ESSILOR MANUFACTURING (THAILAND) CO., LTD v. G. DOULATRAM AND SONS (HK) LTD AND OTHERS

HCA 392/2020

[2020] HKCFI 2489

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 392 OF 2020

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DECISION

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Introduction

1.  Before the Court are two summonses taken out by TCL Overseas Marketing Ltd (“D3”): (1) a summons dated 24 April 2020 for payment out of the sum of US$684,000 paid by D3 into Court on 9 April 2020 (“the payment out summons”); and (2) D3’s application to strike out the statement of claim dated 22 May 2020. At the conclusion of the hearing, the Decision was reserved which I now give.

Background facts

2.  Essilor Manufacturing (Thailand) Co Ltd (“the plaintiff”) is a company incorporated in Thailand. It is a subsidiary of the Essilor Group, a leading manufacturer of spectacle lenses.

3.  This action arises in respect of a fraud perpetrated against the plaintiff by its employees, (in particular, Ms Phetporee, the Finance and Accounting Manager,) and other unknown persons who appear to have acted in concert with Ms Phetporee (collectively, “the fraudsters”).

4.  The plaintiff issued the writ to this action against 44 defendants including D3 on 27 March 2020, the day it obtained an ex parte injunction order (“the Injunction Order”) from Madam Justice Lisa Wong described below.

5.  The plaintiff is the holder of a US dollar bank account with JP Morgan Chase Bank NA in New York (“the JPM Account”). Between 15 October and 11 December 2019, Ms Phetporee effected 87 fraudulent transfers (“First Layer Transfers”) in total in excess of US$135 million from the JPM Account into bank accounts in Singapore held by fictitious vendors she had set up. Of that sum, approximately US$12 million was transferred by 5 of the fictitious vendors (“the First Layer Recipient(s)”) to the defendants in this action (“Second Layer Recipients”).

6.  Idrisco Pte Ltd (“Idrisco”) was one of the First Layer Recipients which received transfers between 15 October 2019 and 11 December 2019 aggregating US$20,860,000 in its bank account in Singapore with Overseas Chinese Banking Corporation (“OCBC”) (“the Idrisco Account”).

7.  Idrisco then transferred part of the sums it received in the Idrisco Account to D3’s bank account with HSBC in Hong Kong (“the D3 account”), making D3 a “Second Layer Recipient”.

8.  Transfers of US$200,000, US$300,000 and US$184,000 were made from the Idrisco Account into the D3 account in Hong Kong on 5, 9 and 10 December 2019 respectively. 

9.  The plaintiff never authorised any of the First and/or Second Layer Transfers and does not know and never had any business, commercial or other dealings with Idrisco and/or D3.

10.  The plaintiff claims against D3 are for unjust enrichment and in constructive trust arising as a result of fraud and seeks payment of US$684,000 as well as declaratory relief.

Procedural history and chronology

11.  On 27 March 2020, the judge granted an ex parte proprietary injunction over the plaintiff’s money which was paid into, inter alia, the D3 account and an ex parte Mareva injunction over D3’s assets in Hong Kong (“the Injunction Order”) with a return date of 24 April 2020[1] unless before then it was varied or discharged by a further order of court.

12.  On 3 April 2019, there was an exchange of correspondence between D3’s solicitors and the plaintiff’s solicitors as follows:

(i) D3 sought the plaintiff’s consent to discharge the injunction “upon D3’s undertaking to the Court that it would not, until the final determination of the captioned proceedings[2] or further order,” diminish the value of its funds in that account up to US$684,000 (“the injunction sum”). 

(ii) the plaintiff was agreeable to the discharge of the injunction “subject to [D3] paying into court the amount of US$684,000”, remarking that such a payment would have the effect of discharging the injunction as against D3.

13.  On 9 April 2020, without notice to the plaintiff, D3’s solicitors obtained directions from Madam Justice Marlene Ng who granted D3 leave, inter alia, to pay the injunction sum into court and to file a notice of payment into court.

