THE YERRID LAW FIRM v. QIANSBAIZI TRADING LTD AND ANOTHER

HCA 2271/2019

[2021] HKCFI 620

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2271 OF 2019

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D E C I S I O N

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Introduction

1.  This is the 2^nd Defendant (“D2”)’s appeal against the Master’s decision dated 14 October 2020 whereby she:

(a)  dismissed D2’s application to set aside the following default judgment entered against it on 20 January 2020:

“The 2^nd Defendant do pay the Plaintiff the sum of USD200,000 (or its Hong Kong dollars equivalent at the time of payment) together with interest thereon at the rate of 8.125% per annum from 13 December 2019 to 31 December 2019, at the rate of 8.084% per annum from 1 January 2020 to the date hereof and thereafter at judgment rate until payment; and HK$11545.00 fixed costs.”; and

(b)  ordered that the Garnishee Order to Show Cause dated 13 March 2020 be made absolute with costs of the garnishee proceedings to be retained by the Plaintiff (“P”) out of the money recovered by P under the Garnishee Order Absolute and in priority to the judgment debt.

In this appeal, D2 seeks to set aside the default judgment and the garnishee order unconditionally. Execution of the garnishee order has been stayed pending the determination of this appeal.  It is trite that an appeal to a judge from master in chambers is a hearing de novo.

2.  D2 accepts that the default judgment is regular.  The only issue is whether D2’s intended defence, namely, that it had no knowledge of any fraud and received the money of P merely as receiving agent in the course of normal money remittance service from Hong Kong to the Mainland, has a reasonable prospect of success.

P’s claim

3.  P, a law firm in USA, is the victim of an identity theft fraud, pursuant to which on 28 October 2019, P was deceived into making a payment in the sum of US$2,569,817.95 (“Stolen Monies”) from P’s trust account maintained with The Bank of Tampa in Tampa, Florida, USA.  The Stolen Monies were sent to an account of the 1^st Defendant (“D1”) at China CITIC Bank International Limited (“China Citic Bank”) in Hong Kong.

4.  Part of the Stolen Monies in the sum of US$200,000 were onward transferred to the bank account of D2 at China Citic Bank (a/c no. 744130552701) on 31 October 2019 (“D2’s Account”).  As at 17 December 2019, there were HK$285,627.03 and US$108,409.79 in D2’s Hong Kong dollar and US dollar accounts at China Citic Bank respectively.

5.  P claims that it is entitled to recover the sum of US$200,000 from D2 on the grounds of money had and received, unjust enrichment and constructive trust.

D2’s case

6.  D2’s case is that it had no knowledge about the fraud.  It was operating as a receiving agent for its principal, Fuyau Investment Management (Hong Kong) Co Ltd (“Fuyau”).  Fuyau holds a licence for operating money service under the Anti-Money Laundering and Counter-Terrorist Finance Ordinance (Cap. 615) (“the Ordinance”).  Fuyau used a trade name “Hui’s Brothers Exchange and Remittance Company” (“Hui’s Brothers”). As the receiving agent of Fuyau, D2’s Account was registered as an account used for operating Fuyau’s money service with effect from 12 February 2019.

7.  In the normal course of business of Fuyau, a money exchange and remittance transaction from Hong Kong to the Mainland would be conducted as follows:

(a)  Fuyau would first inform its client the relevant exchange rate for the transaction. Once the client agreed, Fuyau would complete a formed called “Application for Remittance” (滙款申請書);

(b)  Fuyau’s client would pay the amount to be remitted either by cash to Fuyau or bank transfer to the receiving agent of Fuyau;

(c)  After the receipt of funds, Fuyau would arrange for the equivalent amounts in RMB to be transferred from its agents in the Mainland to its client’s designated bank account(s) in the Mainland.

8.  In this case, the sum of US$200,000 was received by D2 in a money exchange and remittance transaction processed by Fuyau as follows:

(a)  On 31 October 2019, D1 submitted 3 Applications for Remittance to Hui’s Brothers to remit a total sum of US$200,000 in 3 tranches (RMB¥300,000, RMB¥200,000 and RMB¥916,000) to the designated accounts of 3 individuals, namely, 張千里 (Zhang Qianli (“Zhang”)), 曾絲慧，岐治國in the Mainland.  The applications were submitted by Zhang at around between 12:15 and 12:20. Zhang was the sole shareholder and director of D1.

