LIU KE MIAN LORRAINE v. DE XIN DA TRADING CO LTD

HCA 2352/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2352 OF 2015

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REASONS FOR DECISION

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Introduction

1.  This is the hearing of the Plaintiff’s application for summary judgment against the Defendant, pursuant to Order 14 of the Rules of the High Court.  The Plaintiff filed her statement of claim dated 16 November 2015.  The Defendant has yet to file its defence.  The parties have filed affirmations in support or in opposition of the present application.

2.  The Plaintiff is married to Derrick and is a housewife.  Derrick is an un-discharged bankrupt and self-employed businessman in investing in securities and shares in Hong Kong and the Mainland.

3.  The Defendant is a private company incorporated in Hong Kong which operates an “underground” or unlicensed currency exchange business.

4.  On 23 September 2015, Derrick was made the victim of a kidnap which took place in Beijing.  The kidnappers claimed to have been instructed by Derrick’s former business partner, Yang.  They demanded Derrick to pay HK$15 million for his release and directed him to telephone the Plaintiff to arrange for payment of ransom money to the Defendant’s account with Hong Kong and Shanghai Banking Corporation (“HSBC”). 

5.  After receiving calls from Derrick on 24 September 2015, the Plaintiff requested financial assistance from her friends, Zhao and Wong.  Both of them agreed to help.  Wong raised a loan of HK$700,000 from KAF Finance Limited and a loan of HK$300,000 from Grand China Global Capital Limited.  Zhao lent the Plaintiff HK$12,000,000.  These three loans together with a sum of HK$2,000,000 from the Plaintiff’s bank account were transferred to the Defendant’s account.  The Plaintiff then took photographs of the transfer slips and sent them to Derrick’s mobile phone for the kidnappers’ information.  Derrick was released that evening.

6.  The kidnap was reported to the Beijing police on 23 September 2015 by Derrick’s associate in Beijing.  It was last known to the Plaintiff that Yang was arrested in Beijing on 16 October 2015.  On the other hand, Derrick first reported the kidnap to the Hong Kong police on 27 September 2015.

7.  On 12 October 2015, the Plaintiff commenced these proceedings and obtained a Mareva injunction and gagging orders by ex parte application against the Defendant.  The order was continued on 16 October 2015 in the Defendant’s absence, despite the Defendant had been duly served with the relevant documents.

The parties’ case and issues

8.  The Plaintiff’s claim against the Defendant for relief in restitution.  Mr Chow, counsel for the Plaintiff, made it clear in his skeleton submission that no fraud is alleged against the Defendant.  The Plaintiff must be taken to have accepted that the Defendant was not a party to Derrick’s kidnap or had no knowledge of the unlawful event.

9.  The Defendant’s case is that it carries an unlicensed currency exchange business buying and selling currencies, principally in Hong Kong dollars and Renminbi, in the ordinary course of its business.  It is not a party to the kidnap, had no knowledge of the incident, and was not connected with the kidnappers.  The core of its defence case is that the Defendant was not enriched.

10.  The factual background as set out above is not in dispute.  The Plaintiff’s claim is for relief in restitution.  It is well settled law that the standard test used in restitution cases involves three questions:

(a)   Was the defendant enriched?

(b)   Was the enrichment at the plaintiff’s expense?

(c)   Was the enrichment unjust?

(See Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd[1] and Takahashi v Cheng Zhen Shu[2])

11.  The payment of the sum of HK$15,000,000 by the Plaintiff is incontrovertible.  It is supported by the loan documents and payment slips.  There is no dispute about receipt by the Defendant.  The Plaintiff has no relationship or payment obligation with the Defendant.  She paid because she was under duress due to the kidnap of Derrick.  Thus, on the basis of the parties’ case, once receipt is proved or conceded, the above issues may be readily presumed in favour of the Plaintiff.  The more controversial issue is whether the enrichment was unjust.  The Defendant’s case is that there was no unjust enrichment as the funds had been paid over to a third party.  It relies on change of position.  The legal burden of proof is on the Defendant to prove that:

(1)   it operates an unlicensed currency exchange business;

(2)   the funds were received in the normal course of its business; and

(3)   the funds were paid out in the normal course of its business pursuant to purpose for which they were received.

The Defendant filed one affirmation of Madam Fang Haijuan (“Fang”), in opposition.  Fang is the Defendant’s manager.  She is a Mainland citizen.

