JS MICROELECTRONICS LTD v. ACHHADA DILIP G AND ANOTHER

HCA 1202/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1202 OF 2012

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BETWEEN

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J U D G M E N T

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Introduction

1.  This is the return hearing of the plaintiff’s application for a Mareva injunction against the 2^nd defendant.  The plaintiff seeks its continuation.  On the other hand, the 2^nd defendant applies to have the Mareva injunction discharged and to strike out the amended statement of claim. 

2.  The Mareva injunction was granted by Fung J on 12 July 2012 on ex parte application by the plaintiff.  The 2^nd defendant says that it should be discharged because there was material non-disclosure before the judge.  In any event, the statement of claim, even in its presently amended form and let alone when it was before the judge, discloses no reasonable cause of action and should therefore be struck out, which would also result in the setting aside of the Mareva injunction.

The facts

3.  This matter arose out of a fraud perpetrated by the 1^st defendant on the plaintiff.  In about early July 2011, the 1^st defendant representing himself to be agent for Fortune Century Global (“FCG”), whose sole proprietor was a Ms Lina Wong or Linawati (“Linawati”), entered into an agreement with the plaintiff whereby FCG would supply and the plaintiff would purchase 70,200 Samsung MicroSD memory cards for a total price of US$195,156.00.  On 9 July 2011, at the request of the 1^st defendant, the plaintiff transferred that sum into the bank account of Linawati with HSBC.  Then a sum of US$190,000 was transferred from Linawati’s account into the 2^nd defendant’s account, also with HSBC (“D2’s account”).  There is no dispute that this transfer was caused to be made by the 1^st defendant.  Subsequently, on the same day, two sums in cash, respectively HK$1,010,230 (said to be equivalent to US$130,000) and US$60,000, were paid by two moneychangers to the 1^st defendant.  There is also no dispute that these payments were caused to be made by the 2^nd defendant who requested the moneychangers to do so and he paid them back accordingly.  The goods were never delivered, the 1^st defendant disappeared, and the plaintiff reported the matter to the police.  The 1^st defendant was subsequently arrested and charged.  He was convicted on 13 June 2012 in the District Court on two charges, fraud and money laundering, and sentenced on 14 June 2012 to two and a half years of imprisonment.

4.  The 2^nd defendant’s case is, as disclosed by affidavit evidence, that at the material time he was a trader in electronic goods.  On 9 July 2011, while he was in India, he received a long-distance telephone call from the 1^st defendant who at the 2^nd defendant’s request changed to use MSN to communicate.  The 1^st defendant seemed to be in Hong Kong.  He wanted to buy some electronic goods and he needed Hong Kong dollars to do so.  He asked the 2^nd defendant to help him exchange US dollars to HK dollars.  At his request, the 2^nd defendant let the 1^st defendant know the number of D2’s account.  The 1^st defendant informed the 2^nd defendant that a sum of US$190,000 would be transferred into D2’s account.  Upon the 2^nd defendant’s confirmation with HSBC’s internet banking that a sum of US$190,000 had been transferred into D2’s account, he made arrangements with two moneychangers, one to pay HK$1,010,230 and the other to pay US$60,000, to the 1^st defendant.  The 2^nd defendant reimbursed the moneychangers accordingly.  His case was that he did not know the 1^st defendant’s fraud and he changed his position after receiving the US$190,000 in D2’s account.

The 2^nd defendant’s attack

5.  Mr Pirie, with Mr Khosa, on behalf of the 2^nd defendant, attacks the statement of claim from a number of angles.  He submits that the plaintiff has pleaded and pitched its case as if it had a proprietary interest in the funds in D2’s account for breach of constructive trust at the inception, which is wrong.  This is not a fiduciary relationship case because the plaintiff did not entrust the 2^nd defendant with money.  It paid the money to Linawati, when it did not even know the 2^nd defendant.  Moreover, insofar as the plaintiff relies on the 2^nd defendant’s “knowing receipt”, particulars of the knowledge have to be pleaded as a necessary ingredient of a “constructive trust” before or when the money went into D2’s account, which the plaintiff has failed to do.  Any alleged knowledge of turning a blind eye (“blind-eye knowledge”), as opposed to the 2^nd defendant’s actual knowledge of the 1^st defendant’s fraud, by itself is inadequate to raise a cause of action based on constructive trust and “knowing receipt” against the 2^nd defendant.

