EXCLUSIVE NETWORKS DEUTSCHLAND GMBH v. WAKOON TRADING (H.K.) LTD AND ANOTHER

CACV 424/2022, [2025] HKCA 544

On Appeal From [2022] HKCFI 2966

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 424 OF 2022

(ON APPEAL FROM HCA NO 954 OF 2019)

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JUDGMENT

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Hon Anthony Chan J (giving the Judgment of the Court) :

1.  This is an appeal by the Plaintiff against the Judgment of Harris J whereby, inter alia, its action against the 2^nd Defendant was dismissed with costs.

2.  The focus of this appeal concerns the learned Judge’s finding that the 2^nd Defendant had made out its defence of bona fide purchaser for value without notice (“BFP Defence”) against the Plaintiff’s claim.

Background

3.  The background facts can be succinctly stated. The Plaintiff was (and is) a German company.  It was the victim of an email fraud by which a payment of US$438,364.54 intended for a US supplier was transferred by the Plaintiff on 19 March 2018 to the bank account of the 1^st Defendant held with CTBC Bank.  On the following day, US$436,810 (“Sum”) was transferred from the 1^st Defendant’s account with CTBC Bank to the 2^nd Defendant’s account with CTBC Bank.   

4.  An action was brought by the Plaintiff against both Defendants to recover the money it had transferred under fraud.  The 1^st Defendant did not defend the action and judgment was subsequently entered against it in favour of the Plaintiff by the Judge.

5.  The 2^nd Defendant did not dispute that (a) the first transfer to the 1^st Defendant was the consequence of fraud as alleged by the Plaintiff; and (b) the Sum was transferred to its account from the 1^st Defendant’s account the day after the latter account was credited with US$438,364.64.  Apparently, it was not in dispute that the Sum was traceable to the US$438,364.54.  A number of causes of action were advanced by the Plaintiff against the 2^nd Defendant to recover the Sum, namely, money had and received, knowing receipt, dishonest assistance and constructive trust.

6.  The 2^nd Defendant was in the business of selling computer hardware.  The total revenues of the 2^nd Defendant’s business for the financial years from 2016 to 2019 were in the region of HK$4 billion to HK$5.5 billion. 

7.  The 2^nd Defendant had a customer called Shenzhen Jiashi Weiye Technology Co Ltd (“JWT”).  They began trading in 2016 and had yearly framework agreements which contained the basic terms of their business dealings.  Under those terms, monthly payment was to be made by JWT to the 2^nd Defendant.  Subsequently, JWT became one of the 2^nd Defendant’s largest customers and the way in which payment was made changed. 

8.  Instead of monthly payment, payments were made in tranches by JWT.  Some payments were made through remittance agents, including the 1^st Defendant.  Remittance agents were used because the payments were made in USD and using their service would avoid delay.  Prior to the receipt of the Sum by the 2^nd Defendant, the 1^st Defendant had acted as remittance agent for JWT on 168 occasions involving payments in excess of US$45 million.  These payments were trouble free. 

9.  In the course of their business, JWT also made payments to the 2^nd Defendant’s Mainland manufacturer on its behalf.  This helped to reduce the cost to the 2^nd Defendant in exchanging USD into RMB to pay the manufacturer.  JWT’s payments to the 2^nd Defendant’s manufacturer would be set off against the balance in the running account between the 2^nd Defendant and JWT (see below). 

10.  The 2^nd Defendant maintained a debtor account ledger for JWT (“Ledger”).  It was a running account from which whether JWT’s account with the 2^nd Defendant was in credit or debit on various dates could be seen.  The relevant page of the Ledger, which covered the period from 17 March to 21 March 2018, showed that on 20 March 2018 JWT’s account was credited with a sum of US$1,064,700.70.  It was a composite sum made up of 6 payments (“Composite Sum”), one of which was the Sum which was internally transferred from the 1^st Defendant’s CTBC account to the 2^nd Defendant’s account with the same bank.

11.  Before the Composite Sum was booked in the Ledger on 20 March 2018, JWT was shown to have a debit balance of HK$9,400,122.98.  After the booking of the Composite Sum, the debit balance was reduced to HK$1,095,457.52. 

