ARROW ECS NORWAY AS v. M YANG TRADING LTD AND OTHERS

HCA 239/2016

[2018] HKCFI 975

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 239 OF 2016

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JUDGMENT

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INTRODUCTION

1.  This is the Plaintiff’s application for summary judgment against the 5^th, 10^th, 11^th, 13^th, 14^th and 15^th Defendants (collectively the “Second Level Recipients”) in respect of various sums of money (totalling US$4,188,175) received by them from a bank account of the 2^nd Defendant which the Plaintiff says represent a portion of the money which it was induced by fraud to transfer to the said bank account of the 2^nd Defendant. The Second Level Recipients admit that they received the sums in question, and seek to defend the Plaintiff’s claims against them on the ground of change of position, in that they received the funds and subsequently paid them out in good faith and in the usual course of their “money changing business”.

2.  The main issue which arises for determination is whether the Second Level Recipients cannot rely on the defence of change of position because of “illegality”.

BASIC FACTS

3.  The Plaintiff, a company incorporated in Norway, is a subsidiary of Arrow Electronics Inc (“Arrow Electronics”), a NYSE listed company in the United States of America carrying on business as a global provider of products, services and solutions to industrial and commercial users of electronic components and enterprise computing systems.

4.  The 2^nd Defendant is a company registered in Hong Kong and the holder of a bank account at Bank of Communications, Shanghai Branch (“D2 Account”).

5.  Between 18 and 22 January 2016, the Plaintiff was induced by person(s) impersonating himself/themselves, over the telephone or in emails, as the CEO of Arrow Electronics or a lawyer with a Wisconsin law firm (“the Fraud”) to transfer, inter alia, 9 sums totalling US$23,395,000 to the D2 Account (collectively the “D2 Transfers”), as follows:-

	Date	Amount (US$)
(i)	18 January 2016	977,000
(ii)	19 January 2016	2,752,000
(iii)	20 January 2016	1,770,000
(iv)	20 January 2016	2,978,000
(v)	21 January 2016	2,997,000
(vi)	21 January 2016	2,979,000
(vii)	21 January 2016	2,970,000
(viii)	22 January 2016	2,995,000
(ix)	22 January 2016	2,977,000
	Total:	23,395,000

6.  On or about 22 January 2016, the Plaintiff and Arrow Electronics discovered that the Plaintiff had been the victim of the Fraud, and the D2 Transfers had been erroneously made as a result of the Fraud.

7.  The Plaintiff immediately contacted its banker, Nordea Bank Norge ASA, and instructed it to recall, inter alia, the D2 Transfers.  The bank was able to recall Items (vii) and (ix) above, but was unable to do so in respect of the balance of US$17,423,000.

8.  Between 20 and 22 January 2016, portions of the aforesaid sum of US$17,423,000 were transferred from the D2 Account to, inter alia, various bank accounts of the Second Level Recipients at HSBC in Hong Kong, as follows:-

Account	Amount (US$)
D5 Account	450,000
D10 Account	1,041,480
D11 Account	491,025
D13 Account	1,200,000
D14 Account	570,470
D15 Account	435,200
Total:	4,188,175 (“the Funds”)

9.  The Plaintiff does not allege that the 2^nd Defendant or the Second Level Recipients were directly involved in the Fraud, other than that they were in receipt of the Funds.  On this footing, the Plaintiff claims to be entitled to recover from the Second Level Recipients the respective sums which they received from the D2 Account on the grounds of money had and received, unjust enrichment and/or restitution.

The DEFENCE

10.  The Second Level Recipients’ defence to the Plaintiff’s claims is, in summary, as follows.

11.  Silver Fast Limited (“Silver Fast”) was at all material times a money service operator licensed by the Customs and Excise Department of Hong Kong (“CED”) to carry on money changing business providing remittance services and services for exchange of currencies (“the Money Changing Business”).

12.  Silver Fast primarily provided its services to residents or customers in the PRC who needed to exchange foreign currencies but had difficulties, or found it costlier, to do so in the PRC because of foreign exchange controls imposed by the PRC Government.

13.  Chen Mingui (“Madam Chen”) was at all material times the person responsible for the main operations of the Money Changing Business of Silver Fast.  She was a close friend of Ms Chen Yajian, Mr Luo Suixiong and Mr Chen Yongzhang, who were directors of the 10^th, 13^th and 14^th Defendants respectively (collectively the “Respective Directors of D10, D13 and D14”).