(b)  In the Applications, Hui’s Brothers directed D1 to transfer the sum of US$200,000 to D2’s Account.

(c)  On the same day, D1 transferred US$200,000 into D2’s Account.

(d)  After that, D1 arranged, through its agents in the Mainland, namely, 張希霖 (Zhang Xilin), 李宗堅 (Li Zhongjian), payment of the respective sums to the designated accounts of the 3 individuals in the Mainland in accordance with the Applications for Remittance.

Analysis

9.  Under Order 12, rule 9, Rules of the High Court, the Court may, on such terms as it thinks just, set aside or vary any judgment entered in pursuance to this Order.  The relevant principles are well established (see Hong Kong Civil Procedure 2021, vol 1, §§13/9/12-13/9/14 at pp 302-303).  The power to set aside a default judgment which has been entered regularly is discretionary and such power is unconditional.  While the Court should consider various relevant circumstances, the most important consideration is that, generally speaking, the defendant must show a defence which has a reasonable prospect of success.  As held by Godfrey JA in his often-cited judgment in Premier Fashion Wears Ltd v Li Hing Chung [1994] 1 HKC 213 at 219I-220A:

“A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so, he must satisfy the court that his case and the evidence he has adduced in support of it carries some degree of conviction. It seems to me that unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success.”

Accordingly, it is necessary for the Court to form some provisional view of the probable outcome of the action unless such a provisional view cannot be formed without a trial of the facts (L & M Specialist Construction Ltd v Wo Hing Construction Co Ltd [2000] 3 HKC 335 at 339F).  In the last situation, the appropriate test is whether the defence “could well be established”. However, it should be borne in mind that the Court is not supposed to undertake a mini-trial on the affirmation, and must be mindful of the interlocutory nature of the application (Maryo Development Ltd v Tsang Yau May and others, CACV101/2015 (11 January 2016, unreported), §13; Habour Hero Enterprises Ltd v Chau Nung Tai [2018] HKCA 253 at §8).

10.  P contended that D’s alleged defence does not have a real prospect of success.  On the facts, P made various criticisms against the evidence filed by the D2 in its first affirmation made to support its application.

11.  First, P stated that D2 had failed to adduce any documentary evidence to prove the agency relationship between it and Fuyau.  The undated and unsigned form produced by D2 showing the addition of D2’s Account for operating money service does not refer to Fuyau, and there is no evidence that it had been received by the Customs & Excise Department.  In response, D2 produced a complete Form 6 (Notification of Changes in Particulars) (“the Form 6”).  D2 attached a written document dated 12 February 2019 to the Form 6 stating that it allowed Fuyau to use its 4 accounts at China Citic Bank, including D2’s Account, from 12 February 2019 at nil consideration.  D2 also produced an acknowledgement of receipt of the Form 6 by the Customs & Excise Department dated 25 February 2019.

12.  Second, P stated that D2 had failed to adduce any documentary evidence that Hui’s Brother was the trade name of Fuyau.  D2 explained that Hui’s Brothers is, in fact, an alliance formed by about 123 shops which are separate companies one of which is Fuyau; and the most commonly used trade name of members of the alliance is “Huis’ Brothers Exchange and Remittance Company”.  The advantage of the alliance is access to the pool of bank accounts held by different receiving agents of the members ie an operator may “borrow” the account of another operator’s receiving agent to facilitate intra-bank transfer, which would be faster than inter-bank transfer, with the clients.  D2 has also produced another licence of Fuyau which describes the name of its branch office as Hui’s Brothers Money Exchange Company.

13.  Third, P stated that D2 had not explained why Fuyau needed to engage a receiving agent.  But the Form 6 confirms that, for whatever reasons, Fuyau had in fact engaged D2 as its receiving agent by using D2’s accounts for its money service business.

