HEITKAMP & THUMANN KG v. LIVING PROFIT TRADING DEVELOP LTD AND OTHERS

HCA 151/2017

[2018] HKCFI [1006]

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 151 OF 2017

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DECISION

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I. PLAINTIFF’S CLAIM

1.  The plaintiff (“P”) was/is a company incorporated in Germany that carried on the business of manufacturing battery cans and inhaler cans/ actuators. P claimed it had no business dealings with any of the 1^st, 2^nd and 3^rd defendants (“D1”, “D2” and “D3”, collectively “Ds”).

2.  P claimed it was fraudulently deceived into believing money to be transferred to bank account no 5xxxxxxxxx8 of Hen Yue Trade Limited (“Hen Yue”)[1] held with Standard Chartered Bank (“SCB”) in Hong Kong (“Hen Yue Account”) was part of a highly confidential takeover (“Email Fraud”):

(a)	On 9 May 2016, P’s Head of Group Accounting and Taxes Nicole Kayser (“Kayser”) corresponded with an individual purporting to be P’s Chief Executive Officer and General Partner Christian Diemer (“Imposter”). At 10:34am, Kayser received an email from the Imposter using an email account similar to that of Christian Diemer (“Diemer”) and stating he intended to allocate an important task to Kayser with a Dr Wagner (“Wagner”) of Messrs Bracewell & Giuliani LLP who would assist P in the matter. At 12:04pm, Kayser received another email from the Imposter purporting to be Diemer stating (i) P was preparing to take over the majority of shares in a logistics company, (ii) this transaction had to remain confidential until the end of next week, (iii) P’s interests would be supported by Wagner, and (iv) the matter could only be discussed with Diemer directly through email to comply with guidelines set by the German Federal Financial Supervisory Authority. At 12:15pm, Kayser replied she would keep the information confidential. At 12:40pm, the Imposter purporting to be Diemer asked Kayser to provide P’s bank details to Wagner by email for preparation of the necessary contractual documentation, and stated it might be necessary for bank transfer of the pre-payment to be completed on even date.
(b)	On 11 July 2016, at 10:48am the Imposter purporting to be Diemer enquired whether Wagner (then of Messrs Mayer Brown International LLP) had contacted Kayser, but Kayser replied in the negative at 11:16am. At 12:17pm, the Imposter purporting to be Diemer advised they were preparing to proceed with an acquisition, and reiterated the need to keep the entire project confidential by making all communications by email. At 1:48pm, the Imposter purporting to be Diemer stated the pre-payment had to be made, and asked Kayser to check the available balance in P’s bank accounts and the deadline for providing payment instructions to the relevant bank. At 2:17pm, Kayser replied to the Imposter P had €4,000,000 at Commerzbank and €20,500,000 at Landesbank Baden-Wuerttemberg and Westdeutsche Genossenschafts Zentralbank, and advised the Imposter all payment instructions for overseas and domestic payments had to be given to the bank by 2pm and 3pm respectively.
(c)	On 12 July 2016, the Imposter purporting to be Diemer emailed to Kayser a half-completed payment form (“1st Payment Instruction Form”) setting out the requested transfer of €3,760,900 and the details of the Hen Yue Account (recipient), and purporting to bear the signatures of Diemer and P’s Chief Financial Officer Harald Langerbeins (“Langerbeins”). In such email, the Imposter purporting to be Diemer instructed Kayser to complete P’s bank details and to pass the 1st Payment Instruction Form to the bank. At about 11:30am, Kayser attended Commerzbank with the completed 1st Payment Instruction Form, and transferred €3,760,900 (“Defrauded Sum”) from P’s account no 4xx-xxx-xx0 with Commerzbank to the Hen Yue Account.
(d)	On 13 July 2016, due to the Imposter’s further requests for additional transfers of funds, Kayser suspected possible fraud and contacted the real Diemer who confirmed he had never sent the aforesaid emails to her whereupon P discovered the fraudulent transfer of the Defrauded Sum (“Email Fraud”). On the same day, the Imposter sent 2 further half-completed payment forms, but they were not implemented. Also on the same day, P contacted Commerzbank in Germany, interviewed and obtained a statement from Kayser, and reported the matter to the German police.
(e)	On 15 July 2016, P reported the matter to the Hong Kong police, and contacted SCB’s Financial Crime Risk Department.

3.  On 18 July 2016, P obtained an ex parte injunction order against Hen Yue in Intended Action No 86/2016 (later HCA1873/2016 commenced on the same day) restraining Hen Yue from dealing with, disposing of or removing from Hong Kong assets up to the value €3,760,900. Such ex parte injunction order was continued on inter partes basis on 22 July 2016. P obtained default judgment against Hen Yue on 23 August 2016. Pursuant to a garnishee order absolute dated 1 November 2016, P recovered HK$8,776.80 from the Hen Yue Account.

4.  P claimed it was the beneficial owner of the Defrauded Sum and its traceable proceeds, which were held on constructive trust in its favour due to (a) the fraudulent transfer of the Defrauded Sum to the Hen Yue Account, (b) Hen Yue’s knowing, unconscious and dishonest receipt of such sum and/or (c) fraudulent and untrue misrepresentations that P was preparing to take over the majority of shares of a logistics company (which transaction had to be remain confidential) and that the transfer was required by Diemer.

5.  On 28 July 2016, the Hong Kong police informed P’s solicitors the Defrauded Sum in the Hen Yue Account had been exchanged to approximately US$4,150,000, and had been transferred to the following recipients on 13 July 2016:

(a)	US$500,000 by 2 remittances to account no 3xx-xxxxxx-xx3 held by a Hong Kong company Oumeisi Limited (“Oumeisi”) with Hang Seng Bank (“HSB”);
(b)	US$500,000 by 2 remittances to account no 3xx-xxxxxx-xx3 held by a Hong Kong company Bentong Trade Limited (“Bentong”) with HSB;
(c)	US$3,150,000 (“Hen Yue Sum”) by 10 remittances to account no 2xx-xxxxx-xx8 held by a Hong Kong company Pengshunyi Trade Limited (“Pengshunyi”)[2] with Hongkong and Shanghai Banking Corporation (“HSBC”) (“Penhshunyi Account”).

6.  On 28 July 2016, the Hong Kong police further informed P’s solicitors that out of the Hen Yue Sum a total sum of US$2,900,903 (“Pengshunyi Sum”) was further transferred to the following recipients on 13-14 July 2016:

(a)	US$790,000 by 4 remittances to account no 5xx-xxxxxx-xx8 held by a Hong Kong company Haiyun Trade Limited (“Haiyun”)[3] with HSBC (“Haiyun Account”);
(b)	US$200,000 to account no 8xx-xxxxxx-xx8 held by a Hong Kong company Huawenchang HongKong Trade Limited with HSBC;
(c)	US$250,000 to account no 8xx-xxxxxx-xx8 held by a Hong Kong company Mao Hong Da Trading Co Limited with HSBC;
(d)	US$250,000 by 2 remittances to account no 8xx-xxxxxx-xx8 held by a Hong Kong company Welly Smart Trading Limited (“Welly Smart”)[4] with HSBC (“Welly Smart Account”);
(e)	US$1,660,003 by 8 remittances to account no 6xx-xxxxxx-xx8 held by a Hong Kong company Kailaite Technology Co Limited[5] with HSBC (“Kailaite Account”).

7.  On 1 August 2016, P in HCA2006/2016 obtained an ex parte injunction order restraining the 8 companies in paragraphs 5(a)-(c) and 6(a)-(e) above (“8 HK Companies”) from dealing with, disposing of or removing from Hong Kong assets up to the sum of US$4,160,000. Such ex parte injunction order was continued on inter partes basis on 5 August 2016.

8.  On 4 August 2016, the Hong Kong police informed P’s solicitors the 2 sums of US$500,000 each remitted to Oumeisi’s and Bentong’s accounts with HSB referred to in paragraph 5(a)-(b) above were further transferred to the accounts of 5 Hong Kong companies (“5 HK Companies”) on 13-14 July 2016. On 5 August 2016, P in HCA2006/2016 obtained an ex parte injunction order restraining the 5 HK Companies from dealing with, disposing of or removing from Hong Kong assets up to the sum of US$4,160,000. Such ex parte injunction order was continued on inter partes basis on 12 August 2016.

9.  P believed the 8 and 5 HK Companies were all linked to the fraudulent activities of and/or were involved with Hen Yue, and they assisted in the dissipation of funds obtained via the Email Fraud. Of the 8 and 5 HK Companies, only 1 company responded to the proceedings in HCA2006/2016. On 22 September 2016, default judgment was entered against the other companies. Pursuant to a garnishee order absolute dated 18 November 2016 against the 8 HK Companies and 3 of the 5 HK Companies, P recovered a total sum of HK$7,826,673.72 from the garnishee banks (including HK$1,604,036.46 from the Haiyun Account and HK$1,455,887.89 from the Welly Smart Account).

10.  According to paragraphs 51-53 of the affirmation of P’s executive or managing director Dietmar Schmitz (“Schmitz”) filed on 19 January 2017 (“Schmitz 1^st Aff”), HSB and HSBC were required to disclose to P inter alia the source and destination of payments into and out of the bank accounts of the 8 and 5 HK Companies with them pursuant to disclosure orders in HCA2006/2016. When HSB made its first batch of disclosure (mainly bank statements for July/August 2016 and account opening mandates) pursuant to such disclosure order, P discovered there were various withdrawals from the HSB bank accounts of 2 of the 5 HK Companies to other companies. In HCA2698/2016, P obtained an ex parte injunction order against such 3^rd layer recipients, which order was continued and further continued on 22 and 24 October 2016. On 28 November 2016, P obtained default judgment against such 3^rd layer recipients.

11.  On 29 August 2016, HSBC provided the 1^st batch of disclosure (mainly statements for July/August 2016 and account opening mandates) pursuant to the disclosure order granted in HCA2006/2016. On 12 September 2016, P requested disclosure relating to specific transactions identified in the bank statements of various defendants in HCA2006/2016. The Schmitz 1^st Aff claimed that due to HSBC’s delay P did not receive all requested documents until 5 December 2016. From the redacted bank statements and transaction documents disclosed by HSBC, P identified numerous withdrawals from the Haiyun, Welly Smart and Kailaite Accounts, including the following withdrawals made on 13 July 2016:

(a)	from Haiyun Account - US$20,000 was withdrawn and remitted to the bank account held by Living Profit Trading Development Limited (“Living Profit”)[6] with HSBC, and US$270,000 (“Haiyun Sum”) was withdrawn and remitted to D2’s account no 6xx-xxxxxx-xx8 with HSBC (“D2 Account”);
(b)	from Welly Smart Account - US$500,000 and HK$1,628,700 were withdrawn and remitted to Living Profit’s account with HSBC, and US$230,000 (“Welly Smart Sum”) was withdrawn and remitted to the D2 Account.

12.  P claimed that upon the above chronology, it appeared:

(a)	at/about the time Hen Yue received the Defrauded Sum from P, Hen Yue transferred it to various recipients on 13 July 2016;
(b)	after or shortly before/about the time Pengshunyi received the Hen Yue Sum from Hen Yue, Pengshunyi transferred significant sums to various recipients on 13-14 July 2016;
(c)	after or shortly before/about the time Haiyun and Welly Smart received part of Pengshunyi Sum, Haiyun and Welly Smart transferred the Haiyun and Welly Smart Sums to D2 on 13 July 2016;
(d)	after D2 received the Haiyun and Welly Smart Sums, there were a series of withdrawals from but no deposit into the D2 Account until 18 January 2017.

13.  P claimed the Hen Yue and Pengshunyi Sums formed part of and/or were traceable proceeds of the Defrauded Sum, and there was coordination between the depletion of the trust fund (ie the Defrauded Sum or its traceable proceeds) and the transfer of funds (subject of P’s tracing claim) such as to warrant attribution of the value of the transferred funds to misuse of the trust fund (ie the Defrauded Sum or its traceable proceeds) (and insofar as transfers of the Haiyun and Welly Smart Sums to the D2 Account were from funds received from Pengshunyi, P would (if necessary) rely on the doctrine of “backward tracing” to establish such coordination). On such basis, P claimed it was/is entitled to trace and claim the Defrauded Sum or any traceable proceeds (including the Haiyun and Welly Smart Sums) thereof from direct or indirect recipients.

