LOANDEPOT.COM, LLC v. YINGCAI TECH LTD AND OTHERS

HCA 950/2015

[2018] HKCFI 2172

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 950 OF 2015

________________

________________

______________

J U D G M E N T

______________

1.  This action involves internet fraud. It now survives as between the plaintiff (“Loandepot”) and the 7th defendant (“Madam Yau” or “Holly Sun Co”) only. The question as between Loandepot and Madam Yau is whether Madam Yau has made out her defence of having received the sum of money in question as a bona fide purchaser for value and without notice.

2.  Loandepot is a non-bank lender incorporated in California and re-domiciled to Delaware, USA.  It has been operating as a non-bank lender since 2010.  It provides lending products to consumers across the USA.  It is the victim of an internet fraud involving the 1^st Defendant (“Yingcai Tech”).

3.  On 2 December 2014, Loandepot became the victim of a fraudster(s) posing as Loandepot’s CEO by email.  The fraudster(s) tricked Mr Baher Tanius, Loandepot’s Director of Treasury, into sending a wire transfer of USD3.72 million (the “Primary Transfer”) from Loandepot’s bank account in the USA to an HSBC bank account in HK held in the name of Yingcai Tech (the “Primary Account”).

4.  On 3 December 2014, Yingcai Tech (and/or those controlling the Primary Account) transferred, among a number of other transfers, a sum of USD279,171.60 (“the Contested Sum”), from the USD3.72 million belonging to Loandepot and held in the Primary Account, to Madam Yau’s bank account with HSBC.

5.  Yingcai Tech is a private company incorporated in England and Wales on 5 March 2012.  It was struck off and dissolved by the Registrar of Companies of England and Wales under section 1000 of the Companies Act 2006 on 22 October 2013.  It was restored to the Register of Companies on 22 September 2015. Loandepot says that it had procured Yingcai Tech’s restoration to the register.

6.  Madam Yau is a sole proprietorship trading as Holly Sun Co.  Madam Yau appears to be the same person also known as Yau Lo Ling, the shareholder and director of Holly Sun Development Company Limited (“Holly Sun Ltd”) which was incorporated in Hong Kong on 6 February 2015. 

7.  On 27 January 2016, default judgment was entered herein against Yingcai Tech.  Save as against Madam Yau, Loandepot has obtained default judgments or settled its claims against all other defendants in this action.

8.  Loandepot’s surviving claim in this action seeks the recovery of the Contested Sum of USD279,171.60 transferred from the Primary Account to Madam Yau’s bank account on 3 December 2014.

THE CLAIM

Primary transfer and Loandepot’s claim against Yingcai Tech

9.  The following are from the facts agreed between Loandepot and Madam Yau. 

10.  On 2 December 2014, Mr Baher Tanius, Loandepot’s Director of Treasury, received an email from an impostor claiming to be Loandepot’s CEO and Chairman Mr Anthony Hsieh.  The email instructed Mr Tanius to work with a purported attorney “Mr Michael Adelstein” to send several payments regarding a supposedly confidential acquisition that would be made public shortly.  Skipping the details, it transpired that the email address used by the purported Mr Hsieh is identical to Mr Anthony Hsieh’s actual working email address.  Loandepot through Mr Tanius was induced by and relied upon certain misrepresentations of the imposters and transferred USD3,720,000.00 (“USD3.72M”) from its account at Wells Fargo Bank to Yingcai Tech which received USD3,719,991.60 thereof in its Primary Account (“Primary Transfer”).

11.  Mr Tanius later on 2 December 2014 discovered that Mr Anthony Hsieh had not given any instructions to transfer Loandepot’s USD3.72M to Yingcai Tech and Loandepot had been defrauded of this sum.  Loandepot tried to stop the transfer but the wire transfer had already been confirmed by Wells Fargo.  Loandepot contacted HSBC to try to hold the wire transfer.  It also lodged complaints with the FBI in the USA and the Hong Kong Police Force.

12.  On 3 December 2014, the sum of USD279,171.60 (the Contested Sum) was transferred from the Primary Account out of the USD3.72M belonging to Loandepot to the HSBC account of Madam Yau.

MADAM YAU’S DEFENCE

13.  Madam Yau pleaded that it received the Contested Sum in its HSBC account as part of the price paid by its customer Lian Dong Meng Trading Company (“LDM”) for the purchase of a total of 2,400 bags (132,276 lbs) of culinary walnuts by LDM from Madam Yau at the price of USD284,451. 

14.  Madam Yau further pleaded that she did not know and was not in any way connected with Loandepot or any of the other defendants.  She also had no knowledge or notice that the Contested Sum had come to her account at HSBC from Loandepot through Yingcai Tech.  She therefore pleaded that for the Contested Sum, she was a bona fide purchaser for value without notice.  The burden of proof is on her.

MADAM YAU’S PURCHASE OF WALNUTS FROM SUMMIT ALMONDS OF THE USA

15.  The following are also agreed facts between Loandepot and Madam Yau.

16.  Madam Yau entered into five contracts with a supplier of culinary nuts, Summit Almonds of USA in late October 2014 to early November 2014 for the purchase of Jumbo Walnuts for a total contract price of USD485,012.  The First, Second and Third Contracts were for 2,400 bags (132,276 lbs) at the price of USD277,779.60 and the Fourth and Fifth Contracts were for 1,600 bags (88,600 lbs) at the price of USD207,232.40. 

17.  Summit Almonds arranged for the walnuts under the First, Second and Third Contracts to be shipped to Hong Kong by a carrier, Evergreen America (“Evergreen”) and for walnuts under the Fourth and Fifth Contracts to be shipped to Hong Kong by another carrier, NYK LINE (“NYK”). Summit Almonds provided Madam Yau with the draft bills of lading for the goods under the five contracts.

18.  Evergreen notified Madam Yau on 24 November 2014 that the nuts under the First, Second and Third Contracts would arrive in Hong Kong on or about 30 November 2014.  The total freight charges for the shipment were HKD9,750 (“the Evergreen Freight Charges”).

19.  One All-The-Way Express Ltd (“All-The-Way”) notified Madam Yau on 27 November 2014 that the nuts under the Fourth and Fifth Contracts would arrive in Hong Kong on or about 1 December 2015.  The total freight charges for the shipment were HKD6,520 (“the All-The-Way Freight Charges”).

20.  The goods under the First, Second and Third Contracts arrived in Hong Kong on 30 November 2014 and, the goods under the Fourth and Fifth Contracts arrived in Hong Kong on 1 December 2015.

21.  Madam Yau paid Summit Almonds on 1 December 2014 the contract price for the goods in the five contracts at USD485,012 by electronic transfer through HSBC.  Summit Almonds then issued telex-releases to Evergreen and All-The-Way for the release of the goods under the First, Second, Third, Fourth and Fifth Contracts to Madam Yau.  Evergreen and All-The-Way then issued delivery orders to Madam Yau for the release of these goods.

MADAM YAU’S PLEADED CASE ON THE SALE OF THE NUTS TO LDM AND THE RECEIPT OF PAYMENT FROM LDM

22.  Madam Yau pleaded in her amended defence that on or about 1 December 2014, she and LDM entered into a contract (of invoice no. LDMHS086-WA) whereby she sold LDM 2,400 bags (134,706 lbs) of jumbo size walnuts being the goods in the First, Second and Third Contracts for USD284,451 inclusive of USD1,380 freight charges (“the LDM Contract”).

23.  The LDM Contract provided that Madam Yau, upon receipt of payment of the contract price, would provide LDM the bills of lading and any relevant information for the release of the goods under the LDM Contract.

24.  On 3 December 2014, LDM in performance of the LDM Contract paid Madam Yau USD279,172 (the Contested Sum) by electronic transfer to Madam Yau’s account with HSBC.  Madam Yau then issued a receipt to LDM confirming the receipt of the sum. 

25.  Madam Yau also paid Evergreen on 3 December 2014 HKD9,750 for discharge of the Evergreen Freight Charges for the goods under the First, Second and Third Contracts.

26.  Madam Yau then provided the delivery orders of the goods under the First, Second and Third Contracts (“the Delivery Orders”) to one Wah Kei Logistics (HK) Co. Ltd (“Wah Kei”), a logistics company appointed by LDM, and notified LDM of the container no., seal no. and other relevant information associated with the nuts under the First, Second and Third Contracts.  LDM then used the Delivery Orders and information provided by Madam Yau to make its own arrangement to retrieve the nuts under the LDM Contract from Evergreen.

27.  Regarding the balance of (USD284,451 - USD279,172 (the Contested Sum) =) USD5,279, Madam Yau said in evidence that LDM paid it to her on 9 December 2014 together with subsequent purchases from her. 

28.  Regarding the nuts in the Fourth and Fifth Contracts, Madam Yau said in evidence that she sold them to one Beijing Jiashi on about 23 December 2014.  She also said that she paid the All-The-Way Freight Charges for the release of these nuts by All-The-Way.

EVIDENCE

Madam Yau’s evidence

29.  Madam Yau was in the business of buying and selling culinary nuts.  Sometimes she would source goods from overseas suppliers after having received an order from a purchaser.  Sometimes she would source goods from overseas suppliers first and then look for a purchaser while the goods are in transit.

30.  She would require the purchaser to pay in part or in full prior to or upon the arrival of the goods in Hong Kong. Upon receipt of payment, she would provide the purchaser with the necessary shipping documents like release or delivery orders for the release of the goods to the purchaser.  Sometimes she would also provide the purchaser with the shipping documents for the release of the goods before payment if she found the purchaser trustworthy. 

31.  The typical logistics arrangement for the release of goods by the shipping company are as follows: -

(1)   The supplier would send Madam Yau the invoice, packing list and draft bill of lading for the goods for her confirmation;

(2)   A few days prior to the arrival of the goods in Hong Kong, the shipping company would send her an arrival notice;

(3)   She would settle the supplier’s invoice;

(4)   The supplier would issue a telex-release to the shipping company to advising the latter that the goods could be released;

(5)   Madam Yau would usually confirm with the shipping company as to the arrival date;

(6)   Upon arrival of the goods, Madam Yau would settle the terminal handling charges of the shipping company and collect the release or delivery order from it.

32.  Once Madam Yau has obtained the release or delivery order and after her purchaser had settled her invoice, she would pass the release or delivery order to the purchaser’s logistic company.

33.  Madam Yau’s suppliers were mainly US companies that required her to pay for their goods in US Dollars.  She likewise required her purchasers to pay her in US Dollars.  Insofar as she knew, her purchasers (from the Mainland) would employ remitting agents or third parties to pay US Dollars to her.  Though she was not privy to the arrangement between her purchasers and the remitting agents or third parties, she knew that her purchaser would pay the agent or third party Renminbi equivalent in value to the price of the goods in US Dollars.  The agent or third party would then pay her the price of the goods in US Dollars.  After the US Dollars had been paid into her account, her purchaser would advise her that her invoice had been paid. 

34.  If the payment to her was by tele-transfer, she would receive an SMS from her bank afterwards.  If the payment was by local deposit at her bank, she would not be given any notice of the payment by the bank.  When her purchaser called her and advised her of the payment, she would usually not be told the identity of the remitting agent or third party as that was of no concern.  If the transfer was by way of a bank transfer, the name of the remitting agent or third party would appear in her bank statements.  But she seldom paid any attention to the identity of the remitting agent or third party as it might be different every time.

35.  Regarding the Contested Sum, she received it in a transaction with LDM.  As far as she was aware, LDM was a company trading in imported goods including culinary nuts in Zhejiang Province in China.  In about mid-2013, she was introduced by a friend to a Mr Wang Chang Bao (“Mr Wang”),the sales manager of LDM.  Mr Wang told her that LDM was interested in developing a business relationship with her.  He asked her to send price quotations for culinary nuts to LDM.  In early 2014 when she was on a business trip to Shanghai, she also went to Hangzhou to visit Mr Wang who took her on a tour of the business of LDM.

36.  She and Mr Wang conducted business usually by telephone.  She disclosed Mr Wang’s telephone number in her evidence.  Between July 2014 to January 2015, she and LDM had completed twelve transactions.  The culinary nuts she sold LDM were purchased by her from her suppliers. 

37.  She received the Contested Sum from LDM for the sale of 3 consignments ofinshell walnuts (under the under the First, Second and Third Contracts) to LDM.  Her purchase of these walnuts from Summit Almonds at USD277,779.60 have been dealt with in the agreed facts cited above.  She also paid HKD9,750 to Evergreen and HKD6,520 to All-The-Way on 3 December 2014 to discharge the freight charges due on the two lots of walnuts under the First to Fifth Contracts. 

38.  On 3 December 2014, Mr Wang told her that LDM had paid for the 3 consignments of walnut.  She then passed the release orders or delivery orders to Wah Kei as nominated by LDM.  She did not retain the original documents. 

39.  She in fact received the Contested Sum.  She later learnt that the Contested Sum was paid by Yingcai Tech on behalf of LDM.  It was insufficient to settle the whole of the invoiced sum and a balance of USD5,279 was outstanding.  The outstanding sum was paid by LDM on 9 December 2014 together with LDM’s subsequent purchases.

