LESNINA H. D.O.O. v. WAVE SHIPPING TRADE CO LTD AND OTHERS

HCA 154/2020

[2022] HKCFI 1070

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.154 OF 2020

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J U D G M E N T

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A.  INTRODUCTION

1.  This is the Plaintiff’s application for summary judgment against the 8^th and 10^th Defendants who are allegedly second-tier recipients of funds paid out by the Plaintiff pursuant to an alleged email fraud. 

2.  The Plaintiff’s case is that the 8^th and 10^th Defendants have received US$320,000 (“D8 Sum”) and US$99,998.05 (“D10 Sum”) respectively from the 1^st Defendant which are traceable to the Plaintiff.  The Plaintiff makes a proprietary claim and personal claims in unjust enrichment and knowing receipt against the 8^th and 10^th Defendants.  The Plaintiff also seeks, in the event that it succeeds in obtaining summary judgment, a vesting order in respect of the D8 Sum. 

3.  For the reasons given in this judgment, both the 8^th and 10^th Defendants are granted unconditional leave to defend on, inter alia, the ground that there are triable issues as to whether the 8^th and 10^th Defendants are bona fide purchasers for value without notice.

B.  BACKGROUND

The Plaintiff’s Factual Case

4.  The fraud alleged by the Plaintiff in this case is not uncommon.  The Plaintiff is a Croatian company in the business of furniture goods retailing.  It is a subsidiary of the XXXLutz Group based in Wels, Austria, a major international furniture retailer.

5.  The Plaintiff’s case is that, in early 2020, a fraud was perpetrated against the Plaintiff by unknown person(s) impersonating the Plaintiff’s Chief Executive Officer and a person claiming to be a lawyer based in London who identified herself as “Melanie James” (“Alleged Fraudsters”), whereby the Plaintiff transferred EUR1,879,726 (“1^st Tier Sum”) to the 1^st Defendant (“Alleged Fraud”).

6.  The Alleged Fraudsters, by a phone call and various emails on 10 January 2020, told Mrs. Dragica Cavar (“Mrs. Cavar”), an employee of the Plaintiff working in its accounting department, that the Plaintiff had been conducting a confidential acquisition in Asia and that urgent transfers of funds had to be made for that purpose.  In accordance with the Alleged Fraudsters’ instructions, believing that they had come from the Plaintiff’s CEO, Mrs. Cavar arranged the transfer of the 1^st Tier Sum from the Plaintiff’s bank account with Privredna Banka Zagreb D.D. to the 1^st Defendant’s bank account with HSBC (“D1’s Account”) on 10 January 2020.

7.  The Alleged Fraud was eventually discovered when the Alleged Fraudsters made further requests of similar nature, and Mrs. Cavar, increasingly suspicious, conferred with her superiors at the Plaintiff.  The Alleged Fraud was reported to the relevant authorities in Croatia, and later, when it was discovered that some of the funds had been deposited into bank accounts in Hong Kong, authorities in Hong Kong including the Hong Kong Police.

The 8^th Defendant’s Factual Case

8.  The 8^th Defendant is a Hong Kong company that is allegedly a member of the Xianggua Group, which manufactures and sells beauty and healthcare products, including powdered meal replacement shakes.

9.  The 8^th Defendant does not dispute receiving the D8 Sum but contends that it was paid to it as the first instalment payment for goods sold and delivered to 四川尤斯格林贸易有限公司 (“Sichuan YouSi”), a PRC company, under a contract dated 11 January 2020 (“D8 Contract”). 

10.  Under the D8 Contract, the 8^th Defendant and its associated company, 广东橙天绿宝生物医药开发有限公司 (“Guangdong Biomedical”), would manufacture and sell to Sichuan YouSi 200,000 boxes of “Pink Ketogenic Meal Replacement Milkshakes” (“Milkshakes”) for a total price of RMB3,114,400, and Sichuan YouSi would make payment of 70% of the full price (“1^st Instalment Payment”) within 3 working days after the D8 Contract was signed and the remaining 30% of the full price upon delivery of the Milkshakes.

11.  The 8^th Defendant claims that it had been notified by Sichuan YouSi on 14 January 2020 that the 1^st Instalment Payment under the D8 Contract would be made ahead of the transfer of the 1^st Tier Sum.  In the morning of 14 January 2020, Mr. Chow of Sichuan YouSi had allegedly sent a Wechat message to Mr. Huang Wan Ting of the 8^th Defendant stating that the 1^st Instalment Payment of US$320,000 had been paid.

