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

HCA 852/2017

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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The parties

1.  The plaintiff (“Ferrari”) is a well-known Italian luxury car manufacturer.

2.  The 5^th defendant (“Hui Tong”) is in the business of trading frozen meat parts which it imports from overseas suppliers.  It is a private company, was one director, Li Xian Juan, and has been in business since 21 March 2014.  Li Xian Juan says that its business model is one in which frozen meat is bought in bulk from overseas suppliers or exporters and sold on to local buyers in Hong Kong with a small profit made from the difference in the transactions.  Li Xian Juan says that the turnover is high, and that is justified by the bank statements exhibited.

The circumstances leading to the writ

3.  The circumstances arise from an all too familiar scenario, that of an Internet email fraud.  As a result of a sequence of fraudulent emails sent to an officer of Ferrari’s North American subsidiary between 28 and 31 March 2017, by three instalments over those three days, a total of US$6,700,000 was paid by Ferrari to a bank account in Hong Kong held by the 1^st defendant (“Changhon”).  There is no doubt at all, and it is not disputed, that there is no business or personal relationship between Ferrari and Changhon.

4.  As is usual with an Internet email fraud, virtually immediately each of the three sums were deposited into Changhon’s bank account they were paid out, in apparently random amounts, to various parties.

The grant of injunctions and other orders

5.  On 10 April 2017, Ferrari obtained an ex parte Mareva injunction against Changhon together with disclosure orders.  The disclosure orders revealed that a sum of US$164,465 was received by Hui Tong.  Again, there is no doubt at all, and it is not disputed that there is no business or personal relationship between Ferrari and those defendants.

6.  On 24 April 2017, again by ex parte application a Mareva order was made against Hui Tong prohibiting it from removing, disposing or diminishing the value of any of its assets within or outside Hong Kong up to the sum of US$164,465. 

7.  That injunction came before me on the return date, 19 May 2017, when Hui Tong appeared by solicitors and counsel.  After hearing the parties, and giving Hui Tong time to produce bank statements, which when produced were quite unsatisfactory, I ordered that the injunction should be continued.  I then gave timetable directions for the filing of affidavits and adjourned the substantive hearing to 16 June 2017.  I heard argument on that day.

The case for Hui Tong

8.  The cause of action against Hui Tong is based upon money had and received or alternatively restitution re-damages for unjust enrichment.

9.  The case for Hui Tong is a familiar one.  By affidavit, Li Xian Juan says that shortly before the funds were received into Hui Tong’s bank account she entered into transactions with buyers to purchase frozen meat.  By a coincidence, quite unexplained by Li Xian Juan, the amount of the transaction was precisely that of the sum deposited in Hui Tong’s bank account, the original source of the funds being Ferrari.  Li Xian Juan does not suggest any business relationship between Hui Tong and Changhon or Ferrari.  She offers no explanation as to why Changhon would have made a payment to Hui Tong’s bank account.

10.  Li Xian Juan says that Hui Tong is legally entitled to the amount of US$164,465 “as part of its bona fide arm’s length dealings with its business partners”.  She exhibits copies of bills of lading, packing lists, official meat certificates and custom declarations for certain frozen meat goods.  She exhibits two “sales confirmations”, both dated 29 March 2017, and chopped by Hui Tong as seller, one for US$80,604 and one for US$83,861 (a total of US$164,465), both with unnamed buyers.

11.  On the basis of this evidence, Mr Yiu argues that Ferrari has no good arguable case against Hui Tong for money had and received, a constructive trust, unjust entrenchment, or tracing orders.

The relevant law

12.  Mr Hughes correctly reminded me that at this stage of the proceedings it is sufficient for Ferrari to be entitled to relief if it has a good arguable case on the substantive claim over which the court has jurisdiction, that there are assets in the jurisdiction, that the balance of convenience is in favour of a grant, and that there is a real risk of dissipation of assets or removal of assets from the jurisdiction which would render a judgment of no effect.

13.  In establishing a good arguable case Ferrari need not show that it is likely to win, but must demonstrate that its case is one that is:

“ … more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success”:

see Ninemia Maritime Corp v Trave (The Niedersachsen) [1983] 2 Lloyd’s Rep 600 at 605.

14.  As regards risk of dissipation, the test is an objective assessment of the risk that a judgment may not be satisfied.  The appropriate law is set out in the decision of M Chan J in Great Wall Pan Asia International Investment Co Ltd v Cervera Holdings Ltd & Anor, (unreported, HCCT 13/2016, 1 June 2016, §§18 – 21).  I gratefully adopt that statement.