14.  D3 then proceeded to pay the injunction sum into Court and to file a notice of payment.

15.  By letter dated 9 April 2020, D3 notified the plaintiff of the payment of the injunction sum into Court enclosing the notice of payment in and stating in the last paragraph of that letter that the payment was “made without prejudice to [D3’s] right to contest [the plaintiff’s] claims in this action”, and expressly reserving D3’s rights to claim damages suffered as a result of the injunction.

16.  The notice itself stated that D3 paid the injunction sum into court “as security pursuant to the Injunction Order”.

17.  On 17 April 2020, after referring to the hearing on the return date for continuation of the injunction, D3’s solicitors sought the plaintiff’s agreement for proposed directions for that hearing.

18.  On 21 April 2020, the plaintiff’s solicitors initially agreed to the proposed directions but upon receipt of the draft consent summons, they sent a further letter later the same day stating that after further consideration their view was that the injunction had ceased to have effect in relation to D3 and that D3 does not have standing to oppose the plaintiff’s summons nor seek the proposed directions.

19.  It was in those circumstances that D3 took out its payment out summons on 24 April 2020. 

20.  Then on 22 May 2020, D3 issued its strikeout summons on the grounds that the statement of claim discloses no reasonable cause of action; is frivolous or vexatious; and it is an abuse of the process of the court.

21.  On 21 July 2020, the Singapore Court entered judgment in default of defence in the plaintiff’s favour against Idrisco and granted declaratory relief to the effect that the plaintiff is the owner of the funds in the Idrisco Account and entitled to trace the same.

A.      The payment out summons

22.  The only ground stated in the summons is that there is no proper basis for the grant of the ex parte Injunction Order.

23.  The sole issue that arises on the summons is whether it is open to D3, having volunteered that payment into court as security for the plaintiff’s claim, to seek payment out on the basis that the injunction ought never to have been granted.

24.  Mr Jonathan Chang SC, leading counsel for D3, relied heavily on the “reservation of rights” made in the last paragraph of D3’s letter of 9 April 2020.

25.  Mr Sebastian Hughes, counsel for the plaintiff, submitted that D3’s application is fatally flawed because the payment in was made without any reservation of the right to apply for an order that the injunction granted ex parte be set aside.

26.  Both parties relied on Emailgen Systems Corporation v Exclaimer Limited [2013] 1 WLR 2132. In that case, the plaintiff obtained an ex parte injunction freezing the respondents’ assets. At the inter partes hearing, the respondents gave an undertaking to provide security for damages. They later applied to be released from the undertaking on the basis that the injunction should not have been granted without notice.

27.  The court held that on a true construction of the consent order the application for the freezing order had been disposed of by the giving of the undertaking and it was therefore not open to the respondent to argue that the injunction order never to have been granted. It was further held that the respondent can only seek to be released from its undertaking “by showing good cause, typically a change in circumstances”. 

28.  In his judgment, Teare J considered the decisions in Chanel Ltd v FW Woolworth & Co Limited [1981] 1 WLR 485 (on which the plaintiff relied) and Butt v Butt [1987] 1 WLR 1351 (on which D3 relied). After explaining (at §22) the essential difference between them, Teare J went on to state that:

“where an undertaking has been given and the defendant subsequently applies for an order that he be released from that undertaking on the grounds that the ex parte order never to have been granted it is essential to construe the terms of the undertaking given by the defendant in the context of the order as a whole in order to decide whether the application for an injunction was disposed of at the inter partes hearing by the giving of the undertaking.”

29.  In the present case,

(i)     the correspondence of 3 April 2020 (see §12 above) shows that the proposed payment of the injunction sum into court was “as security” for the discharge of the injunction “until the final determination of the captioned proceedings[3]”;

(ii)     paragraph (4) under the heading “Exceptions to this Order” in the Injunction Order provides that the Order “shall cease to have effect with respect to any Defendant which provides security by paying the sums received by it …into Court”;

(iii)     at no time prior to payment into Court did D3 expressly reserve any right to apply to set aside the ex parte injunction; and

(iv)     upon such a payment being made, the order automatically ceased to have effect as against D3 under the terms of the Order.

