FERRARI NORTH AMERICA, INC v. CHANGHON INTERNATIONAL ENERGY CO, LTD AND OTHERS

HCA 852/2017

[2019] HKCFI 1175

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 852 OF 2017

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DECISION

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1.  There are two summonses before the court. They arise out of a fraud perpetrated against the North American subsidiary of the Italian carmaker Ferrari which is the plaintiff in these proceedings in which there are now 14 defendants. This particular application concerns D9, Success Trade Inc Limited.

2.  I should make it clear at the outset that there is no suggestion that D9 or Mr Chan Chun Kit (“Mr Chan”) were in any way implicated in the fraud. In short, the plaintiff’s case is that a person or persons impersonating the CFO of the plaintiff’s parent company induced the plaintiff’s CEO to authorise payments made between 28 March and 31 March 2017 totalling US$6.7 million into D1’s bank account with Standard Chartered Bank Limited as part of a bogus transaction to buy shares in a listed company.  The entire amount was transferred immediately to the bank accounts of D2 to D10 on the same day or the next business day.  Among the transfers was a sum of US$547,512 transferred from D1’s account with Standard Chartered into D9’s bank account held with China Construction Bank Limited (“CCB”) in two separate tranches　of US$386,539 and US$160,613 on 31 March 2017.  That account had been opened on 2 March 2017.

3.  Further US dollar payments were made into D9’s CCB account round about the same time from unidentified persons, and there was already about HK$589,000 in the account.  However, on the plaintiff’s case, six consecutive payments were made out of the account totalling about US$610,000 on 3 April 2017.  So by 24 April 2017, when Madam Justice Wong granted an ex parte Mareva injunction restraining D9 from dissipating the sum of US$547,512 attributable to the Ferrari payments, most of the money from the account was gone. 

4.  On the return date of 28 April 2017, the injunction was extended unopposed by the order of DHCJ Sakhrani.  By then, the position on D9’s CCB account was a credit balance of US$36,176.75 and about HK$540,000, which sums were of course caught by the injunction.  Aside from a few sums paid out which I shall deal with in a moment, that appears broadly to be the present position since the account has largely been inactive since then.

5.  The two matters arising for decision today are as follows.  By summons dated 14 January 2019, the plaintiff applies to vary the terms of the injunction by removing the two paragraphs which allow D9 to draw HK$20,000 per week towards its ordinary and business expenses.  This in fact has only been used to date on two occasions in November and December 2018 when two payments of HK$20,000 were withdrawn.

6.  Further, by summons dated 25 March 2019, D9 applies to vary the terms of the injunction, seeking leave to withdraw HK$410,000 from its CCB account to obtain legal advice and, more generally, to fund the defence of these proceedings.  So far and in accordance with the terms of the injunction, only HK$50,000 has been withdrawn in respect of legal advice,and that was on 15 January 2018.

7.  In that regard, the plaintiff’s applications for summary judgment by summons of 10 January 2018 against a number of defendants, including D9, are fixed for hearing before Madam Justice Mimmie Chan on 20 June 2019.  This is why D9 says it needs access to the money.  For completeness, I should add that a default judgment was obtained against D1 in 2017 which included a declaration that D1 held the US$6,700,000 on constructive trust for the plaintiff.  

8.  It is convenient to begin with the provision for payments of $20,000 per week towards the company’s ordinary business expenses.  The plaintiff’s summons was prompted by the November and December payments which I have mentioned.  D9 resists the application to amend the injunction.  Its evidence sets out the details of the company’s business expenses, including rent, directors’ remuneration, accountancy fees and insurance.  It is said to be oppressive that the company cannot use the funds in the CCB account to meet these expenses. On the other hand, until November/December last year, it is to be noted that that was in fact the position.  D9’s case is that there is no legal right to vary the injunction in the absence of a material change in circumstances.  There has been, it submits, no such change and the application should be dismissed.

9.  The plaintiff’s case relies primarily on the company’s financial statements dated 25 October 2018 for the period from 1 April 2016 to 31 December 2016.  These state clearly that the latter date is “date of cessation of business”.  D9 cannot therefore, the plaintiff argues, contend that there are any ongoing business expenses.  

10.  D9 has responded by way of evidence from its accountant who prepared the statements.  He says that there was a misunderstanding on his part.  He says that he was informed that the company’s sole bank account, which was with Bank of China, had closed in December 2016.  Because of miscommunication, he did not know about the CCB account.  He says he now understands that the company has not ceased business, and he has instructions to prepare up-to-date accounts subject to payment of his fees.

11.  I do not find this evidence persuasive.  The financial statements are very clear in a number of places, including the front page, that the company ceased business at the end of 2016.  They are signed by its principal and sole director, Mr Chan, on 25 October 2018.  The plaintiff was not aware of this until recently.  They say that the November/December 2018 payments would not have been permitted had they been aware of it.  This is clearly a material change of circumstances, and I am satisfied that P is entitled to a variation of the injunction in this respect.

12.  The position as regards D9’s application for legal expenses to be paid out of the CCB account is more complicated.  P’s objection is that the money in the account is its money to which it has a proprietary claim, and applying well-settled principles, no access should be given to D9 in respect of these funds.

13.  D9’s primary response is that it has a good defence to the plaintiff’s claim based upon the doctrine of change of position.  It says that it had a business relationship with a mainland meat importer called Mr Yung for whom it acted as an agent.  This was one of a number of such relationships.  In short, Mr Yung would notify D9 when payments of meat from Brazil through Hong Kong were due, and money would be remitted to D9’s bank account from which Mr Chan would then make appropriate remittances to the suppliers. That is, D9 says, precisely what happened on this occasion and there was nothing to put D9 on inquiry.  Having received funds and remitted those funds in good faith, it has a complete defence.