6.  Upon a true analysis of the facts, Mr Pirie continues, the plaintiff took the risk of non-delivery of the goods by pre-paying for them.  When there was non-delivery of the goods, it claimed back the money.  The tracing of the money is therefore only an equitable remedy and subject to the 2^nd defendant’s equity of “change of position”.  The purchase of goods by the plaintiff was a voidable transaction and could have been rescinded when there was no delivery.  The 2^nd defendant’s position had changed upon his arranging the moneychangers to pay the 1^st defendant and when that happened, he had no notice or knowledge of the 1^st defendant’s fraud.  The 2^nd defendant was only put on notice on 11 July 2011 by the police who informed him that a complaint of theft of the money had been received.  Mr Pirie points out that the plaintiff in the circumstances of this case had no proprietary interest in the funds in D2’s account and that any attempt to raise a proprietary claim will fail, even if the recipient was put on inquiry.  The only interest in resulting trust, Mr Pirie contends, is in respect of US$67.00, being the profit made by the 2^nd defendant from his assisting the 1^st defendant to exchange the money, which the 2^nd defendant has paid into court on 16 August 2012.

The basis for claiming back the money vis-à-vis the 2^nd defendant

7.  The statement of claim pleads the facts as I attempt to summarise in para 3 above.  The relevant parts are set out below:

“5. A sum of US$190,000 was then transferred from Linawati’s personal account into an account at the Hong Kong Shanghai Banking Corporation Limited under the control of the 2^nd Defendant.

6. Thereafter, a sum of HK$1,001,000.00 was received by the 1^st Defendant on 9^th July 2011. Then, a sum of US$60,000.00 was also received by the 1^st Defendant on 9^th July 2011.

7. The Goods were never delivered after the said transfer. The case was subsequently reported with the police.

8. The 1^st Defendant was eventually arrested and prosecuted. Upon trial in the District Court in proceedings DCCC 85/2012, the 1^st Defendant was convicted of a charge of fraud and a charge of dealing with property knowing or having reasonable grounds to believe to be proceeds of indictable offence. The Plaintiff shall rely on the said conviction in these proceedings.

9. In the premises, the consideration of the payment of the said sum of US$195,156.00 has wholly failed, and the 1^st Defendant has had and received the said sum.

10. Further, the 1^st Defendant has, fraudulently and/or negligently made misrepresentations to the Plaintiff as to the Goods, subject matter of the Agreement, which was intended that the Plaintiff to act in reliance on such representations and the Plaintiff in fact does so by transferring the said sum of US$195,156.00.

PARTICULARS OF FRAUD

(i) In the period of June to July 2011, the 1^st Defendant made representations that the Goods were to be released to the Plaintiff upon payment of the said sum of US$195,156.00.

(ii) The representations were made (a) with the 1^st Defendant knowing to be untrue; or (b) with the 1^st Defendant having no belief in the truthfulness in them; or (c) with the 1^st Defendant being reckless as to the truthfulness in them.

11. Further, as a result of the failure of the performance of the Agreement, a trust was created by operation of law over the said sum of US$195,156.00. The 1^st Defendant was in breach of trust by misappropriating the said sum of US$195,156.00.

12. In these circumstances, the 2^nd Defendant was liable to the Plaintiff for knowing receipt of the sum of US$190,000.00 from the 1^st Defendant’s breach of trust as aforesaid.” 

8.  By a letter of 17 August 2012, the 2^nd defendant’s legal advisers notified the plaintiff’s solicitors that the statement of claim should plead particulars of knowledge on which the plaintiff relied as against the 2^nd defendant.  This resulted in the plaintiff having the statement of claim amended.  The amendment only adds a paragraph 13, which reads:

“13. The 2^nd Defendant had knowledge of the 1^st Defendant’s breach of trust as aforesaid in receipt of the said sum of US$190,000.00 from the 1^st Defendant because he had:-

(i) wilfully shut his eyes to the obvious; and/or

(ii) wilfully and/or recklessly failed to make the inquiries that an honest and reasonable man would make,

in the circumstances particularized below.

PARTICULARS OF CIRCUMSTANCES

(i) The amount of the sum involved is significant.

(ii) The 2^nd Defendant had only briefly met the 1^st Defendant once before the receipt of the said sum.”

9.  As can be seen later, Mr Bruce, leading Mr Hoe, for the plaintiff, accepts that the plea of the matters and circumstances in support of the plaintiff’s case that the 2^nd defendant should have made inquiries as an honest and reasonable man can be improved.  Based on those matters, I consider that the particulars of circumstances can include the following:

(iii)  The 1^st defendant called the 2^nd defendant long-distance when the 2^nd defendant was in India.