12.  Upon receipt of the 1^st Instalment Payment, the 8^th Defendant and Guangdong Biomedical, allegedly commenced production of the Milkshakes.  On 15 March 2020, production was completed, and the Milkshakes were delivered to Sichuan YouSi.  The 8^th Defendant refers to a payment receipt for the 1^st Instalment Payment and an invoice for the remaining 30% balance of the full price in the sum of US$138,000 as evidence of its having produced and delivered the Milkshakes to Sichuan YouSi.

The 10^th Defendant’s Factual Case

13.  The 10^th Defendant allegedly resides in the Philippines and operates database and software companies in the Philippines and Malaysia.  His wife allegedly operates a dancing school in the PRC.

14.  It is the 10^th Defendant’s case that he and his wife would hold US Dollars as the intermediate currency for their various businesses and would make remittances between different countries through banking deposits, qualified currency exchange agents and foreign exchange companies.  In particular, the 10^th Defendant had been engaging the services of someone known as 馬自虎 (“Mr. Ma”) for currency investment transactions of US Dollars purchases since around early 2019.

15.  The 10^th Defendant’s case is that, on 13 January 2020, he instructed Mr. Ma to purchase US$100,000 on his behalf and made a total payment of RMB697,000, consisting of RMB290,000 from his bank account with the Shanghai Pudong Development Bank (“SPDB”) and RMB407,000 from his bank account with China Merchant Bank (“CMB”), to Mr. Ma’s account maintained with the Agricultural Bank of China (“ABC”).  A deposit of US$100,000 (after deducing bank charges, US$99,998.05) was then made from the 1^st Defendant’s HSBC Account to the D10 Account (defined below) on the same day.  Mr. Ma allegedly sent remittance records for the transaction to the 10^th Defendant via Wechat. 

These Proceedings

16.  On 17 February 2020, the Plaintiff commenced these proceedings to recover the 1^st Tier Sum and/or its traceable proceeds against the 1^st to 12^th Defendants. 

17.  On 12 March 2020, DHCJ MK Liu granted orders against the Hongkong and Shanghai Banking Corporation Ltd (“HSBC”), Standard Chartered Bank (Hong Kong) Ltd. (“SCB”) and China CITIC Bank International Ltd (“CITIC”) to make disclosure of, inter alia, entries of banking records of the D1’s Account, and all accounts receiving funds from it which were held and maintained with HSBC, SCB and CITIC (“Banking Records”).  Such accounts consist of the bank accounts of the 5^th to 12^th Defendants.

18.  The Banking Records disclosed show the following:

(1)  Before the 1^st Tier Transfer, D1’s Account, which comprised 3 sub-accounts (i.e. a HKD Sub-account, EUR Sub-account and a USD Sub-account) had negligible funds. Shortly after the transfer of the 1^st Tier Sum to D1’s Account, most of the sum was converted into US Dollars (around US$2,077,399.16) and transferred internally from the EUR Sub-account to the USD Sub-account on 13 January 2020.

(2)  On 13 January 2020, a sum of US$100,000 (i.e. the D10 Sum before administrative fees were deducted) was transferred to the 10^th Defendant’s account with the SCB (“D10’s Account”).

(3)  On 14^th January 2020, the D8 Sum was transferred in two tranches (the first in the sum of USD200,000 and the second USD120,000) to the 8^th Defendant’s account with HSBC (“D8’s Account”).

C.  PRELIMINARY MATTERS

The 8^th Defendant’s Application to Adduce Evidence by Huang Aff

19.  By Summons dated 15 March 2021, the 8^th Defendant sought leave to adduce further evidence by filing the Affirmation of Huang Wan Ting (“Huang Aff”).  The substance of Huang Aff relates to the 8^th Defendant’s response to the 6^th Affidavit of Rajko Magdalenc filed on behalf of the Plaintiff.

20.  The 8^th Defendant explains that there had been a delay in making the application for leave due to the intervening New Year and Chinese New Year holidays and the business traveling schedule of Mr. Huang Wan Ting.  It is also submitted on the 8^th Defendant’s behalf that since the Summons had been filed and served on 15 March 2021, the Plaintiff should have had sufficient time to consider Huang Aff ahead of the hearing, especially given its modest length.