The kidnap and ransom

12.  Mr Wong made very lengthy submissions attacking the veracity of Derrick’s evidence about the kidnap and argues that the alleged ransom was a business debt.  The ultimate purpose of that attack is to launch his argument that if there was no kidnap and payment of ransom, it would not be just and fair to order restitution.

13.  I do not find it necessary to deal with that submission in any great length. The kidnap is supported by Derrick’s affirmation.  Mr Wong’s attack on Derrick’s credibility is basically fault finding and unsupported by any evidence.  His submission that the ransom was a business debt is purely speculative.  There is no dispute that the sum of HK$15,000,000 was paid to the Defendant.  The proper way to challenge the Plaintiff’s evidence about the kidnap and the true nature of the ransom is to tender an affirmation from Yang or Ye.  While Yang is detained in the Mainland, there is nothing to suggest Ye is unavailable.  Without Ye’s evidence, I am left with the prima facie evidence of Derrick and the undisputed fact of payment of the ransom.  On the state of this evidence, the kidnap and the payment are incontrovertible.

The Defendant’s currency exchange business

14.  The Defendant is a private company incorporated in Hong Kong on 27 March 2014 with paid up capital of HK$10,000.  It is owned by a Mainland resident, Madam Zhang (“Zhang”), who is its sole shareholder and director.  The Defendant operates an “underground” currency exchange business in Hong Kong, principally dealing in Hong Kong dollars and Renminbi. 

15.  According to the Defendant’s manager, Fang, the Defendant deals principally in exchanging Hong Kong dollars for Renminbi and remitting the exchanged funds into the Mainland or vice versa into Hong Kong.  It has no other business in Hong Kong.  The Defendant has an account with HSBC.  Upon receipt of instructions for remittance from Hong Kong to the Mainland, the Defendant would agree the exchange rate with its client, and the client would pay the funds into the Defendant’s bank account with HSBC.  The Defendant would cause the equivalent amount in Renminbi to be transferred from its or its associated trader’s bank account in the Mainland to the account designated by the client.  Remittances from the Mainland are transacted in the reverse manner.  The transactions are often in very large amounts because the Defendant offers more favourable exchange rate than commercial banks.  As the Defendant is aware of the risk of money laundering, it would only handle funds by way of bank transfers.  The transactions in the Mainland are effected by internet banking. Zhang transacts business with her employees by telecommunication.

16.  Fang produced a statement from the Defendant’s account with HSBC which showed that on the day in question, ie 24 September 2015, the Defendant started with an opening balance of more than HK$87 million and ended with a closing balance of HK$6 million.  It received more than HK$109 million and paid out about HK$190 million.  It also showed payments made to a solicitors firm in Hong Kong.

17.  Mr Chow submits that the Defendant’s case that it is a currency exchange merchant is not supported by documentary evidence. The only documentary evidence produced by the Defendant is a bank statement showing large number of transactions into and out of the Defendant’s account.  It does not show what the transactions were for.  He criticised the lack of evidence such as business contract, licences and tax documents.  On the other hand, Mr Wong argues that such documents are not to be expected from a business of that nature.  In my view, the Defendant has been extremely economical with documentary evidence.   On the Defendant’s case, it is carrying on an unlicensed or “underground” currency exchange business.  While licences and tax documents are not to be expected to be available from such business, there is no reason why other business records which are usually kept in the course of business are not kept or produced.  I remain sceptical about the total lack of business records such as contracts, invoices, receipts, etc. Even if these are not kept because of the illegal nature of the business, documents such as client’s instructions, ledgers, contract notes or notes of agreement as to price and size of the transaction for internal accounting purpose should have been kept. Some of these records should at least be kept in electronic form if not by way of hard copy.  If such records are not kept, how could the Defendant follow up with its transactions and keep track of its profit and loss?  This is particularly incredible in view of the size of the transactions, which is in the tune of tens of millions of dollars a day.  Mr Chow also commented on Fang’s credibility.  Fang’s assertion that the Defendant does not carry on other business in Hong Kong is inconsistent with her affirmation revealing substantial amount of securities held in the Defendant’s bank account.  On the other hand, the bank statement is a contemporaneous record.  It showed very substantial transactions in the Defendant’s bank account, which is consistent with its case of being a currency exchange merchant.  All in all, while remaining sceptical about the Defendant’s evidence, I accept that the Defendant has been carrying on an “underground” currency exchange business.     