12.  As indicated above, the 2^nd Defendant relied upon the BFP Defence against the Plaintiff’s claim.

Findings of the Judge

13.  The Judge found that the 2^nd Defendant had a genuine and substantial business in selling computer hardware.  It sold computer products to JWT and was paid in arrears.  The Sum was accepted as payment from JWT for goods which had already been delivered by the 2^nd Defendant.  At the time of receipt of the Sum (20 March 2018), the 2^nd Defendant was acting bona fide (ie, had no notice of any wrongdoing).

14.  Accordingly, the Judge found that the 2^nd Defendant had made out its BFP Defence.  The rest of the Plaintiff’s causes of action necessarily failed in light of the establishment of the BFP Defence.

Grounds of appeal and the 2^nd Defendant’s Respondent Notice

15.  There are 5 Grounds of Appeal.  There is much overlap between Grounds 1 to 3 and between Grounds 4 and 5.  Essentially, there are 3 issues raised in the Grounds of Appeal.

16.  First, the Plaintiff’s contends that the 2^nd Defendant could not have made out its BFP Defence without being able to identify the goods or the invoice(s) which were paid by the Sum.

17.  Second, the 2^nd Defendant had acquired constructive notice that the Sum represented money defrauded from the Plaintiff by 22 March 2018 at the latest by reason of (a) the freezing of its CTBC account on 21 or 22 March 2018; and (b) its failure to make reasonable inquiries as to the proprietary of the receipt of the Sum.  Further, even if consideration had been given by the 2^nd Defendant for the Sum by way of reducing the running account balance with JWT, the communication of the reduction only took place after it had acquired constructive notice.

18.  Third, the Judge should have considered the Plaintiff’s causes of action in knowing receipt and dishonest assistance, which would give rise to remedies of different nature. 

19.  A Respondent’s Notice had been filed by the 2^nd Defendant.  However, only 3 of the additional grounds set out in that Notice were referred to in the Skeleton Submissions of Mr Nip SC, who appeared with Mr Wong for the 2^nd Defendant. 

20.  Firstly, it is contended that if it was necessary to identify the goods paid for with the Sum, the Judge would have found that the receipt of the Sum was clearly referable to the goods under 5 invoices (Invoices 171, 172, 176, 177 and/or 178) (“5 Invoices”).

21.  Secondly, the Plaintiff is precluded from running the case that the 2^nd Defendant had acquired constructive notice after being informed of the freezing of its CTBC account when there was no pleaded case by the Plaintiff to such effect.

22.  Thirdly, the Plaintiff is precluded from running the case that communication of the reduction of the running account only took place after 22 March 2018 when there was no pleaded case by the Plaintiff to such effect.

Analysis

23.  We are unable to see any merit in this appeal. In respect of the first issue, the key findings made by the Judge are: (a) the 2^nd Defendant was paid in arrears for the goods it sold[1]; (b) the Sum, as part of the Composite Sum, was booked in the Ledger and with which the balance owed by JWT was reduced to a little over HK$1 million on 20 March 2018[2]; and (c) any payment made when the running account was in debt necessarily must be attributable to goods supplied[3]. 

24.  These findings are not challenged in the Notice of Appeal.  We are unable to see any reason or logic why the 2^nd Defendant was required to identify the specific goods or invoice(s) that could be attributed to the Sum or the Composite Sum.  JWT was at the time indebted to the 2^nd Defendant to the tune of HK$9,400,122.98 (see para 11 above), which represented outstanding payment for goods sold and delivered.  Whether the Sum was received for batch A or batch B of such goods hardly mattered for the purpose of establishing the fact that the Sum was received for value given. 

25.  Mr Ng, who appeared with Ms Tse for the Plaintiff, had cited no authority to support the first issue.  Given the unchallenged findings of fact, we take the view that the Plaintiff’s contention is not sound in principle. 