30.  D3’s paper application to the court for leave to make payment into court was not part of the hearing bundle. I have since been able to peruse the court’s correspondence file. D3’s paper application to the Court was made by letter dated 9 April 2020 (“the application letter”).

31.  The application letter referred, inter alia, to disruption[4] to D3’s business as a result of action taken by its bankers (other than HSBC) following the Injunction Order and to the provisions in paragraph (4) of the “Exceptions to this Order”. The application letter then stated that the solicitors were instructed to make payment of US$684,000 into Court on an urgent basis “with a view to discharge the Injunction Order as against our client as soon as possible” and sought leave to do so.

32.  No reference was made to the return date hearing: as stated in the application letter, under paragraph (4) of the Exceptions, the Order “shall cease to have effect” with respect to D3 “upon provision of security by way of payment into Court” of the injunction sum. Nor did the application letter seek directions that the payment in was to be without prejudice to D3’s right to challenge the ex parte Injunction Order

33.  Adopting the approach of Teare J in Emailgen, it is clear from the context of the payment in that the Injunction Order would cease to have effect “until the final determination of the captioned proceedings” thereby disposing of the injunction application between the plaintiff and D3 and dispensing with the inter partes hearing.

34.  D3’s letter to the plaintiff on 9 April 2020 purporting to reserve its rights to challenge the ex parte order is irrelevant absent any prior agreement between the parties and/or court approval that payment in be conditional and subject to D3’s right to challenge the ex parte order.

35.  In any event, no evidence has been filed by D3 to show good cause, such as a change in circumstances. In those circumstances, there is no proper basis for D3 to challenge the ex parte Injunction Order.

36.  Accordingly, subject to the disposition of the strikeout summons, the payment out summons falls to be dismissed.

B.    The strikeout summons

37.  As earlier noted, the plaintiff’s claims against D3 are based on unjust enrichment and through a claim of proprietary constructive trust.

38.  D3 relied on the following grounds for striking out the statement of claim considered below.

(a) Bona fide purchaser for value without notice  

39.  The relevant background is as follows:

(1) D3 is an indirect wholly-owned subsidiary of a Hong Kong listed company (“TCL Electronics”) and at all material times D3 had genuine business operations exporting televisions and electronic products manufactured by TCL Electronics in China to foreign countries.

(2) D3 has been trading with Adnan Mehdi and Hassan Mehdi (“the Mehdis”) in Nigeria through their corporate vehicles Mehdi Global Services Ltd (“MGS”) and ONOFF Limited (“ONOFF”) since early 2018.

(3) Third-party payment is commonplace in international trade and the Mehdis has consistently procured third-parties to pay D3 on their behalf.

(4) Pursuant to a distribution agreement with D3, ONOFF placed an order for goods eventually invoiced for US$1,084,000.

(5) D3 was and is aware of foreign exchange shortages and capital control policies in Nigeria[5].

(6) Payment was made in early December 2019 in 5 tranches without explanation. Apart from one payment of US$200,000 made by ONOFF itself, the remaining 4 payments were made by third parties including the 3 Idrisco transfers.

(7) There is no allegation of fraud against D3 or that he knew of the fraud perpetrated on the plaintiff.

40.  D3 submitted that in respect of the 3 transfers made by Idrisco into the D3 account, D3 is a bona fide purchaser for value without notice. 

41.  D3’s position is that it was up to the customer (ONOFF) to decide how to pay D3 and D3 had no right to insist on payment from a particular source. Thus, the arrangement for payment made between ONOFF and Idrisco was not of D3’s concern.