Whether the receipt and payment out were in the normal course of the Defendant’s business

18.  According to Fang, one of the Defendant’s salesmen, Jiang Haihang (“Jiang”) received telephone instruction from a client called Ye Zhaowen (“Ye”) to convert HK$15 million into Renminbi to be deposited into the account of Hu Yue (“Hu”) in Shenzhen.  The Defendant knows this client and had done several transactions with him before.  Jiang and Ye agreed to the exchange rate of 0.821.  The amount of Renminbi to be deposited into Hu’s bank account was ¥12,315,000.  Then Jiang received four text messages showing four payments into the Defendant’s account in the sums of HK$14,999,805, which was short of $195. The Defendant waived the difference and caused Wang Weiping and Wang Weixuan (collectively, the “Wangs”) each to transfer two sums totalling ¥12,315,000 into the bank account of Hu in Shenzhen.

19.  Mr Wong submits that these four text messages show the four transfers made by the Wong, Zhao and the Plaintiff of the total sum of HK$15,000,000.  He relies, in particular, on the last transaction which, according to documents produced by the Plaintiff, was the transfer of the sum of HK$700,000 by Wong effected at 15:25 hours.  Mr Wong argues that this transfer was late and the Defendant could only remit the sum on the following day as evidenced by a transfer slip dated 25 September 2015 at 15:25 hours from the bank account of Wang Weixuan.  Mr Wong therefore submits that these text messages together with the documents from the Plaintiff are proof that the receipt and payment by the Defendant was in the ordinary course of the Defendant’s currency exchange business, and that the Defendant was a bona fide recipient and had genuinely transferred the funds received to Hu. Hence, the Defendant had changed his position and had not been unjustly enriched.

20.  Mr Chow criticises the text messages as illegible screen captures of messages showing documents of transfer of funds into the Defendant’s account.  It is impossible to identify from those screen captures the date, the sender or the recipient of these messages.  There is no reference in the screen captures of what the transactions were.  He also submits that the total amount in Renminbi calculated at the rate of 0.821 does not tally with the amount in Hong Kong dollars deposited into the Defendant’s account.  He submits that the transfer by the Wangs to Hu’s bank account were just random transfers involving completely unknown and unexplained entities foreign to these proceedings which do not tally with or add  up to the sum of HK$15,000,000.   

21.  Although the Defendant’s solicitors had been very casual in the preparation of the Defendant’s documents, Mr Wong’s criticism is not justified as the screen captures are same as the text messages produced by the Plaintiff.  As for the difference between the total amount in Renminbi transferred to Hu’s account and the amount in Hong Kong dollars deposited into the Defendant’s account, it was only HK$195.  This was most probably due to deduction of bank charges by the transferor bank.  In view of the size of the transaction, it was reasonable for the Defendant to waive the difference.  I consider Mr Chow criticism unfounded.  I find the transfers by the Wangs are referable to the receipt of HK$15,000,000 by the Defendant.

22.  However, this finding and my earlier finding that the Defendant was carrying on an “underground” currency exchange business do not necessarily lead to the conclusion that the Defendant had not been unjustly enriched.  It could have received the funds in the normal course of its business and transferred them to Hu in the normal course of its business, but otherwise than for the purpose of paying them over according to the instruction of Ye.  It is all a matter of fact depending on the court’s finding of credibility of Defendant’s evidence.  Without proper business record, I cannot be sure that there were such instructions from Ye, that there were instructions to pay the funds over to Hu, that the payments by the Wangs were in relation to those instructions.  The payments to Hu could well have been payment to the Defendant’s pool of funds for its business.  I make no secret that I have serious doubt on the credibility of the Defendant’s evidence, not because it is carrying on an “underground” business, but because of the economy of its evidence.  I must also say from the start that given the illegal nature of the Defendant’s business, I am fully aware of its difficulties and constraints.  I am particularly accommodating and relaxed in my approach in assessing the Defendant’s evidence.  But the Defendant simply failed to produce adequate credible evidence to support its defence that the funds were received with specific instructions to transfer them to the account of Hu and were so transferred pursuant to those instructions in the normal course of its business .

23.  To start with, the principal witness in this case is Jiang, if not Ye.  Given the criminality attached to the transfer of funds by the kidnappers, it is understandable that the Defendant may have difficulties in securing Ye’s cooperation in giving evidence.  But that does not justify the Defendant’s economy with its evidence.  There is no reason why the Defendant did not obtain an affirmation from Jiang to give first hand information about his dealing with Ye in this transaction and in the past transactions.  This is particularly important as the Defendant portrait Ye as a known client who had transactions with the Defendant in the past for the purpose of boosting its case of receipt in the normal course of business.  But there is a total absence of evidence as to who Ye is, his whereabouts and means of contact and his past transaction.  Not only is the Defendant hiding Ye from the court, it is also concealing Jiang by producing only an affirmation from the manager asserting hearsay evidence from Jiang.  It is Jiang’s evidence which forms the sole basis of its defence.  If the Defendant chooses to economise its evidence in this way, it cannot complain that the court gives little or no weight to such hearsay evidence, particularly as it bears the burden of proof.