40.  For the other lot of walnuts (under the Fourth and Fifth Contracts) she purchased from Summit Almonds which also arrived in Hong Kong on 30 November 2014, she sold them to Beijing Jiashi [C2-258 to 261].

41.  Madam Yau maintained that she had no knowledge of the alleged impropriety of the transfer of USD3.72M from Loandepot to Yingcai Tech.  She received the Contested Sum in the course of her business of selling culinary nuts that she purchased from her supplier.  She did not know at the time that the sum had come from Loandepot.  In fact, LDM did not tell her the identity of the paying party (Yingcai Tech) at the time.  She could only discover Yingcai Tech’s identity when she looked at her monthly bank statement.  It was her understanding that Yingcai Tech was one of the third parties making payments to her for LDM and the Contested Sum was transferred from Yingcai Tech’s bank to her bank account by a bank transfer.  She did not know that Yingcai Tech had been struck off the Companies Register in England.  Yingcai Tech had paid her USD90,000 earlier on 30 September 2014 also on behalf of LDM.  That payment had not been challenged.

42.  She said in cross-examination that she could communicate with her suppliers in simple English both verbally and in writing.  She was buying nuts from them on CIF terms and selling them to her purchasers on FOB terms.  Hence, her costs were low.  She understood the operation of L/C (letters of credit), but she did not use them to buy her goods from overseas.  Her individual purchase from her suppliers could be worth over USD300,000, but they would not demand an L/C from her. They were contented to sell nuts to her by D/P (Documents Against Payment) and on CIF terms.  They would only get paid when the nuts were about to reach Hong Kong. She thus enjoyed tremendous trusts from her overseas suppliers.  Her accounts showed that her turnover for 2015 was at HKD319 million (or nearly USD41 million). 

43.  The nuts took at least 20 days to arrive in Hong Kong.  She thus had about a month to sell them. Since she was contented with a small profit, there was little risk for her to source the nuts before receiving a purchase order.  For 2015, she paid HKD316 million for her purchases and received HKD319 million for her sales.  Her net profit was at HKD1,189,589.98.  That was less than 0.5% of her costs.  It was extremely rare that she had to pay storage charge for the nuts.  The storage charge was also not expensive as she did not store them at the pier.  The nuts could also be kept for three months.

44.  She also traded in pistachios which she bought from Iran.  This was in fact her main business. 

45.  She had many documents showing her purchases of nuts from her suppliers, but she had none to prove her sales to her purchasers who were all from the Mainland.  She had given the release orders to the logistic companies engaged by her purchasers after having received payments from her purchasers.  She did not keep any copy of them.  A transaction would come to an end after her release of the purchase order to the nominated logistic company.  She did not bother about whether her purchasers had paid her directly from their bank accounts or through third parties.  So long as she received the payment, she was satisfied.  She would only release the goods after having received payment.  She further said that she had never received payment directly from her purchasers. 

46.  She knew that there was currency control in the Mainland and her purchasers could not transfer the purchase price directly from their bank accounts to her bank account as the price in an individual transaction was often in excess of USD100,000.  They therefore had to use some way other than the official way to pay her the hundreds of thousands of US Dollars.  They would make payment probably in Renminbi to some agent in the Mainland and the agent would pay US Dollars of the equivalent value into her account in Hong Kong.  After the incident in which she was paid the Contested Sum, she sought advice from the police.  She was then aware that there was always a risk that the US Dollars paid to her by her purchaser’s agent were the proceeds of money laundering.  She however had no choice but to continue to trade and receive payment in the same way as before because she had no other means to obtain payment.  She agreed that if she had received such advice years ago (and before this incident), she would still trade and receive payment in the same way.

47.  She also clarified that she had never received any document from LDM as she did not require any. They only had verbal but not written contracts.  Regarding the invoices that she prepared purportedly for LDM, they were never issued to LDM but were kept by her as her own records.  She also did not issue any receipt to LDM to acknowledge its payment.  In fact, she did not issue receipt to most of her purchasers.  After she had received LDM’s payment, she would give Wah Kei the release order and the transaction would come to an end.  All her communications with Wah Kei were also made orally and not in writing.   

48.  Though she usually purchased nuts from her suppliers after having received a purchase order from a purchaser, it was not so for LDM.  For her sales to LDM, she had sourced the nuts before selling them to LDM. 

Evidence of Mr Ng Moon Tong, director of Wah Kei

49.  Wah Kei is a logistics company set up in early 2003.  Its main operation was to collect and repack containers, if necessary, in Hong Kong and ship them overseas for customers.  Mr Ng, as director of Wah Kei, was to develop clientele, oversee business operations and make everyday management decisions. The day-to-day operation on the customers’ orders were left to an employee Ms. Tsui Voon Siew Gena (“Madam Tsui”).

50.  When a client had containers to be shipped overseas, the client would usually provide Wah Kei verbally with the name and contact details of the supplier.  Wah Kei would then contact the supplier to obtain the release or delivery order of the containers.  With the release or delivery order, Wah Kei would repack the containers, if necessary, and ship them overseas per the client’s instructions and invoice the client accordingly. It is not Wah Kei’s practice to sign written agreements with its clients for its logistics services.

51.  Mr Ng received a phone call from a Mr Wang, manager of LDM in the latter half of 2014.  Mr Wang inquired on Wah Kei’s logistics services.  They had a meeting in Hong Kong to discuss Wah Kei’s services, but Mr Ng could not recall when and where the meeting was held.  He further said in oral evidence that he had met Mr Wang once in his office in Hong Kong.  He understood that LDM was a Mainland company trading in imported goods including culinary nuts in Zhejiang Province, China.  From then on, Wah Kei accepted orders from LDM to collect, repack, if need be, and ship containers of culinary nuts from Hong Kong to overseas.  No written agreement was signed. 

52.  Mr Wang would usually telephone either Mr Ng or Madam Tsui telling them that there were containers to be collected in Hong Kong for shipment to its overseas customer.  Mr Wang would ask Wah Kei to contact the supplier for details of the containers and to collect the release or delivery orders.  Madam Yau’s Holly Sun Co was one of LDM’s suppliers of culinary nuts and Wah Kei had handled the logistics of these nuts from late 2014 to early 2015.  Mr Ng clarified in oral evidence that the period was from September 2014 to early 2015.  For these nuts, Mr Wang would ask Wah Kei to contact Madam Yau directly.  Madam Tsui of Wah Kei would then telephone Madam Yau for the details of the containers and arrange for collection of the release or delivery.  Thereafter, Madam Tsui would arrange for the repacking, if necessary, of the containers and ship them overseas.  Wah Kei would then invoice LDM for the services provided.  All communication between Wah Kei and Holly Sun Co was over the telephone and there was no written correspondence exchanged.

53.  Mr Ng could not recall the specifics like container numbers, dates and invoice numbers of all the orders from LDM that were related to Holly Sun Co.  But he provided some data on eleven orders that Wah Kei had handled for LDM which were goods purchased by LDM from Holly Sun Co.  The first order for macadamia nuts which was purchased by Madam Yau from her suppliers on 21 July 2014 and allegedly sold to LDM was not included in Mr Ng’s evidence.  Since the documents which Mr Ng consulted in preparing his data were not before the court, I pay no regard to such data.  Wah Kei did not have the release or delivery orders for the containers that it had handled for LDM anymore as they had been handed over to the depot operator upon collection of the containers.

Evidence of Madam Tsui Voon Siew, shipping manager of Wah Kei

54.  Madam Tsui started working for Wah Kei as its shipping manager in or about March 2013.  The content of her witness statement is more or less the same as that of Mr Ng.  She added in oral evidence that the destination for LDM’s goods was a port in Vietnam.

Evidence of Mr Tsang Man Kit Keith, Loandepot’s investigator

55.  Mr Tsang is a director of Intellect Consultancy Ltd (“ICL”), an investigative company in Hong Kong.  ICL was engaged by Loandepot on 19 August 2016 to investigate the existence of LDM, the nature of its business and the identify Mr Wang, the alleged manager of LDM, if he could be located.  ICL was given a name card of Mr Wang which contained LDM’s name, Mr Wang’s full name, his title, an address, two different telephone numbers and a fax number.

56.  Mr Tsang conducted some searches in the internet of the Mainland including searches under the Administrative for Industry and Commerce system and in some archives in Hong Kong against LDM and Mr Wang, but found no record of either.

57.  However, Mr Tsang did not explain what kind of business would have to be registered with the Administrative for Industry and Commerce, the consequence of non-registration and whether this department is the only government department in the Mainland for registration of all businesses of whatever nature.  In Hong Kong, the Companies Registry only registers corporations but not sole proprietorship or partnership which have to be registered with the Business Registration Office.  Mr Tsang also has not explained whether a business would still be searchable at the website of the Administrative for Industry and Commerce after its operation has ceased or after it has been wound up.  He admitted that the result of his search only meant that LDM and Mr Wang could not be found at the time of his search.  His evidence on his internet search is too brief.  There is also no particular of the other searches that he had conducted.  His evidence is of no use for considering whether LDM was not in existence between mid-2013 to early 2015.

Evidence of Mr Tian Gui Yang, Loandepot’s investigator

58.  Mr Tian is an investigator of ICL working in its Shanghai branch office.  He was instructed by Mr Tsang on 23 August 2016 to travel to Hangzhou to investigate the existence of LDM and identify Mr Wang, the alleged manager of LDM, if Mr Wang could be located.  He was given the said name card of Mr Wang which contained LDM’s name, Mr Wang’s full name, title, address, two different telephone numbers and a fax number.

59.  Mr Tian went on 23 August 2016 to LDM’s address in Hangzhou as stated in Mr Wang’s name card.  That was 浙江省杭州市余杭區博園路浙江食品市場 2F31 (Zhejiang Food Market, No. 1 Boyuan Road, Yuhang District, Hangzhou, Zhejiang Province).  He found that the food market actually consisted of 3 buildings which were the No. 1 Market, No. 2 Market, and Healthcare Products Market.  He visited all three buildings on that day.

60.  He found a packaging company called Hangzhou Xinfeng Packaging at shop No. 31 on the 2^nd Floor of No. 1 Market.  It was closed on that day.  All dealers on the 2^nd floor of No. 1 Market were tea merchants except for Hangzhou Xinfeng Packaging which was a packaging company.  The people in the neighbouring stalls told him that they had not heard of LDM or Mr Wang.

61.  He then visited the 2^nd floor of No. 2 Market which was closed on that day.  A security guard on the 1^st floor told him that the 2^nd floor was formerly a food wholesale market, but all the dealers had moved out and the floor had been vacant for 3 or 4 months.  The guard had also not heard of LDM.  But Mr Tian had not asked the guard whether he was working in No. 2 Market from mid-2013 to early 2015. 

62.  Mr Tian could not find the address 2-2-031 and no one in this building had heard of LDM or Mr Wang.  He said in oral evidence that there were glass partitions which partitioned the 2^nd floor into 50 to 100 shops but there was no shop signage or shop number on the shops.  All decorations had been removed and there was rubbish on the floor.  He had walked around the 2^nd floor which was vacant. 

63.  Mr Tian further said that he had also asked the property management of No. 2 Market and was told that the 2^nd floor of this market had been vacant for 3 or 4 months.  But he did not enquire with the management on the identity of the former occupant of shop No. 31 on the 2^nd floor.  It is not known if the management would have responded positively to such enquiry.

64.  He also enquired the people in 3 to 4 shops on the 1^st floor of No. 2 Market for LDM and Mr Wang, but got no result.

65.  He also visited shop No. 31 on the 2^nd floor of Zhejiang Healthcare Products Market.  That was a tea shop and its stated address was H-2-031.  The shop assistant told him that their shop had been operating at that location for more than three years and he had never heard of LDM or Mr Wang.  In fact, all shop numbers in this market started with letter “H”.

66.  In addition, Mr Tian also called the two telephone numbers and the fax number on Mr Wang’s name card, but none of the numbers was in use.

67.  Mr Tian’s evidence cannot show whether there was a shop operating in the name of LDM in the 2^nd floor of No. 2 Market between mid-2013 to early 2015.  This might have been ascertainable from the records of the property management but he did not enquire it with the management.  It is also not known if the security guard whom he met on the 1^st floor was working in the No. 2 Market between mid-2013 to early 2015.  If not, then it would not be surprising that the guard would not have heard of LDM or Mr Wang.  For the people in the few shops on the 1^st floor that Mr Tian had enquired with, it is not known if these people were working there during mid-2013 to early 2015.  In any case, the 2^nd floor of the No. 2 Market had 50 to 100 shops.  It would not be surprising if those working on the 1^st floor should be unaware of or could not recall LDM which might have operated in one of those shops on the floor above between mid-2013 to early 2015.  Regarding Mr Tian’s calling the phone and fax numbers, such checking can only prove that these numbers did not work or were not in use on 23 August 2016 when he made the check.  He had not checked with the telephone service provider of Hangzhou on who was using those numbers from mid-2013 to early 2015.  It is not known if the service provider would have responded positively to such enquiry. 

68.  In a nut-shell, Mr Tian’s evidence is not helpful to resolve the question of whether LDM had operated in one of the shops that dealt with wholesale of foodstuff in the 2^nd floor of No. 2 Market between mid-2013 to early 2015.

