd plaintiff’s payment towards the issuing fee as soon as possible as a US$8 million standby letter of credit was ready to be issued.  Pursuant thereto, the 1^st plaintiff executed a wire transfer of US$805,500 from the 2^nd plaintiff’s account with HSBC to the defendant.

29. By that date the total sum of US$970,000 comprising the sum of US$805,500 and the earlier payment of US$164,500 had been paid to the defendant.

30. On 10 September 2004 the defendant told the 1^st plaintiff that a standby letter of credit for US$8 million had been issued by North-West Private Bank Inc.

31. However, on 14 October 2004 the defendant told the 1^st plaintiff that the funding of Zhengda to be secured by the standby letter of credit from North-West Private Bank Inc. had been delayed because the standby letter of credit had been sent by Pudong Bank to the Central Bank of the PRC for approval.

32. On 20 October 2004 the 1^st plaintiff was informed that the standby letter of credit had been rejected by Pudong Bank as the Pudong Bank did not have a direct business relationship with the named beneficiary Cecil.

33. Subsequently, the defendant put forward another bank to issue the standby letter of credit as a replacement namely, First National of America Banc which the defendant maintained was one of several banks from which he could obtain standby letters of credit.  On 27 October 2004 the defendant sent to the 1^st plaintiff an email attaching a draft standby letter of credit from First National of America Banc.

34. Thereafter the defendant informed the 1^st plaintiff that Zhengda had found a bank in India to fund its project but that the bank would only accept a standby letter of credit from Deutsche Bank and not from North-West Private Bank Inc.

35. On 26 November 2004 the defendant told the 1^st plaintiff that Mr. Zhu of Zhengda and a Mr. Gunawan Wijaya of Cecil were in Indonesia trying to find funding solutions and that if they could not find a solution within 8 to 10 days then either Cecil or Zhengda would return the sum of US$970,000 that had been paid by the 1^st plaintiff and his investors.

36. On 11 December 2004 the defendant told the 1^st plaintiff that no funding solutions had been found and that Zhengda and Cecil would need to discuss whether to refund the sum of US$970,000.

37. The defendant has never refunded the said sum of US$970,000 or any other sum to the plaintiffs.

38. On the evidence it is clear that the licence of North-West Private Bank Inc in the Republic of Nauru had been revoked on 27 March 2003.  Thus in 2004 the defendant could not have had a relationship with this bank and this bank could not have issued the standby letter of credit on 10 September 2004 as the defendant had told the 1^st plaintiff.

39. Also, it is clear that CPTO had been deleted from the Cyprus Companies Registry on 29 August 2003.  Hence CPTO could not have been the applicant for the standby letter of credit.

40. It is also clear on the evidence that Zhengda did not have a Mr Zhu as its Chairman.  At no material time was there an individual named Mr Zhu employed by Zhengda.  Hence the defendant’s representations about his discussions with Mr Zhu were false.

41. The First National of America Banc put forward by the defendant as the replacement bank to issue the standby letter of credit was not an entity authorized to operate as a bank.  Contrary to the defendant’s representation, he could not have arranged for this entity to issue any standby letter of credit.

42. The bank statement showing a balance of US$6,002,239.13 in his account provided by the defendant to the 1^st plaintiff was also false.  On the evidence the real balance at the material time was US$239.13.  Thus, the defendant could not have received any funds from Zhengda in respect of the issuing fee for the standby letter of credit as he had claimed.

43. In the police interview of the defendant conducted on 2 February 2005 the defendant was questioned about an Indonesian passport in the name of Mr. Gunawan Wijaya.  One of the directors of Cecil was Mr. Gunawan Wijaya.  On the evidence the passport belonged to the defendant.  During the interview, the defendant at first denied ownership of the passport but on questioning he admitted that the passport belonged to him.

44. It is abundantly clear on the evidence which I have accepted that the defendant has made false representations to the plaintiffs which I am satisfied were made fraudulently in order to induce the plaintiffs to remit the total sum of US$970,000 to the defendant.

45. The defendant in his defence has denied that he made false representations.  He also averred that only NACM dealt with the 2^nd plaintiff and that he in his personal capacity did not deal with the plaintiffs.  He also averred that he has no knowledge of the purported statement from the Hang Seng Bank internet site showing a credit balance of US$6,002,239.13 in his account.

46. As the defendant has not called any evidence in support of his defence, I reject his defence.

47. I am satisfied that the representations made by the defendant to the 1^st plaintiff were fraudulent misrepresentations made by the defendant knowingly in order to induce the 1^st and 2^nd plaintiffs to pay the sums totalling US$970,000 to the defendant in the belief that such sums would be used to fund the issuance of a standby letter of credit to generate profits for the plaintiffs.  I am also satisfied that the plaintiffs were induced to act on the defendant’s representations as a result of which they have suffered loss and damage.

48. Despite demands the defendant has failed or refused to refund the sums totalling US$970,000 to the plaintiffs.

49. The writ in this action was issued on 3 February 2005 claiming the repayment of the said sum of US$970,000.

50. By my order made on 2 February 2005 a Mareva injunction was granted to the plaintiffs against the defendant over the defendant’s assets in Hong Kong to the extent of US$970,000 until the return date of 4 February 2005.  The Mareva order was varied and extended until after trial or further order on 4 March 2005.