21.  The Plaintiff takes issue with the lateness of the application and questions the 8^th Defendant’s claim that instructions could not be taken by its lawyers for 2.5 months notwithstanding the intervening holidays.

22.  I agree with the Plaintiff that the application to adduce Huang Aff was late and could certainly have been done earlier.  However, I consider that there is little if any real prejudice to the Plaintiff, and that the matters deposed to in Huang Aff are relevant to the 8^th Defendant’s case and necessary for the fair disposal of the present application for summary judgment.  I grant leave to the 8^th Defendant to adduce Huang Aff.

The Plaintiff’s Application to Adduce Findings or Decisions on a Question of PRC Law

23.  Pursuant to Order 38 rule 7 of the Rules of High Court (Cap. 4A), the Plaintiff gave notice of its intention to adduce in evidence findings or decisions on a question of PRC law by virtue of section 59 of the Evidence Ordinance (Cap. 8), the question being “Whether (a) “underground banking” / (b) “underground money exchange transaction” / (c) the purchase of foreign currency from an unlicensed exchange agent breaches PRC law”.

24.  The Plaintiff sought to adduce the following decisions that refer to, inter alia, Article 45 of the PRC Administrative Regulations on Foreign Exchange and Articles 30 and 39 of the PRC Foreign Exchanges Measures for Individuals:

(1)  DBS Bank (Hong Kong) Limited v. Pan Jing [2020] 4 HKC 395;

(2)  Grupo Arbulu S.L. v. City Apex Holdings Ltd [2018] HKCFI 1351;

(3)  DBS Bank (Hong Kong) Limited v. Tian Wen Quan(unreported, HCA 3228 of 2016, 12.10.2017); and

(4)  TTI Global Resources Hong Kong Ltd v. Hongkong Myphone Technology Co. Ltd and Others [2021] HKCFI 306.

25.  Whereas notice of its intention to adduce the first three decisions (“Notice”) had been given in the 4^th Affidavit of Rajko Magdalenc filed on 2 September 2020 i.e. within 21 days after the first hearing of the Summary Judgment Summons on 9 November 2020, the Plaintiff did not give any notice of its intention to rely on the TTI decision until 18 March 2021, when it filed the 2^nd Affirmation of Jeremy Lam without leave, a week before the hearing.

26.  Under RHC O.38 r.7(1)(b), the Plaintiff shall serve notice specifying its intention to adduce any findings or decisions on a question of PRC law within 21 days after the date on which an appointment for the first hearing of its summary judgment application was obtained i.e. by 30 November 2020.

27.  Since the Notice had been confined to the Pan Jing, Grupo Arbulu and City Apex decisions and did not specify the TTI decision, and since RHC O.38 r.7(2) provides that “[t]he notice shall specify the question on which the finding or decision was given or made and specify the document in which it is reported or recorded in citable form” (emphasis added), I consider that it is not open to the Plaintiff to circumvent the time limit as prescribed in RHC O.38 r.7(1) by adducing the TTI decision a week before the hearing. 

D.  FRAUD EXCEPTION IS NOT ENGAGED

28.  The 8^th and 10^th Defendants submit that the fraud exception is engaged pursuant to RHC O.14 r.1(2)(d) and that accordingly the Court has no jurisdiction to grant summary judgment in this case.

29.  The legal principles for when the fraud exception is engaged are well-established: see foe example Zimmer Sweden AB v. KPN Hong Kong Ltd [2016] 1 HKLRD 1016 at §12.2 per Yuan JA.  In particular, I note that the Court should not be restricted to considering the statement of claim only, but should examine all relevant materials existing at the time of the hearing, including subsequent pleadings and the affidavits, and that, in considering whether an allegation of fraud would have to be made to establish or maintain a claim, one must look at the substance, and not the mere form, of the plaintiff’s case.

30.  The 8^th Defendant claims that the fraud exception is engaged because the Plaintiff questions the evidence produced by the 8^th Defendant and contends that the sale to Sichuan YouSi is a sham.  The 8^th Defendant relies on the following statements in the 6^th Affidavit of Rajko Magdalenc:

(1)  That there exists “a fundamental inexplicable doubt on the authenticity of the 8^th Defendant’s alleged records and claims” (§15(c)); and

(2)  That the 8^th Defendant has “fundamentally failed to produce any records and documentary proof of its alleged work under the Contract” and that “[t]hus viewed, the 8^th Defendant’s allegation about its consideration for the Payment to D8 is inherently improbable” (§§16-19).

