TOYOTA BOSHOKU EUROPE N.V. v. HONG KONG LONGSHENYUAN INTERNATIONAL TRADE LTD AND OTHERS

HCA 2091/2019

[2022] HKCFI 1328

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2091 OF 2019

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BETWEEN

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D E C I S I O N

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A. INTRODUCTION

1.  The applications before me concern only the Plaintiff and D48. The focus is on D48’s application to discharge an injunction against it on the ground that there are no serious issues to be tried in the Plaintiff’s case and that D48 was a bona fide purchaser for value without notice.

2.  The Plaintiff is the victim of a large-scale fraud in which approximately HK$500 million was paid to certain companies as a result of fraudsters impersonating the Plaintiff’s CEO and President and convincing the Plaintiff’s General Manager of Finance that funds were required for a secret and urgent acquisition (“Fraud”).

3.  The Plaintiff obtained interlocutory proprietary and Mareva injunctions against all the Defendants, who are said to be recipients of the Plaintiff’s funds as a result of the Fraud. D48 is said to be a 3^rd layer recipient.

4.  The relevant Injunction against D48 was made on 22 November 2019, on inter partes basis but in D48’s absence, in reliance on information provided by the Hong Kong police. The Plaintiff obtained, at the same time, a banker’s disclosure order against the banks that hold the bank accounts of the Defendants into which the Plaintiff’s funds were paid.

5.  The money trail shows that D5 was one of the first layer recipients of some of the Plaintiff’s funds. Part of the funds was then allegedly transferred to D24 as a 2^nd layer recipient. A portion of it, being US$450,001, was transferred to D48 in 2 tranches on 19 and 20 August 2019.

6.  The relevant bank accounts of D48 currently subject to the Injunction is a Hong Kong dollar account which the parties abbreviated as the “7500 Account” at China CITIC Bank International Ltd (“CCBI”). In fact, D48 received the US$450,001 at the same bank with an account which the parties abbreviated as the “7901 Account”.

7.  In May 2021, the Plaintiff obtained default judgments against a number of Defendants, including D5 and D24.

8.  Before me are the following applications:

(1) D48’s summons dated 24 May 2021 for:

(a) discharging the Injunction and Disclosure Order on the bases that there is no serious issue to be tried and/or the Plaintiff has no good arguable case (“Discharge Application”); and

(b) Leave to amend D48’s defence (“Amendment Application”); and

(2) The Plaintiff’s summons filed on 12 August 2021 to vary the Injunction, such that the reference to the 7500 Account be varied to the 7901 Account (“Variation Application”).

9.  D48 has no objection to the Variation Application. In fact, D48 does not dispute having received US$450,001 from D24 at its 7901 Account. D48 accepts that there is evidence showing transfer of money from the Plaintiff to D5, and from D24 to D48. D48 submits, however, that there is absence of evidence of transfer of money from D5 to D24, thereby undermining any serious issues to be tried in the Plaintiff’s case.

10.  The Plaintiff opposes the Discharge Application but not the Amendment Application.

B. BACKGROUND

11.  The trail of the Plaintiff’s funds relevant to D48 is as follows:

(1) D5, as one of the alleged 1^st layer recipients, received a total of US$8,163,000 directly from the Plaintiff on 17 and 19 August 2019.

(2) D24, as one of the alleged 2^nd layer recipients, is said to have received from D5 a total of US$1,145,656, made up of

(a) US$2,000, US$287,654 and US$456,000 on 19 August 2019 (totalling US$745,654); and

(b) a further US$400,002 on 20 August 2019.

(3) D48 then received from D24 US$450,001 in 3 tranches (HK$ 50,000, US$240,001 and US$160,000), all on 20 August 2019. However, presumably upon sight of D48’s defence and the affirmation of Su Zhenbiao (“Su”) which admitted receipt of the total sum but in 2 tranches instead of 3, the Plaintiff changed its case to match D48’s admission. Hence, allegedly as a 3^rd layer recipients, D48 received from D24 a sum of US$210,000 at 7901 Account on 19 August 2019; and a sum of US$240,001.00 at 7901 Account on 20 August 2019, after D24 received US$400,002 from D5.

