HOLY AG (a company incorporated in Germany) v. BMW LTD AND OTHERS

HCA 297/2020

[2022] HKCFI 798

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 297 OF 2020

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BETWEEN

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J U D G M E N T

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A. INTRODUCTION

1.  There are two summonses before me:

(1) a summons of 24 March 2021, by which the 10^th Defendant (“Touki Trading”) seeks security for costs against the Plaintiff (“Holy AG”);

(2) a summons of 25 June 2021, by which Holy AG seeks summary judgment against Touki Trading.

B. FACTUAL BACKGROUND

2.  Unless otherwise indicated, the following is not in dispute.

3.  An employee of Holy AG, a company incorporated in Germany, was persuaded by an unknown fraudster into transferring a sum of €999,560 to the account of one Antoine Limited (“Antoine”) held at the Standard Chartered Bank in Hong Kong on 3 February 2020. Touki Trading has not disputed that part of this sum was converted into Hong Kong dollars, of which HK$882,028 (“the Sum”) can be traced to having been paid into Touki Trading’s account in two separate amounts of $500,000 and $382,028 on 5 February 2020.

4.  Touki Trading says (but Holy AG does not accept) that it has been engaging in the business of importing and distributing second-hand tablet devices, smartphones, electronic and plastic parts, primarily sourcing the same from Japan. It further says that one of its usual customers is a Mr Tsang, who sought to order various items in January 2020 (“the Goods”). Touki Trading placed an order for the items, and issued invoices to Mr Tsang on 3 February 2020 (“the First Invoice”) for RMB 662,225 and on 11 March 2020 (“the Further Invoice”) for RMB 1,913,315 (and other amounts not related to the present case), although the invoices were said to have been mistakenly dated as “2019” rather than “2020”.

5.  It is Touki Trading’s evidence that it later learnt that Mr Tsang arranged for the Sum to be paid into Touki Trading’s account through a third party’s account so as to avoid mainland foreign exchange restrictions, as Mr Tsang’s funds were located on the mainland. However, the third party’s account was in fact Antoine’s account.

6.  Touki Trading says (but Holy AG does not accept) that it kept a running account with Mr Tsang in renminbi. The record of the running account shows as follows.

(1) On 3 February 2020, the amount standing to the credit of Mr Tsang was RMB 448,637.00.

(2) On 5 February 2020, an amount of HK$882,028 (said to be the Sum), converted to RMB 802,602.00, was credited to Mr Tsang, taking the total credit balance to RMB 1,251,257.00.

(3) On 12 February 2020, an amount of HK$150,000, converted to RMB 135,900, was credited to Mr Tsang, taking the total credit balance to RMB 1,387,150.00.

(4) On 18 February 2020, an amount of RMB 377,241.60 was debited from the account. The (translated) entry reads
“TTCL-1176(L) mobile phone”. The total credit balance remaining was RMB 1,009,915.40.

(5) On 20 February 2020, an amount of HK$150,000, converted to RMB 136,950, was credited to Mr Tsang, taking the total credit balance to RMB 1,146,865.40.

(6) On 6 March 2020, an amount of RMB 662,225.00 was debited from the account. It is Touki Trading’s case that this was in payment of the First Invoice. The (translated) entry reads “4449 units + 10120 dismantled parts + 1804 dismantled parts + 3505 dismantled parts + 635 units” = RMB 662225”. The total credit balance remaining was RMB 484,640.40.

(7) Also on 6 March 2020, a further amount of RMB 1,913,315.00 was debited from the account. It is Touki Trading’s case that this was done in anticipation of the Further Invoice (which it says it subsequently issued on 11 March 2020). The (translated) entry reads “22575 units + 6119 units + 1214 units = RMB 1,913,315”. The balance of the account fell into deficit in the amount of RMB 1,428,674.60.

(8) On 10 March 2020, an amount of RMB 150,000.00 was debited from the account. The (translated) entry reads “1413 units + 301 units + 193 units = RMB 150000”. The balance of the account went into further deficit in the amount of RMB 1,578,674.60.