14.  Further or alternatively, P claimed it would be unconscionable for inter alia Hen Yue, Pengshunyi, Haiyun, Welly Smart and/or D2[7] to assert any direct beneficial interest in the Defrauded Sum or any proceeds thereof, and further claimed they held the Defrauded Sum or its traceable proceeds (ie the funds they received including the Haiyun and Welly Smart Sums) on trust for P.

15.  P contended it might be inferred (a) D2 knew or turned a blind eye to the fact that transfer of the Haiyun and Welly Smart Sums belonging to P to the D2 Account had no legitimate commercial reason or justification, (b) D2 knowingly dealt with and/or received the Haiyun and Welly Smart Sums in a wholly unconscionable manner, and (c) at all material times D2 was a constructive trustee thereof, so D2 knew or turned a blind eye to the fact she was not entitled to any sum from P, and the Defrauded Sum was transferred in breach of trust.

16.  P also alleged (a) D2 dishonestly assisted in the breach of trust by Hen Yue, Pengshunyi, Haiyun and Welly Smart, (b) P’s effort to trace the Defrauded Sum had been frustrated or made complicated by D2’s assistance/receipt of the Haiyun and Welly Smart Sums and by transfers of substantial sums from the D2 Account after receipt of the Haiyun and Welly Smart Sums, and (c) D2’s knowledge was such as to render her conduct contrary to normally acceptable standards of honest conduct.

II.  PROCEEDINGS

17.  On 19 January 2017, P commenced the present action against Ds, and applied for an ex parte injunction order with the support of the Schmitz 1^st Aff. Yau J granted an ex parte injunction order against Ds whereby inter alia D2 was restrained from dealing with or disposing of its assets representing any part of US$520,000 or HK$ equivalent transferred to the D2 Account,[8] or removing from Hong Kong or disposing of, dealing with or diminishing the value of any of its assets up to US$520,000 or HK$ equivalent[9] (“Ex Parte Order”). Yau J also granted a disclosure order against Ds (ie paragraphs (8)-(9) of the Ex Parte Order, “Disclosure Order”) and a disclosure order against HSBC (“HSBC Disclosure Order”).

18.  On 20 January 2017, P filed an inter partes summons for continuation of the Ex Parte Order until further order with liberty for Ds to apply to discharge or vary the Ex Parte Order upon notice to P’s solicitors.

19.  P served the Writ of Summons, Ex Parte Order, Schmitz 1^st Aff, P’s skeleton submissions and list of authorities, and the aforesaid inter partes summons on D2 by leaving them c/o HSBC in Hong Kong.

20.  On 27 January 2017, L Chan J amended the Ex Parte Order (“Amended Ex Parte Order”), and continued the same until judgment or further order with liberty for Ds to apply to discharge or vary the injunction order upon notice to P’s solicitors (“Inter Partes Order”).

21.  On 27 February 2017, P entered default judgment against D1 and D3. On 20 March 2017, Master S Lo granted a garnishee order to show cause against HSBC as garnishee in respect of inter alia the judgment debt due to D1. Such application for garnishee order nisi was supported by Schmitz’s 2^nd affirmation filed on 16 March 2017 (“Schmitz 2^nd Aff”). On 18 April 2017, HSBC as garnishee filed its affirmation setting out the net balances in D1’s various accounts with HSBC. On 27 April 2017, I granted a garnishee order absolute to vary the Inter Partes Order so as to enable HSBC (garnishee) to pay P the debt due from HSBC to D1 or so much as might be sufficient to satisfy the judgment sum against D1 with costs.

22.  Pursuant to the HSBC Disclosure Order, on 21 February 2017[10] HSBC provided the identity documents and bank statements of the D2 Account from July 2016 to January 2017 that gave an address in Beijing, Mainland China for D2. On 26 April 2017, the Writ of Summons was amended without leave to give the Chinese name of D2 and her address in Beijing, Mainland China. On 27 April 2017, P filed Schmitz’s 3^rd affirmation (“Schmitz 3^rd Aff”) in support of its application for leave to issue/serve a Concurrent Amended Writ of Summons, the Amended Ex Parte Order and Inter Partes Order on D2 outside jurisdiction.

23.  On 22 May 2017, D2’s solicitors filed Notice to Act. On 16 August 2017, P filed the affirmation of its solicitor Frank Szeto (“Szeto”) in support of its application to re-amend the Amended Writ of Summons to give the correct address of D2 in Beijing, Mainland China and to serve the same on D2’s solicitors. On 24 August 2017, Master Hui granted leave for P to re-amend the Amended Writ of Summons. On 29 August 2017, P filed the Re-Amended Writ of Summons to clarify D2’s address in Beijing, Mainland China.

24.  On 31 August 2017, D2 filed a summons to discharge the Ex Parte, Amended Ex parte and Inter Partes Orders (collectively, “Injunction Order”[11]) (“D2 1^st Summons”) on the grounds that (a) P did not have any good arguable case and/or (b) there was no real risk of dissipation of assets, or to vary the Injunction Order by reducing the monetary limit of assets frozen thereunder to US$250,000. On the same day, D2 filed her affirmation (“D2 1^st Aff”) and the affirmation of her husband Wang Zhe (“Wang”) (“Wang Aff”) in support of the D2 1^st Summons.

25.  On 11 September 2017, D2 filed acknowledgment of service to give notice of intention to defend.

26.  On 19 September 2017, D2 filed a summons for deletion of or alternatively stay of the Disclosure Order (ie paragraphs (8)-(9) of the Amended Ex Parte Order that was continued by the Inter Partes Order) (“D2 2^nd Summons”). On the same day, D2 filed the affirmation of her solicitor Ching King Tat (“Ching Aff”) in support of the D2 2^nd Summons. The Ching Aff disclosed the then bank balance of the D2 Account was US$521,192.79 (which just exceeded the sum that was frozen by the Injunction Order). On 15 September 2017, Chow J stayed the Disclosure Order pending the determination of the D2 1^st Summons.

27.  In the Statement of Claim filed on 6 November 2017, P claimed D2 was liable to account for the Defrauded Sum, to pay equitable compensation/damages for P’s loss in the sum of €3,760,900 (but credit would be given for the sums P recovered from Hen Yue and other recipients) as a result of D2’s dishonest assistance, and further/alternatively for recovery of US$500,000 on the grounds of knowing receipt, money had and received (ie transfer of the Defrauded Sum due to mistakes of fact or alternatively total failure of consideration for such transfer), unjust enrichment or otherwise by way of restitution.

28.  On 13 November 2017, P filed a summons asking for the following reliefs (“P Summons”):

(a)	the Injunction Order be continued “save to the extent set out below in respect of allowing [D2] to make payment of USD500,000 into court”;
(b)	“[upon] the undertaking of [P] via [its solicitors] to make corresponding payment to Court via the Cashier Order (as defined hereinbelow) within 7 days from the date of receipt from [D2’s solicitors], D2 be directed to pay USD500,000 from [the D2 Account] into the Court by first delivering to [P’s solicitors] a cashier order in the sum of USD500,000 made payable to “Registrar, High Court” (“Cashier Order”) within 14 days from the date of the Order to be made herein”;
(c)	upon payment of the sum of US$500,000 in the manner in (b) above, the Injunction Order be discontinued;
(d)	D2 1st and 2nd Summonses be dismissed;
(e)	the hearing of the D2 1st and 2nd Summonses scheduled on 23 January 2018 be vacated;
(f)	costs of the P Summons and the D2 1st and 2nd Summonses be reserved.

29.  On 14 November 2017, D2 filed a summons to seek inter alia the following reliefs (“D2 3^rd Summons”):

(a)	upon discharge of the Injunction Order P shall forthwith pay D2’s costs occasioned by the Injunction Order to be taxed if not agreed;
(b)	D2 be at liberty to file affidavit evidence on loss and damage occasioned by the Injunction Order within 21 days of the order to be made for the purpose of inquiry of damages to be paid by P to D2 upon P’s undertaking of damages in the Amended Ex Parte Order on a date to be fixed in consultation with counsel’s diaries, reserved for half day hearing with liberty to apply;
(c)	costs of this application be to D2 payable by P forthwith.

30.  On 16 November 2017, DHCJ Sherrington directed that the above reliefs in the D2 3^rd Summons be adjourned to be heard together with the D2 1^st and 2^nd Summonses with costs reserved. On 21 November 2017, I adjourned the P Summons to be heard together with D 1^st and 2^nd Summonses.

31.  On 1 December 2017, D2 filed her Defence denying liability.

32.  On 8 December 2017, P filed Schmitz’s 4^th affirmation (“Schmitz 4^th Aff”) to support the P Summons and to oppose the D2 1^st and 2^nd Summonses. On 3 January 2018, D2 filed her 2^nd affirmation (“D2 2^nd Aff”) in reply.

33.  The hearing of the P Summons and the D2 1^st, 2^nd and 3^rd Summonses came before me on 23 January 2018 (“Hearing”). At the Hearing, I granted the following orders:

(a)	the Disclosure Order against D2 (ie paragraphs (8)-(9) of the Amended Ex Parte Order) be set aside, which disposed of the D2 2nd Summons save for the question of costs;
(b)	without prejudice to the D2 1st and 3rd Summonses, the Injunction Order be varied to the extent that the amount of D2’s assets frozen by such injunction be reduced from US$520,000 to US$500,000;
(c)	P was to file an affirmation to update on the aggregate recoveries it received pursuant to its claims since the filing of the Schmitz 1st Aff.

34.  On 25 January 2018, P filed Szeto’s 3^rd affirmation inter alia as follows:

(a)	Schmitz 1st Aff confirmed that a sum of HK$8,776.80 was recovered in HCA1873/2016 (paragraph 18), and a sum of HK$7,826,673.72 was recovered in HCA2006/2016 (paragraph 41);
(b)	since the Schmitz 1st Aff, P recovered HK$13,539.93 from the 2nd defendant in HCA2698/2016 (Kaidi Stock Co Limited) and USD259,648.40 from D1;
(c)	thus the total amount recovered by P as at 25 January 2018 was HK$7,848,990.45 and US$259,648.40.

35.  At the Hearing, P abandoned the reliefs referred to in paragraph 28(b)-(c) above in respect of the P Summons. Thus, other than the question of costs, the remaining issues under the D2 1^st and 3^rd Summonses before the court were (a) whether the Injunction Order should be discharged or further varied to reduce the sum to be frozen to US$250,000, and (b) if the Injunction Order was to be discharged, what consequential directions should be made. On such remaining issues, Mr Lai, counsel for D2, submitted there were the following sub-issues: (i) whether P obtained the Ex Parte Order by “insufficient disclosure or misrepresentation” so that it should be set aside ex debito justitiae, (ii) whether it would have been obvious to P after the filing of the D2 1^st Aff on 31 August 2017 that the Injunction Order could not be sustained and ought to be forthwith discharged, and (iii) whether as at the Hearing the Injunction Order should be discharged or varied.

36.  At the Hearing, the Schmitz 1^st Aff was placed before this court. Out of abundance of caution, Mr Ng, counsel for P, raised the issue of admissibility of such affirmation that exhibited documents obtained from HSB/HSBC pursuant to disclosure orders made by the courts in other actions (but related to the Email Fraud and Defrauded Sum). Mr Ng urged that such documents were admissible, and Mr Lai took no issue on admissibility, so it was agreed this court could refer to the Schmitz 1^st Aff and its exhibits as part of the affirmation evidence before the court.