12.  The pleaded case of the Plaintiff does not allege that D48 has participated in the Fraud, but seeks to trace the funds transferred out to D5, through D24, to D48, based on 3 principal bases:

(1) A proprietary claim for declaration of constructive trust, and an order of account and payment over, or alternatively damages;

(2) A restitution claim based on unjust enrichment, the unjust factor being mistaken payment and/or total failure of consideration; and

(3) Damages for the loss and damage suffered as a result of the Fraud and the diversion of the fund.

13.  The Plaintiff also seeks a permanent injunction until such time that the Plaintiff is able to recover from all the Defendants sums due to the Plaintiff under judgment.

14.  D48’s defence is that it is a stranger to all the parties (except D24) and it denies any involvement in or knowledge of the Fraud. It relies principally on the following defences:

(1) Bona fide purchaser for value without notice, in defence to the proprietary claim of constructive trust; and

(2) No unjust enrichment, as D48 had provided consideration for the US$450,001 without notice of the fraud; and/or

(3) Bona fide change of position, in defence to the restitution claim.

15.  D48 claims that the US$450,001 in its 7901 Account were received as D24’s payment of the price for a genuine purchase of electronic goods from D48:

(1) At all material times, D48 engaged in the business of trading electronic parts, including touch sensors (called “Touch ICs”) for mobile phones and other electronic devices. It had rented a warehouse operated by SZSSJ (“Warehouse”).

(2) On 19 August 2019, D24 entered into a sales contract with D48, whereby D24 agreed to buy and D48 agreed to sell 116,000 units of Touch ICs, model no. ATMXT1386-Z2UIR at a price of US$464,000 (the “Sales Contract”). There were no previous dealings between D24 and D48.

(3) Under the terms of the Sales Contract:

(a) The Touch ICs sold by D48 were to be delivered by D24 collecting them at the Warehouse;

(b) D24 shall pay 97% of the total price prior to delivery, and the remainder within 3 months from the date of the Sales Contract;

(c) Invoice no. T535808 was issued by D48 for the full sum of US$464,000. 97% of the total price was US$450,080, but D24 and D48 agreed to round it down to US$450,001;

(d) The two tranches of payments were made by D24 to the 7901 Account of D48; and

(e) All 116,000 units of Touch ICs were collected by D24 from the Warehouse on 20 August 2019.

16.  For the Discharge Application, there are 2 major issues:

(1) Whether there is any serious issue to be tried or good arguable case to support the Injunction, as there is a missing link in the flow of funds from D5 to D24.

(2) D48 relies only on the pleaded defences in paragraph 14(1) and (2) above and the issue is whether they are established on D48’s evidence.

17.  The Plaintiff opposes the application but has not filed an affirmation in opposition for obvious reasons – it did not have knowledge as to what actually happened at D48’s end and whether any consideration provided was genuine. Effectively it puts D48 to strict proof. However, Mr Brown and Mr Yau, counsel for the Plaintiff, have launched a series of criticisms at the veracity of D48’s case. They submit that the defences relied on are inherently factual matters, based on materially incomplete documents. The evidence provided by D48 raises as many questions as it seeks to answer. The issues could and should only be decided at the trial.

18.  Mr Brown suggests dismissal of the Discharge Application. As a fall back, he suggests discharging only the Mareva injunction but keeping the proprietary injunction.

C. LEGAL PRINCIPLES

19.  In order to obtain a proprietary injunction, the applicant has to show on the merits that there is “a serious issue to be tried”, the balance of convenience lies in favour of the applicant and that it is just and convenient to grant the injunction. It is not necessary to show risk of dissipation of assets. A serious issue to be tried is a claim that is not frivolous or vexatious. If the opposing party seeks to show that there is no serious issues to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out. See Heitkamp & Thumann Kg v Living Profit Trading Develop Ltd & others (unrep) [2019] HKCFI 1006 at §§55-56 and later in Seridom Servicios Integrados Idom Sau v Heng Wen Trade Co Ltd [2019] HKCFI 85, §§65-69, DHCJ Marlene Ng (as she then was); Zimmer Sweden AB v KPN Hong Kong Limited & anor unrep, HCA 2264/2013, 2 May 2014, at §§75-76, DHCJ Kent Yee.

20.  To obtain a Mareva injunction, the Plaintiff has to show on the merits a “good arguable case”, that there are assets within the jurisdiction, that there is a real risk of dissipation of assets or removal of assets from the jurisdiction; and the balance of convenience lies in favour of the grant. The threshold is higher than serious issues to be tried. The Plaintiff is not required to show that he is likely to win. Rather, he must show that his 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”: Heitkamp at §§55-60 and Seridom, §§65-69.