24.  No documentary evidence is produced in respect of the present transaction or the past transactions which the Defendant asserted it had with Ye.  In answer to my query, Mr Wong replies that there was no documentary evidence for this sort of business as the transactions were carried out on the strength of telephone conversations.  I find that utterly unacceptable.  As I have said, even though the Defendant is carrying on an “underground” business, it must at least have kept some internal records, written or electronic, to record its transactions for its business purpose, such as calculating its profit and loss, payment of commission, following up of its transactions and fund flows.  The Defendant is carrying on transactions of HK$190 million a day.  It is virtually impossible that it could manage its business without any written record of its business transactions.  What are glaringly missing are the bookkeeping entries recording the details of the transactions and acknowledgment of receipt from Hu.  The present transaction was in the tune of HK$15,000,000.  It is unthinkable that the payment out to Hu could be as simple and casual as four bank transfers by the Wangs without any evidence of receipt from Hu.  

25.  Though less critical but not at all unimportant is the absence of evidence from the Wangs about the reason for their transfer of funds to Hu.  There is also no evidence from them as to their past role in the Defendant’s currency exchange business.    

26.  On the state of the evidence, I am not satisfied that the Defendant has discharged the burden of proving its payments to Hu were in the normal course of its “underground” currency exchange business or for the purpose of discharging the obligation for which the funds were received in such a business.  A genuine currency exchange merchant could be liable for money had and received and paid out in the ordinary course of his business, if it was not paid out for the purpose of discharging the obligation for which it was received.  Here, there is no credible evidence of the source of payment in and no credible evidence of payment out and the purpose of the payment out.  The fact that the Defendant is an “underground” currency exchange merchant is neither here nor there.   The defence, though possible, is shadowy at best. 

Conclusion

27.  For the purpose of this application, it is not necessary for the defendant to prove that it will succeed in its defence.  The test at this summary stage is as simple as whether the defendant’s assertions are believable: see Re Safe Rich Industries Ltd[3], per Bokhary JA (as he then was).  The threshold is not high.  The defendant need not present all the evidence it intends to adduce at trial, but must adduce such evidence as to make the defence, not only arguable, but believable.  If there is something suspicious in the defendant’s mode of presenting his case, or the court is left with a real doubt about the defendant’s good faith, it is appropriate to grant conditional leave to defend: see Lloyd’s Banking Co v Ogle[4], per Bramwell B; and Fieldrank Ltd v E Stein[5] in which the English Court of Appeal restored the dicta of Bramwell B.

28.  On the evidence before me, I am satisfied that the Plaintiff has proved her case of restitution but not satisfied that the Defendant has proved it has a credible defence of change of position.  Having found it credible that the Defendant is running an “underground” foreign exchange business, it would not be difficult to find its defence of receipt and payment out in its ordinary course of business and change of position arguable.   However, I find it extraordinarily remarkable that the Defendant would have kept no record whatever of the transaction by saying that as an “underground” business it has no such record.  I also find it extraordinary for the Defendant not to call evidence from Jiang and to build two firewalls around Ye, whom it asserted is a known client with whom it had business transactions before.  If that is the way it sought to protect its staff and client, it cannot complain that the court finds its defence suspicious and entertains real doubt about its good faith.  This may well be due to neglect of its solicitors in economising the evidence, but the result is that the Defendant has only been able to show, at best, a shadowy defence.   Perhaps, it may succeed on trial if Jiang or Ye will be called and the case properly prepared with adequate documentary evidence.  But, on the evidence as it now stands, the defence is shadowy and the proper order to make is to grant conditional leave to defend. 

29.  Having indicated my intention to grant conditional leave on payment of the full amount of claim, I enquired from counsel about the appropriate condition to be ordered.  Mr Wong made no submission that the Defendant would be unable to pay the full judgment sum into court.   The discussion only centred around discharging the Mareva injunction to enable the payment to be made.  Mr Wong only asked for 28 days to pay.  Accordingly, I make an order granting the Defendant leave to defend on condition that it pays into court the sum of HK$15,000,000 within 28 days.  I also order that the costs of the application be in the cause.