(9) On 11 March 2020, an amount of RMB 1,100,000.00 was debited from the account. The (translated) entry reads
“2437 disintegrated part + 3162 disintegrated part + 8788 units + 5171 units + 1053 units + 232 units = RMB 1,100,000.00”. The balance of the account went into further deficit in the amount of RMB 2,678,674.60.

7.  On 12 March 2020, Holy AG, having discovered the deception practiced on it and the identities of various parties said to have received (directly or indirectly) its funds, obtained an ex parte injunction against, inter alia, Touki Trading, restraining it from disposing of the Sum and its proceeds, and (to the extent that the Sum was no longer in Touki Trading’s account) restraining it from dealing with assets up to the amount of the shortfall. The injunction and supporting documents were served on Touki Trading on 16 March 2020. Touki Trading accepts that as from that time, it had actual knowledge that Holy AG had been the victim of a fraud, and that it claimed the Sum as its own. The injunction was subsequently discharged by consent by an order of 7 September 2020.

8.  Touki Trading says that the Goods were eventually delivered to Hong Kong on 21 March 2020 and 27 March 2020, and released to Mr Tsang on the same day. Holy AG does not accept that there is evidence that the Goods were released to Mr Tsang.

C. APPLICABLE LEGAL PRINCIPLES

C1. Summary judgment

9.  There was no dispute that it is for the defendant to a summary judgment application to satisfy the court that he has a real or bona fide defence, capable of being believed. Holy AG placed emphasis on the requirement for the defendant to condescend to particulars and that the point that the court is not obliged to suspend its critical faculties and assume that the defendant’s evidence is accurate, citing Menfond Electronic Art & Computer Design Co Ltd v Wong Wang Tat Victor and anor [2013] 2 HKC 259 at [61].

C2. Security for costs

10.  There was no dispute as to the principles applicable to an application for security for costs under RHC O.23 r.1 as summarised by Godfrey JA in Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461 at 464A-F. Touki Trading placed emphasis on the principle that while security will not be ordered as of course against a foreign plaintiff, and only if the court thinks it just to do so, it is ordinarily just to require a foreign plaintiff with no assets in Hong Kong to give security for costs, citing Desarrollo Inmobiliario Y Negocios Industriales De Alta Technologia De Hermosillo SA De CV v Kader Holdings Co Ltd [2014] 1 HKLRD 419 at [29]. Holy AG emphasised that where a foreign plaintiff is able to demonstrate that his case has a high probability of success, security may not be ordered, although that threshold is very high: Desarrollo at [30].

D. HOLY AG’S CLAIMS AGAINST TOUKI TRADING

11.  Holy AG claims restitution of the Sum on the principles of unjust enrichment, citing Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at [67].

12.  Touki Trading does not take issue with the claim that, prima facie, it was enriched by receipt of the Sum, at expense of Holy AG, and that the enrichment was unjust, having been made by reason of Holy AG’s mistake brought about by the fraud practiced on it. What Touki Trading says is that:

(1) summary judgment is not applicable by reason of the fraud exception in RHC O.14 r.1(2)(b);

(2) it was a bona fide purchaser for value without notice of Holy AG’s interest, citing Zief Incorporated v Tekchandani Ajai Mohan (t/a D’Ziner Collections (Hong Kong)) & ors [2021] 3 HKC 69 at [30]; and

(3) it changed its position in good faith, citing Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 579F-580B.

E. TOUKI TRADING’S DEFENCES TO THE APPLICATION FOR SUMMARY JUDGMENT

E1. The fraud exception

13.  This can be dealt with shortly. In the evidence and skeleton submissions filed on behalf of Holy AG, it was said that the documentary evidence put forward by Touki Trading suggested that its Japanese supplier knew that Touki Trading needed a justification for remitting funds out of its account, and that it was amenable to cooperating by issuing invoices to Touki Trading accordingly.