III.  D2’S DEFENCE AND AFFIRMATION EVIDENCE

37.  First, D2 claimed that even on P’s case, there was prima facie probability and reasonable inference that P’s alleged loss was caused/ occasioned by conspiracy, dishonesty, negligence and/or other default of management by P’s own staff for which P was vicariously liable. D2 claimed these matters were within P’s exclusive knowledge, and she reserved her right to rely on any further fact that might be elicited from interrogatories and/or cross-examination of P’s witnesses at trial. On such basis, it was said P was not entitled to any equitable remedy against D2 as the innocent victim.

38.  D2 next claimed the remittance of the alleged Defrauded Sum to Hen Yue was not a mistake as the relevant bank instruments for such transfer were duly executed by P’s staff and were valid instruments to the bank. It was said at the material time P intended title in the money under such remittance to pass and such title did pass to the beneficiary Hen Yue which would defeat any claim of tracing. Further, insofar as such remittance was induced by fraud or misrepresentation by Hen Yue and other conspirators, or alternatively there was failure of consideration, such remittance was voidable at the instance of P against Hen Yue only, so P’s remedy was confined to recovery of money from Hen Yue and the conspirators which would not concern D2. D2 claimed P did not come to court with clean hands, so it was not entitled to any equitable relief.

39.  D2 agreed on 13 July 2016 Haiyun and Welly Smart respectively transferred the Haiyun Sum (US$270,000) and Welly Smart Sum (US$230,000) to the D2 Account, but she was a bona fide purchaser for value without notice as she provided genuine consideration for receipt of such sums, and at the time of receipt she was unaware of the alleged Email Fraud and/or such sums were originally P’s assets:

(a)  D2/Wang were from well-established and respectable Beijing/ Nanjing families. The Li family had substantial businesses with headquarters in Jining, Shangdong and branches in Beijing and Nanjing. The Wang family was based in Nanjing, Jiangsu, and was engaged in hotel, education and Chinese wine trading businesses.

(b)  It was frequent/routine for large amounts to be remitted/ transferred among D2, Wang and their families for legitimate operations of family businesses. The Chinese banking system did not allow cheques on civilian current accounts, so all business transactions were conducted by bank remittances/ transfers. Hence, it was common/open practice for Chinese businessmen in all major cities in Mainland China to approach money brokers for foreign exchange in substantial sums “to avoid the government’s limit of US$50,000 per annum for citizens”.

(c)  In 2014, the Li family business set up a new branch office in Dallas, Texas for expansion into the US market. D2/Wang engaged a prominent Beijing overseas immigration consultancy 北京僑外出國諮詢服務有限公司 (“Qiaowai”) to submit application to the US government for investment immigration. On 18 April 2014, a consultancy agreement was signed with Qiaowai.

(d)  As part of such immigration plan, D2 was required to purchase a US$500,000 membership in the West 57^th Street Funding, LLC scheme (“US Scheme”), so D2 remitted a sum of US$549,050 from the D2 Account to West 57^th Street Funding, LLC for such purpose. On 27 May 2014, D2 obtained a membership certificate of the US Scheme. Subsequently, D2 received a Notice of Action dated 16 November 2015 from the US government’s Department of Homeland Security confirming receipt of her application for immigration and announcing her file was being processed.

(e)  D2/Wang started on their US immigration programme 2 years prior to the events leading to P’s loss with outlay to the tune of US$500,000, so it was mere coincidence when in the course of further progress of their US immigration programme and contemplated property purchase plan that some US currency bought on 13 July 2016 from a money broker might possibly have originated from P’s remittance to fraudsters that D2/Wang were unaware.

(f)  But in the meantime pending processing of D2’s US immigration application, Qiaowai recommended to D2 an available Hungary immigration scheme that could be processed more quickly. As such immigration would give D2 convenience of travel to Hungary and other European countries for business or leisure, D2 found the proposal attractive. On 24 March 2016, a consultancy agreement was signed with Qiaowai for such purpose.

(g)  In May 2016, D2/Wang went to Qiaowai to “辦理匈牙利綠卡” and to purchase the Hungary State Special Debt Fund (“Hungary Fund”). “基於中國外匯管制的相關規例，每人兌換外匯的額度為每年5萬美元或等值貨幣”. As D2/Wang had to pay €300,000 odd to “辦理匈牙利綠卡” and to purchase the Hungary Fund,[12] so Qiaowai’s sales consultant Zhou Haiyan (“Zhou”) introduced D2/Wang to a money exchange broker Hua Kaiqing (“Hua”) who would be able to provide foreign exchange services.

(h)  Wang contacted Hua by Weixin and requested to exchange RMB for €322,800. Hua specified the exchange rate at 7.54, ie RMB2,433,912.[13]At a meeting between Wang and Hua at a coffee shop in Beijing on 26 May 2016, Hua by 5 remittances transferred €322,800[14] to the D2 Account.[15] When Wang asked Hua why there was 5 remittances, Hua replied the remittances were from Euro deposits kept by his various Hong Kong companies. Wang then logged onto the internet banking system of the D2 Account to confirm receipt of the total sum of €322,800, and he then asked his cousin (表弟) Ng Shun Keung (transliteration of 吳新強, “Ng”) to remit RMB2,435,380 from Ng’s bank account no 6xxx-xxxx-xxxx-xxxx-xx6 with Industrial and Commercial Bank of China (“ICBC”) (“Ng Account”) to Hua’s bank account no 6xxx-xxxx-xxxx-xxxx-xx8 with Agricultural Bank of China (“Hua 1^st Account”).[16]  It was later discovered Ng remitted RMB1,468 more than was necessary, so Hua remitted RMB1,468 back to the Ng Account. Thus, Ng remitted RMB2,433,912 to the Hua 1^st Account[17] as consideration for receipt of the total sum of €322,800.

(i)  In the latter half of May 2016, Wang contacted Hua again by Weixin and requested to exchange RMB for €27,200. Hua specified the exchange rate at 7.54, ie RMB205,088.[18] When Wang logged onto the internet banking system of the D2 Account to confirm receipt of €27,200, he then asked Ng to remit RMB205,088 to the Hua 1^st Account.[19] D2/Wang claimed €322,800 and €27,200 (totalling €350,000) acquired from Hua were used for “辦理匈牙利綠卡” and purchase the Hungary Fund.[20]

(j)  In June 2016, D2/Wang intended to make investments in USA, and Wang planned to visit USA and to stay there for 3 months to select investment products and handle relevant procedures. So D2/Wang decided to exchange sufficient US currency for investments/expenses in USA. In June 2016, Wang contacted Hua by Weixin and requested to exchange RMB for US$431,000. Hua specified the exchange rate at 6.68 for US$376,000 (ie RMB2,511,680) and at 6.68 for US$55,000 (ie RMB367,950), totalling RMB2,879,630.[21]

(k)  On 23 June 2016, Wang and Hua met at a coffee shop in Beijing. Hua transferred US$431,000 by 8 remittances[22] to the D2 Account.[23] When Wang asked Hua why such transfer was effected by several remittances, Hua replied that the remittances were from US$ deposits kept by his various Hong Kong companies. Wang then logged onto the internet banking system for the D2 Account to confirm receipt of such sum, and he then transferred RMB2,879,630 from D2’s bank account no 6xxx-xxxx-xxxx-xxxx-xx4 with ICBC to the Hua 1^st Account by 7 remittances[24] as consideration for receipt of the total sum of US$431,000.[25]

(l)  D2 in her Defence claimed that at about this time she/Wang wanted to buy a residential home in Texas, USA as it would be convenient for them when they visited the Dallas branch office and to develop/handle new business in the USA.

(m)  Wang was due to visit USA on 14 July 2016, and thought US$431,000 might not be sufficient for expenses and purchase of decent property in the USA, so he decided to buy more US currency. In the first half of July 2016, Wang liaised with Hua by Weixin for exchange of RMB for US$1,000,000. Hua specified the exchange rate at 6.79, ie RMB6,790,000.[26] On 13 July 2016, Wang and Hua met at a coffee shop in Beijing. Hua transferred US$1,000,000 by 10 remittances[27] into the D2 Account.[28] After Wang logged onto the internet banking system of the D2 Account to confirm receipt of such sum, he then transferred RMB1,833,300 by 2 remittances[29] from his bank account no 6xxxx-xxxx-xxxx-xxx5 with ICBC to Hua’s bank account no 6xxx-xxxx-xxxx-xxxx-xx1 with Agricultural Bank of China (“Hua 2^nd Account”), “並請他表弟汪巍先生從他民生銀行的帳戶6xxx-xxxx-xxxx-xxx4 (下稱“汪巍帳戶”)把4,956,700元人民幣分成5筆匯款(分別為4筆100萬元人民幣及1筆956,700元人民幣)匯到[Hua 2^nd Account]，即合共把679萬元人民幣，匯給[Hua 2^nd Account]，作為兌換100萬美金的代價”.[30]

(n)  D2/Wang claimed the funds for the aforesaid 4 foreign exchange transactions came from their family funds. The Haiyun and Welly Smart Sums were part of Hua’s foreign exchange remittances to the D2 account for which D2/Wang and Wang’s cousin paid full value in RMB. So D2 claimed she had paid consideration for the Haiyun and Welly Smart Sums. But Wang claimed “本人已無法再檢索本人和[Hua]之間的微信記錄，因本人已遺失了當時本人和[Hua]微信聯絡的電話，而本人所知，並無其他辦法檢索以往的微信記錄”.

(o)  D2 claimed she had no business dealings with P and Hen Yue, and no knowledge of and was not involved in the alleged Email Fraud and 8 HK Companies or their directors/staff. Indeed, Hua never mentioned Haiyun or Welly Smart to Wang. Further, D2/Wang did not know the identities of the parties who remitted the various sums that comprised US$1,000,000 into the D2 Account (such identities were not evident from the HSBC bank statements). By 13 July 2016, Wang already had foreign exchange transactions with Hua 3 times on 26 May, 1 June and 23 June 2016 at face-to-face meetings, which went smoothly with no claim by any third party. D2 had no suspicion any of the transfers involved proceeds of fraud when she went through the 4^th transaction on 13 July 2016.

(p)  By reason of the above matters, D2 claimed that the fact she received the Haiyun and Welly Smart Sums did not mean she was involved in the alleged Email Fraud, or that she had any relationship with those who perpetrated such alleged fraud, or that she had helped to dissipate the alleged Defrauded Sum. D2/Wang did not know before receipt of the Haiyun and Welly Smart Sums that they originated from P.

(q)  D2 claimed any legal, equitable, proprietary or personal interest of P in any traceable proceeds of the alleged Defrauded Sum had been extinguished in the foreign exchange transactions with Hua in which D2 through the agency of Wang acted as bona fide purchaser for value without notice of any irregularity, so P had no good arguable case.

40.  D2 claimed the total sum of US$1,000,000 remitted into the D2 Account was progressively utilised in due course for her/Wang’s “US business, immigration and contemplated property purchase purposes”:

(a)	on 19-26 July 2016 there were 8 remittances of US$20,000 each from the D2 Account to Wang’s bank account with JP Morgan Chase Bank NA in San Antonio, Texas;
(b)	on 8-9 August 2016, US$128,000 and US$122,050 were remitted from the D2 Account to Wang’s bank account with East West Bank in Dallas, Texas, which remittances were made by D2 “in the ordinary course of using her own money without knowledge of any question on the origin of the USD funds of Hua”.

41.  D2 claimed that on 18 August 2016 she/Wang entered into a New Home Construction Agreement with Grand Homes 2012, LP to buy a newly built home at 971 Holt Lane, Allen, Texas 75013 at the price of US$625,225, which funds came from the D2 Account. The house was completed and delivered in April 2017.

42.  D2 further claimed she received US$500,000 from Hua on 18 January 2017 in a foreign exchange transaction handled by Wang in Beijing under similar circumstances. Such US$ funds were to cover education/living expenses of Wang’s cousin (daughter of an uncle) who would commence full-time undergraduate study at Cornell University in August 2017.