14.  In or about 2014, Silver Fast, in view of the cancellation of its bank account at HSBC for administrative reasons and with the consent of the Respective Directors of D10, D13 and D14, started to use the D10 Account, D13 Account and D14 Account for its Money Changing Business.

15.  On the other hand, the 5^th, 11^th and 15^th Defendants at all material times carried on business as unlicensed money service operators in Hong Kong.

16.  Zheng Zhouru (“Madam Zheng”), a PRC resident carrying on a money changing business in the PRC –

(1)  had business dealings with various money service operators in Hong Kong, including Silver Fast, and the 5^th, 11^th and 15^th Defendants;

(2)  had a long term customer called Hu Guozhi (“Mr Hu”); and

(3)  did not have any bank account in Hong Kong.

17.  Between 20 and 22 January 2016, Mr Hu informed Madam Zheng that he wished to convert approximately US$5 million into RMB.  Madam Zheng decided to engage Silver Fast and the 5^th, 11^th and 15^th Defendants to receive the funds (in USD) from Mr Hu, and they all agreed to provide the relevant remittance services and indicated that the funds could be transferred to the bank accounts of the Second Level Recipients.

18.  Pursuant to aforesaid arrangements, the following took place:-

(1)  In respect of the 5^th Defendant –

(a) on 20 January 2016, a sum of US$300,000 was transferred from the D2 Account to the D5 Account;

(b) on 21 January 2016, a sum of US$150,000 was transferred from the D2 Account to the D5 Account; and

(c) on 21 January 2016, pursuant to the instructions of Madam Zheng provided on behalf of Mr Hu, the 5^th Defendant arranged various transfers totalling RMB2,856,778 to Madam Zheng’s designated accounts in the PRC.

(2)  In respect of the 11^th and 15^th Defendants –

(a) on 21 January 2016, a sum of US$491,025 was transferred from the D2 Account to the D11 Account, and another sum of US$435,200 was transferred from the D2 Account to the D15 Account; and

(b) on 21 January 2016, pursuant to the instructions of Madam Zheng provided on behalf of Mr Hu, the 11^th and 15^th Defendants arranged various transfers or remittances totalling RMB6,131,609 to Madam Zheng’s designated accounts in the PRC.

(3)  In respect of the 10^th Defendant –

(a) on 21 January 2016, 5 different sums making up a total of around US$1 million were transferred from different accounts or entities to the D10 Account;

(b) the 5 transfers include one for US$300,000 transferred from the D2 Account; and

(c) on 21 January 2016, pursuant to the instructions of Madam Zheng provided on behalf of Mr Hu, Silver Fast arranged various transfers totalling RMB6,732,670 to Madam Zheng’s designated accounts in the PRC.

(4)  In respect of the 10^th, 13^th and 14^th Defendants –

(a) on 22 January 2016, 7 sums totalling US$2,511,950 were transferred from the D2 Account to the D10, D13 and D14 Accounts, as follows –

Recipient Account	Amount (US$)
D14 Account	325,240
D14 Account	245,230
D13 Account	423,880
D13 Account	310,820
D13 Account	465,300
D10 Account	357,375
D10 Account	384,105

(b)   on or about 22 January 2016, pursuant to the instructions of Madam Zheng provided on behalf of Mr Hu, Silver Fast arranged various transfers totalling RMB16,885,314 to Madam Zheng’s designated accounts in the PRC.

19.  It was the Second Level Recipients’ belief that the Funds were transferred from the D2 Account to their respective accounts in the course of the money changing businesses operated by them and/or Silver Fast for legitimate commercial purposes and the Funds were received in good faith, with consideration provided and without notice of the Fraud.

20.  The Second Level Recipients changed their position as a result of the receipt of the Funds, in that they transferred the Funds out of their respective accounts afterwards.

21.  Accordingly, the Second Level Recipients have not been enriched and are not liable to repay the respective sums received by them to the Plaintiff.

DISUCSSION

22.  As I understand from the submissions of Ms Connie Lee (for the Second Level Recipients), she does not seriously dispute that, subject to the defence of change of position, the Plaintiff is entitled to recover the respective sums that the Second Level Recipients received from the D2 Account on the grounds of money had and received, unjust enrichment and/or restitution.  This seems to me to be correct as a matter of principle (see paragraph 14 of an earlier Decision of Recorder L Wong SC, as she then was, given on 22 September 2016 when dealing with an application for summary judgment by the Plaintiff against the 1^st Defendant in this action).  On the other hand, Mr Anson Wong SC (for the Plaintiff), while accepting that, for the present purpose, the sums received by the Second Level Recipients were subsequently paid out, contends that they cannot make out the defence of change of position because:-

(1) there was no causal link between the receipt and change of position; and

(2) the Second Level Recipients cannot rely on the defence of change of position because of “illegality” and/or they did not act “in good faith”.