31.  In my view, no allegation of fraud or dishonesty is required for the Plaintiff to establish its pleaded claims and that the fraud exception is not engaged, having taken into account the pleadings as well as the affidavit evidence filed by the Plaintiff, and having regard to the substance of the Plaintiff’s case.  Scrutinizing and questioning the veracity of the 8^th and 10^th Defendants’ factual cases and evidence do not without more mean that the Plaintiff is alleging fraud or dishonesty against them. 

32.  Further, I reject the 8^th Defendant’s submission that since the Plaintiff has made a claim of knowing receipt, the fraud exception is necessarily engaged, as it is well-established that dishonesty is not a necessary ingredient of liability in knowing receipt: BCCI (Overseas) Ltd & Another v. Akindele[2001] Ch 437 at 448G to 450 F; Tang Yuan Yi v. Tokyo International Investment Ltd [2021] 2 HKLRD 623 at 79-80.  

33.  My view is that the Plaintiff’s application for summary judgment is not precluded by the fraud exception.

E.  SUMMARY JUDGMENT

34.  Coming to the summary judgment application proper, the legal principles applicable to an Order 14 application are well-settled and not in dispute.  See for example summary by DHCJ Lisa Wong SC (as she then was) in Menford Electric v. Wong Wang Tat Victor[2013] 2 HKC 259 at §61.

35.  The issue is not whether the defendant’s assertions are to be believed but rather whether those assertions are believable.  The defence set up needs only show that there is a triable issue or question or that for some other reason there ought to be a trial: Hong Kong Civil Procedure 2022, at §14/4/9A and 9B.

36.  Order 14 is for clear cases only, which mean cases in which there is no serious material factual or legal dispute.  The procedure is entirely inappropriate where the plaintiff’s entitlement to recover any sum is the subject of any serious dispute, whether of law or fact.

F.  CLAIM IN KNOWING RECEIPT

37.  For a claim in knowing receipt, the claimant must establish that the 8^th Defendant had “unconscionable knowledge”.  This was explained by Anthony Chan J in DBS Bank (Hong Kong) Ltd v. Tian Wen Quan(HCA 3228/2016, 12 October 2017):

“22. On unconscionable knowledge, I agree with Mr. Man that the test is that the recipients state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt: Lewin on Trust, 19^th edn, §42-073. 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: Lewin, §42-076”.[1]

38.  In my view, there are triable issues in respect of whether the 8^th and 10^th Defendants each had unconscionable knowledge of any facts that rendered it unconscionable for them to retain the D8 Sum and/or D10 Sum.  There is no evidence that either the 8^th or the 10^th Defendant had knowledge of the Alleged Fraud.  Neither am I able to accept that the factual cases of the 8^th and 10^th Defendants are, as submitted by counsel for the Plaintiff, clearly incredible or plainly “moonshine”. 

39.  In particular, the 8^th Defendant’s claim that it had received the D8 Sum pursuant to the D8 Contract is evidenced by the Wechat messages from Mr. Chow of Sichuan YouSi on the same date of the remittance informing the 8^th Defendant that the remittance of the 1^st Instalment Payment had been made.  I am not satisfied that any of the queries raised by the Plaintiff in respect of the veracity of the 8^th Defendant’s evidence, such as the fact that the 8^th Defendant had confirmed receipt of the D8 Sum at 9:32 am on 14 January 2020 before it was actually received at 17:30pm and 18:15pm on the same day, demonstrates that the 8^th Defendant’s factual case is clearly unbelievable.

40.  Likewise, for the 10^th Defendant, there are in my view triable factual issues as to whether or not the 10^th Defendant had unconscionable knowledge sufficient to render it liable to the Plaintiff for knowing receipt.  The Plaintiff has not demonstrated that the 10^th Defendant’s case that it had received the D10 Sum pursuant to a currency investment transaction with Mr. Ma is clearly unbelievable or incredible.  These are matters that should be fully investigated at trial.

G.  THE PROPRIETARY CLAIM

41.  In respect of the Plaintiff’s proprietary claim, the 8^th and 10^th Defendants both raise the bona fide purchaser for value without knowledge defence.  The elements of the defence are that: (1) there is a purchase for value; (2) of the legal estate in property; (3) in good faith; (4) without notice; (5) at the time of the transfer of the legal estate.  See Lewin on Trusts (20^th ed) at §44-119.