43.  D2 next denied the Haiyun and Welly Smart Sums could be traced back to the Defrauded Sum. On P’s affirmation evidence, on 12 July 2016 P remitted €3,760,900 (Defrauded Sum) to Hen Yue, on 13 July 2016 Hen Yue remitted US$3,150,000 (Hen Yue Sum) to Pengshunyi, on 13-14 July 2016 Pengshunyi remitted US$790,000 and US$250,000 to Haiyun and Welly Smart respectively, and on 13 July 2016 Haiyun and Well Smart remitted US$270,000 (Haiyun Sum) and US$230,000 (Welly Smart Sum) to the D2 Account. But D2 claimed there was no proper paper trail to evidence the aforesaid transactions:

(a)  The Schmitz 1^st Aff did not disclose bank statements of the accounts of Hen Yue and Pengshunyi so there was nothing to prove the Hen Yue Sum remitted to Pengshunyi was part of the Defrauded Sum.

(b)  D2 claimed P had not shown the Haiyun Sum remitted to the D2 Account all came from Pengshunyi. The bank statements of the Haiyun Account showed there were various deposits/ withdrawals on 13-14 July 2016, including 3 deposits US$250,000, US$250,000 and US$90,000 on 13 July 2016 and a deposit of US$200,000 on 14 July 2016 all from Pengshunyi, totalling US$790,000. Since there was only 1 withdrawal of US$270,000 on 13 July 2016 in the transaction records of the Haiyun Account, it must be the Haiyun Sum that was remitted to the D2 Account. But the transaction records of the Haiyun Account showed that on 13 July 2016 (i) Pengshunyi remitted US$250,000 to Haiyun, (ii) Haiyun remitted US$270,000 to the D2 Account, and (iii) Pengshunyi remitted US$250,000 and US$90,000 to Haiyun:

Transaction Details進支詳情		Deposit存入	Withdrawal提取
DEPOSIT BIB-PENGSHUNYI TRADE LTD	存款	250,000.00
WITHDRAWAL			270,000.00
……
DEPOSIT BIB-PENGSHUNYI TRADE LTD	存款	250,000.00
……
DEPOSIT BIB-PENGSHUNYI TRADE LTD	存款	90,000.00

So D2 claimed the Haiyyn Sum could not have all come from Pengshunyi, and P could at most only say US$250,000 out of US$270,000 came from Pengshunyi.

(c)  D2 claimed P was unable to prove the Welly Smart Sum remitted to the D2 Account all came from Pengshunyi. The bank statement of the Welly Smart Account showed there were various deposits/withdrawals on 13 July 2016, including 2 deposits from Pengshunyi (US$100,000 and US$150,000) totalling US$250,000. Since there was only 1 withdrawal of US$230,000 on 13 July 2016 in the transaction records of the Welly Smart Account, it must be the Welly Smart Sum that was remitted to the D2 Account. The bank statement of the Welly Smart Account showed that on 13 July 2016 (i) Welly Smart remitted US$230,000 to D2 Account,[31] and (ii) Pengshunyi remitted US$100,000 and US$150,000 to Welly Smart:

Transaction Details進支詳情		Deposit存入	Withdrawal提取
DEPOSIT	存款	444,598.06
WITHDRAWAL	提款		230,000.00
DEPOSIT …… DESPOST…… DEPOSIT ……	存款 存款 存款	30,000.00 50,000.00 70,000.00
DEPOSIT BIB-PENGSHUNYI TRADE LTD	存款	100,000.00
DEPOSIT ……	存款	24,000.00
WITHDRAWAL WITHDRAWAL	提款 提款		7.10 147,812.90
DEPOSIT BIB-PENGSHUNYI TRADE LTD	存款	150,000.00
DEPOSIT DEPOSIT ……	存款 存款	62,998.06 248,693.45
WITHDRAWAL WITHDRAWAL WITHDRAWAL WITHDRAWAL WITHDRAWAL	提款 提款 提款 提款 提款		7.10 440,992.90 127,000.00 121,693.00 150,000.00

It appeared the Welly Smart Sum was remitted from the Welly Smart Account to the D2 Account before Welly Smart received the proceeds of the Defrauded Sum (US$100,000 and US$150,000) from Pengshunyi, so it was said the Welly Smart Sum could not have come from Pengshunyi at all. D2 contended the Welly Smart Sum was from Welly Smart’s own monies.

(d)  D2 submitted P should have disclosed these matters to the ex parte judge. But even if the court would not discharge the Injunction Order for such non-disclosure, the monetary limit should be varied to US$250,000.

44.  D2 further pointed out she only received US$230,000 from Welly Smart, but P recovered HK$1,455,887.89 or US$186,652 from Welly Smart, so P’s claim against D2 in respect of the Welly Smart Sum could not have exceeded US$43,348.

45.  D2 noted it appeared P had abandoned its proprietary claim over the Haiyun and Welly Smart Sums as it had entered default judgment against Haiyun and Welly Smart for personal remedies without tracing of assets,[32] and had executed on such default judgment. D2’s solicitors wrote to P’s solicitors on 28 July 2017 for disclosure of the court documents in HCA2006/2016, but P failed to disclose the same.

46.  D2 also complained that despite requests for disclosure of documents provided by HSBC pursuant to the HSBC Disclosure Order, P failed to do so. The D2 2^nd Aff exhibited the bank statements of the D2 Account from April 2016 to September 2017. D2 claimed P should have the bank statements in January 2017 before its application for the Ex Parte Order, but they were still not disclosed.

47.  D2 also complained that the Injunction Order locked up US$500,000 and D2’s other private monies in the D2 Account pending adjudication by the court. D2 denied any actual/pretended risk of dissipation of funds in the D2 Account. D2 suggested in fact the evidence of risk of dissipation was wholly against P. The bank statements of the D2 Account clearly indicated the disputed receipts in the total sum of US$500,000 on 13 July 2016 (ie the Haiyun and Welly Smart Sums) remained idle for half a year up to the time of the Writ of Summons in the present action (ie 19 January 2017) and for another half year until D2 discovered the Injunction Order.

48.  D2 said the D2 Account was opened with HSBC on 24 April 2014 with her maiden home address at Unit 9A, Section 2, Block 1, Madian Guancheng North Garden, Haidian District, Beijing City, which was owned by her parents. It was her home until she married in 2009. In 2011, Wang and D2 bought their own residential property at Unit 702, Section 2, Block 5, Linsui East Road No 2 Mansion, Chaoyang District, Beijing, which had been their home since. In/about 2015, D2’s parents also left the maiden home address and moved to new accommodation. The old property was locked up and left uninhabited. D2 claimed this explained why she was unaware of the grant of the Injunction Order freezing her money in the D2 Account for half a year until she wanted to use her monies in May 2017.

49.  D2 suggested this was conclusive evidence there was never any risk of dissipation of assets, which was in stark contrast to P’s other funds that were remitted into accounts of other parties who typically took flight within a matter of 1-2 days. D2 claimed the fact the disputed monies idled in the D2 Account for the first half year was known to P in January 2017 prior to its application for the Ex Parte Order, and the court was misled into wrongly granting the Ex Parte Order by P’s non-disclosure. D2 therefore claimed she was entitled to have the Injunction Order discharged ex debito justitiae.

50.  On the other hand, P in its Statement of Claim denied D2’s defence that the funds received formed part of an alleged foreign exchange transaction with Hua, and claimed that (a) such alleged transaction was to circumvent the foreign exchange control in PRC, ie the rule that an individual could only exchange foreign currency to the value of US$50,000 annually, (b) D’s own case was that it was Hua and not Haiyun or Welly Smart who was obliged to transfer US$ to D2, and (c) D2’s own case was that she or Wang communicated with Hua by Weixin text, but they were unable to produce the text messages.

51.  The Schmitz 4^th Aff also raised concern over D2’s open admission of her disrespect of the Chinese foreign exchange control laws, and reserved the right to report such conduct to the relevant agencies/ authorities. Schmitz claimed it was for the relevant government authorities in, say, Mainland China to conduct necessary investigation and to implement measure(s) to prosecute any person(s) admittedly involved in activities that contravened the relevant laws and regulations.

52.  But D2 denied any deliberate circumvention of any Chinese foreign exchange law. It was said that while PRC state licensed banks were required by law to limit foreign exchange transactions of individual account holders to not more than US$50,000/year, there was (to D2’s knowledge) no Chinese law that prohibited citizens from going to money brokers to satisfy their foreign exchange needs in excess of the service provided by banks. D2 claimed this practice was fairly open and common to all Chinese business communities in major cities, and even the Chinese government had knowledge of such open operation of money brokers for many years. D2 claimed she had personal knowledge that even senior government officials would go to money brokers to get needed foreign exchange, which was just routine commercial reality in Mainland China.

53.  D2 claimed it lied ill in the mouth of Schmitz being a German national “to pass wanton observations (說三道四) on China’s economic activities which only goes to illustrate that [P’s] entire claim and the application for the Injunction Order against [D2] have absolutely no merit and no legal basis”. D2 claimed the alleged illegality was irrelevant to the issues defined in the pleadings and to any consideration as to whether or not the Injunction Order should have been granted or whether it should be varied or discharged.

54.  But even assuming that buying foreign exchange from money brokers were illegal (which D2 denied), D2 claimed that under the law of illegal contracts in the jurisdiction of Hong Kong courts to which P expressly submitted, illegality only made the contracts unenforceable by the parties, but would not affect their respective property rights. So whilst the court would not assist any party to enforce illegal contract with outstanding obligation or breach remedy, illegality would not affect the passing of title of private property given in exchange by the parties in the transaction. Thus, D2 claimed the issue of illegality was irrelevant to any issue in this action.

IV.  LEGAL PRINCIPLES

(a)  Proprietary injunction

55.  For an interim injunction to protect a claim for trust property, the Amercian Cyanamid principles apply, ie an applicant must show (a) there is a serious question to be tried on the merits of the claims, (b) the balance of convenience is in favour of granting an interlocutory injunction, and (c) it is just and convenient to grant the injunction “although irremediable damage need not necessarily be shown and the court will readily find that the balance of convenience favours the preservation of the fund pending trial. See eg Lewin (supra) at §38-14; A v C [1981] QB 956; CY Foundation Group v Cheng Chee Tock & Ors [2012] 1 HKLRD 532 at §§14, 37”.[33]

56.  As to the substantive merits of the claim, “the court need only be satisfied that the claim “is not frivolous or vexatious, in other words, that there is a serious question to be tried.” (American Cyanamid (supra) at 407). If the opposing party seeks to show there is no serious issue to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out. See eg Yifung Properties Ltd & Ors v Manchester Securities Corp and Ors (unreported) CACV258/2015, 9 September 2016, at §20.”[34]

57.  In Zimmer Sweden AB v KPN Hong Kong Limited & anor,[35] DHCJ Kent Yee concurred with To J’s observations in Falcon Private Bank Ltd v Borry Bernard Edouard Charles Limited & anor[36] that the application does not have to show risk of dissipation of assets:[37]

“…… A claimant’s right to a proprietary injunction is different. It is issued to preserve assets which a claimant has a proprietary claim so that they can be turned over to the claimant if he is successful in the action. A proprietary injunction is easier to obtain and not subject to the usual liberties inserted into Mareva relief and there is no need to prove risk of dissipation. It is a better relief than Mareva injunction, provided that the property has not been dissipated. ……” (my emphasis)

58.  In Samtani v Samtani, DHCJ Au-Yeung (as she then was) summarised what has to be shown for the grant of a preservation order:[38]

(a)	there is property which is bona fide the subject matter of the cause or matter, or as to which any question may arise, which means the plaintiff must demonstrate a proprietary claim on which there is a serious question to be tried;
(b)	something ought to be done for the security of that property, but the court will refuse to grant a preservation order if damages will be an adequate remedy for the plaintiff;
(c)	on the matter of balance of convenience, “[what] is involved is an exercise in salvage, pending and for the purpose of, the ultimate determination. It is, therefore, relevant to consider what will be involved in that determination, and how it relates to the property sought to be preserved, and what justice demands in the way of making an order for the preservation of the property so as to prevent a determination one way or the other proving abortive”.[39]

(b)  Mareva injunction

59.  Generally, for the grant of a Mareva injunction, the plaintiff must give the cross-undertaking as to damages and comply with a strict duty of full and frank disclosure, and must show that (a) he has a good arguable case on the merits, (b) there are assets within the jurisdiction, (c) there is a real risk of dissipation of assets or removal of assets from the jurisdiction, and (d) the balance of convenience is in favour of the grant.[40]

60.  “In applications for Mareva injunctions, the threshold is much higher [than the test of “a serious question to be tried”] and the claimant needs to show “a good arguable case” in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one that the judge believes to have a better than 50% chance of success.”[41] In Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & ors, DHCJ Douglas Lam SC said:

“41. Although a plaintiff may have had at the ex parte stage a good arguable case, the defendant may be able to put up a defence and evidence of sufficient cogency as to “water down” the merits of the claim to an extent that it no longer amounts to a good arguable case (or even a serious issue to be tried). See eg Arrow ECS Norway AS v Xin Cheng Holdings (International) Company Limited (unreported) HCA 239/2016, 12 May 2016 at §§46, 61.