(iv)  The 1^st defendant asked the 2^nd defendant to help him get money or to exchange US dollars into HK dollars urgently, instead of having the money exchange transaction done with moneychangers around in the Tsimshatsui area where the 1^st defendant physically was.

(v)  The normal business of the 2^nd defendant’s was as an electronic goods trader and not a moneychanger.

(vi)  The 1^st defendant had never done business with the 2^nd defendant involving that large sum of money as US$190,000.

(vii)  The 2^nd defendant did not know the source (including the identity of the person or account) from which the US$190,000 was transferred or deposited into D2’s account and he did not inquire with the 1^st defendant or with HSBC or with any other person despite the fact that he himself was in India and not in Hong Kong,

The plaintiff will seek leave to add to these particulars after discovery.

10.  The statement of claim, as amended, shows very clearly that the plaintiff alleges that a constructive trust (one created by operation of law) arose in the circumstances, namely, a failure of the performance of the agreement for which the plaintiff had US$195,156 paid or transferred, and the 1^st defendant was in breach of that trust.  The pleading against the 2^nd defendant is his knowing receipt of US$190,000.  The plaintiff does not say that the 2^nd defendant had actual knowledge of the fraud perpetrated by the 1^st defendant or of the 1^st defendant’s breach of trust in causing the transfer of the sum of US$190,000 into D2’s account.  The pleading against the 2^nd defendant is that in the circumstances of the case where he had only briefly met the 1^st defendant once before the receipt of that sum, which was a significant sum, and where the 2^nd defendant had shut his eyes to the obvious and failed to make any inquiry as an honest reasonable man would, he was liable to return the US$190,000 to the plaintiff. 

11.  While Mr Pirie stresses that the facts of this case as pleaded by the plaintiff do not admit of a case of constructive trust and knowing receipt, he does not gainsay that there could be a resulting trust (in the case of equitable tracing as a remedy) in favour of the plaintiff on the sum of US$195,156 which had been paid at the instigation of the 1^st defendant into Linawati’s account and then transferred (at least as to US$190,000 thereof) to D2’s account.  The 2^nd defendant’s defence in this regard is “change of position” in that he had changed his position upon and after receiving the sum of US$190,000 into his D2’s account.  Mr Pirie does not contest that, in these circumstances, the law whether it would be inequitable or unconscionable for the 2^nd defendant to keep the money applies.  For considering this aspect of the case, the 2^nd defendant’s knowledge (whether including “blind-eye knowledge”) would be most relevant.

The law

12.  Mr Pirie directs my attention to a number of authorities.  He refers to In re Goldcorp Exchange Ltd [1995] 1 AC 74, at 102-103 per Lord Mustill for the following propositions.  In a case where a purchaser pays the price pursuant to a sale and purchase agreement, he no longer retains a proprietary interest in the money, and even where he rescinds the agreement he would not be entitled to recover his money, but only an equivalent sum.  In a case where the purchase money was paid under a mistake of fact, that may entitle the purchaser to have the agreement set aside, and to have a personal right to recover the sum equivalent to the amount paid, but even if he had chosen to exercise that right, it would not by operation of law have carried with it a proprietary interest.  Mr Pirie submits that the plaintiff’s case is simply that of a purchaser who claimed back the purchase money when there was no delivery of the goods.  So the tracing remedy is only an equitable one and subject to other equities, namely, the 2^nd defendant’s change of position.

13.  Mr Pirie also refers to El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, where Millett J (as he then was) dealt with the situation of the plaintiff who employed a fiduciary, as compared with others who did not employ any fiduciary but were simply swindled to purchase shares where no breach of fiduciary obligation was involved.  In respect of their respective entitlements to remedies, Millett J said at 734d:

“… having been induced to purchase the shares by false and fraudulent misrepresentations, they are entitled to rescind the transaction and revest the equitable title to the purchase money in themselves, at least to the extent necessary to support an equitable tracing claim: see Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 387-390 per Brennan J. There is thus no distinction between their case and the plaintiff’s. They can rescind the purchases for fraud, and he for the bribery of his agent; and each can then invoke the assistance of equity to follow property of which he is the equitable owner. But, if this is correct, as I think it is, then the trust which is operating in these cases is not some new model remedial constructive trust, but an old-fashioned institutional resulting trust. This may be of relevance in relation to the degree of knowledge required on the part of a subsequent recipient to make him liable.”

14.  Mr Pirie submits that since the 1^st defendant was not a fiduciary of the plaintiff and he was not imposed with any fiduciary obligation, there could not be a constructive trust and the plaintiff could only be entitled to an equitable remedy of tracing by way of a resulting trust.  Moreover, since it is not alleged that the 2^nd defendant had any actual knowledge of the fraud perpetrated by the 1^st defendant, no fiduciary duty could be attached to the 2^nd defendant.