PRINCIPLES FOR ASSESSING CREDIBILITY OF WITNESSES

69.  Mr Lee, counsel for Loandepot referred me to Ip Fung Kuen v Sam Kee Frozen Meat Company Ltd [2009] HKCFI 588 at §§65 to 67 quoting Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd (unreported) HCA 1957/2005, 28 July 2011; Hui Cheung Fai v Daiwa Development Ltd (unreported) HCA 1734/2009, 8 April 2014; and Kwai Tak Ming v KS Capital One Ltd [2016] HKCFI 733 at §§16 to 17 for the principles on assessing the credibility of witnesses.  The important things to note are the inherentprobabilities or improbabilities of one’s testimony, its internal consistency, its consistency with contemporaneous documents and undisputed or indisputable evidence and the overall impression of the characters and motivations of the witnesses.

LOANDEPOT’S INITIAL POINTS ON CREDIBILITY OF MADAM YAU

70.  Madam Yau had kept some so-called invoices of her sales.  She had however admitted through her solicitors by letter dated 21 July 2016 that they had not been sent to her purchasers.  These invoices were merely her own records of her sales and she did not provide them to her customers.  She further said in oral evidence that she did not issue any invoice or receipt to her purchasers save the few who had asked for them.  All her sales were conducted verbally in the way as referred to above. 

71.  Mr Lee raised the question that without any invoice or receipt, her purchasers could not import the goods whether into the Mainland or anywhere else.  Unfortunately, this was not raised with Madam Yau in cross-examination.  Mr Lee also did not refer to any evidence or common knowledge that import of goods into the Mainland or any other country would require an invoice or receipt.  My understanding is that importing goods into Hong Kong or the Mainland would require a cargo manifest or cargo list for customs purpose rather than an invoice or receipt.  I do not think this is a valid criticism of Madam Yau’s evidence.

72.  Madam Yau had to pay terminal fees to the shipping companies to obtain the release/delivery orders. The amount of such fee levied by the shipping companies varied from company to company.  She also charged her purchasers terminal fees which were recorded in her invoices.  When questioned on this, she said some shipping companies charged her more and some less.  She then averaged them out and charged the same rate of such fee on all her sales.  She was not charging a reimbursement of what she had paid for any particular transaction.  She also considered that her purchasers would take her terminal fees as part of the price they had to pay for the goods.  In the case of LDM, the fees she charged were in fact higher than the amounts she paid to the shipping companies for the same loads of goods.

73.  Mr Lee commented upon Madam Yau’s practice of levying such fees as a “naughty” practice as they far exceeded what she had actually been charged by the shipping company and she did not disclose this to her clients. However, I do not see any problem in this.  Madam Yau could have described the charges as terminal fees or administrative fees.  She could have given it any other name.  To her purchasers, the charges were part of the payments for acquiring the goods.  If the overall price was acceptable, they would buy, if not, there would be no deal.  The situation would be the same regardless of such fees are called terminal fees or something else.  There is nothing in this comment.

74.  Mr Lee also referred to the fact that Madam Yau had received not just the Contested Sum, but also an earlier sum of USD90,000 from Yingcai Techon 30 September 2014 and another sum of USD26,857 from D3 on 23 July 2014.  In fact, I note that there was one more receipt of USD145,000 from Yingcai Techon 3 November 2014 and seven more receipts from D3 at USD151,800 on 3 July, USD40,000 on 30 September, USD65,000 on 15 October, USD50,000 on 20 October, USD105,000 on 27 October, USD100,000 on 11 November and USD110,000 on 18 November 2014.  There were thus altogether ten previous receipts from Yingcai Tech and D3 prior to the receipt of the Contested Sum on 3 December 2014.  Mr Lee referred to such sums as tainted money.  Loandepot obtained default judgment against D3 on 31 July 2015 and against Yingcai Tech on 27 January 2016. 

75.  It is understandable that Mr Lee would refer to the Contested Sum as tainted money.  But I cannot see any basis for his describing the earlier receipts of Madam Yau from Yingcai Tech and D3 as tainted.  Those ten sums had nothing to do with Loandepot and were not part of the sum channeled from its account into the Primary Account.  Madam Yau’s receipt of those earlier sums from Yingcai Tech and D3 without being thereby subject to any query supports her plea of innocence and lack of notice of any irregularity in relation to her receipt of the Contested Sum.  I can find nothing in this submission.

OVERALL APPROACH

76.  I agree with Mr Lee’s submissions that Madam Yau’s evidence should be considered along the following lines:

(1)   first, whether Madam Yau was a bona fide purchaser for valuable consideration.  For this line, there are three aspects that should be considered: (a) the nature of Madam Yau’s business; (b) the alleged Holly Sun Co - LDM transactions generally; and (c) the particular alleged Holly Sun Co - LDM transaction referenced as LDMHS086-WA (under which Madam Yau received the Contested Sum);

(2)   second, whether Madam Yau had actual or constructive notice of Loandepot’s prior interest.

NATURE OF MADAM YAU’S BUSINESS

Was Madam Yau exclusively or otherwise a trader in food products

77.  Mr Lee submitted that the court should not accept that Madam Yau was (or was exclusively) a trader in food products or that she was the sole owner of any such trading business.  I would however point out first that if Mr Lee would want the court to find positively that Madam Yau was carrying on any other trade in addition to her trade in food products or that she had other partners in her trading business, then these are matters for Loandepot to plead and prove.  As matters stand, I would just consider whether I would accept Madam Yau’s case as pleaded and evidenced by her.

78.  To start with, I accept that Madam Yau has proved on a balance of probability that she was indeed carrying on a business of selling substantial quantities of culinary nuts which she bought from her suppliers from the USA.  Whether she was at the same time carrying on any other business undertaking or venture is neither here nor there.  This is not a trial of what undertaking she was having.  It is only a trial on one question of whether she was a bona fide purchaser of the Contested Sum for value and without notice that it had come from Loandepot.   

79.  It is agreed that all the nuts she purportedly sold to LDM were sourced directly from the USA (save the first transaction sold to LDM on 23 July 2014 which she bought locally). She paid USD3.137 million (or HKD24.4 million) for them (not include the first transaction).  Just for this quantity which she bought in the course of about 4 months for sale to one purchaser and without considering what other amounts she might have bought and sold in relation to other purchasers, I accept that she bought them for sale.  She would not have burnt these nuts or thrown them into the sea. 

80.  The fact that she was trading in culinary nuts is also confirmed by the investigation conducted by Loandepot’s investigator on 15 April 2015 [C1-221].  The investigation was on Holly Sun Ltd which Madam Yau incorporated on 6 February 2015 for conducting her business after her sole proprietorship experienced the problems consequential upon the receipt of the Contested Sum. 

81.  She was also a trusted purchaser of her American suppliers and was able to purchase nuts of substantial value from them on CIF terms pay them by D/P.  That means that these suppliers had to assume all the risks including the costs of their goods when they were floating over the Pacific Ocean.  Judging from the fact that all three American suppliers of the nuts that were purportedly sold to LDM were contended to sell these nuts of substantial worth to her on these terms and nobody was given an L/C, one can tell the amount of faith and trust they had in her.  Such faith and trust could only have been established by due discharge of her obligations to these suppliers in the past.  Her purchases must have also meant good business to them so that they regarded their assumption of risks worthwhile.

Madam Yau’s receipt of sale proceeds

82.  One remarkable feature of her business is that she had all the usual and proper documentation to prove all her purchases and payments for the goods, but she had no document to prove their sale.  She said her sales were on FOB terms.  She would, after receiving the purchase price, release the delivery order to the logistics agent of the purchaser.  That would conclude the sale.  The logistics agent would use the release order to obtain the goods from the shipping company direct.  She did not issue any invoice or receipt to her purchasers save to the few who expressly asked for them. 

83.  She also admitted that all her purchasers paid her through third parties.  She obviously knew that the purchase price came to her through the underground banking system though she was at first reluctant to admit it.  She said she had to accept payment through this channel despite the risk that such money could be the proceeds of money laundering.  Her purchasers were obviously those who did not have the Mainland government’s permission to channel hundreds of thousands of US dollars or millions of Renminbi out of the country to purchase goods from outside the country. Otherwise, they would not have to resort to the underground banking system but would have paid her through inter-bank transfer or remittance across the border. 

84.  Though it is lawful for Madam Yau to receive purchase price from her purchasers through the underground banking system per se, it must be illegal in the Mainland for her purchasers to channel money out of the Mainland to Hong Kong through this system as that defeats the currency control system of the Mainland.  Madam Yau’s purchasers, in so doing, were committing serious breaches of the Mainland’s financial criminal laws.  That was probably the reason why Madam Yau was reticent about her knowledge that her purchasers were paying her through such system.  Furthermore, to knowingly receive hundreds of millions of Reminibi through such system would most probably be illegal in the Mainland too though there is no evidence on it.

85.  Madam Yau’s readiness to receive purchase price through such system may be the reason for her being able to find a niche for her business as other reputable traders in the same line of business might not want to receive purchase price through the underground system and hence not to sell goods to these purchasers.  But there is no evidence that she had ever got into any kind of trouble by reason of her numerous receipts through such system prior to and after receiving the Contested Sum.

Madam Yau’s Iranian deals

86.  The same applies to her purchase of pistachios from Iranian sellers.  On her admission in cross-examination, she obviously knew that such business activity was contrary to the sanctions imposed by the USA on Iran.  She was circumventing the sanctions by paying for such goods in US dollars to a bank account of (an Iranian) company in Hong Kong.  In the light of the sanctions, reputable traders of pistachios might not want to purchase goods from Iranian sellers. But she again indulged in trails that others feared to tread.

87.  Mr Lee submitted that several aspects of the nature of Madam Yau’s business were unusual and several material respects of her evidence were internally inconsistent or incredible.  One of which was her Iranian trade.

88.  He referred to Madam Yau’s witness statement which began by stating that she was the sole proprietor of a business of trading food including culinary nuts mainly between the USA and Mainland China.  But she at the end of oral evidence claimed that she also sourced large amounts of goods from South Africa and Iran.  Mr Lee further submitted that when she was questioned about the huge volume of payments of over USD15 million from her HSBC account to other local Hong Kong accounts over a six-month period (when payments into her account totaled USD30 million over the same period), she then tried to distance herself from her original stance of trading mainly between the USA and Mainland China by alleging that these payments were to a Hong Kong company belonging to Iranian suppliers.  She said those suppliers could not be paid in USD in Iran due to US sanctions.  Mr Lee asked the Court to weigh this explanation with caution.  He submitted that there is no independent or documentary evidence to support the explanation and it seemed unlikely that an Iranian supplier could or would open a company and bank accounts in Hong Kong if it was subject to US sanctions.  

89.  Mr Wong, counsel for Madam Yau replied that there is no basis to say that an Iranian company (or its nominee) cannot form a business or incorporate a company to conduct business and open bank accounts in Hong Kong just because of the US’s sanctions on Iran.  It is a matter for that company to decide how to use the US dollars in its Hong Kong bank account even if it cannot transfer it directly from Hong Kong to Iran.  Mr Wong is clearly right.

90.  When Madam Yau was cross-examined about her substantial payments totaling USD15 million from her HSBC account to other local Hong Kong accounts, she explained that the payments were to a Hong Kong company belonging to Iranian suppliers who could not be paid in USD in Iran due to US sanctions.  Mr Lee submitted that Madam Yau in so saying was trying to distance herself from her original stance of trading mainly between the USA and Mainland China by alleging that these payments were to a Hong Kong company belonging to Iranian suppliers.  I do not think Madam Yau was trying to distance herself from anything. 

91.  She no doubt said nothing about the Iranian side (or the South African side) of her business in her witness statement.  She just confined her explanation to things in connection with her trade with LDM.  It is in the course of such trade that she received the Contested Sum.  She knew very well that her trades with Iranian suppliers were contrary to the US sanctions.  But when she was cross-examined about the USD15 million payments to a local company, she chose to come clean and revealed her Iranian trade (and also her South African trade).  By revealing these other parts of her business, she was explaining the cause of her local payments, she was not trying to distance herself from anything.  It is of course incorrect for her to have said that she was trading food including culinary nuts mainly between the USA and Mainland China.  But I take it that her failure to disclose her Iranian and South African trades was because her desire to keep her Iranian trade secret because of the US sanctions. 

Some alleged oddities of Madam Yau’s business

92.  Madam Yau’s business registration record shows that she commenced business on 3 February 2012 [C1-128]. She stated in her bank account opening form dated 23 September 2013 that her anticipated level of activity was HKD20 million.  She said in oral evidence that she had put down this figure without actually thinking about it.  But her accounts show that her turnover for the year ended 31 March 2015 was at HKD 319 million. 

93.  Mr Lee submitted that there are a number of oddities:

(a)   Madam Yau’s profit margin was extremely low at less than 0.4%.

(b)   She admitted she did not have insurance to cover goods she bought and sold while they were in Hong Kong.

(c)   Despite the huge volume of goods allegedly passing through her hands, her US suppliers never required her to procure letters of credit before delivering goods to her.