14.  Counsel for Touki Trading, Mr Avery Chan, submitted that Holy AG’s application for summary judgment fell within the fraud exception of the former O.14 r.1(2)(b) (which is applicable to Holy AG’s application as it was issued prior to 1 December 2021: O.14 r.12), since it amounted to a positive allegation that Touki Trading was putting forward a sham transaction to justify its dealing with the Sum.

15.  At the hearing, Mr Ng for Holy AG confirmed that he was not advancing any argument that Touki Trading had engaged in a sham transaction; he was merely arguing that Touki Trading had not established a credible defence. He further submitted that Holy AG’s evidence should be understood on this basis.

16.  I accept that it is not necessary for Holy AG to make any allegation of fraud against Touki Trading in order to maintain its claim for unjust enrichment.

17.  The fraud exception is therefore not engaged. See Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016 at [18], per Yuen JA.

E2. Bona fide purchaser without notice

18.  Holy AG did not take any issue with whether the defence of bona fide purchaser without notice may be relied upon in respect of both personal and proprietary claims in unjust enrichment, although some academic commentators have expressed the view that it only applies in respect of the latter: see Zief Incorporated at [30], per Mr Recorder Eugene Fung SC. I therefore proceed on the basis that it applies to both types of claim without considering further whether this is indeed the case.

19.  The main dispute between the parties is whether Touki Trading has put forward any credible defence that it had provided value for the Sum, being one of the requirements of establishing the defence: Zief Incorporated at [31].

20.  Originally, in its pleadings and affirmations, Touki Trading suggested that Touki Trading gave value for the Sum by releasing the Goods to Mr Tsang, and at a time before Touki Trading was aware that Holy AG had been fraudulently induced to part with the Sum. In its Defence of 4 June 2020, Touki Trading pleaded that Mr Tsang procured the transfer of the Sum to Touki Trading’s account in settlement of the First Invoice, and that after such transfer, the Goods were delivered to Touki Trading on 21 March and 27 March 2020, and released to Mr Tsang on the same dates, such matters being generally relied upon in support of the plea that Touki Trading was a “bona fide purchaser for value without notice”. In the Affirmation of Lau Siu Chi dated 7 May 2020 (“Lau 1st”), made by Mr Lau, a director of Touki Trading, it was said that Touki Trading was unaware of the fraud practiced on Holy AG, and that the Goods were released to Mr Tsang on 21 and 27 March 2020. In the 2^nd Affirmation of Lau Siu Chi dated 24 March 2021 (“Lau 2nd”), it was said that the Goods were delivered to Mr Tsang on 21 and 27 March 2020 and that this was before Touki Trading was aware that the Sum had been generated from illegal activities.

21.  It is now accepted, however, that by the time that the Goods were released to Mr Tsang, Touki Trading could no longer claim not to have notice of Holy AG’s claim that the Sum constituted proceeds of a fraudulent scheme, having been served with the Injunction and accompanying papers on 16 March 2020.

22.  Mr Chan has therefore instead submitted[1] that Touki Trading provided consideration as “purchaser” of the Sum in one of two ways:

(1) by the act of “debiting” the amounts due under the First Invoice and the Further Invoice of RMB 662,225 and RMB 1,913,315 from the running account with Mr Tsang on 6 March 2020, thus “setting off” the two amounts against, “inter alia”, the Sum, and thereby partially paying for the two amounts due under the invoices;

(2) alternatively, by the act of crediting the Sum to the running account with Mr Tsang on 5 February 2020.

23.  I deal first with the (latter) argument that the act of crediting the Sum to the running account with Mr Tsang on 5 February 2020 amounted to the provision of value for receipt of the Sum. I do not agree that the mere receipt of a sum, and internally acknowledging that it has been received, can amount to the giving of value. Mr Chan cited Royal Bank of Scotland v Tottenham [1894] 2 QB 715 at 717 for the proposition that a bank that gives credit upon receipt of a customer’s cheque is considered to have provided valuable consideration. However, in that case, it was not the mere fact of deposit of the cheque which constituted the consideration given by the bank, but rather, the fact that the bank gave the customer credit in the amount of the cheque without the cheque having cleared. Merely entering the value of the cheques on the ledger does not constitute the giving of consideration: Akrokerri (Atlantic) Mines Ltd v Economic Bank [1904] 2 KB 465 at 470; AL Underwood Ltd v Barclays Bank Ltd [1924] 1 KB 775 at 805. Furthermore, as Mr Chan fairly acknowledged, Lord Templeman in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 observed that:

“…If a thief deposits stolen money in a building society, the victim is entitled to recover the money from the building society without producing the pass book issued to the thief. As against the victim, the building society cannot pretend that the building society gave good consideration for the acceptance of the deposit” (at 562B);

and

“…when the customer hands over his cash at the cash desk, and receives his chips, does the store give valuable consideration for the money so received by it? In common sense terms, the answer is no. For, in substance and in reality, there is simply a gratuitous deposit of the money with the store, with liberty to the customer to draw upon that deposit to pay for any goods he buys at the store. … It follows that, by receiving the money in these circumstances, the store does not for present purposes give valuable consideration for it. Otherwise a bank with which money was deposited by an innocent donee from a thief could claim to be a bona fide purchaser of the money simply by virtue of the fact of the deposit” (at 576G).

24.  I then turn to the argument that the act of debiting the amounts of RMB 662,225 and RMB 1,913,315 from the running account with Mr Tsang on 6 March 2020 constituted payments for the amounts due under the First Invoice and the Further Invoice, and therefore amounted to provision of value for receipt of the Sum.

25.  In order to rely on the defence of bona fide purchaser for value without notice, the purchaser must have given value in the form of executed, and not merely executory, consideration. A purchaser’s promise counts as value only to the extent that the purchaser has completely performed it. See Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5^th ed.) at 8-250. Thus in Great Investments Ltd and others v Warner and others (2016) 243 FCR 516 at [108] to [109], the Federal Court of Australia observed, obiter, that receipt of bonds which would only discharge a debt to the extent that money was realised from the bonds, or to the extent that they retained their value, would not be “value” for the purpose of this defence.

26.  In the present case, I do not agree that the mere making of entries by Touki Trading unilaterally in its record of the running account on 6 March 2020[2] constitutes the giving of value for receipt of the Sum on 5 February 2020. There is nothing to suggest that any entry made on 6 March 2020 could not have been simply amended or reversed by Touki Trading, at least at any time prior to communication to Mr Tsang that his debts had been discharged. There is no evidence (whether from Mr Lau or Mr Tsang) that there was any communication to Mr Tsang on 6 March 2020 (or at any other time prior to 16 March 2020) that his debts pursuant to the First and Further Invoices had been discharged (indeed, the Further Invoice had not even been issued as at 6 March 2020).

27.  I therefore do not consider that Touki Trading has a real defence of bona fide purchaser for value without notice.

E3. Change of position

28.  There was no dispute that the defence of change of position is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution or restitution in full. There must be a causal link between the receipt of the benefit by the defendant and his change of position, and the appropriate test of causation is at least the “but for” test. See Zief Incorporated, supra, at [35]. Furthermore, a qualifying change of position must be legally or practically irreversible, or there must be significant difficulties in reversing the change. See Goff & Jones, The Law of Unjust Enrichment (9^th ed.), paragraph 27-21.

29.  Mr Chan submitted[3] that Touki Trading changed its position in good faith by crediting the Sum in the running account with Mr Tsang. It was said that this was because once the Sum was so credited, it could be used by Mr Tsang for purchase of any goods in future or to settle amounts owed to Touki Trading; and that Touki Trading would not have given Mr Tsang the relevant credit but for the receipt of the Sum.