42.  Contemporaneous WeChat messages exchanged between Hassan Mehdi and Jason (D3’s employee) when the first of the Idrisco transfers was taking place as well as subsequent exchanges between them do not sit well with that assertion. The contemporaneous message from D3 shows that Idrisco was not a company known to D3. It caused D3 to immediately query[6] whether Idrisco was a Nigerian company.

43.  By email sent on 30 March 2020, D3 requested information regarding the “capital source” of the 3 deposits, “payout status” and “the payer’s background with company detailed information”.

44.  Hassan Mehdi replied on 2 April 2020 explaining that ONOFF used Idrisco to make the payment because they (the Mehdis/ONOFF) were unable to transfer from Lebanon due to capital controls and “for not delaying your payment we asked Idrisco to do it in our behalf and we funded them in Naira in Nigeria. They have assured us that it is not illicit …”.

45.  Pausing there, it is clear that when D3 received the payments from Idrisco, the latter was a complete stranger. Moreover, the ‘assurance’ the Mehdis/ONOFF allegedly received from Idrisco suggests that it was given pursuant to a request which must mean that the legality of the transaction was a concern.

46.  Attached to Hassan Mehdi’s email is a letter from Idrisco exhibited to Yang 1^st as YQF-31 (“the letter”) expressing shock and disappointment with what had “occurred[7]”. The letter has no named addressee and, seemingly, its purpose was to clarify the origin of the 3 payments. It stated that 

“owing to the paucity and challenges associated with sourcing for Foreign Exchange in Nigeria, [Idrisco] agreed, and indeed made the payments from their overseas Account, domiciled in Singapore.”

47.  Although the letter itself is undated, it bears a notary’s stamp with the date “25 March 2020” in the notary’s handwriting. It would follow that itwas created 2 days before the Injunction Order which is a curious state of affairs and necessarily raises issues as to its authenticity and reliability[8].

48.  Subsequent to the transfers, on an unknown date, D3 sought details not only of instructions given to Idrisco but also the agreement between Idrisco and ONOFF[9] for the transfers. On being informed that only verbal instructions were given based “on trust”[10], D3 requested email records as it was “very important for this case”. Although D3 was told that ONOFF would “normally” forward transfer details to Idrisco once they were received, no such records are in evidence.  

49.  Then, on 16 April 2020, D3 repeated its request to Hassan Mehdi to produce the record (email or message) from ONOFF authorising Idrisco to make the deposit. Once again, no such records are in evidence.

50.  Idrisco was incorporated in Singapore[11]as recently as 25 March 2019 and only opened its bank account with OCBC in September 2019. It is a supplier of sanitary ware and bathroom furnishings. That it should engage in money remittance and exchange activity plainly required an explanation.

51.  The transfers took place in December 2019 less than 3 months since the opening of the Idrisco Account which presumably was when Idrisco commenced its business activities. It is not evident what relationship the Mehdis/ONOFF came to develop with Idrisco in that short time span that led to an arrangement that has trappings of circumventing Nigerian exchange control restrictions.

52.  D3 submitted that it had provided value for the transfers. But no consideration flowed between D3 and Idrisco. D3 maintained that it had provided value by supplying the goods on the basis that the Mehdis confirmed that Idrisco was paying on their behalf as agent for ONOFF.

53.  However, on that basis, it would be a tripartite arrangement and in substance indistinguishable from that in DBS Bank (Hong Kong) Limited v Pan Jing [2020] HKCFI 268: see §59 below.

(b) Illegality

54.  It is evident from §32 (3) of the defence that D3 was aware that the reason for Nigerian customers instructing third parties (including those outside Nigeria) to make payment was “due to foreign exchange restrictions”. As earlier noted, the arrangement between ONOFF and Idrisco was that in exchange for the payments to D3, Idrisco would be “funded … in Naira in Nigeria[12].

55.  Prima facie, that arrangement is only inexplicable as a mechanism deployed for circumventing foreign exchange restrictions.