15.  Evidence of an unacceptably low standard of commercial morality or questionable integrity, particularly in connection with the transactions in question, may be sufficient to entitle a court to conclude that there is a sufficient risk to justify a Mareva injunction: Akai Holdings Ltd (In Compulsory Liquidation) & Ors v Ho Wing On & Ors [2009] HKCU 172 §52.  Where a good arguable case is established on a claim for fraud or dishonesty, the court will be more willing to infer a real risk of dissipation: see Akai Holdings at §53, and Gee, Commercial Injunctions (6^th ed) §12-033.

16.  Irrespective of what is pleaded, dishonesty or suspicion of dishonesty will strongly suggest there is a real risk of dissipation: see Guinness plc v Saunders (The Independent, 15 April 1987), cited in Goldrein & Wilkinson Commercial Litigation 2^nd ed, 185 – 186, per Browne-Wilkinson VC:

“ In my judgment dishonest behaviour is relevant to Mareva relief not by reference to what is pleaded but by reference to the possibility or likelihood of its existing. Whether or not pleaded, if there is dishonesty or suspicious of dishonesty, that will be an important ground on which Mareva relief can be obtained.”

This decision was applied in Hong Kong in Standard Chartered Securities v Lai Arthur & Ors [1993] 1 HKC 375 at 393G.

17.  Mr Yiu sought to rely upon the dicta of Au-Yeung J in Arrow ECS Norway AS v Xin Cheng Holdings (International) Co Ltd (unreported, HCA 239/2016, 12 May 2016) at §30, where the judge said:

“ Being a mere recipient of funds (like D18) remitted through an underground banking system is not sufficient in itself to find guilt. It has to be proved that the recipient knew or had reason to believe that the money had an illicit source.”

18.  Mr Yiu argued that the evidence fell far short of establishing “guilt” on the part of either Li Xian Juan or Hui Tong in respect of the receipt of the funds.

19.  With respect to the judge, the decision in Guinness plc makes it clear that, at least at the Mareva stage, the expression “guilt” is inappropriate.  I accept that by itself the mere fact that a payment to a bank account came from an unrelated source may not necessarily be sufficient to raise a suspicion of dishonesty.  But if viewed in its whole context, that fact raises a suspicion of dishonesty, it is not necessary for the court, at the Mareva stage, to require a plaintiff to show “guilt” on the part of the recipient of the fund.

The challenge to Hui Tong’s “transaction”

20.  Mr Hughes took me carefully through the evidence available at this time to demonstrate, not only that the transaction between Changhon and Hui Tong was itself suspicious, but that the foundation transaction upon which Hui Tong relied was also suspicious.

21.  First, the account opening documents in respect of Changhon’s bank account show that its business activity is the trading of timber for flooring and construction.  There is no suggestion at all that it is engaged in the frozen meat trading business.  There is no suggestion at all by Li Xian Juan that she has any business or personal connection with Changhon, or that there is any reason why she should receive a payment from Changhon.

22.  Next, Changhon’s bank account shows no normal commercial banking or business related activities at the time of the transfers.  The account was set up in September 2016, and on 13 October 2016, a user by the name of “Yuan Bo” was authorised to make online transactions using the bank’s online service.  On the date of the receipt of the first payment (US$957,968), the account held just US$54.03.  The closing balance of the account, on 3 April 2017, after the entire sum had been distributed, was US$39.74.

23.  There is a very strong case to argue that Changhon is a key and instrumental participant in the email fraud, being in a position to receive the funds fraudulently obtained from Ferrari, and to immediately distribute them to other participants in the fraud.  In the absence of any attempt whatsoever by Li Xian Juan to explain why Changhon might make a payment to Hui Tong, of a precise sum, immediately upon Changhon receiving fraudulently obtained funds, the inference necessarily arises that Li Xian Juan and Hui Tong are also parties to the fraud.

24.  It is right that other inferences may be argued.  It might be suggested, for example, with evidence, that there was a mistake or error in the banking system.  It might be suggested, with evidence, that there is another company with a similar name.  It might be suggested, with evidence, that the payment was made through an underground banking system.  But none of these suggestions were made.  Li Xian Juan was tellingly silent in respect of the source of the funds.