Growth of Madam Yau’s business and low profit margin

94.  Mr Lee referred to the startling growth of her business questioned whether she was operating more than a nuts trading business.  He pointed to her bank account opening form which shows that she was anticipating level of activity at HKD20 million per year [C1-109]. But she was expecting substantial turnover [C1-112].  She asked the bank to allow her a daily payment limit from her account to third parties at HKD20 million, a daily limit for her account to pay bills at HKD1 million and daily autopay limit at HKD500,000.  These are the maximum limits that the bank would allow.  She also asked for a daily transaction limit of her account to be set at HKD128 million. 

95.  If she was accurate in giving the bank her anticipated level of activity at around HKD20 million, I do think she would have asked for these daily limits.  They simply did not stand together. It is more likely than not that she had exercised her mind a bit more when asked to fill in these daily limits as they would have affected her actual operation.  Too low a limit would hinder her transactions. 

96.  Regarding her low profit margin, the figures in the audited accounts for her incorporated business Holly Sun Ltd for the period from 6 February 2015 to 31 March 2016 and the year ending 31 March 2017 are also worth consideration.  If her turnover for the year ending 31 March 2015 was phenomenal, her turnover from 6 February 2015 to 31 March 2016 for Holly Sun Ltd was even more so.  It increased by more than double to HKD684,267,728. But the net profit was just HKD1,932,541.  She drew director’s fee and other emoluments totaling HKD911,874.  The total of the net profit and her remuneration is HKD2,844,415.  That is just 0.42% of the turnover and is the same as before.

97.  For the period from 1 April 2016 to 31 March 2017, the turnover went down to HKD476,746,700 with a net profit of HKD1,668,224.  She drew director’s fee and other emoluments totaling HKD844,000. The total of the net profit and her remuneration is HKD2,512,224.  That is 0.53% of the turnover.  This rate is slightly higher than the two previous years but still very low.   

98.  The three years of accounting records confirm that her business strategy was buying and selling in bulk and selling at low profit margin.  Hence, the turnover was high but net profit low.  This is also consistent with her gross profit in the alleged transactions with LDM.  The gross profit for each individual transactions was ranged from 1% to 5%.  The total sale to LDM was at USD3,306,772 for which she paid USD3,232,057.78 purchase price.  The gross profit margin for the total sale to LDM is 2.31%.  I can see nothing odd in her high turnover and low net profit. Mr Lee questioned whether she was operating more than a nuts trading business. But even if that was the case, whatever other operation she was undertaking also produced just the same low level of profit.  In any event, she only had to prove that she had received the Contested Sum in the ordinary course of her nut trading and she received the same as a bona fide purchaser for value and without notice.  There is overwhelming evidence that she was a nut trader regardless of whether she was also in other business.  She never suggested that she had no other business undertaking or venture.  It is also irrelevant to consider whether she had anything else to do apart from carrying on her nut trading.

99.  I would add that this strategy of low profit margin is consistent with her evidence that she could sell her goods quickly and was not worried that she had to pay warehouse charge for them or they might even perish after long storage.  Though her purchasers could not buy directly from the US sellers, she was only charging them a small margin on top of the price charged by the American suppliers.  Hence, she could sell her goods quickly.

Madam Yau did not have insurance cover

100.  Mr Lee submitted that it was odd for Madam Yau not to have insurance cover.  It is undisputed that she bought the nuts from her suppliers on CIF terms and she said she sold them to LDM on FOB terms.  She said these were the terms for all her purchases and sales.  She did not have to pay warehouse charges for the nuts she sold LDM.  She also said that it was very very rare that she had to pay warehouse charge for her goods.  That was because she was selling at a low profit margin and hence able to sell quickly.  For all her sales to LDM, she just delivered the release orders to LDM’s logistics agent Wah Kei before the expiry of the free storage period given by the shipping company.  She did not have to keep the goods in her custody.  Hence, she probably had no exposure to any risk though this was not canvassed in her cross-examination. 

101.  In any case, even if there was a period between the CIF purchase and FOB sale that she was exposed to risks, it was not canvassed with her on whether she was aware of it.  If she was not aware of it, then she did not know that there was a risk to insure.  She did say in evidence that before encountering the problems consequential upon her receipt of the Contested Sum, she regarded that there was no risk in her business and she would not have incorporated Holly Sun Ltd.  It was only after this event and upon legal advice that she incorporated Holly Sun Ltd to insulate herself from liabilities of her business.

102.  There was indeed one transaction where warehouse charge had to be paid.  It was not a sale of goods to LDM but her sale of goods under the Fourth and Fifth Contracts to Beijing Jiashi on about 23 December 2014.  These goods arrived on 1 December 2014.  The free warehouse period was from 2 to 6 December.  The warehouse charge was payable from 7 to 15 December to the shipping company at HKD750 per day per container. Madam Yau charged her purchaser USD100 per day per container thereby making a profit of about HKD30 per day per container.  The release order was only released to the purchaser on 23 December.  But no warehouse charge was levied from 16 to 23 December.  This transaction was not dealt with in cross-examination and I do not want to make any guess as to what had happened [C2-258 to 261].

The US suppliers never required Madam Yau to procure L/Cs before delivering goods to her.

103.  Mr Lee also submitted that it was odd that despite the huge volume of goods allegedly dealt with by Madam Yau, her US suppliers never required an L/C from her before delivering goods to her.  I cannot see anything odd in this.  We are talking about three reputable US nut suppliers.  Any straightforward thinking person can see the tremendous trust and faith that these suppliers had in her.  It is a matter of common sense that such trust and faith from these (and not just one) suppliers must have been the result of faithful discharge by Madam Yau of her obligations as a purchaser in the past.  Otherwise, I cannot imagine that any of them would have agreed to sell her nuts worth several hundred thousand US Dollars on CIF and to be paid by D/P.  If anything, it casts Madam Yau under very favourable light as a business person.  I am unable to draw any adverse inference from this.

Madam Yau distancing herself from Holly Sun Co after her bank account was partially frozen in late 2014

104.  Madam Yau admitted that she wanted to distance herself from her sole proprietorship Holly Sun Co after her bank account was partially frozen in late 2014.  She stopped her trading in that business and incorporated Holly Sun Ltd for her trading from 8 February 2015.  This was to insulate herself from the liability of her trade.  She did so pursuant to legal advice after her bank account was partially frozen.  There is nothing fishy in this.  She said but for the problems she encountered consequential upon receiving the Contested Sum, she would not have incorporated Holly Sun Ltd.  Mr Lee referred to three matters in particular as her discreet attempts to distance herself from her proprietorship business:

(a)   The form for opening the bank account in 2013 for Holly Sun Co described Madam Yau as the sole proprietorship [C1/18/111]. But the subsequent ATM card enrolment form at [C1/20/143] only described her as a manager.

(b)   Madam Yau used two different signatures, a Chinese one for opening bank accounts and business registrations [C1/18/115 & 128], and an English one consenting to act as a director for Holly Sun Ltd) [C1/23/161] and for court documents (e.g. her witness statement [B/4/39]).  She seemed to have started using her English signature after her HSBC account was partially frozen.

(c)   Madam Yau used one company secretarial service for Holly Sun Co and a different one for Holly Sun Ltd.

105.  Regarding the ATM card enrolment form at [C1/20/143], it was dated 30 July 2014 which was some 4 months before (and not after) the receipt of the Contested Sum and her subsequent incorporation of Holly Sun Ltd.  Secondly, the top of that particular page of the form stated that for sole proprietorship, it had to be signed by the sole proprietor.  Madam Yau signed it though her title was stated as “manager” [C1/20/143]. The bank staff would not have allowed her to sign it or to accept the form with her signature if she was not known to the bank as the sole proprietor.  Madam Yau did say in evidence that she was the sole proprietor, manager and person responsible for all things.  I cannot see any basis in the submission that Madam Yau was trying to distance herself from the sole proprietorship on about 30 July 2014 by describing herself as the manager instead of the owner of Holly Sun Co.  She was then still trading in her sole proprietorship Holly Sun Co. 

106.  Regarding Madam Yau’s use of two signatures, I can see no significance in it.  Many bilingual people use different signatures in different languages.  Madam Yau’s Chinese signature is complicated and needs time and care to write [C1-115].  Her English signature is simple and easy to write [C1-161].  It is much easier to imitate too comparing with the Chinese one.  Her explanation for using the Chinese signature for her bank opening form is because of the advice from the bank staff that this would be the signature for operating the bank account and signing cheques.  But when she was signing the company incorporation document and witness statement, she just signed in English without giving much thought as to which signature to use.  This is a perfectly reasonable explanation.  I cannot see why this had anything to do with her alleged intent to distance herself from her sole proprietor business. 

107.  Even if it is unusual for Madam Yau to have two signatures, so what?  I cannot see how Madam Yau could use an English signature to distance herself from her sole proprietorship.

108.  There is again nothing in the point about Madam Yau’s use of different secretarial service company to serve different business entities.  A company secretarial service company only provides services on incorporation of company and preparing and filing of returns to the Companies Registry and Business Registration Office.  They have nothing to do with the business of the companies or business entities they serve.  I just cannot see how Madam Yau can distance herself from Holly Sun Co by engaging a different secretarial service company to incorporate and serve Holly Sun Ltd.  I also cannot see how this can mean anything. 

Madam Yau’s paperless trading

109.  Mr Lee referred to Madam Yau’s detail explanation in her witness statement on how she was invoiced for the goods, notified of the arrival of the goods, paid for the same, paid the terminal handling charges to the shipping company and then collected the release order for the goods [B/4/29/§5].  But for her sale, she said after she had obtained the release order for the goods and after her purchaser had settled her invoice (which she never sent out), she would pass the delivery order to the purchaser’s logistic agent [B/4/29-30/§6].  Mr Lee submitted that her detail explanation on her purchase of goods was in stark contrast with her extremely terse explanation of how she sold and delivered her goods to her customers. 

110.  Madam Yau said she sold her goods in a paperless mode of trading.  It is no doubt unconventional.  But it can indeed work in her case because she was dealing with purchasers who paid her through the illegal underground banking system.  She said she conducted her business with her purchasers on the phone.  She did not need to invoice them for payment.  She was selling at a profit margin that Mr Lee regarded as ridiculously low.  Her purchasers would thus be eager to buy from her.  They could not buy direct from the US suppliers as those suppliers would not accept underground payment.  If they did not pay money into her bank account, she would not release the goods to them.  It was her discretion on whether to take the risk of releasing the goods before receipt of price.  Since her purchasers paid her through the underground system, they would not want the Mainland authorities to know that they had done so.  Hence, Madam Yau’s receipts to acknowledge their having paid her millions of Renminbi would not serve any lawful purpose for them.  The receipts could only be the cause for their being investigated by the Mainland authorities.  I do not see why these purchasers who paid for their goods through an illegal channel would like to leave a paper trail of their purchases. 

111.  In such paperless mode of business, it was the purchasers who were taking risks as they had to trust Madam Yau when they made payments into her bank account.  Madam Yau could have taken their money and not give them the goods.  But it appears that these purchasers regarded her as trustworthy.  If she had been conducting her sales on a paperless mode, it would be artificial for her to create invoices and receipts to evidence her sales.  Indeed, she had admitted through solicitors very early on that her so-called invoices had not been sent to her purchasers [C5/275/1084]. These were only her records of her sales and purchases.

Inconsistency between Madam Yau’s pleading and her witness statement and her practice of sourcing goods before having a purchase order

112.  Mr Lee submitted that Madam Yau’s evidence is at odds with her pleaded case.  Madam Yau’s amended defence pleaded that it was her trade practice that once she had sourced goods from her overseas suppliers, she would solicit business from her clients while the goods were in transit.  When the client placed an order, she would ask for payment in part or in full prior to or upon the arrival of the goods in Hong Kong.  Upon receipt of payment, she would provide her client with the document for the release of the goods. 

113.  She said in her witness statement that she did not have a usual trading practice.  Sometimes she would receive an order from a purchaser first and then source goods from her overseas suppliers, but sometimes she would source goods from overseas suppliers first and then look for a purchaser while the goods were in transit.  She would request the purchaser to pay in part or in full for the goods when an order was placed and prior to or upon their arrival in Hong Kong.  Upon receipt of payment, she would provide the purchaser with the release/delivery orders for the release of the goods to the purchaser.  Sometimes if she could trust the purchaser, she would provide the purchaser with the necessary shipping documents for the release of the goods before receiving payment from the purchaser [B/4/28/§4]. In oral evidence, she further said that her more usual practice was to receive an order from a purchaser before sourcing the goods from overseas.  When the inconsistency was pointed out to her in cross-examination, she put the blame on her poor English. 

114.  There is indeed the inconsistency.  Her witness statement gave a more flexible and realistic way of doing business.  But this inconsistency cannot detract from the fact that she was indeed carrying on a trade of culinary nuts.

115.  Mr Lee further submitted that Madam Yau was unable to explain her practice of sourcing goods before soliciting orders from her clients, in particular LDM.  Madam Yau said in cross-examination that she would usually have time to sell the goods before the goods arrived in Hong Kong.  She said the market for certain products was rising then.  She also said that it was very very rare that she had to store her goods in a warehouse and pay warehouse charges.  Mr Lee said that she had no basis to say that the market was rising.  He also questioned her saying that it was rare that she had to pay warehouse charge when she accepted that her goods were perishable and could not be stored for more than 3 months. 