21.  With regard to the risk of dissipation of assets:

(1) The applicant must show a real risk, judged objectively, that a future judgment would not be met because of an unjustified dissipation of assets. Whilst it may not always be necessary to demonstrate a nefarious intent, there must be something more than the mere ordinary or usual dealing with assets. The applicant is required to show that, at least objectively, the effect of the defendant’s conduct would be to frustrate the enforcement of any judgment.

(2) There must be solid evidence of the risk of dissipation showing appropriately clear and strong facts and risks. Mere inference or generalised assertion is not sufficient. The burden to adduce cogent evidence of commercially sharp practice likewise falls on the plaintiff.

(3) An assessment of the risk of dissipation necessarily involves an evaluative and predictive judgment. The evidential burden can be satisfied by drawing proper inferences from a holistic consideration of all the circumstantial materials that are indicative of risk, including matters which point against such risk.

See Predicine Holdings Ltd v Bianchi (Hong Kong) Ltd and ors [2021] HKCFI 123, §76, Coleman J; Seridom, §§67-68.

22.  Victims of fraud normally have a good arguable case against the recipient of funds for constructive trust, and money had and received: see Arrow ECS Norway AS v Xin Cheng Holding (international) Co Ltd, Au-Yeung J, §§13-15:

(1) They may assert a proprietary claim to the extent that their funds can be traced and identified as representing recognisable assets of the recipient, unless the recipient can establish the defence of bona fide purchaser for value without notice.

(2) For a claim on unjust enrichment, the plaintiff has to show that (a) the defendant was enriched at the expense of the plaintiff; (b) the enrichment was unjust; (c) the plaintiff transferred the money under an unjust factor (eg mistake and/or failure of consideration); and (d) it would be unjust for the defendant to retain the money: Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, §67 (Ribeiro PJ).

23.  To discharge an injunction, the burden is on the defendant to put up a defence and evidence of sufficient cogency so as to “water down” the merits of the Plaintiff’s claim to that extent that it no longer amounts to a good arguable case (for a Mareva injunction) or a serious issue to be tried (for a proprietary injunction): Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & Ors unrep., HCA 3023/2016, 2 May 2017 at §41, DHCJ Douglas Lam SC.

24.  However, the existence of a “good arguable defence” does not necessarily negate a “good arguable case”. It is entirely possible to have, at the interlocutory stage, both the claim and the defence being more than barely capable of serious argument and not necessarily having a better than 50% chance of success. For a Mareva injunction, there is no requirement for the plaintiff to show that he has a “much better” case than the defendant. See Pacific Rainbow, at §42.

25.  An application to set aside an injunction should be dealt with at trial save in exceptional circumstances. The simple reason is that the Court is not to resolve disputes of fact and difficult points of law on an interlocutory basis: Pacific Rainbow, at §40; DBS Bank (Hong Kong) Limited v Tian Wen Quan, unrep., HCA 3228/2016, 12 October 2017 at §13, Anthony Chan J.

26.  On the defence of bona fide purchaser for value without notice, the relevant principles can be found in Predicine, §§93-100:

(1) For the defence of bona fide purchase for value without notice, the defendant needs to show that (a) there is a purchase for value; (b) of the legal estate in the property; (c) in good faith; (d) without notice, actual or constructive; (e) at the time of the transfer of the legal estate; and

(2) Bad faith is not limited to dishonesty but is capable of embracing (a) a failure to act in a commercially acceptable way, (b) sharp practice of the kind that falls short of outright dishonesty.

27.  Whilst good faith is an element independent from the element of notice and is required to be proven, it is difficult to imagine a case in which the purchaser does not have notice and yet is not acting in good faith: Ng Luk Mui v Shiu Tsun Wai Vincent [2011] 5 HKLRD 707, §35, CA.

28.  The defendant who seeks to set aside an injunction on the ground that he was a bona fide purchaser for value without notice carries the burden of proof. Oftentimes, the plaintiff has no personal knowledge of the circumstances, or the reasons why the monies were transferred to the defendant, or whether the defendant was a participant in the apparent fraud, or was in fact an innocent party. These are matters known only to the defendant himself. At the interlocutory stage, the court can only look at the defendant’s version of events and form a broad brush view as to its credibility based on inherent probabilities and whether it is supported by the contemporaneous materials which have been disclosed by the defendant. See Pacific Rainbow, §50.