14.  Fourth, P stated that D2 had not explained the following discrepancies.  On Fuyau’s licence, the specified premises are situated at Shop D1, G/F, Chung Wui Apartments, 106-114 Wan Chai Road, Wan Chai, Hong Kong (branch name: Hing Yip Exchange and Remittance Company). On the Applications for Remittance in the name of Hui’s Brother, the address is Shop A, G/F, 82 Lung Sum Avenue, Sheung Shui, New Territories. D2 admitted that it had made a mistake in this respect. The Applications for Remittance were in fact submitted to Wanyuen Investment Development (Hong Kong) Ltd (“Wanyuen”).  Wanyuen is also a member of the alliance.  What happened was that, as D1 intended to transfer funds from its account at China Citic Bank, the back office of the alliance did a matching and “borrowed” D2’s Account (being an account of the receiving agent of a fellow member of the alliance ie Fuyau) in the same bank to facilitate an intra-bank transfer under the arrangement described above.  Wanyuen’s licence for operating money service states that its specified premises are situated at Shop A, G/F, 82 Lung Sum Avenue, Sheung Shui, New Territories with the branch name “Hui’s Brothers Exchange and Remittance Company”, which match the particulars set out in the Applications for Remittance.

15.  Fifth, P stated that D2 had not conducted any due diligence exercise against Zhang to confirm his identity as representative of D1.  D2 replied that Wanyuen had conducted due diligence by obtaining Zhang’s Hong Kong Identity Card, Visa Permit, Exit-Entry for Travelling to and From Hong Kong and Macao; the business registration certificate of D1; the Certificate of Incorporation and the Incorporation Form of D1.

16.  Sixth, P stated that D2 had not explained why Fuyau had to engage two agents in the Mainland to transfer the sums to the designated accounts of the 3 individuals in the Mainland. P also stated the 3 Mainland bank transfer slips were not dated, and it is unclear whether they were contemporaneous documents.  In response, D2 produced the printed bank account transaction records of the Mainland agents. They show that, on 31 October 2019, Li Zhongjian transferred RMB¥200,000 to曾絲慧 leaving a balance of RMB¥46,812, which was insufficient to complete the two remaining transfers.  Hence, according to the bank records of Zhang Xilin ie the second agent, on the same day, he transferred RMB¥916,000 to岐治國 and RMB¥300,000 to Zhang.

17.  D2 also pointed out that its accounts at China Citic Bank including D2’s Account had been frozen since about 14 November 2019 but the bank refused to provide any reason. Hence, on 15 January 2020, it instructed solicitors to make enquiries with the bank in January 2020.  In reply, on 17 January 2020, China Citic Bank asked D2’s solicitors to contact the police.  D2 claimed that it only learnt about these proceedings when it received the Court’s letter dated 28 April 2020 about the garnishee application.  D2 took out the application to set aside the default judgment on 6 May 2020.

18.  In view of the supplemental evidence filed by D2 in response to P’s criticisms, I am satisfied that D2 has produced credible evidence to support its case on the primary facts.

19.  At this hearing, P argues that, first, D2 has not adduced any evidence that it had transferred out any part of the US$200,000 which it had received from D1; and hence, there was no change of position.  D2 replies by relying on the principles of ministerial receipt as set out in Goff & Jones, The Law of Unjust Enrichment (9^th edn), where the authors state in §28-02 at p 807:

“On another view, which we prefer, an agent who receives a benefit for which he must account to his principal should be able to resist a claim in unjust enrichment whether or not he pays the value of the benefit to his principal… because his obligation to account means that he never takes the value of the benefit for himself, and that the principal alone is enriched by the transaction.”

In this case, D2 merely received the sum of US$200,000 as the receiving agent for Fuyau or Wanyuen.  There is no suggestion that D2 was entitled to keep any part of this sum in its own right.  For the present purpose, I accept that this is an argument with a real prospect of success.  But this is not the end of the matter.

20.  More importantly, at this hearing, P raises an argument which was not run before the Master.  It contends that D2 cannot rely on the defence of change of position, bona fide purchaser for value without notice and ministerial receipt for the follow reasons:

(a)  It is illegal for D2 to receive the funds on behalf of Wanyuen. It was not Wanyuen’s agent. The mere fact that Fuyau and Wanyuen belonged to the same alliance does not give D2 any right to receive the funds.

(b)  There is no evidence that the Customs & Excise Department had accepted the Form 6.  Even if it had, D2 was at most Fuyau’s agent.

(c)  D2 did not retain control of D2’s Account and allowed it to be used by Fuyau.  It did not carry out any due diligence in relation to D1 and merely relied on Wanyuen.