116.  I do not agree with Mr Lee’s submissions.  Madam Yau has said clearly that she favoured frequent deals with small profits per deal.  She only had to pay for the goods by D/P.  But she could start selling them as soon as they were loaded onto a ship for Hong Kong.  The journey from a port in the US to Hong Kong would take about 20 days.  The goods can also be stored for about 3 months.  She was able to sell them quickly as her profit margin was slightly above her purchase price.  So long as she was seeking a small profit margin, she would have little difficulty in selling her goods.  In fact, her yearly turnover for the three years from 1 April 2014 is evidence of her success in her trade.  I also disagree with Mr Lee that she could not tell if the market trend was on the rise or fall.  She had been trading in culinary nuts since February 2012.  It is not surprising that she had an idea as to the market trend though the trend might not be a straight line and she might also be wrong in her forecast of the trend.  I can see nothing in Mr Lee’s criticisms.

117.  Mr Lee then attacked Madam Yau’s business model as highly speculative and chaotic and is irreconcilable with business common sense.  He said on her razor thin margins, one single shipment going wrong (i.e. that she was unable to sell or that she had to store) could wipe out her entire annual profit.

118.  It cannot be disputed that Madam Yau was buying in bulk and hence could negotiate for a lower price.  She was seeking a small profit margin in her sale.  The 20-day transit time plus a few days of free storage at the Hong Kong port was a comfortable period for her to sell the goods.  She only had to pay for the goods when they about to arrive or had arrived in Hong Kong.  She would only release the goods after the purchase price was paid into her account (though she might consciously take risk with customers she trusted by releasing goods before payment).  If she could not sell the goods quickly, she could always reduce her price further to quicken the sale rather than just sitting on the goods for three months or more and then dump them to the rubbish landfill.  There was indeed an occasion that I have referred to above when she had to pay warehouse charge.  The charge in that case was USD100 per container per day.  That was a small sum comparing with the value of the goods in a container.  I therefore cannot see any basis for Mr Lee to say that her business model was speculative or chaotic.  The fact of her high turnover is evidence of her success.  I also cannot see why her business model was irreconcilable with business common sense.

Madam Yau having paid salaries, rented an expensive office and employed a Mr Wai on an intellectual property business

119.  Madam Yau’s accounts show that she had paid staff salaries.  She said in cross-examination that a little bit of the salaries was paid to her and some to an assistant.  She also had a part-time helper to inspect goods for her at the depot.  Mr Lee questioned this evidence as Madam Yau had also said that she handled most of the work herself including the preparation of transaction records.  But I cannot see any problem in this. 

120.  Even if Madam Yau was doing most of the work, it would not be surprising that she needed the help of an assistant.  No doubt she herself might have to communicate with the suppliers and clients, make payments and check receipts and prepare transaction records, there are still a lot of other less important work to do.  They include going to the shipping companies to obtain release orders, liaising with the clients’ logistics agents and give them the release orders and other miscellaneous works.  She had a turnover of HKD319 million for the year ended March 2015, more than double of that for the year ended March 2016 and 1.5 times of that for the year ended March 2017.  There must have been a lot of work to do to achieve such turnovers.  The fact that she had employed an assistant Ms Karen Chan was also known to Loandepot back on 15 April 2015 when its investigator went to investigate Holly Sun Ltd at its office in Tsuen Wan.  The information in the investigation report was provided by Ms Chan to the investigator. 

121.  Mr Lee also commented that she had rented an expensive serviced office for the year ended March 2015.  But I just cannot see any problem about that.

122.  Madam Yau’s bank statements from July 2014 to January 2015 were produced at the trial.  They showed that there was a HKD30,000 monthly salary payment and a HKD300 monthly MPF payment [C3/247/472, 476, 480, 485, 490 and 495, 500].  She answered in cross-examination that they were not for herself or her assistants, but rather a Mr Wai with whom she was working together on an intellectual property business.  Mr Lee submitted that there was never any mention anywhere in the evidence of any intellectual property business and no reference to such business appears in her financial statements.  But there was no MPF payments to any staff or assistants hired for her nut trading business. 

123.  I have already said above that this trial is just on a narrow question about her receipt of the Contested Sum.  Madam Yau never said that she did nothing else apart from her trading in culinary nuts.  She was also not obliged to disclose how she had paid the MPF for her staff.  I am of the view that it is absolutely unnecessary for her to make a full disclosure of all her undertakings in business or otherwise or how she paid the MPF for her staff.  To require her to do so is very unfair.  I see nothing mysterious about Madam Yau employing someone on some other business undertaking.  Nor can I see any relevance of that vis-à-vis the issue in this trial. 

Decision on the nature of Madam Yau’s business

124.  Having considered Madam Yau’s evidence and considered all the submissions by Mr Lee, I find that Madam Yau has proved on a balance of probability that she was carrying on a sole proprietorship business Holly Sun Co in the buying and selling of culinary nuts since February 2012 up to February 2015 and carrying on the same business through Holly Sun Ltd from February 2015 onwards.  I also find that she sold her goods to purchasers in a paperless way and her purchasers paid her through the underground banking system which operated across the boundary between the Mainland and Hong Kong.  This finding is regardless of whether she had any other undertaking in business or otherwise. 

THE TRANSACTIONS BETWEEN MADAM YAU AND LDM GENERALLY

125.  Mr Lee submitted again there are unusual features in Madam Yau’s evidence on her dealings with LDM generally and several areas in her evidence that are unsupported by documents or internally inconsistent.

Meeting Mr Wang

126.  The first point raised by Mr Lee is an inconsistency between Madam Yau’s witness statement and her oral evidence.   She said in her witness statement that she had met Mr Wang, the sales manager of LDM in mid-2013.  Mr Wang said LDM was interested in doing business with her and asked for price quotations for culinary nuts.  However, she in cross-examination said that she only had a telephone call from Mr Wang in 2013.  She met him for the first and only time in her trip to Hangzhou in early 2014.  She was also able to recall what she saw in Mr Wang’s office including the number of people working there, but she did not pay attention to the location of the office when she was driven there. 

127.  There is indeed the inconsistency between her witness statement and her oral evidence on when she had first met Mr Wang is a point.  But her familiarity with Hangzhou was not canvassed in cross-examination and I cannot say whether her failure to pay attention to or recall the address of the office was unreasonable.

Failure to call witnesses

128.  Mr Lee submitted that Madam Yau gave no good explanation as to why neither Ah Bo nor her friend, Don was called as witnesses.  It is her case that Don introduced her to a certain Ah Bo, who in turn introduced her to Mr Wang.  She only said Ah Bo had told her that “it was not very convenient for him to get involved”.

129.  Mr Wong replied that Don did not know Mr Wang.  All Don could say was his introduction of Madam Yau to Ah Bo.  Don could not give any evidence about Wang.  The Court therefore should not draw any adverse inference against Madam Yau for not calling Don.

130.  Madam Yau did say in oral evidence that she had tried to contact Ah Bo who told her that he had no knowledge of the transactions between her and Mr Wang/LDM.  He was just an introducer and he was reluctant to be involved with this dispute. Mr Wong submitted that this explanation is consistent with common experience and could not be impeached as incredible.  He also referred to Madam Yau’s other independent witnesses, Ng and Tsui of Wah Kei, who had personal dealings with Mr Wang and LDM in the transactions between Madam Yau and LDM.  Hence, no adverse inference should be draw against Madam Yau for her failure to call Don and Ah Bo.  I agree with Mr Wong that if I should accept the evidence of Ng and Tsui of Wah Kei, then I should not draw any adverse evidence against Madam Yau for her not calling Don and Ah Bo.

131.  Mr Lee also submitted that Madam Yau had failed to call Mr Wang as a witness and she had not explained her failure in her statement.  Madam Yau explained at the trial that in late 2014 or early in 2015, she had contacted Mr Wang, who told her that he had already paid the RMB to someone.  He purported not to know what had happened in Hong Kong.  He told her to give her explanation to the Hong Kong Police.  She invited him to come to Hong Kong to speak to the police, but he refused on the ground that the problem had nothing to do with him. Subsequently, he was out of touch.

132.  On drawing inference, Mr Lee referred to Tjang Siu Thu v Profield Construction Engineering Ltd [2015] 5 HKC 22 where the court of appeal said at §§ 27 and 33:

“27. Mr Lim relies on the English Court of Appeal decision in Wisniewski v Central Manchester Health Authority [1998] PIQR 324. At page 340 Lord Justice Brooke said he derived the following principles from his examination of the case law:

‘(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.

(2) If a court is willing to draw such inferences they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.

(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.

(4) If the reason for the witness’s absence or silence satisfies the court then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.’

...

31. In Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd, CACV 90, 91, 93, 94, 95 and 96/2012, unreported, 17 September 2013 this court referred to the Wisniewski principles. At paragraph 107 the court quoted a commentary on the principles by Lord Sumption in Prest v Petrodel Resources Ltd [2013] UKSC 34 at paragraph 44 where he said:

‘There must be a reasonable basis for some hypothesis in the evidence or the inherent probabilities, before a court can draw useful inferences from a party’s failure to rebut it.’

...

33. The following propositions can be derived from the case law:

(i) the Wisniewski principles do not constitute a presumption; consequently, the mere failure of a party to call a witness does not automatically confer an evidential benefit on the opposing party;

(ii) the Wisniewski principles concern the drawing of inferences and whether any inference is drawn will depend upon the quality of the primary facts on which the inference is based; this is necessarily a fact sensitive matter and will vary from case to case;

(iii) the primary facts must allow of the inference to be drawn in the sense that the inference logically flows from those facts;

(iv) in the circumstances of the case the judge must be persuaded that it is appropriate to draw the inference; and

(v) one circumstance where it will not be appropriate to draw the inference is where there is an explanation for the party’s failure to call the witness.”

133.  Mr Lee also submitted that even if Madam Yau’s evidence is accepted at face value, he would ask rhetorically why would Mr Wang disappear if he truly did not know what had happened or had nothing to fear from?  He invited the Court to draw an adverse inference from Madam Yau’s failure to call Ah Bo or Mr Wang, namely that Mr Wang/LDM did not actually exist, or that it is a fear of self-incrimination that had caused his disappearance and Ah Bo’s refusal to be involved in the present case.

134.  Mr Wong submitted in reply that Madam Yau had contacted Mr Wang after her account was frozen by the police.  At that time, she was naturally concerned with criminal implications and her account being frozen.  There were no civil proceedings on foot at that time.  Loandepot only obtained ex parte Mareva and proprietary injunctions on 29 April 2015 and this action was only commenced on 30 April 2015 [A/6/93 at 97].  Prior to that, Madam Yau’s account was frozen by the police administrative measure.  It would therefore be inherently unlikely that Madam Yau had asked Mr Wang to be a witness at a civil trial in late 2014 or early in 2015.  Madam Yau explained that she had asked Wang to talk to the Hong Kong police but Wang refused.  That explanation was consistent with the reaction of someone who had used the illegal underground system to send huge sums of money out of the Mainland.

135.  Mr Wong also referred to the evidence of Mr Ng and Madam Tsui which corroborated Madam Yau’s evidence that Mr Wang could not be contacted since 2015.  Mr Ng said that he did not have contact with Mr Wang since 2015 although he did not try to call him.  Madam Tsui also said that the last time she contacted Mr Wang was the beginning of 2015.  Madam Tsui in fact said that she had tried to call Mr Wang on his mobile but Mr Wang did not pick up the call. 

136.  Mr Wang was also out of contact in August 2016.  The witness statements were exchanged in August 2016, but there was no statement by Mr Wang.  I am of the view that Loandepot’s solicitors should be aware of that, but they never raised this question with Madam Yau’s solicitors.

137.  I am satisfied that Madam Yau had indeed tried to get Mr Wang to talk to the Hong Kong police shortly after her HSBC account was frozen by the police and before Loandepot had commenced this action.  That was to protect her own interest in her account.  But Mr Wang refused.  His reason for refusing to do so was possibly because he had flouted the Mainland’s law by channelling money across the border with Hong Kong unlawfully.

138.  I also accept the evidence of Mr Ng and Madam Tsui of Wah Kei as I will explain below.  Though I refused discovery of the documents that they were only willing to produce just before the trial, I do not have to ignore the rest of their evidence that does not depend on the contents of the documents. 

139.  It is Mr Ng’s evidence that he had met Mr Wang of LDM and thereafter his company had on behalf of LDM received the release orders of goods from Madam Yau’s Holly Sun Co and delivered the goods per LDM’s instructions.  Madam Tsui also gave evidence that she had dealt with Mr Wang of LDM on the phone and she was responsible for the processing LDM’s instructions to take delivery of the release orders from Madam Yau’s Holly Sun Co and then deliver the goods for LDM to a port in Vietnam.  Since I accept the evidence of Mr Ng and Madam Tsui, there is no doubt about the existence of Mr Wang and LDM and that LDM had purchased culinary nuts from Madam Yau which were delivered by Wah Kei for LDM to a port in Vietnam.  I therefore do not see any basis for drawing any inference for Madam Yau’s failure to call Don, Ah Bo or Mr Wang.