D. PROCEDURAL DELAY IN THE DISCHARGE APPLICATION

29.  D48 was absent at the inter partes hearing that granted the Injunction Order. At that time a “no consent letter” was issued by the police which caused D48’s account to be frozen and the Plaintiff’s then application was based on information from the police.

30.  The Plaintiff’s summons seeking an injunction and relevant affirmations were sent to D48’s registered address in Hong Kong, which was the office of an accountancy company. Those documents were later sent by courier to Chan Siu Leong (“Leong”, General Manager of D48) and Su (sole director and shareholder of D48) in Shenzhen. By the time the documents reached the hands of Leong, the Injunction had already been granted.

31.  The Discharge Application, taken out 18 months after the Injunction Order was made, was thus the first occasion for D48 to deal with the Injunction. D48 explained its delay by affirmation.

32.  In essence, Leong and Su first became aware of the CCBI account being frozen in early September 2019. They then liaised with CCBI and the police to defreeze the account, but to no avail.

33.  Leong was tasked by Su to handle these proceedings. Leong urgently engaged D48’s former solicitor (“BCC”) on 22 November 2019. In essence, the advice given (by a Mr Lam, legal executive) was that nothing could be done to challenge the Injunction Order. There was no mentioning of a discharge application, not even when counsel was instructed to prepare D48’s defence. Leong was led to focus on an application for security for costs (done by correspondence), but the Plaintiff had rejected the same on 24 December 2020. No application for security was taken out on behalf of D48.

34.  Mr Wong, a former partner of BCC, then took over the case in September 2020. It was only on 18 September 2020 that Leong and Su were advised, for the first time, by Mr Wong of the right to apply for discharge of the Injunction Order. However, D48 was unable to put up funds then as all of its liquid money (including the excess above the frozen amount of US$450,001) had been frozen.

35.  Mr Wong joined MCA Lai Solicitors LLP (“MCA Lai”) and that firm came on record as D48’s solicitors on 19 October 2020. Further time was spent on requesting CCBI to release the excess funds of about HK$344,391.60 from D48’s accounts, which was achieved only after 17 March 2021. Meanwhile, MCA Lai requested BCC to release the case papers, but that request was ignored.

36.  With the money released as costs on account, MCA Lai made the Discharge Application on behalf of D48. A full set of draft summons and supporting affirmations have been provided to the Plaintiff’s solicitors on 5 May 2021. Upon the Plaintiff’s objection, the Discharge Application was taken out 4 days later.

37.  For present purposes, I am prepared to accept D48’s explanation.

E. ANY SERIOUS ISSUE TO BE TRIED OR GOOD ARGUABLE CASE

38.  Essentially, D48’s case is that it can accept that money had been transferred from the Plaintiff to D5; and from D24 to D48. However, D48 submits that, buried in the mass of evidence adduced by the Plaintiff after a series of discovery, there is a missing link showing transfers from D5 to D24.

39.  At about the time of application for the Injunction Order, when it was urgent and the information was incomplete, the Plaintiff could legitimately act on police information (essentially tables and flowcharts) and assert the flow of money from D5 to D24 as set out in paragraph 11(2) above. However, by now, over 2 years have elapsed since the Fraud had taken place. Mr Tam, counsel for D48, submits that the Plaintiff is still unable to produce documentary evidence to show that US$450,001 of the proceeds of the Fraud were transferred from D5 to D24. That waters down any serious issues to be tried in the Plaintiff’s case. The default judgments entered against D5 and D24 would not assist the Plaintiff’s case in this aspect.

40.  I am unable to agree with Mr Tam. According to the Plaintiff,

(1) The opening balance in D5’s account was only US$5.00.

(2) The deposit into D5’s account on 17 August 2019 of US$2,976,981.70 was the first deposit of the Plaintiff’s funds, less US$18.30. There was no mixture of the Plaintiff’s funds with funds from other sources between 17 and 19 August 2019 in D5’s USD account.

(3) Over the course of 19 August 2019, D5 made a series of withdrawals out (including those in paragraph 11(2) above), plainly using the Plaintiff’s funds.