42.  Even assuming (without deciding) that the Plaintiff has made out a proprietary claim in respect of the D8 Sum and D10 Sum, I am of the view that both the 8^th and 10^th Defendants have demonstrated that there are triable issues as to whether or not they are bona fide purchasers for value without notice and as to whether they have relevantly changed their position, on the bases that they had respectively given value for the D8 Sum and D10 Sum pursuant to the D8 Contract and the currency investment transaction with Mr. Ma. 

43.  The Plaintiff submits that there are various weaknesses in the factual cases of the 8^th and 10^th Defendants.  In respect of the 8^th Defendant, the Plaintiff points out that the price payable under the D8 Contract is in fact denominated in RMB whereas the D8 Sum was made in US Dollars.  In response, the 8^th Defendant referred to a previous agreement between the 8^th Defendant and Sichuan YouSi dated 8 July 2019 that shows that the parties would typically arrange for payment in US Dollars and claimed that in this particular instance the parties had orally agreed for the D8 Sum to be made in US Dollars. 

44.  In respect of the 10^th Defendant, the Plaintiff submits that there is an “alarming absence of documentary proof” supporting the 10^th Defendant’s alleged transaction with Mr. Ma.  However, the 10^th Defendant has produced a copy of the bank deposit receipts of transfers of RMB from the 10^th Defendant’s bank accounts with SPDB and CMB to Mr. Ma’s account with ABC that largely correspond with the D10 Sum as evidence of the purported currency exchange transaction.  I am not satisfied that the Plaintiff has demonstrated that the factual cases of the 8^th and 10^th Defendants are wholly unbelievable or incredible. 

45.  The Plaintiff further submits that the 8^th and 10^th Defendants should not be allowed to rely on the defence since the ways in which the 1^st Tier Sum had been transferred to them involved illegalities.  Therefore, the issue of whether the 8^th and 10^th Defendants succeed in showing triable issues by way of the bona fide purchaser defence and the change of position defence boils down to whether they are precluded from raising the defence by the alleged illegalities.

The Plaintiff’s Illegality Argument 

46.  The Plaintiff’s case is that the 8^th and 10^th Defendants should not be allowed to rely on the bona fide purchaser defence because the ways in which the 1^st Tier Sum had been transferred to them involved illegalities, the D8 Sum and D10 Sum having been allegedly remitted through the so-called “underground banking” in circumvention of foreign currency exchange controls under the laws of PRC.  On this basis, the Plaintiff submits that there is no triable issue in respect of the Plaintiff’s claims of unjust enrichment and constructive trust against the 8^th and 10^th Defendants.

47.  The Plaintiff claims that the illegality would preclude reliance on the defence of bona fide purchaser for value without notice because (1) the defendants cannot be considered to have provided value; and (2) the illegalities negative the good faith on the part of the defendants.  The Plaintiff claims that the illegalities also preclude reliance on the defence of change of position.

48.  The Plaintiff relies on DBS Bank (Hong Kong) Limited v. Pan Jing [2020] 4 HKC 395, which follows Laddie J’s approach to the bona fide purchaser defence where the relevant transactions involve illegalities in Barros Mattos Junior v. General Securities & Finance Ltd [2005] 1 WLR 247.

49.  In Barros Mattos, the defendant companies made various transfers of funds based on the instructions of fraudsters and had converted the monies into Nigerian currency in breach of Nigerian exchange control mechanisms.  On the ground that the defendants’ actions had been illegal, the change of position defence against the claimant’s action in restitution was held to be barred.  Laddie J held that subject to a de minimis threshold, if a defendant’s actions are illegal, it cannot rely on the change of position defence, elaborating at §43 that:

“There is no room for the exercise of any discretion by the court in favour of one party or the other. If the recipient’s actions of changing position are treated here as illegal, the court cannot take them into account. The recipient cannot put up a tainted claim to retention against the victim’s untainted claim for restitution. It may be, as Mr. Briggs suggests, that in some cases the illegality will be so minor as to be ignored on the de minimis principle.”