14.  I will begin by setting out the legal test as formulated by Mr Terrence Tai of D9 which I am content to adopt.  Where a defendant seeks the release of funds subject to a proprietary claim to pay for his legal expenses, the court will ask three questions:

（１）  whether the defendant has demonstrated that he has no other assets to use to pay for his legal expenses;

（２）  whether the defendant can show that he has an arguable case for denying that the funds in question belong to the plaintiff;

（３）  if there are no assets other than those assets subject to a proprietary claim, whether the balance of justice militates in favour of permitting or refusing payment. 

See Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783 at paragraph 13 per Au J (as Au JA then was), and the judgment of Deputy High Court Judge B Chu (as she then was) in Hong Kong Life Insurance Ltd v Fung Siu Cheung Michael HCA 1164/2012, 21 February 2014, paragraphs 33 and 34.

15.  I shall address each of these questions in turn.  Mr Chan has made an affirmation dated 23 March 2019, setting out in considerable detail his personal position and those of his close associates.  He has no access to any further funds for this litigation, he says, and should not be denied the opportunity to put in a proper defence at the upcoming summary judgment hearing.  

16.  It is always difficult for a plaintiff to challenge effectively a statement of means of this kind.  There is at least a question raised on the evidence as to associated companies with D9 and whether proper disclosure has been made in that regard.  Broadly, however, I am satisfied that Mr Chan has demonstrated a lack of assets to pay D9’s expenses.  I am disposed to consider that, though not without qualification, the first question has been sufficiently answered by D9. 

17.  The second question is more difficult.  The plaintiff’s case is straightforward.  It says that its money went into the account and was used to pay the Brazilian meat suppliers.  It has, it contends, an unanswerable proprietary claim to the money which is not defeated by any valid change-of-position defence. 

18.  D9 has a subsidiary argument in that regard. There were other moneys paid into the account, and treating the payments-in pari passu, it is submitted that the plaintiff can only show proprietary claim to 75% of the funds.

19.  However, it is to be noted that these other payments were all made about the same time as the Ferrari money went into the account.  I would expect to see some concrete evidence as to the source of the other funds and the circumstances of the payment-in.  I was not taken to any such evidence, and I am not at present inclined to regard this point as arguable.

20.  D9’s strongest argument is as to change of position.  It is important to state that the plaintiff does not challenge D9’s basic factual case that it did in fact act in some capacity for mainland meat importers, and that the relevant transactions showing D9 acquiring either in its own name or otherwise shipments of meat from Brazil are genuine transactions, and that D9 transmitted funds for the payment of those shipments. 

21.  A substantial body of evidence has been put in by D9 in this regard with a view to the summary judgment proceedings.  WeChat exchanges have been produced which are said to show someone said to act for Mr Yung notifying D9 of the payments that would be received into D9’s account and giving instructions for their disbursement to the Brazilian parties.  There was nothing, it was submitted, given the previous course of dealing, to put D9 on inquiry, that being the applicable legal test.

22.  I am conscious that these defences will come to be considered by the judge hearing the summary judgment application, and it would be wrong for me to say anything to prejudice the defence on the present application.  I must, however, take proper account of the response made by Mr Sebastian Hughes for the plaintiff.  In short, he points out that there is nothing in the evidence to explain who Mr Yung actually is or even if there is a Mr Yung beyond Mr Chan’s assertion uncorroborated by any documentary material.  There is no evidence of any link between Mr Yung or any other meat importer and D1, ie Changhon International Energy Co Limited.

23.  It will be borne in mind that this application raises the question whether D9 has an arguable case for denying that the funds in question belong to the plaintiff, in the context of the specific application for access to the funds pending the summary judgment hearing. It may be that a different view will be taken at that hearing particularly when this case is heard with others all involving, I understand, much the same issues.

24.  However, in the present application, it is relevant, in my view, that D9’s sole bank account was closed in December 2016, the CCB account was opened at the beginning of March, and it is for consideration whether it was opened specifically for this transaction.  Mr Chan, so far as the evidence presently goes, knew nothing about D1, and the court has no evidence before it as to the status of Mr Yung or what the source of the funds was understood to be. The money came in and was paid out almost immediately.

25.  I do not rule out the possibility of D9 establishing an arguable change-of-position defence so as to entitle it to leave to defend in due course.  That will be a decision for the judge hearing the summary judgment application.  But for the purposes of today, D9 has not satisfied me that it has an arguable case for denying that the funds in question belong to the plaintiff.   

26.  That leaves the third question which goes to the balance of justice.  This is not an easy question to answer.  D9’s defence appears to have been conducted sensibly and in an economical manner.  There is nothing untoward in the sums which it is requesting from the account, namely, HK$410,000, including legal fees already owed of HK$300,000.

27.  On the other hand, this will severely deplete the money in the account, and as Mr Hughes pointed out, if granted, this application may not be the last.  In this case, Ferrari has been the victim of a massive fraud.  It is very unfortunate that D9 has been caught up in it.  However, my conclusion is that the money should stay where it is. Even if all of it is paid now to the plaintiff, it will still suffer a very large shortfall on this transaction alone.  Despite Mr Terrence Tai’s well-presented submissions, that is my conclusion.

28.  Mr Hughes, I think you are entitled to your costs in any event of the summons in relation to the business expenses.  I think in relation to the other application, that is so closely linked to the summary judgment application that it should be costs in the cause.