26.  Mr Ng submitted that the Judge had wrongly made an assumption that the payment of the Sum (or the Composite Sum) was for the 5 Invoices.  We do not agree.  The Judge clearly took the view that it was unnecessary for the 2^nd Defendant to identify the specific goods or invoice(s) paid for[4]. However, in dealing with one of the “subsidiary objections” of Mr Ng (who also appeared below), the Judge said that: “If one treats the [Sum] as attributable to [the 5 Invoices] or any of them it follows that the goods had been collected at the time payment was made and before [the 2^nd Defendant] became aware of the fraud[5]”. The Judge was making no assumption but was addressing one of Mr Ng’s objections.

27.  The second issue is underpinned by the proposition that for the 2^nd Defendant to give value for the Sum the reduction of the running account had to be communicated to JWT.  It is contended by the Plaintiff that the communication only took place in early April 2018 when the 2^nd Defendant and JWT carried out a reconciliation of their records.

28.  With respect, the proposition is premised on a misunderstanding of the case of Holy AG v BMW Ltd [2022] HKCFI 798.  The facts of that case are similar to the present.  A transfer of Holy AG’s funds was induced by an unknown fraudster.  Part of that sum (Proceeds) was traced to the bank account of Touki Trading, which was in the business of importing and distributing second-hand electronic goods.  Touki Trading had a running account with a customer who had ordered some goods from it and arranged for the Proceeds to be paid to Touki Trading.  After receipt of the Proceeds, the balance in the running account was adjusted.  Cheng J rejected Touki Trading’s case that value was given by it for the receipt of the Proceeds.  The learned Judge referred to the principle that executed consideration must be given to ground a BFP Defence[6] and said :

“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 constitutes the giving of value for receipt of the [Proceeds] 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 [the customer] that his debts had been discharged. …[7]”

29.  In order to understand the above dicta, it is important to note that in Holy AG the goods ordered by the customer had not been delivered until after Touki Trading had notice of fraud[8].  Further, the running account was in credit in favour of the customer prior to the receipt of the Proceeds, and the credit balance was increased by the Proceeds when they were received on 5 February 2020[9].  These features distinguish the present case from Holy AG, and explain the comment of the court that an entry unilaterally made by Touki Trading in its record could be amended or reversed prior to communication to the customer.  We do see any general principle having been established by the dicta.

30.  This argument of the Plaintiff was ran before and rejected by the Judge below.  Apart from disagreeing with Mr Ng’s reading of Holy AG, the Judge held that it was “clearly a bad argument on the facts”.  The evidence of the 2^nd Defendant, which the Judge accepted, was that it had sent JWT an email on 21 March 2018 confirming the receipt of the Sum[10].

31.  It was pointed out by Mr Nip, which is confirmed by the transcript, that when the 2^nd Defendant’s finance manager was asked in re-examination about the purpose of the email, he answered: “To inform the other side that we confirmed the receipt of their money and also to offset their debt[11]”.

32.  Two further points should be made.  Mr Ng submitted that before the 2^nd Defendant communicated the reduction of the running account with JWT, its consideration remained executory, not executed.  We disagree.  The 2^nd Defendant had provided executed consideration for the receipt of the Sum because goods had been delivered to JWT and the payment for which was outstanding.

33.  Finally, Mr Ng’s submission about the 2^nd Defendant acquiring constructive notice of fraud is a red herring.  The finding of the court below was that the 2^nd Defendant was acting bona fide in accepting the payment on 20 March 2018[12].  The fact that the 2^nd Defendant might have acquired constructive notice subsequently had no impact on its BFP Defence.  This was the view taken by the Judge[13] and is clearly right.

34.  For these reasons, we reject the second issue.

35.  The third issue is irrelevant unless the Plaintiff can succeed on the first or second issue.  A BFP Defence is equally effective against the other causes of action of the Plaintiff. 

36.  Given the lack of merit in this appeal, it is unnecessary to deal with the Respondent’s Notice.

Disposition

37.  For the reasons aforesaid, this appeal is dismissed.  The costs of this appeal be paid by the Plaintiff, to be taxed if not agreed with a certificate for 2 counsel.  We take the view that the Respondent’s Notice is unnecessary and we make no order as to the costs of the same.

38.  We are grateful to counsel for their assistance.