15.  Mr Pirie submits that the 2^nd defendant’s case is that of “change of position” without knowledge.  This “change of position” defence is well recognized.  In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, at 579F-580F, Lord Goff of Chieveley said:

“… where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position. Likewise, … if a thief steals my money and pays it to a third party who gives it away to charity, that third party should have a good defence to an action for money had and received. In other words, bona fide change of position should of itself be a good defence in such cases as these. …”

The learned Law Lord continued:

“… 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. … At present, I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. …”

16.  The required extent or degree of knowledge or bad faith that destroys a defence of “change of position” can be found in subsequent cases.  In Maersk Air Ltd v Expeditors International (UK) Ltd [2003] 1 Lloyd’s LR 491, Her Honour Judge Caroline Alton had this to say at 498:

“36. … a very recent unreported decision in Nihru (sic) Battery v. Milestone Trading Ltd. and Others, [2002] EWHC 1425 (Comm.) in which Mr. Justice Moore Bick had to consider the scope of the defence of change of position particularly in the context of the knowledge/conduct which might or might not warrant depriving a defendant of such defence albeit such knowledge or conduct fell short of actual dishonesty. …

37. I find helpful assistance in the judgment of Mr. Justice Moore Bick at par. 135 in which he rejects the proposition that dishonesty in the Twinsectra sense could amount to the sole criterion for the availability or otherwise of the defence of change of position and concludes that while it was inappropriate to attempt to define the limits of good faith it was 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. …

39.     … knowledge of, or involvement in, the fraud would fall within that description of unacceptable commercial conduct or sharp practice or to be other conduct such as to warrant the conclusion that the defendant did not act in good faith when paying away the moneys.  …”

17.  The case of Niru Battery went on to appeal and is reported in [2004] 2 WLR 1415.  The holding reads:

“ … that on a claim for restitution of money paid under a mistake of fact the essential question was whether on the facts it would in all the circumstances be unconscionable or inequitable, and thus unjust, to allow the recipient of the money to deny restitution to the payer; that where the recipient knew of the mistake it would generally be unconscionable or inequitable to refuse restitution; that in order to defeat the defence of change of position it was not necessary to show that the recipient had been dishonest, merely that he had not acted in good faith; that a person who had or thought he had good reason to believe that a payment had been made to him by mistake failed to act in good faith if he paid the money away without making inquiries of the payer; …”

18.  At pp 1430-1431, Clarke LJ pointed out the similarities between “knowing receipt” and “change of position”.  While dishonesty is not a necessary ingredient of liability in knowing receipt, it is only necessary to show that the defendant knew that the moneys paid to him were trust moneys and of circumstances which made the payment a misapplication of them.  The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.  On the other hand, the change of position defence would be available to a person whose position had so changed that it would be inequitable in all the circumstances to make restitution or, alternatively, to make restitution in full.  When comparing the two: if the circumstances of the receipt are such as to make it unconscionable for the recipient to retain the benefit of it, there is an obvious difficulty in saying that it is equitable for a change of position to afford him a defence.

19.  In BCCI (Overseas) Ltd v Akindele [2001] Ch 437, the knowledge required in “knowing receipt” was discussed.  At 453, referring to Sir Robert Megarry V-C’s judgment in In re Montagu’s Settlement Trusts [1987] Ch 264, Nourse LJ said:

“The effect of Sir Robert Megarry V-C’s decision, broadly stated, was that, in order to establish liability in knowing receipt, the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust and that constructive knowledge is not enough.”

The learned judge further explained at 454D:

“It will have been observed that up to this stage I have made no more than a passing reference to the fivefold categorisation of knowledge accepted by Peter Gibson J in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA (Note) [1993] 1 WLR 509, 575-576: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which will put an honest and reasonable man on inquiry. Reference to the categorisation has been made in most of the knowing receipt cases to which I have referred from In re Montagu’s Settlement Trusts [1987] Ch 264 onwards. In many of them it has been influential in the decision. In general, the first three categories have been taken to constitute actual knowledge (or its equivalent) and the last two constructive knowledge.”

20.  In Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The ‘Star Sea’) [2001] 1 Lloyd’s LR 389, 413-414, Lord Scott of Foscote explained “blind-eye knowledge”.  He said:

“112. … ‘Blind-eye’ knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. …

113. In Eurysthenes, [1976] 2 Lloyd’s Rep. 171; [1977] 1 Q.B. 49, Lord Denning, M.R. gave the following description of ‘blind-eye’ knowledge:

If a man, suspicious of the truth, turns a blind eye to it, and refrains from inquiry – so that he should not know it for certain – then he is to be regarded as knowing the truth.