(4) Of the withdrawal made from D5’s account, 4 were made by corresponding amount of deposits on the same dates into D24’s account (pp 78-80 of Exhibit LSLD-10).

41.  Paragraphs 11 and 40 above constitute a good arguable case to be tried by the trial judge. What inference to be drawn from e.g. lack of deposit slips from D5’s bank to evidence the transfers from D5 to D24’s account is a matter of inference and weight for the trial judge. That the Plaintiff initially acted on tables and flowcharts of the police and had to amend its case based on D48’s admission would not water down the Plaintiff’s case. Applying Keitkamp, it cannot be said that the Plaintiff’s claim against D48 is frivolous or vexatious or liable to be struck out. The first ground for setting aside the Injunction is not established.

F. DEFENCES OF BONA FIDE PURCHASER FOR VALUE WITHOUT NOTICE AND NO UNJUST ENRICHMENT

42.  D48 has set out at length its case, with supporting documents. Mr Tam submits that it is inherently improbable that D48 had concocted documents. Mr Brown, however, draws my attention to Pacific Rainbow, §§50-53; and Seridom, §104 as to how the Court in those cases approached the defendant’s evidence in support of a discharge application.

43.  Noting that the Plaintiff puts D48 to strict proof, I find it pertinent to bear in mind that the citations from those 2 cases are fact sensitive. It is not necessary, in every case, to look for the same sort of documents from a defendant. However, I have no objection to approaching D48’s evidence from 3 Perspectives as suggested by Mr Brown:

(1) Whether D48 has established that it was operating a legitimate business;

(2) Whether D48 has established that it has legitimate business in the alleged line of business (i.e. electronic parts); and

(3) Whether D48 has established that the particular transaction with D24 was legitimate.

F(1). D48’s evidence

44.  Su started his sole proprietorship in Huaqiangbei region in Shenzhen, sourcing for components and parts that he anticipated would become scarce in the near future and resold at higher price. He only traded in components and parts produced by quality manufacturers or sourced from well-known merchandisers to minimize the risk of selling faulty items.

45.  Three years into this business, Su incorporated D48 in Hong Kong on 31 October 2018 to carry on that business. He has been the sole director and shareholder. D48 was to be a window to expand the business by trading with overseas traders and achieving tax savings. It had a virtual address with an accounting consultancy in Hong Kong but its actual business operations were conducted in Huaqiangbei Square (“SZ Office”).

46.  D48 holds the 7500 Account (a current account) and the 7901 Account (a multi-currency statement savings account), which were opened in about March 2019. The 2 Accounts were largely dormant until about July 2019, which was the time that D48 began actively trading in electronic units and components through D48. The bank accounts were frozen by the police in early September 2019.

47.  Su had been hiring Leong as his personal assistant since mid-2018 and then D48 employed Leong as the General Manager since about June 2019, at all times at a salary of HK$7,000 per month in cash.

48.  D48 had rented some space from the Warehouse, which was within walking distance of the SZ Office. The tenancy agreement covered a period of 7 months from 1 June to 31 December 2019. There were standard protocols under the tenancy agreement, which D48 claims to have been followed for the purpose of stocking-in and -out of goods at the Warehouse.

49.  As the business involved price-sensitive goods, therefore D48 often traded with entities with no previous dealings but who were able to offer “good prices” for purchase or for sale. Purchases or sales were by written sales contracts, with invoices issued for the price. Goods would be delivered upon receipt of payment.

50.  Before collecting goods from a supplier, Su would source for buyers, with a view to minimizing storage costs if resale could be achieved. If the suppliers were in Mainland China, usually in Huaqiangbei, the goods would be delivered to the Warehouse first.

51.  In respect of sales by D48, normally, the buyers would have examined the samples prior to execution of the sales contract. If the goods were in Mainland China, Su would instruct the buyers to collect them from the Warehouse or the buyers could pick up the goods at the Hong Kong border. Generally, D48 would issue sales invoices to the buyers on the day the goods were picked up and demanded the buyers to make full or at least 97% payment prior to the actual pick up.

52.  For both purchases and sales, prices were settled either in RMB, USD or HKD. RMB were received or transferred by a nominee of D48, Lian Shao-bin (“Lian”), who was the finance staff at the company of Su’s relative. For USD/HKD, D48 would use the 2 CCBI Accounts.