(i)   The effect of “illegality” on the defence of “change of position”

23.  I shall fist deal with the Plaintiff’s contention that the Second Level Recipients cannot rely on the defence of change of position because of “illegality”.

24.  In Barros Mattos Junior v MacDaniels Ltd [2005] 1 WLR 247, Laddie J held that an innocent recipient of stolen money could not rely on the defence of change of position where that change was regarded by the court as wrongful, and that if the recipient’s actions of changing position were treated as illegal the court could not take them into account and had no discretion to do so, unless the illegality was so minor as to be ignored on the de minimis principle.  In that judgment, Laddie J first set out the arguments of counsel for the claimants, as follows:-

“[22] Mr Briggs argues that this does not get the defendants home. He says that an innocent recipient cannot rely upon a plea of change of position where that change would be regarded by our courts as wrongful. This submission is based on the following passage in the speech of Lord Goff in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 , 580 (emphasis added):

‘I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration. They do not arise in the present case.’

[25] Mr Briggs explains this brief passage in the Lipkin Gorman case as follows. A court will not allow a party to plead or rely on activity which it regards as illegal or wrongful. Thus, if the change of position is wrongful, the court will decline to allow the recipient to rely on it…

[26]   He argues that this is consistent with the decision of the House of Lords in Tinsley v Milligan [1994] 1 AC 340…

[28]   This principle applies as between conspirators in a wrongdoing. Neither can be heard to base his claim or his defence upon the wrongdoing. The court will not take notice of illegal activity. The result is indiscriminate in the sense that the party which benefits from the application of the principle does so not because of any merits on his side but simply because the other party is debarred from relying on the illegal activity for his claim or defence, as the case may be. Mr Briggs says that the same principle must apply not only as between parties to the wrongdoing but also, as here, where the claimant is not a party to the wrongdoing but the recipient of the stolen funds is. On public policy grounds, the court will not allow the recipient to hold onto the claimant's money if, to do so, he has to rely on a change of position which the court considers illegal.

[30] First, our common law requires the English courts to take notice of the illegality of a contract in each of the following circumstances: (a) contracts the object of which involves committing a legal wrong or carrying out conduct otherwise contrary to public policy; (b) contracts entered into for the purposes of doing the above; or (c) contracts performed in such a way that one party (or both parties) commits a legal wrong or carries out such conduct.”

25.  The learned judge’s conclusion on the law can be found in the following passages of his judgment:-

“[42] I do not understand Miss Roberts to dispute Mr Briggs's general proposition. Her point is that this was an undeveloped area of law and that the courts have to decide on a case by case basis whether the wrongdoing is of sufficient significance to deprive the recipient of his defence of change of position. In each case the court needs to decide whether the recipient's actions are so heinous that it would be equitable to require restitution in full.

[43] I do not accept that submission. It would represent a return to the principle of the length of the Lord Chancellor's foot (or the foot of whosoever takes the Lord Chancellor's place). It seems to me that the approach of Lord Goff in Tinsley v Milligan [1994] 1 AC 340 , set out at para 27 above, applies to this sort of case. 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. This is not such a case.”

26.  There have been some attempts to argue that the decision of Laddie J in Barros Mattos Junior is wrong (see, for example, Kathleen Margaret O’Neil v Faye Gale [2013] EWCA Civ 1554, at paragraphs 26 and 27; DBS (Hong Kong) Limited v Tian Wen Quan, HCA 3228/2016, 7 December 2017).  I have not, however, been referred to any case authority which holds that the decision of Laddie J is wrong.

27.  Similar to the argument advanced on behalf of the defendants in Barros Mattos Junior, Ms Lee argues that the effect of illegality on the defence of change of position is “subject to unsettled development at this stage”, and that the said decision of Laddie J is based on Tinsley v Milligan but that has effectively been overruled by the UK Supreme Court in Patel v Mirza [2017] AC 467.