42. That said, the existence of a good arguable defence does not necessarily negate a good arguable case. This was fairly accepted by Ms Lau, as 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 that the plaintiff show that he has a “much better” case or argument than the defendant. See eg Kazakhstan Kagazy plc v Arip [2016] 2 All ER (Comm) 711, CA, at §25.”

V.  DISCUSSION

(a)  P’s causes of action

61.  P’s pleaded causes of action included (a) a proprietary claim of traceable proceeds (US$500,000) of the Defrauded Sum by “backward tracing” such that D2 held such traceable proceeds on trust for P, (b) a claim in personam based on constructive trust and knowing or unconscionable dealing with or receipt of US$500,000 (Haiyun and Welly Smart Sums), (c) claim in personam based on dishonest assistance in breach of trust by Hen Yue, Pengshunyi, Haiyun and Welly Smart in respect of the sum of €3,760,000 (Defrauded Sum), and (d) claim in personam for money had and received and unjust enrichment of US$500,000.

(b)  D2’s miscellaneous defences

62.  D2 raised the following defences in her Defence which could be dealt with shortly: (a) staff conspiracy or fault of P that affected its clean hands status (see paragraph 37 above), and (b) voidable payments due to fraud did not prevent valid payments to banks and innocent parties (see paragraph 38 above).

63.  In respect of the alleged defence in paragraph 62(a) above, Mr Lai submitted P’s staff conspiracy, incompetence and/or negligence were obvious if not patent in the present case since even Diemer was critical of the conduct of Kayser who played a central role in the fraudulent transfer of the Defrauded Sum.[42] But as Mr Ng reminded, D2 in her Defence accepted she was not able to plead any particulars, so the pleaded averment of a prima facie probability and reasonable inference that P’s alleged loss was caused or occasioned by P’s own staff conspiracy, dishonesty, negligence and/or other default of management was nothing more than a bare assertion. Moreover, at the Hearing, Mr Lai conceded that if fraud was involved, the cause of action of the employer as victim against the fraudster would not be circumscribed by staff default/negligence in failing to notice signs/indicia of fraud. In my view, it is not uneasy to understand how an employer’s cause of action for fraud/conspiracy would be diminished by his employee’s involvement in such fraud/conspiracy. After all, when a fraudulent employee who (together with others) perpetrates a fraud/conspiracy against his employer, such employee could hardly be acting within his scope of employment duties vis-à-vis his own employer. Further, it is again not easy to understand the suggestion of vicarious liability on the part of the employer for staff misdemeanour, default and/or negligence when such act/default was not visited on some third party to whom the employer might owe a duty of care but on the employer himself.

64.  In respect of the defence in paragraph 62(b) above, D2 claimed P’s payment to Hen Yue was not a mistake because the relevant bank instruments for transfer of the Defrauded Sum being duly executed by P’s staff were valid instructions to the bank. Mr Lai initially argued the signatures of Diemer and Langerbeins on the 1^st Payment Instruction Form must have been genuine because otherwise P would have sued Commerzbank for payment under forged signatures, but there was simply no evidence of relevant German law and procedure before me. In any event, paragraph 12 of the Schmitz 1^st Aff noted Diemer’s 1^st affirmation filed on 20 July 2016 in HCA1873/2016 (“Diemer 1^st Aff”) confirmed that Diemer “……. did not instruct [Kayser] to make any transfers and that the instructions provided to [Kayser] came from fraudsters”. Paragraphs 5-6 of the Diemer 1^st Aff also made clear that after P discovered the Email Fraud, Diemer and Langerbeins read the email correspondence between Kayser and the Imposter as well as the 1^st Payment Instruction Form, and Diemer adamantly confirmed it was a fraud perpetrated on P, and as Chief Executive Officer he would not be involved in all the technicalities of a payment. The whole tenor of the Diemer 1^st Aff was that the Email Fraud was a scam, and neither he nor Langerbiens had approved any payment instruction.

65.  Mr Lai then tried to argue Kayser believed the signatures on the 1^st Payment Instruction Form were genuine and vouched for them by taking the form to Commerzbank. But the whole purpose of forged signatures was to deceive, and the fact that initially Kayser mistakenly thought they were genuine was neither here nor there. As Mr Ng submitted, P’s case was that the instructions to the bank were tainted by mistakes in the first place. As explained in Goff & Jones, The Law of Unjust Enrichment,[43] there can be mistake even if payment is made electronically or by machines, and “a person who uses an automated process is similarly placed to a person who uses a human agent”. Mr Lai eventually accepted at the Hearing that without cogent evidence to the effect that the signatures on the 1^st Payment Instruction Form were genuine, the line of defence in paragraph 62(b) above could hardly be made out.

(c)  P’s proprietary claim and proprietary injunction

66.  In respect of P’s causes of action referred to in paragraph 61 above, Mr Lai submitted that for the proprietary claim referred to in paragraph 61(a) above, tracing is not a claim or remedy but is “merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing …… does not affect or establish his claim”,[44] and P still had to raise/prove some viable cause of action to make out its proprietary claim. But even if P’s proprietary claim were a viable cause of action as at 19 January 2017 (ie when the Ex Parte Order was granted) capable of supporting an interim proprietary injunction, Mr Lai submitted that with clarification of the fund movements in the Haiyun, Welly Smart and D2 Accounts in paragraph 43 above (which paper trail was not disputed by the time of the Hearing) that was clearly against P, a straightforward application of the first in first out principle under Clayton’s Rule[45] would reduce the traceable amount to US$250,000. But since P recouped about US$186,652 from Welly Smart (see paragraph 44 above), Mr Lai contended P’s ultimate traceable loss/damage was at best only US$43,348, and even then D2’s defence of bona fide purchaser for value without notice of the Email Fraud would put an end to P’s tracing claim.

67.  Mr Ng fairly accepted that on the presently available bank statements and transaction records Haiyun transferred the Haiyun Sum to the D2 Account before it received all remittances from Pengshunyi, and Welly Smart transferred the Welly Smart Sum to the D2 Account before it received any remittance from Pengshunyi (see paragraph 43(b)-(c) above). Nevertheless, Mr Ng argued P had a good arguable proprietary claim against D2 as the Haiyun and Welly Smart Sums (US$500,000) were traceable proceeds of the Defrauded Sum. He suggested the law was more nuanced than suggested by the attractive simplicity of Mr Lai’s submissions referred to in the above paragraph.

68.  In my view, tracing enables a beneficiary to recover trust property that has been misappropriated. Lord Millett in Foskett v McKeown & ors explained as follows:[46]

“A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds everyone who takes the property or its traceable proceeds except a bona fide purchaser for value without notice.”

Thus, the alleged innocence of the recipient will go to the question of whether he is a bona fide purchaser for value and without notice.

69.  Mr Ng referred to Guaranty Bank and Trust Company v ZZZIK Inc Limited[47] in which DHCJ Cooney summarised the legal principles for a proprietary constructive trust claim as follows:

(a)	when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient, so that the money is recoverable and traceable in equity (paragraphs 28-30);
(b)	even if the recipient is not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the money, the defrauded claimant has a tracing remedy, ie the property is held on constructive trust for the claimant (paragraph 32);
(c)	knowledge does not have to be acquired at the time of receipt, but can be acquired subsequently while the money is still in the recipient’s hands (eg the recipient may gain knowledge of the fraud from any injunction order, pleadings and other court documents served on such recipient) (paragraphs 33-34).

In that case, the plaintiff was a victim of an email fraud with the fraudster altering the account details of one of the plaintiff’s customers and instructing the plaintiff’s employee to effect payment transfer to the altered account. Out of such payment, a sum was transferred to the defendant’s account. The learned judge held it was unconscionable for the defendant to retain the funds as (a) there were no dealings between the customer and the defendant and (b) there was no legitimate reason for the defendant to receive the funds from the customer.[48]

70.  Turning to P’s case that the Haiyun and Welly Smart Sums were traceable proceeds of the Defrauded Sum that went through a number of bank accounts, I note Mr Ng relied on the principle of “backward tracing”. Lewin on Trusts[49]explained that when there are evidential difficulties “…… the court may be prepared to draw the inference that a payment into one account is attributable to a previous payment out of another account and therefore traceable where the two payments are of a similar though not identical amount and the time gap between them is reasonably short.” (my emphasis)

71.  In Relfo Limited (in liquidation) v Varsani,[50] the English Court of Appeal held that:

“63. …… monies held on trust can be traced into other assets even if those other assets are passed on before the trust monies are paid to the person transferring them, provided that the person acted on the basis that he would receive reimbursement for the monies he transferred out of the trust funds. The decision in Agip demonstrates that in order to trace money into substitutes it is not necessary that the payments should occur in any particular order, let alone chronological order. …… a person may agree to provide a substitute for a sum of money even before he receives that sum of money. In those circumstances the receipt would postdate the provision of the substitute. What the court has to do is establish whether the likelihood is that monies could have been paid at any relevant point in the chain in exchange for such a promise. ……

64. I further agree …… that there is no logical reason why the substituted product of a claimant’s money cannot be traced through any number of accounts. There is no limit on the number of substitutions that can in theory take place. However, the number of substitutions and the fact that they do not occur in chronological sequence may make it harder to substitute one asset for another.” (my emphasis)

72.  I rely on (but do not repeat here) my discussions in A Co v W Co & ors[51] in respect of Agip (Africa) Ltd v Jackson & ors (paragraphs 55-57) and Relfo Limited (in liquidation) (paragraphs 58-62). Although “backward tracing” was not applied on the facts of A Co, it would be useful to refer to the following passage in Snell’s Equity[52] cited in paragraph 53 of A Co as follows:

“(d) Payment Systems.  Special difficulties may arise where the trustee misapplies the claimant’s money and passes it through a series of bank accounts, each linked by a network of payment systems. The problem may be to identify the funds misapplied at the outset with the funds of similar value deposited in the defendant’s account at the end of the tracing process. The claimant may succeed even without exact proof of each transactional link between himself and the defendant. The inference that the sum in the defendant’s account represents the proceeds of the claimant’s money would be stronger if the trustee has arranged the sequence of payments or if they are part of systemic scheme of laundering funds. The inference may even stand where the sum was paid to the defendant before it was reimbursed by the misapplication from the claimant’s account. Where defendant is a wrongdoer, he cannot defeat the possibility of tracing against him by creating an evidential “black hole” designed to frustrate the claimant’s action against him.” (my emphasis)

73.  The principle of “backward tracing” was recently affirmed in Federal Republic of Brazil & anor v Durant International Corpn & anor.[53] In that case, the plaintiffs (a foreign state and a municipality of that state) sued the defendant companies which were under the practical control of a former mayor of the municipality and/or his son as constructive trustee of monies from bribes paid to the former mayor. The plaintiffs claimed that the US$10.5 million had been paid into an account under the control of the son in the name of C (C Account) between 9 January and 6 February 1998, that from 14 to 23 January 1998 6 payments totalling US$13.1 million were paid from C Account to an account held by the 1^st defendant in Jersey, and that from 22 January to 23 February 1998 4 payments totalling US$13.5 million were paid from the 1^st defendant’s account to an account held by the 2^nd defendant in Jersey. The defendants claimed such deposits were legitimate brokerage commissions, and further claimed the total amount that could be properly traced to them was limited to US$7.5 million since (a) the last 3 payments into the C Account had come after the final payment from the C Account to the 1^st defendant’s account and so could not be traced to the defendants because there was no doctrine of “backward tracing”, and (b) on 2 occasions payments had been made from the C Account to the 1^st defendant’s account of sums which exceeded the maximum which could be said to have come from the earlier bribes and therefore had to come from other sources.