53.  In respect of the alleged transaction between D48 and D24, one Anna purported to represent D48. The agreed terms were: 116,000 units of Touch IC, model no. ATMXT1386-Z2UIR, manufacturer ATMEL, to be delivered on 20 August 2019, at unit price of US$4 and total price of US$464,000. The payment terms were “97% payment within 24 hours of arrival, and the residual 3% (as quality assurance) should be paid in three months”. Su explained that he thought that “97% payment within 24 hours of arrival” meant prior to delivery. The price agreed upon would lead to a profit of about 12% for D48. Anna transferred US$210,000 to D48 on 19 August 2019 and another US$240,001 to the 7901 Account on the following day. Su then went to the Warehouse to give instructions to stock out and D24 picked up the goods.

54.  On the purchase side, documents produced by D48 in support included: (a) a written sales agreement dated 2 August 2019 to buy from an entity called “Wuzhou” 176,500 units of Touch ICs, at a unit price of RMB26.63 and the total price was RMB4,700,195; (b) documents and photos showing stock-in of those goods; (c) invoice issued by Wuzhou to D48, to be paid to Wuzhou’s nominee Chen Lie Xun. D48 effected payment through Lian to Chen Lie Xun.

55.  On the sale side, documents produced by D48 included (a) the Sales Contract signed by Anna and Su with a company chop (instead of a signature chop which Leong had mistakenly taken away); (b) a Sales Invoice of D48 (which was allegedly mistakenly dated as 20 August 2019), for the full sum of US$464,000.00; (c) WhatsApp messages between Anna and Su; and (d) stock-out notices issued by the Warehouse dated 20 August 2019.

56.  After collection of the goods, Anna sent 2 WhatsApp messages to Su stating that the procedure at the Warehouse was extremely complicated.

57.  In respect of the remaining 3% of the purchase price, it was due for payment on 20 November 2019 but Anna could not be reached. By then, the CCBI Accounts had been frozen. Su and Leong claim not to have knowledge of the Fraud or the Plaintiff’s interest in the US$450,001.

58.  The remaining Touch ICs were allegedly sold in 3 lots to 2 entities, Xing Wei Trading Limited, Success Logistics Limited, in August and September 2019, generating similar documentation. Full payments had allegedly been received by Su.

59.  D48’s transaction with D24 is strongly documented in virtually every step, including evidence from the Warehouse. D48 had apparently delivered goods in exchange for the money from D24. Notwithstanding D24’s default on the 3% balance, D48 had still made a profit. This pattern of receiving the price in the proportion of 97% and 3% had happened with Su before with other customers (eg H Suo Trading Ltd).

60.  The Warehouse was an operation independent from D48. It appeared to be running a business with 50-60 customers, and earned income from leasing storage space.

61.  Further, D48 had provided 2 lists, one in respect of its sales contracts and another of its purchase contracts, entered into before freezing of the CCBI Accounts. There are purported documents in support.

F(2). Whether D48 has established that it was operating a legitimate business

62.  D48’s business ceased in less than 2 months of its active use of the CCBI Accounts.

63.  From April to June 2019, the 7901 Account had had a balance of about US$15,000. The first month of the use of this Account was July 2019. Without paying out anything, D48 already received 3 items of deposits totaling US$1,203,600.

64.  There followed huge deposits into and withdrawals from the 2 CCBI Accounts:

(1) In July 2019, HK$101,000 was deposited with no withdrawals; and US$3,200,000 were deposited and withdrawn. That was emerged in the month before the Fraud occurred.

(2) In August, there were HK$44,000,000 deposited and about the same amount withdrawn; and US$16,600,000 deposited and US$15,899,000 withdrawn.

(3) In September, the CCBI Accounts had only been used for 3 days. And yet, there were HK$16,100,000 deposited and HK$12,570,000 withdrawn; and US$1,245,000 deposited and US$1,972,000 withdrawn.

65.  The balance at the time of freezing by the police stood at HK$3,654,066.20 and US$25,726.01.

66.  D48 should have been frantic about freezing of the Accounts upon learning of the same from the police. And yet Su’s attitude was that this was common in the Mainland China, just “wait and see”. D48 went to the extent of not doing any more trading, leaving what would have been market sensitive stock in the Warehouse.