28.  I accept that the correctness of the decision in Tinsley v Milligan may well be open to review in view of Patel v Mirza, but such review cannot be undertaken by the Court of First Instance.  This is because in Kan Wai Chung v Hau Wun Fai [2016] 5 HKC 585, Cheung JA (with whom Yeung VP and Kwan JA agreed) said at paragraph 8.7 that “this Court [ie, the Court of Appeal] is bound by the decision of the Court of Appeal which adopted the majority view of Tinsley”, and referred to the observation of Tang VP (as he then was) in Loyal Luck Trading Ltd v Tam Chun Wah [2008] 4 HKLRD 681, at paragraph 48, that the potential conflict between Tinsley v Milligan and Nelson v Nelson could only be resolved by the Court of Final Appeal.  If the Court of Appeal is bound to apply Tinsley v Milligan, so must the Court of First Instance.

29.  In the circumstances, I consider that I am bound to accept Tinsley v Milligan as correctly stating the law in Hong Kong. It follows that I should also accept the correctness of the decision of Laddie J in Barros Mattos Junior, because that is the logical consequence of the application of the principle established in Tinsley v Milligan.

30.  In the present case, it is clear that the 5^th, 11^th and 15^th Defendants cannot rely on the defence of change of position because, according to them, the receipts and payments out mentioned in paragraph 18(1) and (2) above occurred in the course of their operation of unlicensed, and therefore illegal, money service businesses, contrary to Part 5 of Division 2 of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, Cap 615 (“the Ordinance”).

31.  The same consideration applies to the position of the 10^th, 13^th and 14^th Defendants. Although Silver Fast was a licensed money service operator and, allegedly, used the D10 Account, D13 Account and D14 Account for its Money Changing Business:-

(1)  According to the affirmations filed by the Respective Directors of D10, D13 and D14, they had no control over the D10, D13 and D14 Accounts and allowed those accounts to be used by Silver Fast to operate the Money Changing Business as it liked, and had no knowledge as to the identity of the 2^nd Defendant.

(2)  According to the 1^st affirmation of Madam Chen, Silver Fast was told by Madam Zheng on or about 21 January 2016 that one of her customers (unidentified) wished to exchange US$1 million to an equivalent sum in RMB and Silver Fast provided the money changing service requested by Madam Zheng, apparently without making any further inquiries about the identity of the “customer” or other details of the transaction.  The same is true of Madam Zheng’s further approach on 22 January 2016 when Silver Fast was informed that “she had another US$2 odd million which would need to be exchanged into an equivalent sum of Renminbi”.  Indeed, it was only after Madam Chen had received notice of the Injunction Orders granted by the court in this action in January/February 2016 that she “enquired with Zheng as to what really happened” and was given to understand that “Zheng also does not and did not know D2 and she only received instructions from her long term customer known as Mr. Hu Guozhi” (see paragraphs 21, 25 and 35 of Madam Chen’s 1^st affirmation).

(3)  In paragraph 15 of her 2^nd affirmation, Madam Chen further said that she “was not even aware that the transferor was D2”.

(4)  In the circumstances, it is clear that Silver Fast, and (in so far as relevant) the 10^th, 13^th and 14^th Defendants, failed to comply with the raft of customer due diligence requirements imposed by paragraphs 2, 3, 8, 9 and 13 of Schedule 2 to the Ordinance.  I do not propose to set out the details of those requirements here because the breaches are not seriously disputed by Ms Lee.  She has not advanced any submissions to contend that there was no breach of the relevant requirements.

(5)  In other words, the receipts and payments out mentioned in paragraph 18(3) and (4) above occurred in the course of Silver Fast’s Money Changing Business which was being carried out in an unlawful or illegal manner.

(6)  The breaches of the customer due diligence requirements cannot be said to be so minor as to be ignored on the de minimis principle.  On the contrary, those requirements are, it seems to me, precisely the sort of measures designed to prevent what happened here, namely, the rapid and successive transfers of the proceeds of a fraud by unknown or unidentified persons or entities through different bank accounts in multiple jurisdictions.

(ii)   Absence of causal link between the receipt and change of position

32.  Having reached the above conclusions, I propose to deal with the Plaintiff’s remaining arguments, namely, (i) there was no causal link between the receipt and change of position, and (ii) the Second Level Recipients did not act “in good faith”, only briefly.