56.  The plaintiff has adduced evidence from a Nigerian solicitor who has opined that the money remittance arrangements to effect payment to D3 for the goods (whether involving a parallel currency exchange or a parallel currency/goods exchange or a parallel loan arrangement) are illegal and void under Nigerian law.  That evidence is uncontested. 

57.  D3’s ‘explanation’ for the arrangement is that it is extremely common in Nigeria for a buyer to nominate and procure a third party to pay the seller directly on its behalf. But where the intended purpose of the arrangement is to circumvent currency shortages and controls, it is illegal and the fact that it may be “common” is irrelevant.

58.  Breach of exchange control is a form of illegality. The recipient is not acting in good faith “if he shuts his eyes to the facts presented to him and puts the suspicion aside without further inquiry[13].”

59.  The plaintiff relied on the statement made in Virgo, The Principles of the Law of Restitution 3^rd edn, 2015 at p 659 (concerning the effect of illegality in restitution in the context of a defence of bona fide purchaser) that:

“[t]he defendant cannot be considered to have provided value for the property if it was transferred pursuant to an illegal transaction”.

That statement was accepted as a correct statement of the law in the DBS Bank case at §56.  

60.  As earlier noted, D3 sought to distinguish the DBS Bank case on the facts that in that case the recipient was a party to the arrangement having instigated it whereas in the present case D3 was not a ‘party’ as such to the arrangement between ONOFF and Idrisco.

61.  At best, the point may be arguable. On the current state of authorities, it is plainly not dispositive. At the very least, the plaintiff’s entitlement to trace in such a case must be a serious issue to be tried.

(c) The plaintiff’s pleaded case

62.  D3 submitted that as the plaintiff’s proprietary claim based on constructive trust and unjust enrichment depends on the ability to trace its funds into D3’s hands, the plaintiff needs to plead and prove that Idrisco was party to the fraud or knew about the fraud at the time it of its receipt of the monies. The failure to plead knowledge on Idrisco’s part was said to be fatal to the establishment of a constructive trust and thus of any tracing remedy.

63.  Although knowledge is not a pre-requisite under English law, it was submitted that Guaranty Bank and Trust Company v ZZZIK Inc Limited, unreported, HCA 1139/2016, 18 July 2016 at §§31-35 is authority that in Hong Kong knowledge is required.

64.  The English position is reflected in the following extract from Goff & Jones, The Law of Unjust Enrichment, 9th edn (at §38-11):

“The best view is therefore that a constructive trust or resulting trust can arise whatever the state of the trustee’s knowledge, and that when it does the beneficiary immediately acquires an equitable proprietary interest in the trust assets, whether or not the trustee also owes the beneficiary personal obligations to account for his dealings with the property.”

65.  I do not read the Guaranty Bank case as departing from the English position. The judge accepted[14] the proposition[15] that when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient, so that the money is recoverable and traceable in equity. What has to be shown is that on the facts it would be unconscionable for the recipient to retain the money.  It was not a case concerning pleadings.

66.  In the present case, the evidence[16] points to the Idrisco Account having been set up exclusively as a receptacle for deposits aggregating US$20,860,000 paid into it from the JPM Account. The Singapore Court granted a judgment in the plaintiff’s favour on 21 July 2020. It also granted declarations that the plaintiff is the owner of the Idrisco Account entitled to trace the same and that Idrisco was constructive trustee of the funds it received.

67.  In my view, based on the evidence adduced, the inference that Idrisco’s conscience must be affected is compelling. 

68.  D3’s submission that is not bound by that judgment as it was not a party to the proceedings and as it is a default judgment, the circumstances are not known. However, the authorities are clear that a proprietary interest created by a constructive trust imposed on a first layer recipient of the funds binds all subsequent transferees, other than bona fide purchaser for value without notice: Foskett v McKeown [2001] 1 AC 102 at 128. Moreover, it is clear from the Singapore judgment that Idrisco failed to file any defence. It is unthinkable that Idrisco would not have resisted the claim if it had had a defence.