51. The Mareva order affected, inter alia, the following properties:

(a)  the property known as Flat C on 33^rd Floor of Block 9, No. 2 Mei Tung Street, Tung Chung Crescent, Tung Chung, Lantau Island (“Flat C”); and

(b) the property know as Flat F on 41^st Floor of Block 8, No. 2 Mei Tung Street, Tung Chung Crescent, Tung Chung, Lantau Island (“Flat F”).

52. By my order made on 21 August 2007 the Mareva order was varied to the effect that the order no longer permitted the defendant from withdrawing the sum of HK$5,000 per week from the defendant’s bank account.

53. The defendant had also applied for an order that the Mareva order be varied to the effect that it did not prohibit the defendant from raising sufficient funds to pay legal costs and to meet his living expenses by the sale of Flat F held by the defendant and his wife as joint tenants.  This application was refused by me also 21 August 2007.

54. In my Reasons for Judgment handed down on 27 August 2007 I dealt with the evidence in respect of the purchase of Flat C and Flat F and the plaintiffs’ proprietary claim to the funds in the defendant’s bank account and to properties purchased with those funds.  I reiterate and adopt what I said at paragraphs 17 to 22 as follows:

“17.  The Mareva order affected all of the defendant’s assets including Flat F and Flat C.  On the evidence Flat F was purchased in the names of the defendant and his wife for HK$1,950,000 by an instrument dated 15 November 2004.  Flat F is and was at all material times unencumbered.  Flat C was purchased in the names of the defendant and his wife for HK$2,030,000 also by an instrument dated 15 November 2004.  Flat F was subject to a mortgage with Standard Chartered Bank (Hong Kong) Ltd also by an instrument dated 15 November 2004.  According to the mortgage service application form of Standard Chartered Bank (Hong Kong) Ltd the mortgage loan was HK$1,000,000.  With the purchase price of HK$2,030,000 and a mortgage loan of HK$1,000,000, it is clear that the sum of HK$1,030,000 was paid by the defendant and his wife towards the purchase of Flat C.  This sum of HK$1,030,000 together with the purchase price of HK$1,950,000 for the unencumbered Flat F amounting to the total sum of HK$2,980,000 would have been required to be paid by the defendant and his wife for the purchase of the two properties.

18.       The bank statements in respect of the defendant’s bank account show, inter alia, the following withdrawals and cheques issued from the defendant’s bank account:

(1)    on 15 October 2004, a withdrawal in the sum of HK$240,000;

(2)    on 11 November 2004, a cheque in the sum of HK$150,000;

(3)    on 12 November 2004, a cheque in the sum of HK$831,000;

(4)    on 12 November 2004, a cheque in the sum of HK$1,759,000.

19.       These show that the total sum of HK$2,980,000 had been drawn from the defendant’s bank account as at 12 November 2004.

20.       There is no dispute that the total sum of US$970,000 from the plaintiffs was paid into the defendant’s bank account prior to 15 October 2004.

21.       Although the plaintiffs consented to the orders to vary the Mareva order on two occasions in the past to permit the defendant to withdraw sums for legal advice and representation it is clear that the concessions were made before the plaintiffs made a proprietary claim to the funds in the bank account and to any property purchased with those funds.  The proprietary claim is contained in the amendments to the statement of claim in respect of which the plaintiffs were given leave to amend by a consent summons dated 8 May 2007.  The relevant bank statements of the defendant’s bank account were only provided to the plaintiffs pursuant to the order of Master Levy made on 26 January 2006 well after the variation orders were made on the two previous occasions.

22.       The plaintiffs have included by way of the amended statement of claim a proprietary claim to the enjoined assets and opposed the defendant’s summons and in addition applied for an order in the terms of the plaintiffs’ summons so that the defendant may no longer withdraw HK$5,000 per week for living expenses from the defendant’s bank account.”

55. I find that the plaintiff is entitled to judgment for the repayment of the sums paid over to the defendant.

56. I am satisfied that the total sum of US$970,000 provided by the 1^st and 2^nd plaintiffs has been paid to the defendant’s bank account.  I am also satisfied that as the sum of US$970,000 was obtained by fraud, a constructive trust is imposed on the defendant and the property is recoverable and can be traced.  In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 667 Lord Browne-Wilkinson said at page 716:

“ I agree that the stolen moneys are traceable in equity.  But the proprietary interest which equity is enforcing in such circumstances arises under a constructive trust, not a resulting, trust.  Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity….”

57. I am satisfied that the plaintiffs are entitled to a declaration that the defendant is the constructive trustee of a trust in the sum of US$164,500, in respect of the 1^st plaintiff, and US$805,500, in respect of the 2^nd plaintiff.

58. Counsel for the plaintiffs has informed me that Flat C has been sold by the mortgagee bank Standard Chartered Bank (Hong Kong) Ltd and from the documents shown to me I am satisfied that half of the remaining surplus of proceeds has been paid to the OR as trustee in the bankruptcy of the defendant and the other half has been paid into court as the defendant’s wife claims to be entitled to the same.

59. I am satisfied that the plaintiffs are entitled to the declaration in the terms as sought at trial namely, a declaration that they are entitled to trace any funds paid out of the defendant’s bank account up to a maximum sum of US$970,000 and to recover such funds subject to any competing rights to be asserted and resolved in the District Court proceedings DCMP 3519 of 2007.

60. For the above reasons I gave judgment to the plaintiffs and made the orders as set out above at paragraph 1.