33.  In order to make out the defence of change of position, it is obvious that the Second Level Recipients must show that there was a causal link between the receipt and change of position.  For this purpose, in order to successfully resist the Plaintiff’s application for summary judgment, the Second Level Recipients are required to condescend upon particulars and adduce sufficient evidence that is capable of being believed to show that there is a fair or reasonable probability of a real or bona fide defence.

34.  In so far as the 5^th, 11^th and 15^th Defendants are concerned, they allege that they carried on business as money service operators.  However, none of them has produced any business records such as contracts, invoices, receipts, clients’ instructions, books and accounts in respect of their alleged businesses.  The absence of business records cannot be explained away simply on the ground that they are unlicensed money service operators, because such business records are essential even for an illegal business operation of the nature in question.  Further, the evidence adduced by or on behalf of these defendants in respect of the relevant fund flows is scanty.  In particular, no documentary evidence such as bank statements, remittance advices or receipts has been produced to show that funds were transferred by the 11^th and 15^th Defendants to Madam Zheng’s designated accounts in the PRC as alleged.  I do not consider that the 11^th and 15^th Defendants have produced sufficient evidence of a causal link between the receipt and change of position of such quality as would entitle them to be given leave to defend the Plaintiff’s claims against them.  In so far as the 5^th Defendant is concerned, if this were the only point against it, I would be disposed to grant only conditional leave to defend, namely, payment into court of the amount claimed less such sum in the D5 Account as may have been frozen by the Injunction Orders.

35.  The quality of the evidence produced by Silver Fast and the 10^th, 13^th and 14^th Defendants regarding the fund flows is better, but is still incomplete to establish a complete chain of funds flowing from the D2 Account to the D10/D13/D14 Accounts to Silver Fast’s account and then to Madam Zheng’s designated accounts in the PRC.  If this were the only point against the 10^th, 13^th and 14^th Defendants, I would be disposed to grant them only conditional leave to defend, namely, payment into court of the respective amounts claimed against them less such sums in the D10/D13/D14 Accounts as may have been frozen by the Injunction Orders.

(iii)   Absence of good faith

36.  The Plaintiff’s further argument that the defence of change of position is precluded because the Second Level Recipients did not act “in good faith” is based on the same facts and matters relied upon by it in support of the argument about “illegality”.  It has been said that “bad faith” is capable of “embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself” (see Niru Battery Manufacturing Co v Milestone Trading Ltd [2002] EWHC 1425 (Comm), per Moore-Bick J at paragraph 135, which was approved by the English Court of Appeal, [2004] QB 985, at paragraph 164 per Clarke LJ).  At paragraph 149 of the judgment of the Court of Appeal, Clarke LJ said that the essential question is “whether it would be inequitable or unconscionable, and thus unjust, to allow the recipient of money paid under a mistake of fact to deny restitution to the payer.” In view of the illegality mentioned above, I consider that the Second Level Recipients failed to act in a commercially acceptable way, and that it would be inequitable, unconscionable, or unjust to allow the Second Level Recipients to deny restitution to the Plaintiff.

DISPOSITION

37.  For the foregoing reasons, I give judgment in favour of the Plaintiff in terms of paragraphs 1(a) and (e), 2(a) and (e), 3(a) and (e), 4(a) and (e), 5(a) and (e), and 6(a) and (e) of the Plaintiff’s summons dated 8 February 2018, together with pre-judgment interest at the prime rate plus 1% per annum from the respective dates on which the judgment sums were received by the 5^th, 10^th, 11^th, 13^th, 14^th and 15^th Defendants respectively to the date of this judgment, and post-judgment interest pursuant to Section 49 of the High Court Ordinance.

38.  On the question of costs, I order the 5^th, 10^th, 11^th, 13^th, 14^th and 15^th Defendants to pay the Plaintiff’s costs of the application for summary judgment, including the costs of the hearing on 12 February 2018, to be taxed if not agreed with certificate for one counsel.  As for the costs of the action itself, I shall leave it to the parties to agree on how they should be apportioned having regard to the fact that the present action includes other claims against other defendants not before the court, with liberty to the parties to apply for further directions in the event that the matter cannot be resolved by agreement.

39.  The Plaintiff does not oppose the 5^th, 10^th, 11^th, 13^th, 14^th and 15^th Defendants’ summons dated 8 February 2018 seeking leave to file and rely on the affirmation of Tsang Hin Man Terence for the purpose of the hearing on 12 February 2018.  I make an order in terms of that summons.

40.  Lastly, it remains for me to thank counsel for their assistance rendered to the court.