(d)  The due diligence performed by Wanyuen was incomplete and unsatisfactory, in particular, it did not make any inquiries about the source of the funds.

(e)  D2’s receipt of the funds from D1 was carried out in an unlawful or illegal manner in the course of Wanyuen’s money service.

(f)  The breach of the customer due diligence requirements cannot be said to be so minor to be ignored on the de minimis principle, and resulted in the rapid and successive transfer of the funds by D1 from Hong Kong to the Mainland.

(g)  D2 has failed to produce sufficient evidence of a causal link between its receipt of the funds and its change of position of such quality as would entitle it to set aside the default judgment.  In particular, the documents produced by D2 do not establish a complete chain showing the flow of funds.

(h)  D2 did not act in good faith. In view of the illegality of D2’s receipt of the funds on behalf of Wanyuen, D2 failed to act in a commercially acceptable way and it would be inequitable, unconscionable or unjust to allow D2 to deny restitution to P.

21.  To support its argument, P cites the judgment of Chow J in Arrow ECS Norway AS v M Yang Trading Ltd and others [2018] HKCFI 975 in which he applied the principles propounded in Barros Mattos Junior v MacDaniles Ltd [2005] 1 WLR 247.  The learned judge held at §§24-29 that an innocent recipient of stolen money could not rely on the defence of change of position where that change was regarded by the court as wrongful, and that if the recipient’s actions of changing position were treated as illegal the court could not take them into account and had no discretion to do so unless the illegality was so minor as to be ignored on the de minimis principle.  In that case, some of the recipients dealt with the funds in question in the course of their operation of unlicensed, and therefore, illegal money service businesses; and some of the transfers occurred in the course of money change business which were being carried out in an unlawful or illegal manner (ie failure to comply with the raft of customer due diligence requirements imposed by paragraphs 2, 2, 8, 9 and 13 of Schedule 2 to the Ordinance).

22.  D2 submits that the facts of Arrow ECS Norway AS are distinguishable from the facts of this case. I agree that each case must depend on its own facts.  However, D2 has not challenged the correctness of the legal principles propounded in that case.

23.  Returning to the facts of this case, the short and simple, but crucial, point is that D2 was not a receiving agent of Wanyuen.  Under the Ordinance, it is clear and cannot be disputed that a money service operator may only use specific accounts reported to and approved by the Customs & Excise Department for its business.  This is why a licensee must report any addition of bank account for such use by submitting a Form 6.  There is no suggestion, let alone evidence, that Wanyuen had obtained any approval from the Customs & Excise Department to use D2’s Account for operating its money service.  There is no evidence that D2’s Account was included in Wanyuen’s application for a money service operator licence in the first place.  There is also no evidence that Wanyuen had notified the Customs & Excuse Department that D2’s Account had been added as an account used for operating Wanyuen’s money service by completing a Form 6.  Under section 40 of the Ordinance, a licensee must report any changes in particulars to the Commissioner of the Customs and Excise in writing within one month beginning on the date on which the change takes place.  Such changes include the addition of bank account used for operating money service.  Breach of this requirement constitutes a criminal offence.  In practice, if Wanyuen was entitled to use D2’s Account, it would not have needed to “borrow” the use of D2’s Account from Fuyau.

24.  D2 submits that s.40 of the Ordinance only imposes an obligation on the licensee ie Wanyuen but not D2. This is correct but has missed the point.  The legal principles propounded by Chow J apply to an innocent recipient of stolen money.  What is critical is that the innocent recipient received the money as a result of some illegal activity.  Here, it was unlawful for Wanyuen to use D2’s Account to operate its money service business; and D2 received the sum of US$200,000 as a result of such unlawful act.  D2 has no valid answer to this point. In the circumstances, I take the view that D2 has failed to show any defence with a reasonable prospect of success.

25.  P also complains that there was a breach of s.15 of Schedule 2 of the Ordinance in that insufficient due diligence measures had been taken out by Wanyuen, in particular, in relation to D1’s source of funds.  I am not sure whether this statutory provision applied to this case.  It is unnecessary for me to consider this point further in view of what I have already concluded.

Conclusion and order

26.  For the above reasons, D2’s appeal is dismissed with costs to be taxed if not agreed. The stay of execution of the garnishee order is also lifted.