50.  In Pan Jing, DHCJ Blair stated that, in relation to the bona fide purchaser for value without notice defence, a defendant could not be considered to have provided value for the property if it was transferred pursuant to an illegal transaction, citing and applying §68 of Barros Mattos.  In Pan Jing, the illegality involved was the use of the so-called “underground banking” which was accepted by the court to be illegal under PRC law.  For further support of the proposition, DHCJ Blair at p.407A-B refers to The Principles of the Law of Restitution (3^rd Ed), Graham Virgoat p.659, which states that “The Defendant cannot be considered to have provided value for the property if it was transferred pursuant to an illegal transaction”.  However, there is no further explanation in Virgo or the remainder of the judgment regarding the underlying rationale of the stated proposition. 

Triable Legal Issues

51.  The absolute approach in Barros Mattos and Pan Jing that all kinds of illegality (save for de minimus ones) would preclude reliance on the change of position defence and the bona fide purchaserfor value without notice defence has been criticised for being over rigid and involves conflicting legal authorities. 

52.  I have been helpfully referred by counsel for the 10^th Defendant to Ryder Industries Limited (formerly Saitek Limited) v. Chan Shui Woo [2015] 18 HKCFAR 546, where Lord Collins NPJ said at §56-57:

“56. It has been suggested (obiter) that a contract which is valid by the governing law of the forum, English law, or in this case, Hong Kong law, may be refused enforcement if it has been “performed in such a way that one party (or both parties) commits a legal wrong”: Barros Mattos Jnr v MacDaniels Ltd  [2004] EWHC 1188,  [2005] 1 WLR 247, [30] (Laddie J). But, as Johnston, Conflict of Laws in Hong Kong, para 5-012, text at note 80, rightly points out, this obiter suggestion states the principle much too widely. Thus in Re O’Connor’s Bill of Costs [1993] 1 Qd 423 a Queensland solicitor was entitled to recover on his bill of costs although he had done some of the work in New South Wales where he was not entitled to practise, and where therefore his work was illegal (and must have been contrary to an implied term of the retainer). But he was entitled to recover because the contract did not require an illegal mode of performance and he did not seek to enforce any illegal mode of performance by the client.

57. There may nevertheless be cases in which a sufficiently serious breach of foreign law which reflects important policies of the foreign state or separate law district may be such that it would be contrary to public policy to enforce a contract. But there is no basis in authority or principle for holding that every breach of foreign law would come into this category.” (Emphasis Added)

53.  The passage in The Conflict of Laws in Hong Kong (2^nd edition), Graeme Johnston (at §5-012) approved by Lord Collins NPJ states that “a more flexible approach having regard to the seriousness of the foreign illegality is required to determine whether public policy and comity really require enforcement of the contract to be denied”.  I note that the Ryder decision was not referred to or considered in Pan Jing.

54.  Similarly, it is argued in A Restatement of the English Law of Unjust Enrichment, Andrew Burrows (at p.121), that the better view is that the defendant should only be disqualified from the defence by illegality where the criminality is significant and not trivial:

“The criminality may be relatively trivial (and yet more than de minimis) so that denying the defence may impose too harsh a sanction. The better view therefore is that the defendant should only be disqualified from the defence by illegality where the criminality is significant and not trivial. The word ‘significant’ allows some flexibility; and it may be that the courts will in due course move to the preferable position of applying a ‘proportionate’ response to the illegality taking into account the various policies in play”.

55.  The absolute approach in Barros Mattos is also at variance with suggestions in the authorities that a due sense of proportionality is needed on questions relating to illegality.  In Gray v. Thames Trains Ltd [2009] UKHL 33 at 30, Lord Hoffmann said that: “the maxim ex turpi causa expresses not so much a principle as a policy. Furthermore that policy is not based upon a single justification but on a group of reasons which vary in different situations”.  And in Patel v. Mirza [2017] AC 467, Lord Toulson stated that:

"So how is the court to determine the matter if not by some mechanistic process? In answer to that question I would say that one cannot judge whether allowing a claim which is in some way tainted by illegality would be contrary to the public interest, because it would be harmful to the integrity of the legal system, without (a) considering the underlying purpose of the prohibition which has been transgressed, (b) considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and (c) keeping in mind the possibility of overkill unless the law is applied with a due sense of proportionality. We are, after all, in the area of public policy."

56.  I note that, David Donaldson QC in O’Neil v. Gale [2013] EWHC 644 (Ch) at §67 recognized that Barros Mattos is “somewhat light on reasoning” although, on appeal, Vos LJ giving the judgment of the English Court of Appeal, remarked that “A consideration of that question must await another case”[2].