74.  The Royal Court of Jersey concluded that if an account remained in credit during the relevant period and there was no suggestion of an intervening bona fide purchaser for value, a tracing claim could succeed if there was sufficient evidence to establish a clear link between credits and debits to an account, and gave judgment to the plaintiffs, observing that it was the defendants’ own pleaded case that the relevant payments into the 1^st defendant’s account were linked with one another as well as with the payments into the C Account. The Privy Council at pp 312-313 said as follows:

“38. The development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries, makes it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect. If the court is satisfied that the various steps are part of a co-ordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appears in the bank account of an intermediary before a reciprocal credit entry.  …… the availability of equitable remedies ought to depend on the substance of the transaction in question and not upon the strict order in which associated events occur.

……

40. The Board therefore rejects the argument that there can never be backward tracing, or that the court can ever trace the value of an asset whose proceeds are paid into an overdrawn account. But the claimant has to establish a co-ordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund. This is likely to depend on inference from the proved facts, particularly since in many cases the testimony of the trustee, if available, will be of little value.” (my emphasis)

75.  Mr Lai agreed that the principle of “backward tracing” involved questions of mixed law and fact. Indeed, the Privy Council in Federal Republic of Brazil & anor reminded that quite often useful evidence from the defendant will be hard to come by, and often the plaintiff will have to rely on inference from proved facts. In respect of the co-ordination discussed by the Privy Council as applied in the context of the present case, Mr Ng drew attention to the fact that (a) after, shortly before or about the time Pengshunyi received the Defrauded Sum from Hen Yue it transferred significant sums to various parties on 13-14 July 2016, (b) shortly before or about the time Haiyun and Welly Smart received funds from Pengshunyi they transferred significant sums to D2 on 13 July 2016, and (c) after D2 received the Haiyun and Welly Smart Sums there was a series of withdrawals from the D2 Account.

76.  For the Haiyun Sum, the transaction summary of the Haiyun Account showed many deposits and withdrawals on 13 July 2016 (covering 2½ pages of the transaction summary), but out of such many transactions the very transaction after Pengshunyi deposited US$250,000 into the Haiyun Account was the transfer of the Haiyun Sum of US$270,000 to the D2 Account (see paragraph 43(b) above), and after 7 more deposits and 2 withdrawals Pengshunyi deposited another sum of US$250,000 into the Haiyun Account. In my view, the temporal proximity of these transactions that all happened so shortly on the same day demonstrated a good arguable case (let alone a serious question to be tried) supportive of P’s case.

77.  For the Welly Smart Sum, the transaction summary of the Welly Smart Account also showed many deposits and withdrawals on 13 July 2016 (almost 1 page of the transaction summary), but out of such many transactions the Welly Smart Sum ($230,000) was paid out of the Welly Smart Account to the D2 Account, and in the 4^th and 6^th deposits after such withdrawal Pengshunyi paid US$100,000 and US$150,000 into the Welly Smart Account (see paragraph 43(c) above). Mr Ng suggested the subsequent withdrawal of US$440,992.90 closely matched the deposit of US$444,598.06 just before withdrawal of the Welly Smart Sum, the withdrawals of US$127,000 and US$121,693 (totalling US$248,693) closely matched the deposit of US$248,693.45 into the Welly Smart Account after the Pengshunyi deposits, and the withdrawal of US$150,000 closely matched the 1^st, 2^nd and 3^rd deposits after the withdrawal of the Welly Smart Sum (US$30,000, US$50,000 and US$70,000). Again, at this interlocutory stage of the proceedings, I find the temporal proximity of the withdrawal of the Welly Smart Sum and the Pengshunyi deposits in the context of other deposits/withdrawals made so near in time within the same day demonstrated a good arguable case (let alone a serious question to be tried) supportive of P’s case.

78.  In my view, the close temporal proximity of the deposits by Pengshuiyi into the Haiyun and Welly Smart Accounts and the withdrawals of the Haiyun and Welly Smart Sums therefrom in similar manner, the multiple deposits and withdrawals in the Haiyun and Welly Smart Accounts on 13-14 July 2016, the failure of Pengshunyi, Haiyun and Welly Smart to defend P’s legal claims such that P secured default judgment against them all conspired to raise a good arguable case (let alone a serious question to be tried) as to whether there was co-ordination between Pengshunyi and Haiyun / Welly Smart and whether there was anticipation of reimbursement from Pengshunyi for withdrawals of the Haiyun and Welly Smart Sums such that the lack of strict chronological order did not matter. In my view, P had shown an arguable basis to suggest the chronological entries in the bank statements and transaction summaries were not necessarily conclusive. Further, in light of the inherent evidential weaknesses of the alleged defence of bona fide purchaser for value without notice discussed in paragraphs 80-84 below, which undermined the vitality of such alleged defence, there was arguably an evidential “black hole” designed to frustrate P’s claim against D2.

79.  On such basis, there was likewise a good arguable case (let alone a serious question to be tried) as to whether D2 held the sum of US$500,000 (Haiyun and Welly Smart Sums) on constructive trust for P (who paid out the Defrauded Sum as a result of the Email Fraud) and/or whether it would unconscionable for D2 to retain such money (P claimed it had no prior dealing with D2 who had no legitimate reason to receive the Haiyun and Welly Smart Sums – this would further turn on the defence of bona fide purchaser for value without notice which I shall discuss in paragraphs 80-84 below).

80.  Snell’s Equity states that:[54]

“Regardless of whether the claimant’s property remains specifically identifiable, the claimant will be barred from recovering it if his proprietary interest has been extinguished. Accordingly the claimant may not recover money or personal property which is received by a bona fide purchaser for value of the legal interest. ……”

Mr Lai relied on the defence of bona fide purchaser for value without notice raised in the background context of D2’s family/business and her history of US and Hungary immigration activities since 2014 (ie long before the critical date of 12 July 2016) that, according to Mr Lai, was well-documented by contemporaneous and indisputable bank statements and foreign government public documents. Mr Lai reminded that D2 had used Hua’s foreign exchange brokerage services since those early days when she applied for Hungary investment immigration pending processing of her US immigration application, and there was nothing to suggest D2 knew the D2 Account had been frozen. Mr Lai submitted this was a strong and unanswerable defence.

81.  In my view, the burden was on D2 to establish bona fide purchase,[55] and to show she lacked constructive notice of any impropriety in respect of the Haiyun and Welly Smart Sums.[56] As a matter of law, a defence of bona fide purchaser for value without notice can be defeated if (a) a reasonable person with the attributes of D2 should either have appreciated on facts already available to her that a proprietary right probably existed, or (b) she should have made inquiries or should have sought advice which would have revealed the probable existence of such a right (in which case D2 would have had constructive notice of the existence of the right), and in the latter situation D2 must make inquiries if there is a serious possibility of a third party having such right or, to put in another way, if the facts known to D2 would give a reasonable person with her attributes serious cause to question the proprietary of the transaction.[57]

82.  Mr Ng frankly accepted that at this interlocutory stage D2’s state of mind was not entirely clear, and I agree it is inherently not easy for P to get information/evidence of the state of mind of a 4^th layer recipient of the proceeds of the Defrauded Sum. So in determining whether the Injunction Order to be discharged, I bear in mind that direct evidence of D2’s knowledge might not be readily available at this early interlocutory stage. Indeed, in JS Microelectronics Ltd v Achhada,[58] DHCJ Woo Kwok Hing observed as follows:

“38.   On the complaint of inadequate pleading of knowledge, Mr Bruce concedes, in view of at least what he submits ……, that the particulars of the circumstances under para.13 of the amended statement of claim can be improved (see para.9 above), but this cannot be a proper basis for striking out or discharging the Mareva injunction in all the circumstances of this case. I agree. This case allegedly involves fraud and deceit; the evidence of it and that necessary for assisting in tracing the loot will unlikely be readily available. Indeed, I venture to say that after discovery, it may be necessary to amend the statement of claim further ……”

83.  Mr Ng submitted D2’s knowledge might be inferred from the fact Haiyun and Welly Smart transferred substantial funds to D2 shortly before or about the time they received funds from Pengshunyi. Even though D2 claimed the Haiyun and Welly Smart Sums she received formed part of a foreign exchange transaction with Hua, I am not persuaded on the available evidence before me that such defence was as conclusive as Mr Lai would have this court accept:

(a)	It was D2’s own case that it was Hua (not Haiyun or Welly Smart) who was obliged to transfer US$ to D2.
(b)	There were no contemporaneous documents to show that on 13 July 2016 D2/Wang exchanged RMB for US$1,000,000 through Hua. D2/Wang claimed Wang communicated with Hua by Weixin, but they were unable to produce the relevant text messages, and the only reason put forward was “本人[Wang]已遺失了當時本人和[Hua]微信聯絡的電話”. As for Hua’s telephone number, there was no evidence D2/Wang had contacted Zhou who introduced Hua to them and no evidence Zhou was not contactable. As for Wang’s own telephone number, it was unexplained how he had “lost” his own telephone number or why he could not contact his own service provider to find out his own telephone number. According to D2’s Defence, D2/Wang still used Hua’s foreign exchange services on 18 January 2017. D2/Wang did not say when they last contacted Hua, but no reason was given as to how and why the “telephone number” was lost in the half year or less (from 18 January 2017 or later until the Wang Aff was filed on 31 August 2017).
(c)	Although D2’s Defence averred and D2 1st Aff stated that for each foreign exchange transaction between Wang and Hua, Wang took a cautious approach by having Hua first remit US$ into the D2 Account and then confirming receipt of US$ by checking the internet banking system for the D2 Account before Wang caused RMB to be remitted from various accounts to the Hua 1st or 2nd Account. Indeed, for the exchange for US$1,000,000, D2/Wang by the D2 1st Aff and Wang Aff stated that after Wang confirmed receipt of such sum in the D2 Account via 10 remittances (including the Haiyun and Welly Smart Sums), Wang then remitted RMB1,000,000 and RMB833,300 from his account with ICBC to the Hua 2nd Account, and then asked his cousin 汪巍 to make 5 remittances (4 remittances of RMB1,000,000 each and 1 remittance of RMB956,700) in the total sum of RMB4,956,700 to the Hua 2nd Account. But as Mr Ng pointed out, this was not borne out by the documents. The Welly Smart Sum and Haiyun Sum were remitted to the D2 Account respectively at 15:04 and 16:28 on 13 July 2016.[59] If what D2 averred in the Defence and what D2/Wang stated in their affirmations were correct, Wang would only have arranged to remit RMB to the Hua 2nd Account after he confirmed safe receipt of US$1,000,000 in the D2 Account, which must be sometime after 16:28 (ie 4:28pm) on 13 July 2016. Turning to the transaction summary of Wang’s account with ICBC, a sum of RMB1,000,000 was remitted to the Hua 2nd Account at 15:59:46 (about 4:00pm) on 13 July 2016, ie about half an hour before the Haiyun Sum was remitted to the D2 Account. The transaction summary for the ICBC account of Wang’s cousin汪巍 showed the 5 remittances from that account to the Hua 2nd Account took place between 13:58:28 (about 2:00pm) and 15:10:32 (about 3:10pm) on 13 July 2016, ie all such remittances were before the remittance of the Haiyun Sum to the D2 Account. Indeed, the first 3 remittances were made even before the remittance of the Welly Smart Sum. Thus, the transaction summary suggested 汪巍 began remitting RMB to Hua even before Hua transferred any US$ to D2 Account. In my view, this immediately and directly raised question as to whether D2’s/Wang’s reliance of money brokerage and foreign exchange transactions with Hua as explanation for his receipt of the Haiyun and Welly Smart Sums was reliable or accurate. No countervailing explanation was given by D2/Wang, and Mr Lai did not address this except to say that this was a matter for trial. In my view, this was nothing more than tantamount to an admission that there was a good arguable case on the part of P (which I find to be more than a serious question to be tried). Mr Lai then argued that since the pleadings were closed there was mere joinder of issues and no positive countervailing case on the part of P, so P’s case was liable to be struck out. Such argument was not understood since (as explained in paragraph 81 above) the burden was on D2 to establish the defence of bona fide purchaser for value without notice. More importantly, Mr Ng’s criticisms did not rely on any positive case on the part of P (and quite frankly one cannot really expect P to know anything about dealings in the D2 Account). The essence of P’s attack was against D2’s own evidential foundation (and Mr Lai conceded that the bank records were indisputable). I cannot say there was no good arguable case, especially in the context of large sum foreign exchange transactions carried out by Weixin and internet banking in a coffee shop in Beijing without any contemporaneous documentary evidence and when the available bank documents contradicted D2’s alleged case.
(d)	Although Wang claimed Hua told him the transfers of the Haiyun and Welly Smart Sums (and indeed previous Euro and US$ sums) had to be done by various remittances because Hua effected such transfers via various accounts of his Hong Kong companies, D2/Wang did not offer any explanation by the alleged reimbursements in RMB whether out of the accounts of D2, Wang and/or Wang’s cousin also had to be made by various remittances all on the same day when (a) (subject to the discussions in (c) above) D2/Wang claimed they had received the Euro and US$ payments from Hua before Wang caused RMB to be paid to the Hua 1st and/or 2nd Accounts, (b) there was no suggestion of regulatory restrictions on inter-account transfers of RMB in contra-distinction to foreign currency, (c) several remittances were made from an account all on the same day (eg paragraph 39(h) and footnote 16 above – 13 remittances, paragraph 39(k) and footnote 24 above – 7 remittances, and paragraph 43(m) and footnote 29 above – 2 and 5 remittances). These apparently unnecessarily numerous remittances also raised question over the vitality of this defence.