25.  Circumstances where, following an Internet email fraud, a substantial sum is deposited in the account of one company, and then distributed, immediately, in apparently random sums, to a number of other companies, each with no apparent relationship to the distributor, have become commonplace in the courts.  Equally commonplace is the suggestion by the ultimate recipients of the funds that the amount received precisely matches a transaction undertaken at the time the deposit was made.  These are “coincidences” which cannot be ignored by the courts.

26.  Next, Mr Hughes took me to the transactions relied upon by Li Xian Juan.

27.  As I have said, no explanation at all was suggested as to why payment for two separate transactions between Hui Tong and its buyers should be made in one payment by a complete stranger. 

28.  In her first affirmation, Li Xian Juan claimed that “orders were made by individuals by telephone and monies would be deposited into (Hui Tong’s) bank account upon completion of the transaction”. It is to be noted that the plural expression was used.  In the skeleton submission by counsel on 19 May 2017, it was now asserted that both orders were not made by separate individuals, but by the same “individual surnamed Wong”. In her second affirmation, Li Xian Juan changed her story, now asserting the name of the customer, apparently in respect of both transactions, was not Wong but Ma.

29.  The documentary evidence shows that Hui Tong’s business model involves sourcing a buyer, and only then making the purchase from its supplier.  Only then Hui Tong enters into a sales confirmation requiring a deposit, usually of 30%, with an invoice being issued when the shipment is on the high seas.  Upon payment in full, the buyer then collects the shipment directly upon arrival in Hong Kong.

30.  Unlike every other sales confirmation in evidence, the sales confirmations relied upon do not state the buyer’s name at all.  Unlike every other transaction in evidence, the transactions relied upon, contrary to Hui Tong’s established business model, Hui Tong took the substantial risk of paying for the perishable goods without having first obtained a buyer.  Unlike every other sales confirmation in evidence, the payment terms are 100% of the contract price upon delivery.

31.  Instead of stating a customer name in the sales confirmation a container number and bill of lading number is listed under the expression “Buyer”, and in a markedly different font to the text of the rest of the documents.  Unlike every other sales confirmation in evidence, there are no corresponding invoices.

32.  There is nothing in the “payment slip” bank document relied upon by Hui Tong for its receipt of US$164,465 from Changhon to link the payment to a customer named either “Wong” or “Ma”.

33.  From the whole of this evidence I am satisfied that there is clear and justifiable suspicion of dishonesty on the part of Li Xian Juan and Hui Tong.

34.  That suspicion of dishonesty is more than adequate to find that there is a good arguable case for the remedies sought by Ferrari against Hui Tong, and that there is a real risk of dissipation of funds.

35.  In reaching this conclusion I have weighed in the balance that apparently genuine documents in relation to the importation of meat products and sales of those products have been produced.  I have no doubt at all that Hui Tong is in the business of importing and selling meat products.  But the circumstances of the particular sales upon which Hui Tong and Ms Li relies, and the documents in support of those sales, by themselves give rise to the suspicion of dishonesty.

Balance of convenience

36.  The sum sought to be restrained is US$164,465. The bank statements produced by Hui Tong show that that is an insignificant sum compared with amounts in Hui Tong’s bank account from time to time.  The assets in the bank account range between HK$3.5 million in October 2016 and HK$8.6 million in February 2017.

37.  Li Xian Juan says that she has raised a loan by asking “fellow importers” to pay the sum of US$164,465 to suppliers on his behalf.  To support this assertion she exhibits two incomplete undated printouts, apparently from a teller machine, which are described, erroneously, as “deposit slips”.  These are from two unidentified bank accounts.  No explanation is offered as to when these payments were made, by whom they were paid, the identity of the fellow importers, or the terms of the purported loans.  In the whole of the circumstances the documents do not assist Hui Tong.

38.  Having regard to the foregoing I am satisfied that the balance of convenience lies firmly in favour of continuing the Mareva injunction.

The undertaking as to damages

39.  Ferrari is a well-known and substantial international company.  I have no doubt at all that it is good for its undertaking as to damages.  Mr Hughes has confirmed to me that Ferrari has been clearly advised as to its obligations under the undertaking.

Disposal

40.  I am accordingly satisfied that this is a proper case to order that the injunction, as granted on 24 April 2017, should continue.  Leave is reserved to apply.

Costs

41.  There will be an order nisi that the costs of the injunction proceedings are to be the plaintiff’s costs in the cause.