67.  The first point to challenge the existence of a business is that, with such enormous trading value, no tax returns or audited accounts have been produced by D48. D48 asserts that it was because it was only recently incorporated in October 2018 and had only traded for weeks that it was not required to file a tax return as at the date of the affirmation (29 April 2021). However, by the time of the summons for discharge, over 18 months have elapsed since the first trading of D48 and the time for filing the first set of tax returns had long lapsed. Even if it did not have audited accounts, D48 should at least have management accounts or journals.

68.  Secondly, there was nothing to show that D48 had taken over Su’s sole proprietorship which had run for 3 years.

69.  Thirdly, it is questionable whether some transactions were genuine having regard to the following:

(1) One purported “buyer”, who paid D48 US$3,470,300 in 6 tranches was “Hinghingyuen Limited”, was also listed as a “seller” to whom D48 paid HK$1.7 million just 9 days later;

(2) Another purported “buyer” named “Xing Wei Trading Ltd”, received from D48 a total sum of US$966,800, and paid to D48 a total sum of HK$930,000 half a month later; and

(3) In the 2 lists of buyers and sellers, a number of the transactions did not have contracts or invoice numbers, although there appeared to be corresponding entries in the bank statements. Examples are precisely HingHingYuen Limited and Xing Wei Trading Ltd.

This kind of back and forth transactions call out for explanation as to what those transactions actually were for.

70.  The evidence is far from establishing that D48 was running a business, and/or that it was taking over business from Su’s sole proprietorship.

F(3). Whether D48 has established that it has legitimate business in the alleged line of business

71.  Firstly, as pointed out by Mr Brown, from documents with suppliers disclosed, the goods are almost exclusively in the category of “camera or surveillance equipment and accessories” rather than what Su professed to deal with, ie electronic components or goods of the same category as the Touch ICs.

72.  Secondly, apart from the supply of the Touch ICs from Wuzhou, none of the documents show D48’s source of electronic components.

73.  Thirdly, it is questionable whether some of the suppliers were genuine, having regard to the following factors:

(1) One of D48’s suppliers was D32 (PH Import and Export Co Ltd), who had received US$2.5 million of the Plaintiff’s funds and had allowed default judgment to be entered against it.

(2) A purported supplier was Chiu, Szeto and Cheng, solicitors, who had provided HK$10 million of “goods”.

(3) Some other purported suppliers, judging from their names, were unlikely to have supplied electronic goods to D48, eg “China Metal Mining Group Co., Ltd”, “Beijing Gas Blue Sky Holdings Ltd”, “Wolfty Foods Company Limited”, “All Ways Food Trading Limited”.

74.  Fourthly, some purported buyers such as “HK Quanyi Coil Spring Metals, Beauty Bags (HK) Limited, T C Pharmaceutical Company” do not appear to be buyers of electronic components.

75.  If D48 traded principally in “camera or surveillance products and accessories”, it becomes questionable how or why buyers (mostly without any prior dealings with D48) would approach D48 for the purchase of electronic components (especially if D48 specialises in “niche” electronic components).

76.  Fifthly, there is a stark contrast between documents produced on dealing with suppliers and Hong Kong customers on the one hand (over 200 pages) and documents on dealings with Mainland Chinese customers on the other (22 pages).

77.  The 22 pages show 4 transactions with 3 customers in Mainland China on 22 July, 23 July and 16 August 2019. Out of those, (a) 12 pages were generated by a warehouse company called Shi Jie showing goods had been stored at a warehouse; (b) 8 pages were sales contracts generated by D48 itself. A sales invoice was provided for only 2 out of the 4 transactions. Unlike documents in respect of camera or surveillance produces and accessories, none of the 22 pages showed who D48’s suppliers were.

78.  Having regard to the matters in section F(3), there is doubt as to whether D48 did take on Su’s sole proprietorship and run the alleged line of business in electronic components.

F(4). Whether D48 has established that the particular transaction with D24 was legitimate

79.  There are some peculiar features in D48’s evidence.

80.  Firstly, the model number of the goods that Su purchased and then sold to Anna did not match. The goods purchased were described as AMTMXT1386-Z2UR. However, the goods to be sold by Su had tags of “AMTMXT1386E-Z2UI”. The family of chips bore different descriptions, some with an “E”, some without, but none with “R".