Loandepot’s repeated submissions on paperless trading and the findings of its investigators

140.  Mr Lee also submitted that Madam Yau had not disclosed any price quotations she gave LDM.  Madam Yau’s case is that she dealt with LDM verbally on the phone.  That must include the discussion of the terms of sale.  I have already found above that she was carrying on a business in the buying and selling of culinary nuts at all material times since February 2012.  I have also found that she was selling her culinary nuts in a paperless way and received payment through the underground banking system.  Her case is that she did not need to issue any documents to her purchasers or receive any from them. 

141.  Mr Lee also referred to the inability of Loandepot’s investigator to contact Mr Wang by any of his numbers.  The investigators could find no trace of Wang/LDM. That was in August 2016.  I have already dealt with the investigators’ evidence above. 

Payment to supplier first in the first LDM transaction

142.  Mr Lee then submitted that notwithstanding that Madam Yau claimed to have only met Wang once, she agreed that even for her first transaction with LDM [C2/46/244-245]), she had paid her supplier USD95,051 on 21 July (see [C3/234/458 and C3/247/473]) before receiving her first payment from LDM on 23 July (see [C3/247/473]). But that was always her way of buying and selling.  She had explained rightly that even if her purchaser did not pay her, she still had to pay her supplier. There is nothing to suggest that her liability to her suppliers would depend on whether she would be paid by her purchasers.  I find nothing in this submission. 

143.  I instead note that she had provided Wah Kei the release order on 17 July ahead of her payment for the goods to the supplier on 21 July [C3/178/397, 210/430 and 234/458] [C2/46/244-245].  This supplier was not an overseas one but a local one and the goods were delivered from Zhongshan Port in Guangdong Province to Hong Kong.  It seems that she had already obtained the release order before paying for the goods.  She also appeared to have provided the release order to Wah Kei before she had been paid by LDM.  But this was a local transaction as she bought the goods from a local and not overseas supplier. All other transactions were of goods she purchased from overseas.  These strange aspects in this first transaction were not canvassed in cross-examination.  I therefore do not wish to guess why things had happened in this way for this transaction. 

The receipt for the Contested Sum

144.  Mr Lee then attacked Madam Yau for not having shown the Court any receipt or any document she got from LDM for her alleged transactions with LDM.  But Mr Lee was aware that Madam Yau’s case is that she did not need any documents from LDM as the transaction would be completed upon her giving the release order for the goods to Wah Kei. 

145.  Madam Yau’s defence and amended defence pleaded that she had issued a receipt to LDM confirming payment of the Contested Sum.  The solicitors for Loandepot then requested for specific discovery of the receipt together with some other documents on 15 July 2016.  Madam Yau’s solicitors answered the request in a letter dated 21 July 2016.  They dealt with the receipt as follows:

“11. The receipt was indeed the 發票(invoice) dated 3 December 2014 with invoice number LDM-HS086-WA, which has been disclosed under our client’s Supplemental List of documents. Although the 發票/invoice was issued to LDM, it was for our client’s internal records and was never sent out. The same applies to all the other 發票/invoice disclosed in our client’s Supplemental List of Documents. No formal receipt was issued and sent to LDM confirming receipt of the sum of USD279,171.60.”

146.  Mr Lee suspected that Madam Yau’s solicitors might have perhaps inadvertently made the disclosure that the alleged receipt issued was the invoice dated 3 December 2014 [C2/50/252-253] implying that it was something they did not intend to disclose but did so inadvertently.  I regret that there is absolutely no basis for such sinister suggestion.

147.  Mr Lee then submitted that in the light of the explanation by Madam Yau’s solicitors, her pleading that she had issued a receipt to LDM confirming payment of the Contested Sum is therefore blatantly false.  I think this is certainly correct.  But he went on to submit that Madam Yau was silent on this error in her witness statement and it was only in cross-examination on the first day that she admitted that no invoices and receipts had ever been issued to LDM.  I think this criticism is really out of place.  Her solicitors had set the picture straight in the letter of 21 July 2016.  There was no misunderstanding on this issue regardless of her pleading.

Paperless trading again and Madam Yau’s simple accounts

148.  Mr Lee then repeated his argument that Madam Yau’s sale of culinary nuts was not supported by any invoices and receipts, whether actually delivered to LDM or not and such was astounding.  He further said that there was not one shred of correspondence or written communication between her and LDM.  He criticized her in not explaining in her statement on how LDM was notified on how much to pay if no invoice was delivered to LDM.  He further said that the problem was compounded by the fact that she frequently allowed LDM to roll over outstanding amounts to future invoices.  He said Madam Yau would not have proper documents to support her accounts without these documents.  Furthermore, her accounts are a very simple income statement that showed a total sales figure of HKD 319,187,725.89 and he questioned that there is nothing to show whether or not the sales with LDM are included in this total sales amount, and/or whether the total sales figure had been arrived at with reference to the alleged LDM sales.

149.  Regarding Madam Yau’s sale of culinary nuts not being supported by any invoices and receipts, I have found above that she was carrying on a paperless mode of sale despite she had all the necessary documents to prove all her purchases.  The price could have been quoted and agreed on the phone.  I accept that it is unusual to do business a paperless way, but bearing in mind that her purchasers were paying through the underground system, this is workable.  I have also dealt with above the issue of her not issuing any receipt to most of her purchasers except the few who asked for it. 

150.  Regarding Mr Lee’s criticism that Madam Yau had not explained in her witness statement on how LDM was notified on the amount to pay if no invoice was delivered to LDM, it is a repetition of the attack that she had not produced any price quotation to LDM.  I have already said above that Madam Yau’s case is that she dealt with Mr Wang verbally on the phone.  Regarding the rolling over of sums due under one transaction to a later transaction, I do think there was any problem. Madam Yau’s internal records recorded the amounts paid, the dates of payment and the outstanding sum(s) for each transaction and sums rolled over to later transactions clearly.  There is no reason why the receipts could not be recorded on some temporary papers pending their input into the computer if the situation did not permit access to the computer there and then.  These matters were not even raised with Madam Yau in cross-examination.  But they are really matters of common sense. 

151.  Mr Lee said that her accounts are a very simple income statement that showed a total sales figure of HKD 319,187,725.89 and he questioned that there is nothing to show whether or not the sales with LDM are included in this total sales amount.  This criticism shows a misunderstanding of the accounting practice. There is no legal requirement that a sole proprietorship should have its accounts audited per the prevailing auditing standard of Hong Kong.  For such business, a very simple income statement will suffice.  The audited accounts produced by Madam Yau for Holly Sun Ltd are different.  They all compile with the appropriate auditing standard and are a lot more comprehensive.  Regarding the turnover of a business as recorded in accounts, whether audited or not, it usually does not reveal the figure or particulars of any individual transactions.  Mr Lee queried in his submissions whether the LDM transaction were included in the turnover in the accounts, but this was not raised in cross-examination.

Accuracy or otherwise of Madam Yau’s internal records

152.  Mr Lee further submitted that Madam Yau’s internal LDM transaction records are unreliable as the invoice at [C2/45/242] wrongly states the date of tabulation to be July 2014 when the goods were only delivered on 19 September 2014 and payment made only on 19 September 2014.  He further said that she had also failed to mention this in her witness statement.  I think it is obvious that the date of preparation of this record is a typo.  I do not think the accuracy of Madam Yau’s records can be said to be unreliable when there is only one typo in 12 sets of records.  These records contain all the payments, receipts and their dates which can all be checked against the entries in her bank statements produced at the trial.  I regard this submission as a nit-picking one. 

Arbitrary allocation of receipts by Madam Yau?

153.  Mr Lee then considered the details of the 12 transactions that Madam Yau had with LDM.  He observed that:

(a)   Her profit margin in each transaction ranged from as low as 0.7% to sometimes as high as 4.9%.

(b)   The payments received by her were not always in one tranche and were frequently made by multiple parties or unknown parties.

(c)   The dates of the payment to Madam Yau for each order were not always consistent.  Sometimes they consisted of multiple dates and sometimes they were ‘deferred’ or combined with subsequent orders.

154.  Mr Lee put to Madam Yau in cross-examination that she had simply allocated arbitrarily receipts from third parties to payments to her suppliers and claimed that these arbitrary receipts were in settlement of her so-called invoices to her purchasers. Madam Yau answered rhetorically why would she do so.  She further said that she could match each of her payments to suppliers to the container numbers and invoices supplied by the suppliers.  Mr Lee submitted that she was trying to avoid answering the question and did not deal with the substance of the point which is that she was allocating payments into her account arbitrarily, not payments out of her account. 

155.  Mr Lee submitted that there is no objective method to ascertain whether and if so which payments into Madam Yau’s account can or should be allocated to which client or invoice.  Whatever payment by a third party into Madam Yau’s account she wants to claim is ‘clean money’ or a genuine payment, she would simply have to allocate the payment to one of her invoices or to a corresponding payment to a supplier, and it would be impossible for anyone to challenge such a payment because of the lack of records. 

156.  I think this submission is wrong.  There is an objective method to ascertain whether and if so which payments into Madam Yau’s account can or should be allocated to which client or invoice.  It can be done by asking Madam Yau to make specific discovery of all the purchase documents and internal records (invoices) of her non-LDM transactions which relate to her receipts (other than those identified in the LDM transaction internal records).  The ground for seeking specific discovery is the allocation of receipts point.

157.  Hence, the first objection to this point being taken is that it was taken too late. It was only taken in cross-examination and then fully developed in final submissions with the aid of a table of allocation of payments.  The table was not even mentioned or shown to Madam Yau in her evidence.  This point should have been taken by Loandepot by request for specific discovery as suggested above or raised at the latest in Loandepot’s written opening together with the table of allocation.  If it was raised then, Madam Yau would have the opportunity to produce the purchase documents and internal records of other transactions to show that the non-LDM receipts in her bank statements are her sale proceeds in these transactions.  Such discovery, if she could make it, would be a full answer to this argument of arbitrary allocation of receipts as sale proceeds of the LDM transactions.  However, this point was only taken in cross-examination and developed in final submissions with the aid of a table. Madam Yau was not afforded an opportunity to answer it by discovery.  I would therefore not consider this point as it was taken too late to be fair. 

158.  The second objection is that for the 11 internal records (invoices) Madam Yau produced to support the 11 transactions she had with LDM (excluding the transaction that had the Contested Sum as the receipt), Loandepot has not denied their authenticity in its pleadings or served any notice under Order 27 rule 4(2) of the Rules of the High Court to dispute their authenticity.  To say now that the receipts recorded in these 11 records are not the actual receipts for the sales recorded in these records but are other sums arbitrarily allocated as such is to say that these records are not authentic records but faked documents.  Without a denial of authenticity in the pleadings or a notice under Order 27 rule 4(2), Loandepot is not permitted to take this point.

159.  I would also go further and say that Mr Lee’s submission on this point can make some sense if Madam Yau was customarily receiving doubtful moneys which she had to explain so much so that she had to use a system of allocation to masquerade the tainted receipts as legitimate ones.  But this is not the case.  Madam Yau had several hundreds of receipts per year.  Prior to receiving the Contested Sum, she had also received 10 payments from LDM in 5 transactions.  It is only the Contested Sum that she has to explain.  There is nothing to suggest that she has been called upon in the past to explain her other receipts.  Even if the case is narrowed to her receipts from LDM, her records show that there were 25 of them and only the Contested Sum is being questioned.  I cannot see the sense or logic of the submission that she had allocated arbitrarily another 24 receipts as her LDM- receipts but not to state the actual receipts from LDM in her internal records. 

160.  I also note that save a few exceptions, most of her LDM-receipts were received prior to or on the same day when she gave the release orders to Wah Kei.  There is also nothing curious about the profit margin being low and not being the same but varied.  It is a matter of business.  The low profit margin is also reflected in the accounts of Holly Sun Co and the audited accounts of Holly Sun Ltd.

No contemporaneous record of advice of payments

161.  Mr Lee then criticized Madam Yau that she had produced no contemporaneous record or evidence to support her claim that LDM and her other Mainland clients had informed her whenever payment through a third party was made.  But it is Madam Yau’s evidence that these notifications were all made by phone.  The lack of document is consistent with her case. 

162.  Mr Lee further submitted that there were no emails or written records of telephone conversations or text or WhatsApp/WeChat messages and not even screenshots or photos of call records on Madam Yau’s phone.  This is notwithstanding that Madam Yau, up to the present date, continues to operate an alleged nut trading business through a company and continues to receive payment from Mainland clients through third parties. 

163.  I agree that it looks incredible that Madam Yau was able to carry on the sale of her goods with turnover of over HKD300 million per year in a paperless way. But with her simple mode of operation and large value per transaction of usually over USD200,000, it is entirely possible.  Furthermore, there are all the purchase documents, her bank statements, her accounts for her sole proprietorship and the audited accounts for Holly Sun Ltd which proved her purchases and receipts for her sales.  The fact that she was able to conduct her sales in such a way is possibly because her purchasers paid her through the underground system and they saw no reason to leave a paper trail of their purchases.  If there should be any dispute between her and her purchasers on any payment, she could always resort to her bank statement on the internet to show what payments she had received.  I also repeat that if anybody was taking risk in participating in this mode of business, it is the purchaser and not Madam Yau.  She could have kept some records like emails, written records of telephone conversations, text or WhatsApp/WeChat messages or screenshots or photos of call records on her phone.  But it was not necessary.  She could continue with her business without keeping any of these.   She has been and is still doing her business in this way and there is nothing to suggest that she had encountered any problem save the receipt of the Contested Sum.  She had in fact received two sums from Yingcai Tech and eight sums from D3 prior to the receipt of the Contested Sum on 3 December 2018 though she might not have been aware of or concerned with the identities of the payors.  