84.  As explained in paragraph 56 above, to discharge the proprietary injunction D2 had to show P’s claim was liable to be struck out. I am not persuaded D2 could do so at this stage when the account given in the D2 1^st Aff and Wang Aff did not sit well with the bank documents. Since no risk of dissipation had to be shown, and the balance of convenience necessarily fell in favour of P as victim of the Email Fraud, I see no basis to discharge the Injunction Order.

85.  Mr Ng suggested that on such basis there was no need to go further to consider P’s in personam claim and the Mareva injunction. But in deference to counsel’s submissions, I shall go on to deal with the same.

(d) In personam claim and Mareva injunction

86.  As regards the in personam cause of action referred to in paragraph 61(b)-(d) above (knowing receipt, money had and received and unjust enrichment – US$500,000), the test was whether D2 had been unjustly enriched at P’s expense. For a claim based on knowing receipt, Snell’s Equity states that:[60]

“Where the defendant receives the property beneficially he may be liable to give restitution of its value in an action for knowing receipt. The basis of the defendant’s liability is that he received property in which the claimant had a subsisting equitable interest, so the claim could not arise if he received it as a bona fide purchaser for value. The claimant may need to prove by the formal rules of following or tracing that the money received by the defendant was specifically attributable to him. ……

The defendant must be at fault when he receives the trust property. This justifies his continuing liability to restore its value to the claimant even after he may no longer have the original property to restore by a proprietary claim. Fault means that the defendant must know enough of the facts surrounding the misapplication of trust property to make it unconscionable for him to retain the benefit of his receipt. The degree of knowledge which might make the defendant’s conduct unconscionable varies with the context.

The degree of awareness which might fix the defendant with liability varies on a sliding scale between two extremes. At one end, the defendant may actually know the possibility that the money is paid to him in breach of trust or without proper authority. This would clearly be unconscionable. A defendant’s wilful decision to overlook a possible breach of trust or to his deliberate failure to make reasonable inquiries as to that possibility would be treated in the same way. At the other end of the scale, a mere negligent failure to appreciate that transfer to him was possibly improper would not be unconscionable. But the defendant’s failure to appreciate a probable breach would have been obvious to a reasonable person in his situation may be enough to make his receipt unconscionable, at least in situations where there is an established practice of making inquiries into title. But where there is no such practice and where transactions need to be concluded promptly, the defendant may need to be subjectively aware that he is receiving tainted property before his receipt could be stigmatised as unconscionable. His knowledge of the facts may shade into dishonesty, as that term is now defined. But in gratuitous transactions, where the defendant has no reasonable justification to rely unquestioningly on the trustee’s authority to transfer the property to him, it may be reasonable to impose a duty of inquiry on him. The recipient’s knowledge of facts that would put a reasonable person on inquiry might amount to unconscionable knowledge.”

As for a claim for money had and received, in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd,[61] Ribeiro PJ said “[the] common law cause of action asserted by the plaintiff for money had and received where consideration has totally failed is now generally regarded as a species of claim for restitution based upon principles of unjust enrichment”, and a useful framework for approach such claims involves asking 4 questions: (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? (d) are any of the defences applicable?

87.  As explained in Guaranty Bank and Trust Company at paragraph 27, regarding a claim based on unjust enrichment, money paid under a mistake of fact is prima facie recoverable provided that (a) the payer did not intend the payee to have the money in any event, (b) the money was not paid for good consideration and (c) the payee has not in good faith changed his position. I will turn to (b)-(c) below, but obviously on P’s pleaded case and affirmation evidence, P’s payment of the Defrauded Sum was caused by its mistake, ie such sum was paid pursuant to the purported secret takeover transaction which was untrue, and P did not intend D2 to have the Haiyun and Welly Smart Sums.

88.  As to whether the transfers of the Haiyun and Welly Smart Sums were at P’s expense, there was no need to demonstrate a direct payment from P to D2 nor a proprietary link between them because the relevant question was whether there was “sufficient causal connection” in the sense of a sufficient nexus or link between the loss to P and the benefit received by D2.[62] In considering whether there was sufficient nexus or link, Lord Reed JSC in Investment Trust Companies v Revenue and Customs Commissioners[63] referred to 3 scenarios:

(a)	a situation in which an agent of one of the parties was interposed between them such that the series of transactions between the claimant and agent and between the agent and defendant is legally equivalent to a transaction between the claimant and the defendant;
(b)	an intervening transaction was found to be a sham;
(c)	“[there] are also situations where the defendant receives property from a third party into which the claimant can trace an interest. Since the property is, in law, the equivalent of the claimant’s property, the defendant is therefore treated as if he had received the claimant’s property”.

P relied on the scenario in (c) above. Pursuant to the above analysis of “backward tracing”, I have find there was a good arguable case that the Haiyun and Welly Smart Sums received by D2 were traceable proceeds of the Defrauded Sum (see paragraphs 75-79 above).

89.  As to any defence of good consideration, D2 relied on the defence of bona fide purchaser for value without notice. But in my above discussions in relation to this defence and the reservations that I had expressed (see paragraphs 80-84 above), I am not persuaded D2’s contentions in this regard caused any dent to P’s good arguable case.

90.  As for the defence of change of position, there was no such pleaded defence. But even if I were to consider this potential defence, such defence is obviously a fact-sensitive one in which a defendant has to show not only that his position has changed, and also his position has so changed that it will be inequitable in all the circumstances to require him to make restitution or to make restitution in full. Causation is required and reliance is usually required, and to apply the test in the present context was to ask whether D2 entered into a transaction that she would have not entered into but for her enrichment.[64] The mere fact D2 had spent the money, in whole or in part, did not of itself render it inequitable that she should be called upon to repay.[65]

91.  In my view, there was good arguable case that D2 knew the Defrauded Sum was transferred because of mistake. Since D2’s only answer to the inference of a good arguable case that she had changed her position not in good faith and/or with knowledge of P’s entitlement to restitution was the defence of bona fide purchaser for value without notice, the inherent evidential weaknesses in D2’s contentions in this regard as discussed in paragraphs 80-84 above undermines the vitality of such defence. I am unconvinced D2 could rely on any defence of change of position to overcome the good arguability of P’s cause of action in support of the in personam injunction.

92.  Further, as for the claim based on constructive trust and knowing or unconscionable receipt, the above discussions also showed the Haiyun and Welly Smart Sums (arguably imbued with equitable interest traceable from the Defrauded Sum pursuant to the doctrine of “backward tracing”) found their way to the D2 Account, so P had a good arguable case of demonstrating beneficial receipt on the part of D2. As for D2’s “fault” to support a claim based on constructive trust and knowing receipt, D2’s answer was the defence of bona fide purchaser for value without notice, but I refer to the discussions in paragraphs 81-84 above to say there was arguable basis to support such “fault”.

93.  I now turn to P’s in personam cause of action referred to in paragraph 61(b) above based on dishonest assistance. Mr Lai submitted this was a non-starter as P did not in its pleadings or affirmation evidence plead or aver any material fact, particular or evidence of conduct/wrongdoing on the part of D2 to justify such cause of action (eg conduct on the part of D2 which was “assisting” and which was “dishonest” as being in aid of breach of trust) other than the paper trail of receipt of the Haiyun and Welly Smart Sums in the D2 Account on 13 July 2016 (which was not disputed). Mr Lai submitted such in personam claim was “complete nonsense” if not outright abuse of legal proceedings, and was liable to be struck out for want of essential particulars of assistance, dishonesty, knowledge and/or fiduciary duty under Order 18 rule 12 of the Rules of the High Court, which was not a mere technicality as it went directly to the question (a) whether P had any arguable claim apart from proprietary tracing and (b) whether there was any good arguable case.

94.  Mr Ng accepted the position was not particularly clear-cut, but nevertheless contended P had a good arguable claim on dishonest assistance.[66] As to the element of “assistance”, Mr Ng pointed out that “those who assist in money laundering after the breach of trust has first occurred may be made liable for dishonest assistance. In money laundering cases, the assistance will normally take the form of receiving and then parting with money representing the trust property while it is in the course of being laundered. For the purpose of establishing assistance in this kind of case, it will be necessary to trace the money representing the trust property into the hands of the defendant, using the equitable tracing rules for the purpose”.[67]  In Heinl & ors v Jyske Bank (Gibraltar) Ltd, Nourse LJ said “[in] regard to the case based on money laundering it is clear in principle that the concealment of misapplied trust moneys in that way can constitute assistance”.[68] In my view, especially in the context of the above analysis for “backward tracing” and the inherent evidential weaknesses of the alleged defence of bona fide purchaser for value without notice, there was arguable basis for Mr Ng’s contentions that D2 played an active role in dissipating the Defrauded Sum (ie D2 received the traceable monies from other recipients), and that P’s effort to trace the Defrauded Sum has been complicated and frustrated by D2’s intervention.

95.  As to the element of “dishonesty”,[69] Mr Ng fairly accepted dishonesty cannot be proved if unconscionable knowledge cannot be shown,[70] and “[in] the context of commercial transaction, constructive knowledge would only suffice if on the facts actually known to the defendant, a reasonable person would either have appreciated that the transfer was probably (as distinct from possibly) in breach of trust or would have made inquiries or sought advice which would have revealed the probability of breach of trust”.[71] Mr Ng properly drew this court’s attention to DBS Bank (Hong Kong) Limited v Tian Wen Quan where it was said that the mere fact of receipt of funds from underground currency exchange by circumventing exchange control in Mainland China was not necessarily dishonest or amounted to sufficient knowledge to defeat a defence of bona fide purchaser for value without notice, and that mere receipt of such funds arguably would not amount of unconscionable knowledge for the purpose of knowing receipt (let alone dishonesty).[72]

96.  No doubt, the burden is a high one, and Mr Ng frankly accepted the position was not entirely clear-cut at this stage, but he suggested that by reason of the matters discussed above in relation to “backward tracing” in the context as explained in paragraph 78 above, the apparent coordination between Hen Yue, Pengshunyi and Haiyun / Welly Smart with transfers effected within a short time of each other (see paragraphs 76-79 above), and the present unreliability of D2’s case of acquiring the Haiyun and Welly Smart Sums by alleged foreign exchange transaction with Hua (see paragraphs 80-84 above), I find there was enough, at this interlocutory stage, to demonstrate a good arguable case of drawing inference that D2 might be dishonest and might have knowledge of the fraud. I also bear in mind that a good arguable defence may co-exist with a good arguable case.