(d) Tracing

69.  The 3 payments constituting the injunction sum were made on 5, 9 and 10 December 2019. On 23 December 2019, D3 transferred a sum of US$38 million out of its account, leaving a balance of just under US$7,803.61. In the interim, between the receipt of the injunction sum and the subsequent transfer out of US$38 million, amounts greater than US$7,803.61 had been credited into the account.

70.  It is D3’s case that applying the rule in Clayton’s Case[17] (the first in first out principle) no traceable property of the plaintiff remained in D3’s hands. That, it was said was fatal to the plaintiff’s proprietary claim based on constructive trust which is premised on D3 retaining an ownership interest in the relevant property.

71.  The issue that arises is whether, as is the plaintiff’s contention, where there are no competing equitable interests, the plaintiff is entitled to elect between the rule in Clayton’s Case or the rule in ReHallett’s Estate[18]. Under the Hallett rule, a trustee making withdrawals from a mixed account is deemed to have withdrawn its funds first (not the plaintiff’s) in tracing its funds into the accounts held by D3, or into substitute assets.

72.  Under that rule, the lowest intermediate balance is the lowest balance in the account during the intervening period between the payment in of the trust money and the time when the disentanglement of the account to be made. Credits and withdrawals on the same day will be taken at the end of the day and not be distinguished: see Lewin on Trusts, 20th ed. §44-071 citing Smith, The Law of Tracing (1997) at 265-266.

73.  Applying the Hallett rule, the lowest intermediate balance in D3’s account on the day of the withdrawal of US$38million was not the figure put forward by D3 but US$446,617.64[19] which is approximately two thirds of the injunction sum.

74.  In my view, this is a case where the plaintiff may choose to apply the Hallett rule, there being no competing equitable interests. On that basis, there is clearly a serious issue to be tried on the plaintiff’s proprietary claim.

Whether the Injunction Order should be continued

(a) The proprietary injunction

75.  In respect of the proprietary injunction, there is clearly a serious issue tried in relation to Idrisco’s knowledge of the fraud, whether D3 is a bona fide purchaser for value without notice and the plaintiff’s entitlement to apply the Hallett rule.

76.  As regards the balance of convenience, it is relevant to note that D3 has recourse against the Mehdis/ONOFF for payment of the balance of the purchase price:

(a) MGS has guaranteed ONOFF’s obligations to D3;

(b) D3 has recourse to an export credit insurance policy with China Export & Credit Insurance Corporation in respect of export business transactions entered into between D3 and MGS; and

(c) under clauses 6.1.1 and 9.3 of the Distribution Agreement dated 1 March 2019 between D3 and ONOFF, D3 is entitled to be indemnified by ONOFF where it has acted in contravention of, inter alia, the requirement that it complies with all applicable laws in respect of the importation, sale and distribution of the products.

(b) The Mareva injunction

77.  The plaintiff has shown a good arguable case that the defence of bona fide purchaser for value without notice does not apply in respect of monies in the D3 account.

78.  The question of balance of convenience has been addressed above.

79.  On the risk of dissipation, one week prior to this hearing, D3’s parent company, TCL Electronics, offered to provide a deed of indemnity to the plaintiff in respect of the injunction sum. If the plaintiff ever had to resort to it for payment, it could mean further delays and possibly further court applications.

80.  Such an offer might have made a difference had it been made before the return date but that did not happen. As matters stand, the plaintiff remains entitled to the protection of the payment into Court and no good reason has been advanced for not continuing that protection.

Order

81.  For the reasons set out above, it is ordered that

(1) D3’s payment out summons be dismissed; and

(2) the Injunction Order the continued until trial or further order of the Court.

82.  There is also to be an order nisi of costs in favour of the plaintiff with certificate for counsel, such costs to be summarily assessed in Chambers and payable forthwith. Directions will be given separately for the summary assessment of costs.