Paperless trading again

164.  Mr Lee then repeated his submissions that Madam Yau’s purchasers would not know how much to pay her and she could not verify that they had settled all outstanding amounts.  I have dealt with these points above by referring to her internal records.  

165.  Mr Lee also questioned how she was able to check or confirm which payments from which third party could be attributed to which purchaser when she was receiving third party payments in very substantial amounts in settlement of numerous orders on each day.  I think it would not have been difficult for Madam Yau to answer these questions if she was cross-examined on them.  She had her internal computer records.  If there was any reason she could not input the data into her computer, there was no reason why she could not have resorted to temporary paper records which would be dumped after transfer of data into the computer. She could also go to the internet for her bank statement for corroboration of figures advised to her through the phone.  All these are matters of common sense.  Perhaps that is the reason for their not being raised in cross-examination.

166.  Mr Lee painted a chaotic picture of Madam Yau’s business because she sold without paper records.  But Mr Lee was assuming that there were numerous orders and receipts on each day.  A perusal of the bank statements covering the period from 23 June 2014 to 23 January 2015 [C3 247/471 to 253/503] would however show that, save for a few busy days when there were 8 or 9 receipts, there were usually a receipt in a few days to a few receipts in a day.  There is no reason why these amounts could not have been recorded directly into the computer or on some temporary records pending their input into the computer. Furthermore, these amounts were different from one another.  If Madam Yau and her clients behaved honestly towards one another, I do not think they would have any difficulty in tallying their accounts.

“INVOICE” OF THE SUBJECT TRANSACTION LDM-HS086-WA [C2/50/252-253] DATED 3 DECEMBER 2014

167.  There is no dispute that Madam Yau had purchased on 18 and 22 October 2014 the inshell walnuts in the First, Second and Third Contracts and paid for the same on 1 December 2014.  The issues between the parties, as summarized by Mr Lee, are whether: (a) Madam Yau had sold these walnuts to LDM; (b) Madam Yau had received the Contested Sum in settlement of the price for these walnuts.

168.  For the first issue, Mr Wong submitted that there was no reason for Madam Yau to fabricate LDM as the purchaser if the sale was to another purchaser.  I agree with him.  LDM is just a purchaser as any other of her purchasers.  There is no conceivable reason for her to lie on the identity of the purchaser. 

169.  Mr Lee queried that Madam Yau could not explain how goods could have passed through customs at the destination port without any documentation.  I think it is a question for Mr Ng and Madam Tsui of Wah Kei and not for Madam Yau.  I do not think invoices and receipts are necessary for importing goods to the Mainland or Vietnam (where Madam Tsui said the LDM’s goods had been sent). There is also no evidence of such need.  What is commonly known to be a necessary document for customs purpose is the cargo manifest or cargo list.  That was not to be made ready by a seller of goods but by the captain of the ship that carried the cargo.  I find that Madam Yau has proved that she had sold the walnuts in the First, Second and Third Contracts to LDM. 

170.  Mr Lee submitted that Madam Yau had provided no proof to show that the Contested Sum was made to her in satisfaction of her sale of the 3 contracts of walnuts to LDM.  The Contested Sum did not even correspond with the USD284,451 payable by LDM for the goods.  The payment with the Contested Sum left an outstanding sum of USD5,279.  When this was rolled over to the next LDM-transaction, the payment for that transaction left a credit of USD290 in favour of LDM.

171.  In the light of Mr Lee’s objection to taking the Contested Sum as the payment for the three contracts of walnuts, I would consider the other receipts shown in Madam Yau’s bank statements shortly before and after her payment to the supplier for the goods on 1 December 2014.  Mr Lee in fact suggested that there could be 5 alternative grouping of the receipts that came in shortly before and after 1 December which could be the payment for the goods in place of the Contested Sum.  These five alternatives exhausted all receipts that could be payment for these goods.  If any of those alternatives should be the actual payment for the goods, then the Contested Sum was not.  The burden of proof that the Contested Sum was the payment for the goods is of course on Madam Yau despite the alternatives are proposed by Mr Lee. 

172.  The 5 alternatives are:

(a)   USD211,004.70 received on 24 November + USD50,000 received on 5 December = USD261,004.70.

(b)   USD211,004.70 received on 24 November + USD60,000 received on 5 December = USD271,004.70.

(c)   USD300,000 received on 28 November.

(d)   USD60,000 received on 5 December + USD59,400 received on 8 December + USD100,000 received on 8 December + USD45,270 received on 8 December = USD264,670.

(e)   USD99,998.06 received on 5 December + USD205,785 received on 9 December = USD305,783.06.

173.  For the first alternative of USD261,004.70.  It is far below the cost of USD277,779.60.  Even assuming that there was an outstanding sum of USD5,279 rolled over to the next transaction, the total sum would only be USD266,283.07 and is still below the cost by USD11,496.53 or 4.1% of the cost.  If this was the actual sale, then this was the only one of the twelve transactions that Madam Yau had suffered a loss.  Of the sum of USD261,004.70, part of it at USD211,004.70 was received on 24 November which was before her payment to the supplier.  If this was indeed the sale, then it should have taken place early.  If Madam Yau was selling at such early time, there was all the more reason for her not to sell at a loss as there was less pressure for selling fast.

174.  For the second alternative of USD271,004.70.  It is also below the cost of USD277,779.60.  Even assuming that USD5,279 was rolled over to the next transaction, the total would only be USD276,283.07 and is still below the cost by USD1,496.53 or 0.54% of the cost.  This alternative receipt has problems that are similar to those of the first alternative receipt. 

175.  For the third alternative of USD300,000 received on 28 November, it produced a gross profit margin of 8%.  The profit margin for the other 11 transactions ranged from 1.08% to 5.6%.  The 8% is way beyond the highest margin.  The payment was also before Madam Yau had paid the supplier and is not in line with Madam Yau’s pattern of dealing with LDM. 

176.  The fourth alternative of USD264,670 is below the cost of USD277,779.60.  Even assuming that an outstanding sum of USD5,279 was rolled over to the next transaction, the total would only be USD269,949 and is still below the cost by USD7,830.60 or 0.2.82% of the cost.  Though the receipts that constituted the USD264,670 had come in after 1 December, they were received no later than 8 December.  Bearing in mind that the nuts could be stored for three months, there was still a long period to sell.  There was no reason for selling at a loss. 

177.  The fifth alternative of USD305,783.06 would produce a gross profit margin of 10.08%.  It is way beyond the highest margin of 5.6% she had charged in all her sales to LDM.

178.  Hence, the five alternative receipts suggested by Mr Lee are all outside the pattern of Madam Yau’s trading with LDM.  I find that they cannot be the actual receipt from LDM for the walnuts in the First, Second and Third Contracts. 

179.  On Madam Yau’s case, the receipt of the Contested Sum left an outstanding debt of USD5,279.  That debt was rolled over to the next transaction which was fully discharged by a receipt of USD205,785 which left a credit of USD290.  Mr Lee submitted that this credit of USD290 was highly significant when multiplied by hundreds or thousands of transactions across every year.  I do not understand what significance in relation to the issues in this case that he is referring to.  This credit just happened in one of the twelve transactions.  In the eleventh LDM-transaction, there was a shortfall USD4 which was written off by Madam Yau.  In the remaining ten LDM-transactions, the receipts tallied with the sale price exactly.  In fact, Madam Yau could have omitted the credit of USD290 simply by reducing the sale price by USD0.0033 per pound in her internal record.  The presence of the credit of USD290 did not make her case any less credible. 

180.  I also accept Madam Yau’s evidence as I will explain below. I therefore accept her case that she received the Contested Sum as payment for the walnuts in the First, Second and Third contracts. 

CREDIBILITY OF MADAM YAU’S WITNESSES

181.  Mr Ng and Madam Tsui of Wah Kei were prompt in answering questions in cross-examination and their evidence was straightforward.  There is nothing unreasonable in their evidence.  They are independent witnesses who do not appear to have any interest in the outcome of this action.  There is no reason why they would commit perjury for the sake of Madam Yau.  I accept their evidence. 

182.  Though Madam Yau’s mode of sale was incredible in that it was done in a paperless manner, it was entirely possible as she was only selling on FOB terms and could dictate when to release her goods which she usually did only after receipt of payment.  Her case is supported by her internal records of transactions which were by and large accurate and tallied with her bank statements on all her payments and receipts.  Her evidence is believable.  She was at first reticent about her purchasers paying her through the underground banking system.  But once that was fully canvassed, she was prompt and ready to answer any question in cross-examination.  Her reticence about the underground system is understandable as such payment was contrary to the law of the Mainland.  On the whole, she was frank and open.  Her case is also supported by the evidence of Mr Ng and Madam Tsui of Wah Kei.  I accept her evidence.

WHETHER MADAM YAU WAS A BONA FIDE PURCHASER FOR VALUABLE CONSIDERATION FOR THE CONTESTED SUM

183.  In the light of my findings on the nature of Madam Yau’s business; the 12 transactions between Holly Sun Co and LDM; the transaction of reference LDMHS086-WA (under which Madam Yau received the Contested Sum); and my acceptance of the evidence of Madam Yau’s three witnesses, I also find that Madam Yau has proved on a balance of probability that she was a bona fide purchaser of the Contested Sum and her purchase of the same was for valuable consideration.

WHETHER MADAM YAU HAD ACTUAL OR CONSTRUCTIVE NOTICE OF LOANDEPOT’S PRIOR INTEREST IN THE CONTESTED SUM

The legal principles

184.  Regarding how the approach to deal with the question of notice, both Mr Lee and Mr Wong referred to the Privy Council decision of Papadimitriou v Credit Agricole Corporation and Investment Bank [2015] 1 WLR 4265.  This case was relied on recently in Tam Ying Man v Leung Ka Chun and Ors (unrep., HCA 2166/2018, 31.08.2016) and BR CAT International Co Ltd v Hongkong Proof Import and Export Trading Co Ltd (unrep., HCA 1023/2014, 22 September 2017) at §26.  The approach has been discussed by Lord Clarke of Stone-cum-Ebony JSC as follows: -

“13. In para 109[1] Lord Neuberger summarised his conclusion as to how the question should be put. He said that the question was whether, on the facts known to the banks on the three dates,

‘a reasonable person with their attributes (i.e. those of a responsible large bank with the benefit of highly experienced insolvency practitioners as their appointed administrative receivers) should either have appreciated that a proprietary claim probably existed or should have made inquiries or sought advice, which would have revealed the probable existence of such a claim.’

14. The approaches of Lord Browne-Wilkinson and Millett J do not seem to the Board to be entirely consistent. The position has however been resolved in Lord Neuberger’s para 109. As he indicates, it is important for these purposes to distinguish between three different circumstances. The first is where the bank in fact appreciates that a proprietary right in the property probably exists, so that the bank has actual notice of the right. That is not this case. The second is where a reasonable person with the attributes of the bank should have appreciated based on facts already available to it that the right probably existed, in which case the bank has constructive notice of the existence of the right.

15. The third is where the bank should have made inquiries or sought advice which would have revealed the probable existence of such a right. Here too, the bank would have constructive notice of the right. …” (emphasis supplied)

185.  Lord Clarke then dealt with the nature of the third circumstances in which the purchaser or recipient would have constructive notice so that it should make inquiries or sought advice to ascertain the probable existence or otherwise of such a prior right.  He said:

“15. … The question is in what circumstances and to what extent it can properly be said that the bank should have made inquiries or sought advice. The cases suggest various possible approaches. So, for example, Lord Browne-Wilkinson said in the passage quoted in para 12 above:

‘In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it.’

The suggestion there is that the bank must make inquiries if the bank is on notice as to the possible existence of such a right.

16. What then is meant by possible? The Board does not think that Lord Browne-Wilkinson can have intended to refer to the mere possibility of the existence of a proprietary right. Although Lord Browne-Wilkinson referred more than once to possibility, he also referred in a similar context to there being “a substantial risk” (at p 196E). …

…

18. As the Board sees it, the problem is largely resolved by Lord Neuberger’s approach in his para 109. He identifies the relevant persons at the bank and says that the bank will have constructive notice where they should either have appreciated that a proprietary claim probably existed or have made inquiries or sought advice, which would have revealed the probable existence of such a claim. However, the Board thinks that by “proprietary claim” Lord Neuberger must have meant “proprietary right”. ...

19. In para 109, Lord Neuberger identifies two alternative cases in which the bank would have constructive notice of a propriety right. The first is where the bank should have appreciated that a propriety right probably existed. Lord Neuberger does not suggest that further inquiries or advice would be needed in that event, because the bank would have constructive notice of the right. The second is where the bank should have made inquiries or sought advice which would have revealed the probable existence of such a right. He does not identify the state of mind which should have led the bank to make such inquires or sought such advice. It appears to the Board that Lord Neuberger did not intend to contradict Lord Browne-Wilkinson’s approach at the earlier stage.