81.  Secondly, in the WhatsApp messages, Anna asked for model no. ATMXT1386 but Su replied with model no. ATMXT1386-Z2UIR”. It is not clear if the 2 model numbers were one and the same, or were the same as the model numbers in the preceding paragraph.

82.  Thirdly, in respect of the list of purchases, the money was not paid by D48 to Wuzhou but by Lian to Wuzhou’s nominee. It was strange that, having been in the business for 3 years, Su/D48 could not use their own bank accounts. One queries what the source of the deposits into Lian’s account was, in particular the RMB4.7 million paid to Wuzhou.

83.  Fourthly, the payment model of 97% and 3% was odd, having regard to the fact that D48 did not have prior business dealings with those customers. Importantly,

(1) D48 asserts that the profit per unit was about US$3.4. By Mr Brown’s calculation, the profit from D24’s deal would have been US$22,702 (a profit margin of 4.9%).

(2) There was no sign that D48 had chased Anna for the remaining 3%, which D48 said amounted to US$13,999, a substantial portion of the profit margin. That was despite D48 not having knowledge of any fraud.

(3) 3% of Anna’s deal should be US$13,920 instead.

(4) 97% should have been US$450,080, which calls into question why D24 paid 2 tranches totalling US$450,001 instead, which was not an odd number resulting from deduction of bank charges.

84.  Mr Brown suggests that these anomalies call into question whether there was an attempt of D48 reverse engineering the contractual payment terms to fit the payments made. That suggestion was, in my view, a reasonable query.

85.  Fifthly, the rest of the Touch ICs were sold, amongst others, to Xing Wei Trading Limited, which happened to both a “buyer” and a “supplier” of D48, with substantial funds exchanged between them.

86.  Sixthly, the contracts contained a term stating “97% payment within 24 hours of arrival”. The pleaded defence has changed it to 24 hours “in advance”, the explanation being that Su was not familiar with English and copied that term from some forms on the internet. For present purposes, I accept that Su did copy without thinking. The evidence of transactions that he had produced, with D24 and others, did show that he had received payments (although just 97%) in advance of delivery of goods.

87.  Seventhly, there was a “quality assurance” (for goods which were not manufactured by D48) in respect of the balance payment of 3%. There was also an odd clause to carve out liability in respect of “atmospheric rust on surface”, which was hard to imagine on electronic components.

88.  The peculiar features in this particular transaction with D24 give rise to a doubt as to its genuineness.

89.  It is of course not necessary for D48 to explain every little detail of a transaction. The question is whether there is evidence to prove, on balance of probabilities, that it was a bona fide purchaser for value without notice in respect of the sum transferred from D24 to D48. In my view, Mr Brown’s comments on D48’s evidence on any of the 3 Perspectives in paragraph 43 cannot be brushed aside. The Court should not resolve the dispute over facts in this interlocutory application. I can only say that whilst D48 has an arguable defence, the evidence produced is not so reliable as to be sufficient to strike out the claim.

G. EXERCISE OF DISCRETION

90.  As DHCJ Abraham SC who granted the Injunction, I am satisfied that there is a good arguable case as to whether or not money had been transferred from D5 to D24 and whether the money transferred from D24 to D48 originated from the Plaintiff. Whilst D48 has put forth evidence to show that it was a bona fide purchaser for value without notice, there are aspects in its evidence which give rise to doubts that can only be resolved at trial.

91.  No doubt the Injunction would adversely affect D48’s business and its trade was suspended as a result. However, it should not be overlooked that Su resides in Mainland China and its doubtful business is operated there. Once the injunction is uplifted, it is easy for money to be transferred away. On balancing the inconvenience, I am not satisfied that I should discharge the Injunction.

H. ORDER

92.  I order as follows:

(1) In respect of the Discharge Application, the summons is dismissed. On a nisi basis, D48 do pay costs to the Plaintiff with certificate for one counsel, summarily assessed at $200,000.

(2) In respect of the Amendment Application, there be leave to D48 to amend its defence, with leave to the Plaintiff to make consequential amendments to its reply. Costs of and occasioned by the amendments to be borne by D48.

(3) In respect of the Variation Application, there be an order in terms of paragraph 1 of the summons to vary the account number to that of the 7901 Account. On a nisi basis, there be no order as to costs.

93.  I thank counsel for their assistance.