30.  I do not agree that there is any causal link as relied on by Mr Chan. In none of the affirmations filed by Touki Trading (Lau 1st, Lau 2nd or the 3^rd Affirmation of Lau Siu Chi dated 27 August 2021 (“Lau 3rd”)), or indeed the Defence, was it said that Touki Trading would not have given Mr Tsang the relevant credit but for the receipt of the Sum. On the contrary, in Lau 1st at paragraph 17, where the running account was first explained, it was said that (1) the sum of the deposit made by Mr Tsang did not always correspond to the order placed, and (2) there would sometimes even be an overdraft or deficit. In other words, the evidence is that Touki Trading might well have given Mr Tsang credit even if it was not in receipt of funds from Mr Tsang. The same evidence was repeated in Lau 2nd. Furthermore, the record of the running account shows that even after the entries of 6 March 2020, by which time the account was in deficit, Touki Trading apparently allowed Mr Tsang to make further purchases on 10 and 11 March 2020, putting the account into further deficit.

31.  I also agree with Mr Ng’s submission that on the formulation of the defence as advanced, there was no irreversible change of position. It was said that once the Sum was credited in the running account with Mr Tsang, it might be used by Mr Tsang, or it might be used (by Touki Trading) to settle amounts owed to Touki Trading. In other words, it was not the case that credit would irrevocably be given to Mr Tsang; Touki Trading might instead use the Sum to settle amounts owed to it.

32.  Furthermore, Touki Trading has not explained why it would be inequitable, in the circumstances, to require it to make restitution. In this regard, I note that it has not been suggested that Touki Trading was not in a position to take any steps to protect its position vis-à-vis Mr Tsang between the time it learnt of the problem with the Sum on 16 March 2020 and the time it released the Goods to Mr Tsang on 21 and 27 March 2020. Indeed, no evidence was adduced as to what steps Touki Trading took after learning of the injunction and the matters set out in the supporting documents on 16 March 2020.

33.  I therefore do not consider that Touki Trading has a real defence of change of position.

E4. Credibility of Touki Trading’s factual account regarding its business and its trading with Mr Tsang

34.  Holy AG says that Touki Trading’s factual account as to its general business, and as to its dealings with Mr Tsang specifically, is in itself not credible, so that it is not necessary to even consider the defences advanced by Touki Trading.

35.  In the light of the views I have expressed above, namely, that even on the basis of the factual case as advanced by Touki Trading, there is no real defence to Holy AG’s claim, I will only deal briefly with Holy AG’s submissions in this regard.

36.  Holy AG has pointed to various aspects of Touki Trading’s evidence which it says are suspicious. However, this is an application for summary judgment, and it is not appropriate to embark on a mini trial by affidavit. Having considered the points made by counsel for Holy AG, Mr Ernest Ng, I do not consider that Touki Trading’s factual account should be rejected as being incredible.

(1) It was submitted that the evidence as to Touki Trading’s business over the years was sparse. However, Touki Trading’s evidence was that it is a small, informal business. The fact that it has not put forward lengthy and comprehensive records of all transactions engaged in past years does not mean that its description of the business is incredible.

(2) It was submitted that the documentation provided as to Touki Trading’s business had omissions and errors. For example, the First Invoice and Further Invoice were dated “2019” rather than “2020”. However, I consider that it is possible, as Touki Trading says, that these were clerical errors.

(3) It was submitted that there was no evidence as to the recipients of the list of electronic products provided by Touki Trading’s Japanese supplier to Touki Trading, or evidence that Touki Trading did in fact order the Goods. However, Touki Trading explained that to prevent revealing the identity of potential bidders, the list was sent by the supplier by email without disclosing the recipients. It also adduced evidence to show the Goods were shipped to it Hong Kong, after various logistical difficulties brought about by the COVID-19 pandemic.

(4) It was submitted that there was inadequate documentary evidence as to Touki Trading’s payment to its Japanese supplier, and that it was suspicious that the supplier appeared to suggest that Touki Trading could state whatever amount it wished as being remitted to the supplier. However, Touki Trading’s evidence was that there was a running account between it and the supplier, which explained the way in which remittances were made to the supplier.

(5) It was submitted that there was no evidence as to Mr Tsang’s quotations for the Goods and Touki Trading’s acceptance of the same. However, Touki Trading exhibited spreadsheets which were said to show Mr Tsang’s purchase quantities and prices as proposed to Touki Trading.