20. Thus, on the one hand, the bank’s knowledge of facts indicating the mere possibility of a third party having a proprietary right would not be enough to put the bank on inquiry but, on the other hand, it is not necessary for the bank to conclude that it probably had such a right. The test is somewhere in between. It may be formulated in this way. The bank must make inquiries if there is a serious possibility of a third party having such a right or, put in another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction. This approach seems to the Board to be consistent with that expressed in Lewin on Trusts, 19th ed, 2015, at para 41-134 in connection with commercial transactions. They say that in some commercial contexts a purchaser may be fixed with notice in the absence of actual knowledge, but

‘only where in the particular commercial contract involved he has failed to draw inferences which ought reasonably have been drawn in that context or has been put upon inquiry by knowledge of suspicious circumstances indicative of wrongdoing on the part of the transferor, but has failed to make inquiries that are reasonable in the circumstances.’”

186.  Lord Sumption also said in §33 of the judgment:

“The principle is, I think clear. We are in the realm of property rights, and are not concerned with an actionable duty to investigate. The hypothesis is that the claimant has established a proprietary interest in the asset, and the question is whether the defendant has established such absence of notice as entitles him to assume that there are no adverse interests. The mere possibility that such interests exist cannot be enough to warrant inquiries. There must be something which the defendant actually knows (or would actually know if he had a reasonable appreciation of the meaning of the information in his hands) which calls for inquiry. The rule is that the defendant in this position cannot say that there might well have been an honest explanation, if he has not made the inquiries suggested by the facts at his disposal with a view to ascertaining whether there really is. I would eschew words like “possible”, which set the bar too low, or “probable” which suggest something that would justify a forensic finding of fact. If even without inquiry or explanation the transaction appears to be a proper one, then there is no justification for requiring the defendants to make inquiries. He is without notice. But if there are features of the transaction such that if left unexplained they are indicative of wrongdoing, then an explanation must be sought before it can be assumed that there is none.” (emphasis supplied)

Madam Yau’s receipts through paying agents of the underground banking system

187.  Before considering the three circumstances referred to by Lord Clarke in §§14 and 15 of Papadimitriou in the context of this case, I would deal with a few points raised in Mr Lee’s submissions.

188.  It is Madam Yau’s case that her clients would pay remitting agents or third parties in RMB and such agents would remit the US Dollars equivalent to her account.  Her clients would inform her that the invoice had been settled after the agent had paid her.  If the payment was made by tele-transfer, she would receive an SMS from her bank soon afterwards. However, if it was made by a local deposit, there would not be such notification.  She would not know who was the paying agent when she received the phone call from her clients.  Her clients would not tell her this and this was not a matter of concern.  The identity of the agent would only appear in her bank statements if the transfer was done through a bank.  She seldom paid any attention to the identity of the agent since it might be different every time.

189.  Madam Yau was aware of the existence of the underground banking system.  I find that she was fully aware that the payments to her came through the underground banking system as she had received hundreds of millions from her clients and not a single payment was through the official banking system but all through such agents.  I also find that if she would have desired to know who was the paying agent who paid her money by tele-transfer, she could do so through the internet banking system instead of waiting for the monthly bank statement.  But I accept that she had no particular interest to learn of the identity of the agents as she had received hundreds of payments through them without problem until receiving the Contested Sum on 3 December 2014. 

190.  In fact, prior to receiving the Contested Sum on 3 December 2014, she had received from Yingcai Tech USD90,000 on 30 September and USD145,000 on 3 November 2014 and from D3 USD151,800 on 3 July, USD26,857 on 23 July, USD40,000 on 30 September, USD65,000 on 15 October, USD50,000 on 20 October, USD105,000 on 27 October, USD100,000 on 11 November and USD110,000 on 18 November 2014.  These could all be seen from her bank statements.  There were altogether 10 prior receipts from both Yingcai Tech and D3.  Most of them were paid not on behalf of LDM though she might not have paid any attention to the identity of these paying agents.  The Contested Sum was the only receipt that gave rise to problems. 

Whether Madam Yau had notice of Loandepot’s prior right in the Contested Sum

191.  Mr Lee asked the court to find (1) a reasonable person in Madam Yau’s position must have appreciated that she was probably receiving the Contested Sum that was the subject of a prior right (in other words she had constructive notice in the second type of circumstances that the Contested Sum was subject to a prior right); or (2) she should have made inquiries or sought advice which would have revealed the probable existence of such a right (or in other words she had constructive notice in the third type of circumstances that the Contested Sum was subject to a prior right).

192.  Mr Wong dealt with all three circumstances of notice.  He referred to the three circumstances as three scenarios. 

Scenario 1 – Actual knowledge of Loandepot’s prior right

193.  For the first scenario of actual notice, Mr Wong submitted that Madam Yau did not have actual knowledge of the cyber fraud on Loandepot.  She had not even paid attention to the fact that the Contested Sum was transferred from the account of Yingcai Tech into her account.  She thus had no actual knowledge of Loandepot’s prior proprietary right.  Since Mr Lee is not suggesting that Madam Yau had actual knowledge and I have accepted Madam Yau’s evidence, I do not think I need to go any further on this scenario. 

Scenario 2 – Constructive knowledge of Loandepot’s prior right

194.  Scenario 2 deals with the situation where a defendant does not have actual knowledge of the prior equitable right. It is an objective assessment of whether the defendant should have notice of the prior right based on the defendant’s subjective knowledge of facts already available to it. 

195.  Mr Lee submitted that Madam Yau had no good answer to the question why she did not ask her clients or customers in the Mainland to pay her directly as opposed to using remittance agents.  She simply said that she had no control over the financial arrangements of her clients.  She claimed that as long as she received money, that was good enough.  Mr Lee further submitted that she had feigned ignorance as to why her clients had to use remittance agents.

196.  I do not think Madam Yau had feigned ignorance as to why or how her clients had paid her.  She was just initially reticent about the underground banking system.  Regarding how her clients should pay her, it is indeed not a matter she could control as she was dealing with people who could not pay through the official banking system.  Her only choice was whether to do business with them or not.  But her willingness to accept payment from her clients through this system does not affix her objectively with constructive notice of Loandepot’s prior right to the Contested Sum. 

197.  Mr Lee submitted that this system of payment was inherently suspicious.  But I cannot see what suspicion there was.  Madam Yau had received proceeds of sale through it for several hundred times.  Mr Lee also submitted that it was a complicated and opaque system of the remittance agent engaging or arranging for an entirely unknown third party (different every time) who would make payment (never exact) to Madam Yau.  But the Court of Final Appeal has referred to the underground banking system in HKSAR v Yan Suiling (2012) 15 HKCFAR 146 and said at §34 that “What was described does not seem to be a very sophisticated operation.”  Madam Yau was also advised by her clients of the exact amount of payment each time she was paid. 

198.  Mr Lee also submitted that Madam Yau was a sophisticated business woman and it was incredible that she did not ask why her clients had to use a remittance agent.  I think the reason was obvious and she knew it.  These purchasers had to pay through the underground channel because they had no permission to channel hundreds of thousands of USD (or in Renminbi equivalent) out of the Mainland through the official banking system.  Indeed, the CFA in §25 of Yan Suiling referred to §22 of the judgment of the Court of Appeal in that case, “it is common experience that foreign exchange restrictions or currency controls beget underground banking.” This submission shows the incomprehension of this common experience. 

199.  Madam Yau also did not feign ignorance of the fact that remittance agents – or the ‘underground banking system’ – can be used to launder illegal gains.  No one suggested that she was not aware of the meaning of the term “money laundering” which she admitted to have heard of.  She of course knew the meaning of money laundering.  She of course knew of the possibility that the money she received through the underground system could be the proceeds of a money laundering operation. She just thought that it was unfortunate that it had happened to her in her receipt of the Contested Sum and she thought that it was just like being hit by a falling flower pot in the street.  But that does not mean that upon her receipt of the sum, she knew that it was subject to a prior proprietary right of someone or that it could reasonably be said that she should be aware of such prior rights.  There is also nothing to contradict her case that this was the first time that she had problems with her receipt of purchase price.  Given the fact that she had received hundreds of such payment all trouble free, the possibility of such prior right as appeared to her was low.

200.  She also said that the advice from the police and her solicitors to her was that there was nothing she could do to avoid receiving such tainted money, but she could prove her innocence by keeping her papers to show that the payments were the result of genuine sale and purchase transactions between her and her clients.  She also agreed that even if she had been given this advice 5 years ago, she would have continued to accept payments through the underground system.  I agree that there was indeed nothing she could do to avoid receiving tainted money if she should continue to sell goods to these purchasers who could not pay through the official banking system.  But her willingness to receive payments through the underground system does not thereby affix her with constructive notice that the Contested Sum was subject to a prior right of another party.  All in all, I cannot see that a reasonable person in Madam Yau’s position with the knowledge that the payment she received through the underground banking system could be the proceeds of money a laundering operation but had received hundreds of payments through this system with 10 of them from LDM all trouble free should have appreciated without more that a prior right probably existed over one of her receipts. 

Scenario 3 – Constructive knowledge on failure to make inquiry

201.  In this scenario, the recipient would have constructive notice and it should make inquiries or sought advice which would reveal the probable existence or otherwise of such a right.  But the circumstances when the recipient would have such constructive notice are that there is a serious possibility of a third party having such a right or, in other words, if the facts known to the recipient would give a reasonable person in his position serious cause to question the propriety of the transaction. 

202.  Mr Lee submitted that it is incredible for it not to have occurred to Madam Yau, a sophisticated trader that money received from dozens or hundreds of unknown payment agents could be proceeds of crime.  The overwhelming likelihood is that she knew or must have known that some of the money she had received, being proceeds of crime, could be subject to the rights of the victim.  Given the fact that Madam Yau had received hundreds of millions through this system with 10 of them from LDM and this was the sixth transaction she had with LDM, I think, even putting this submission to the highest, there can only be a mere possibility that the money she had received, could be being proceeds of crime and be subject to the rights of the victim.  That is not enough to affix her with constructive notice that the Contested Sum was subject to the prior right of Loandepot. 

Further enquiries by Madam Yau

203.  Mr Wong further submitted that even if Madam Yau were affixed with constructive notice under scenario 3 and should have made inquiries or sought advice, which is disputed, it is unlikely that the enquiries or advice would have revealed to her the cyber fraud on Loandepot or that Loandepot had a prior right over the Contested Sum so that she would be affected by the constructive notice under scenario 3. 

204.  Madam Yau’s evidence is that she had asked Mr Wang after the event and he asserted ignorance of any problem on his part.  Mr Wong submitted that there is no reason to suppose that Mr Wang would give a different answer to Madam Yau if questioned on 3 December 2014. It is thus unrealistic to say that enquiry by Madam Yau of Mr Wang would have revealed to her the cyber fraud on Loandepot.  I think Mr Wong is right.

205.  Mr Wong further submitted that if Madam Yau should have enquired with her bank the Hong Kong Bank on 3 December when she received the Contested Sum, it is likely that the bank would not have told her anything on the ground of privacy.  In any case, the bank would not have told her about the cyber fraud on that day.  Had the bank learnt of the cyber fraud on 3 December, it would not have permitted the transfer of fund out of Yingcai Tech’s account.  I agree with Mr Wong.

206.  Mr Wong further submitted that Madam Yau would not have been able to enquire with Yingcai Tech as she did not have any information to contact this company.  The full name and domicile of the company were not disclosed in her bank statement.  It cannot be suggested seriously that Madam Yau in the circumstances of this case should have engaged solicitors to ascertain the details of Yingcai Tech or whether there was any prior right over the Contested Sum before accepting it.  If that were the legal requirement, commerce would indeed come to a halt.  Mr Wong is clearly right.

Pausing for a day or two?

207.  Mr Lee finally suggested that it would be sufficient for Madam Yau to pause for a day or two before accepting the Contested Sum and providing the release order of the goods to the logistics contractor.  He said such a pause would have allowed for any problem with the sum to become apparent and would have avoided for Madam Yau the problem in which she is mired.  He justified this by the speed with which banks have learned to act to freeze accounts on the notification of suspected fraud.  My immediate reaction to this argument is that if this was what Madam Yau should have done, why did her bank not do it?  Why could her bank not pause for a day or two before crediting the Contested Sum into her account?  Furthermore, there are many cases where the fraud is not discovered on the next day or two but a few days later or even longer.  Mr Wong also submitted that there is no law stipulating that a pause for a day or two will make the recipient immune from the constructive notice under the 2^nd or 3^rd scenario and make him or her a bona fide purchaser for value and without notice.

208.  I think payment through such system will only stop if the underground system is cracked down by the Mainland authorities.  But it seems that it is still working vigorously because a lot of business is being done with payment going through it instead of the official banking system. 

JUDGMENT

209.  In the light of my findings above, I find that Madam Yau has proved on a balance of probability that she is a bona fide purchaser of the Contested Sum for value and without notice of any prior right over it.  I dismiss Loandepot’s claim for the Contested Sum and discharge the injunction granted in this action on this sum on 29 April 2015 and extended on 8 May 2015.

210.  I also make a costs order nisi that Loandepot do pay Madam Yau the costs of this action.