57.  There is much to be said for the suggestion that Laddie J’s approach in Barros Mattos involved an overly blunt application of the maxim ex turpi causa non oritur action, and a preferable approach would be one that measures the gravity of the defendant’s criminal conduct against the impact of allowing the defence of change of position[3], and in my view the point applies to the bona fide purchaser defence as much as it does to the change of position defence.

58.  As I had said in G H Holdings Limited v. Able Profit Investment Limited[2018] HKCFI 2480 at §§26 & 35, where the applicability and/or force of foreign law is in dispute, the Court cannot determine the summary application on assumed facts and would need to resolve the expert evidence before the Court can decide whether, as a matter of public policy, to enforce the specific transaction in question, this is a matter that will have to be considered at trial.

59.  I also draw guidance from the more recent case of Solyda S.R.L. (A Company Incorporated in Italy) v. Wu Ge and Another [2021] HKCFI 1825, where DHCJ Le Pichon took the view that the issue of whether foreign illegalities would preclude reliance on a change of position defence involved conflicting legal authorities and therefore it was inappropriate for the issue to be decided in a summary manner, stating at §§35-36:

“Barros has also been criticised[4] for being overly rigid due to its absolute approach that all kinds of illegality (save de minimus ones) would deny the defence: see Andrew Burrows, A Restatement of the English Law of Unjust Enrichment (at p. 121) stating that the better view is that the defendant should only be disqualified from the defence by illegality where the criminality is significant and not trivial.

Given the state of the authorities, it is hardly appropriate for this issue to be decided in a summary manner.”

60.  For the above reasons, I find that the illegality argument raised by the Plaintiff involves triable legal issues, which are inappropriate to be resolved in summary judgment proceedings without full argument and should be fully ventilated at trial.

Triable Factual Issues

61.  Further, in respect of the 8^th Defendant, there is no evidence that any underground banking services had been used by Sichuan YouSi in making the 1^st Instalment Payment to the 8^th Defendant.  Even if the transfer of the 1^st Instalment Payment by Sichuan YouSi had involved any illegalities, the 8^th Defendant was merely a recipient, and there is no evidence that shows or from which the Court can infer that the 8^th Defendant had participated in any underground banking.  In my view, the mere fact that a defendant was in receipt of funds remitted through an underground banking system is without more insufficient to defeat a bona fide purchaser for value without notice defence or a change of position defence.

The Unjust Enrichment Claim

62.  The elements of a personal unjust enrichment claim are set out in Big Island Construction (HK) Ltd v. Wu Yi Development Co Ltd[2015] 18 HKCFAR 364.

63.  In making out its unjust enrichment claim, the Plaintiff relies on its alleged mistake in transferring the 1^st Tier Sum to the 1^st Defendant arising from the Alleged Fraud as the unjust factor.  It is well-established that payment by mistake can ground a claim in restitution: Guaranty Bank and Trust Co v Zzzik Inc Ltd(unreported, HCA 1139/2016, 18 July 2016) at §27.

64.  The Plaintiff has sought to demonstrate that there is a proprietary or transactional link between the 1^st Tier Sum and the D8 Sum and D10 Sum, which is established by the following exercise conducted the Plaintiff in obtaining the Banking Records, such that the 8^th and 10^th Defendants can be said to have been enriched at the Plaintiff’s expense.

65.  Even assuming (without deciding) that the 8^th and 10^th Defendants have been enriched at the Plaintiff’s expense, the bona fide purchaser for value without notice defence raised by both the 8^th and 10^th Defendants applies and operates in respect of the Plaintiff’s unjust enrichment claim, and given my findings above on the defence for both the 8^th and 10^th Defendants, the Plaintiff’s summary judgment application insofar as it is based on the unjust enrichment claim also fails.

Conclusion

66.  Summary judgment should be granted in the clearest of cases and the Plaintiff has not demonstrated that this is such a case.  The defence of the 8^th and 10^th Defendants cannot be dismissed at this stage and should be tested at trial.  I refuse to grant summary judgment to the Plaintiff, and I consider that the proper and fair order to make is to grant unconditional leave to defend. 

67.  Given my decision on the Plaintiff’s application for summary judgment above, it is unnecessary for me to deal with the Plaintiff’s application for a vesting order in respect of the D8 Sum.

68.  As to costs, I make a costs order nisi that the costs of the Summary Judgment Summons be in the cause.  The costs order nisi shall become absolute unless an application is made to vary the same within 14 days.