37.  Generally, in answer to the various points of suspicion raised by Holy AG in the Affidavit of Christian Bartels, Touki Trading adduced Lau 3rd, which condescended to particulars in response. It is not possible to say on the basis of the affidavit evidence alone that Touki Trading’s account of its business and dealings with Mr Tsang is incredible and that summary judgment should therefore be granted on that basis.

F. RELIEF CLAIMED BY HOLY AG

38.  Holy AG seeks both a personal remedy and a proprietary remedy.

F1. Personal remedy

39.  Given my view that Touki Trading does not have any real defence to Holy AG’s claim for restitution of the Sum, Holy AG is entitled to judgment for the Sum.

F2. Proprietary remedy

40.  Holy AG also asserts a proprietary claim to the Sum received by Touki Trading and seeks a declaration that Touki Trading holds the Sum, and any money or assets derived therefrom, as constructive trustee for Holy AG, and relief ancillary to such a declaration.

41.  However, there is no evidence as to what happened to the Sum after it was paid into Touki Trading’s bank account on 5 February 2020. There is Touki Trading’s record of its running account with Mr Tsang (the veracity of which Holy AG does not accept), but that is simply a record of credits and debits as between Touki Trading and Mr Tsang; it does not show what actually became of the Sum itself after it was paid into Touki Trading’s bank account.

42.  Furthermore, whilst the bank account was frozen pursuant to the injunction of 12 March 2020, the injunction was subsequently discharged by a consent order made on 7 September 2020. There is no evidence as to the inflow and outflow of funds in that account since that time.

43.  There is therefore simply no evidence that Touki Trading currently holds the Sum, or any property which represents the traceable proceeds of the Sum.

44.  As explained in Virgo, The Principles of the Law of Restitution, 3^rd ed., at p.567, if a claimant seeks a proprietary restitutionary remedy it will be necessary to show that the defendant has retained property in which the claimant can identify his or her proprietary interest (whereas if a personal restitutionary remedy is sought it is enough that the defendant received the property, without needing to show that it was retained).

45.  It is not possible to make a declaration of a trust over unidentified property. Cf. Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 705E, per Lord Browne-Wilkinson:

“(iii) In order to establish a trust there must be identifiable trust property. The only apparent exception to this rule is a constructive trust imposed on a person who dishonestly assists in a breach of trust who may come under fiduciary duties even if he does not receive identifiable trust property.”

46.  In Zief Incorporated, supra, Mr Recorder Eugene Fung SC said at [48]:

“Constructive trusts provide proprietary relief. To obtain proprietary relief in relation to the HK$559,545 in D4’s Account, P must establish that the money claimed can be identified by the tracing process as representing the original property…”

47.  Mr Ng sought to distinguish Zief Incorporated on the grounds that what was sought to be made the subject of the constructive trust claimed was the sum originally paid into Touki Trading’s account, rather than the balance that now remains in the account. However, this does not address the point that there has been no identification of the property currently in the hands of Touki Trading – if any – over which a declaration of constructive trust can operate.

48.  I therefore decline to make the declaration sought by Touki Trading.

G. TOUKI TRADING’S APPLICATION FOR SECURITY FOR COSTS

49.  In the light of my view that Holy AG should be granted summary judgment, I decline to order it to give security for costs.

H. DISPOSITION

50.  I dismiss Touki Trading’s summons of 24 March 2021, and make an order nisi that the costs of and incidental to the summons be paid by Touki Trading to Holy AG, to be taxed if not agreed.

51.  I grant summary judgment to Holy AG in terms of paragraphs 1 and 2 of its summons of 25 June 2021.

52.  I further make an order nisi that Holy AG’s costs of the action (including the costs of and incidental to the summons of 24 March 2021, and all reserved costs), be paid by Touki Trading, to be taxed if not agreed.

53.  I direct the parties to submit an agreed draft order, including the rate at which, and date from which, pre-judgment interest is to run, within 14 days from today. In the event that the parties are unable to agree on the order, each party should submit its respective draft order, giving reasons for disagreeing with the other party’s draft. I will thereafter determine the matter on the papers, unless a party raises an objection to such a course, with supporting reasons.