97.  Since I accept there was a good arguable case in respect of this in personam cause of action, Mr Ng argued P would be entitled to claim for its full loss (ie the Defrauded Sum) being the proper measure for a dishonest assistant’s liability, and the court should focus on the breach by the fraudster (that resulted in loss of the Defrauded Sum) and not on the assistance of the assistant (US$500,000 that D2 received).[73] Lam J (as he then was) in High Fashion Garments Co Ltd v Ng Siu Tong & ors[74] cited with approval what the Court of Appeal said in Grupo Torras v Al-Sabah said as follows:[75]

“However, we think the judge was right when he said:

‘… the requirement of dishonest assistance relates not to any loss or damage which may be suffered but to the breach of trust or fiduciary duty. The relevant enquiry is ... what loss or damage resulted from the breach of trust or fiduciary duty which has been dishonestly assisted. In this context, as in conspiracy, it is inappropriate to become involved in attempts to assess the precise causative significance of the dishonest assistance in respect of either the breach of trust or fiduciary duty or the resulting loss.’

This is the essence of accessory liability clearly spelled out by Lord Nicholls in Royal Brunei ([1995] 2 AC 378, [1995] 3 All ER 97).”

98.  On the matter of risk of dissipation, Mr Lai submitted there was never any such risk, and P had known since 5 December 2016 prior to the application for the Ex Parte Order on 19 January 2017 that US$500,000 was sitting idle in the D2 Account for half year since 17 July 2016 (see paragraphs 46 and 49 above). It was said if this fact was drawn to the attention of the ex parte judge, the Ex Parte Order might never have been granted (see paragraph 49 above). In this respect, Mr Lai drew attention to the bank statement of the D2 Account dated 23 July 2016 that showed 9 deposits into the D2 Account (including the Haiyun and Welly Smart Sums) on 13 July 2016 which brought the net balance to US$1,431,920.92. Although there were various withdrawals in the next few days, there was still US$1,137,248.98 by 23 July 2016. The amount of US$ in the D2 Account as at 23 November and 23 December 2016 was the same at US$837,140.84.

99.  Mr Ng submitted (and I agree) there was no factual evidential basis for D2 to say P had knowledge by 5 December 2016 that US$500,000 had been idling in the D2 Account for half a year. In respect of his contentions set out in the above paragraph, Mr Lai referred to paragraphs 51-53 of the Schmitz 1^st Aff which stated that pursuant the injunction orders obtained in HCA2006/2016 against the 8 and 5 HK Companies (ie the 2^nd layer action), HSBC was required to disclose to P inter alia the source and destination of payments into and out of the bank accounts of the 13 defendants in the 2^nd layer action. HSBC provided the first batch of disclosure on 29 August 2016 which contained mainly bank statements for July/August 2016 and the account opening mandates (see paragraph 11 above). On 12 September 2016, P requested disclosure of documents relating to “specific transactions identified in the bank statements of the various defendants. However, due to delay on the part of HSBC, [P] did not receive all of the requested documents until 5^th December 2016. From the redacted bank statements and transaction documents disclosed by HSBC, [P] identified numerous withdrawals made from the account of Haiyun, Welly Smart and Kailaite” (see paragraph 11 above). D2 was not one of the “thirteen defendants” in HCA2006/2016, and there was no evidence P received any bank statement of the D2 Account by 5 December 2016. In fact, it was from such disclosure by HSBC that P discovered the remittances of the Haiyun and Welly Smart Sums out of the Haiyun and Welly Smart Accounts to the D2 Account.

100.  Indeed, the Schmitz 1^st Aff was made prior to the grant of the Ex Parte Order. It was only upon grant of the Ex Parte Order that P obtained the HSBC Disclosure Order for disclosure documents in respect of the D2 Account (see paragraph 17 above). In fact, it was on 21 February 2017 (ie after the grant of the Ex parte, Amended Ex Parte and Inter Partes Orders) that P’s solicitors received the bank statements of the D2 Account from HSBC.[76] There was no factual basis to support Mr Lai’s allegation of material non-disclosure, and there is no merit to this suggestion.

101.  Mr Lai then submitted that the lack of risk of dissipation was strengthened by the fact that despite the grant of the Ex Parte Order, the money continued to sit idle in the D2 Account for another half year when D2 was unaware of the Injunction Order. Mr Lai submitted this was “overwhelming evidence of the conduct of an honest, respectable, ordinary Beijing citizen who is not a fly-by-night member of a conspiracy team”. In my view, whether D2 was aware of the Injunction Order or not was beside the point since the Injunction Order protected the frozen funds in the D2 Account from being removed, and it was irrelevant whether D2 did or did not do anything.

102.  The bank statements of the D2 Account showed there were subsequent withdrawals/transfers from such account. The amount now remaining in the D2 Account was only slightly more than the cap of US$500,000 under the Injunction Order. In the Wang Aff, Wang explained the ease with which funds could be withdrawn and remitted from bank accounts by internet banking from a coffee shop in Beijing without physical attendance at HSBC in Hong Kong. This was also linked to the defence of bona fide purchaser for value without notice. The inherent factual weaknesses of such defence when viewed against the bank documents (see paragraphs 80-83 above) also raised the questionability of withdrawals from the D2 Account. In my view, a risk of dissipation could be inferred in all the circumstances. As for the balance of convenience, in view of the risk of dissipation, the balance was in P’s favour. In my view, there is no basis to discharge the Injunction Order.

(e)  Injunction limit

103.  The next question was whether the cap of US$500,000 should be reduced to US$250,000 or less by virtue of P’s default judgment and recoveries against Haiyun and Welly Smart. I do not agree to any reduction of the cap as P proposed:

(a)

For the claim of dishonest assistance, there would be no double recovery since the recoverable loss (ie the Defrauded Sum of €3,760,900) after giving credit for the recovered monies set out in paragraph 34 above still exceeded US$500,000 (see paragraph 97 above).

(b)

The focus for P’s claim in knowing receipt and money had and received was on D2’s enrichment (US$500,000). Since D2’s liability is restitutionary, it is fixed at the value of the property when she first received it.[77] As for P’s proprietary claim, it was not necessarily inconsistent with the personal claim and recoveries from Haiyun and Welly Smart. P had cumulative remedies and could go after the trustee or recipient, so the default judgment and recoveries against Haiyun and Welly Smart would not necessarily debar P from suing D2. As explained in Serious Fraud Office v Lexi Holdings Plc,[78] “39. As made clear by Lord Millett in Foskett v McKeown [2001] 1 AC 102, an in personam claim against a defaulting trustee may be supplemented in addition by a claim to enforce an equitable charge or lien over the proceeds in which the misappropriated assets have been mixed. That is an available remedy to secure compliance by the trustee with his personal obligation to account. In this context Mr Marshall appositely cited the decision of the Privy Council in Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514, 521 where Lord Nicholls of Birkenhead said: ‘Faced with alternative and inconsistent remedies a plaintiff must choose between them. Faced with cumulative remedies a plaintiff is not required to choose. He may have both remedies. He may pursue one remedy or the other remedy or both remedies, just as he wishes. It is a matter for him. He may obtain judgment for both remedies and enforce both judgments. When the remedies are against two different people, he may sue both persons. He may do so concurrently, and obtain judgment against both. Damages to the full value of goods which have been converted may be awarded against two persons for successive conversions of the same goods. Or the plaintiff may sue the two persons successively. He may obtain judgment against one, and take steps to enforce the judgment. This does not preclude him from then suing the other.’ 40. In the present case, Lexi by the form of the judgment it obtained on 19 March 2007 had elected to pursue its equitable claim against M in personam. But that is not of itself inconsistent with a claim to an equitable charge, as Foskett v McKeown makes clear: it is a cumulative remedy in aid of an equitable in personam claim, not an alternative remedy. On the whole we do not think that, by electing to enter judgment in the form that it did, Lexi is to be taken as having conclusively and for all purposes abandoned any further claim it might have for an equitable charge, sought by way of further legal proceedings or steps. ……” But this is subject to prevention of double recovery, so it was necessary to turn to the amounts received by Haiyun and Welly Smart from Pengshunyi. Haiyun received US$790,000 from Pengshunyi, and P recovered HK$1,604,036.46 (ie about US$205,645.70 at the exchange rate of HK$7.8 : US$1) from Haiyun. So P was entitled to sue D2 for the whole Haiyun Sum after giving credit. Welly Smart received US$250,000 from Pengshunyi, and P recovered HK$1,455,887 (ie about US$186,652.18) from Welly Smart, so full recovery of US$230,000 from D2 on its face may give rise to double recovery. Mr Ng suggested it was unclear whether the other sums received by Welly Smart on 13-14 July 2016 were also traceable to P, but he conceded at the Hearing that at this stage there was no evidence to support his contentions. But this was neither here nor there in light of (a) above.

VI.  CONCLUSION

104.  In the circumstances, D2’s 1^st and 3^rd Summonses are dismissed. I grant a costs order nisi that D2 shall pay P costs of and occasioned by such summonses, including all costs reserved if any, to be taxed forthwith if not agreed.

105.  As regards the D2 2^nd Summons, once HSBC disclosed the bank statements of the D2 Account pursuant to the HSBC Disclosure Order in February 2017, P should have realised the available balance in D2 Account exceeded US$500,000 (or even US$520,000), so there was no point in pursuing the Disclosure Order in aid of the Injunction Order. Steps could have been taken then (or at least when D2 served the D2 1^st Summons) to abandon or withdraw the Disclosure Order. The fact P did not do so until just before or at the Hearing meant P should pay D2’s costs of the D2 2^nd Summons. I therefore grant a costs order nisi that P shall pay D2’s costs of and occasioned by such summons, including all costs reserved if any, to be taxed forthwith if not agreed.

106.  As for the P Summons, the relief sought in paragraph 28(a) above asked for continuation of Injunction Order, which was unnecessary given the Inter Partes Order. The relief sought in paragraph 28(d) above asking for dismissal of the D 1^st and 2^nd Summonses was unnecessary since the determination of such summonses would have resolved the matter. As for the abandoned reliefs in paragraph 28(b)-(c) above and the consequential relief in paragraph 28(e) above, on 28 July 2017 D2’s solicitors proposed payment of US$520,000 into court.[79] When P’s solicitors wrote to D2’s solicitors on 7 November 2017 to confirm P’s agreement to such proposal with slight variation that HSBC shall be directed to pay US$500,000 (or HK$ equivalent) (instead of US$520,000) out of the D2 Account into court as security for P’s claim with costs reserved to enable the Injunction Order to be discontinued and the Hearing to be vacated, D2’s solicitors replied on 13 November 2017 to say such belated response did not reflect any sincerity on P’s part, and in any event the offer was “water under the bridge”. By then D2 was not willing to make payment into court as she believed the Injunction Order would not have survived the Hearing, and she asked P to consent to immediate discharge of the Injunction Order with costs to her. As the outcome of the D 1^st and 3^rd Summonses demonstrated, D2’s stance was inappropriate. But then the P Summons was also unnecessary. Since payment into court was no better or different for P than the Injunction Order (with the amount to be frozen reduced to US$500,000), and as D2 unwilling to make payment into court, there was no sensible reason for P to complicate matters by the proposal in the P Summons, especially when instead of asking HSBC to pay US$500,000 out of the D2 Account into court P proposed an even more convoluted route by having D2 utilise the funds in the D2 Account to buy a cashier order to give to P’s solicitors for payment into court. In my view, the proper order (which I now make) is no order on the P Summons with costs order nisi that there be no order as to costs of such summons.