114. Lord Justice Roskill, in the same case, made clear that ‘privity’ in s. 39(5) ‘must mean that he is privy to the unseaworthiness and not merely that he has knowledge of facts which may ultimately be proved to amount to unseaworthiness’ and then turned to ‘blind-eye’ knowledge. He said at p. 184, col. 2; p. 76:

If the facts amounting to unseaworthiness are there staring the assured in the face so that he must, had he thought of it, have realised their implication upon the unseaworthiness of his ship, he cannot escape from being held privy to that unseaworthiness by blindly or blandly ignoring those facts or by refraining from asking relevant questions regarding them in the hope that by his lack of inquiry he will not know for certain that which any inquiry must have made plain beyond possibility of doubt.

115. …

116.     In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. … In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts.  The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe.  To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity.  That, in my opinion, is not warranted by s. 39(5).”

21.  On behalf of the plaintiff, Mr Bruce maintains that the plaintiff’s claim against the 2^nd defendant is on the basis of constructive trust and “knowing receipt”.  He cites the dictum fallen from Lord Browne-Wilkinson in Westdeutsche Bank v Islington LBC [1996] AC 669 in support.  At 715H to 716D, His Lordship said:

“The stolen bag of coins

The argument for a resulting trust was said to be supported by the case of a thief who steals a bag of coins. At law those coins remain traceable only so long as they are kept separate: as soon as they are mixed with other coins or paid into a mixed bank account they cease to be traceable at law. Can it really be the case, it is asked, that in such circumstances the thief cannot be required to disgorge the property which, in equity, represents the stolen coins? Moneys can only be traced in equity if there has been at some stage a breach of fiduciary duty, i.e. if either before the theft there was an equitable proprietary interest (e.g. the coins were stolen trust moneys) or such interest arises under a resulting trust at the time of the theft or the mixing of the moneys. Therefore, it is said, a resulting trust must arise either at the time of the theft or when the moneys are subsequently mixed. Unless this is the law, there will be no right to recover the assets representing the stolen moneys once the moneys have become mixed.

                       I agree that the stolen moneys are traceable in equity.  But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust.  Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. …”  [Emphasis added.]

22.  Mr Bruce relies on the above passage to base the plaintiff’s case against the 2^nd defendant.  When the 1^st defendant defrauded the plaintiff out of the US$195,156, equity imposes a constructive trust on the fraudulent recipient (the 1^st defendant): the sum that went into D2’s account is recoverable and traceable in equity.  He submits that he does not need to prove that the 2^nd defendant had actual knowledge of the fraud or breach of trust perpetrated by the 1^st defendant.  He relies on Akindele for the proposition that other kinds of knowledge, short of actual knowledge, is good enough for the plaintiff to recover from the 2^nd defendant. 

23.  Mr Bruce very fairly draws my attention to the fact that the above cited dictum of Lord Browne-Wilkinson in Westdeutsche Bank had been followed in Michael Chen Kang Huang & Anor v Peter Lit Ma, HCA 218/2005 (10 July 2009) (Sakhrani J) and in Armstrong DLW GmbH v Winnington Networks Ltd [2012] 3 WLR 835 (Deputy High Court Judge Stephen Morris QC), while Shalson & Ors v Russo & Ors [2005] Ch 281 (Rimer J) and the New Zealand case of Trustees Executors Ltd v Eden Holdings (2010) Ltd [2010] NZHC 1800 (12 August 2010) (Associate Judge Bell in the HC) did not follow it.  Mr Pirie attempts to dissuade me from adopting the said dictum as good law.  He stresses that no court higher than a single High Court first instance judge had ever adopted the said dictum, and draws my attention to various passages in the same judgment of Lord Browne-Wilkinson to say that they were contrary to what was stated in the said dictum.

24.  On the question of knowledge required to establish knowing receipt, Mr Bruce also refers to an authority from our highest court, Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) [2010] 13 HKCFAR 479, 529 where Lord Neuberger of Abbotsbury NPJ, with whom all the four other judges agreed, stated:

“137. If the recipient’s reliance on the alleged agent’s apparent authority, when accepting the asset from the alleged agent on behalf of the principal, was dishonest or irrational, it seems to me that it would be unconscionable for the recipient to retain the asset against the wishes of the principal, or, to put it another way, the recipient would have the relevant ‘actual knowledge (or the equivalent)’. On the other hand, if the reliance was merely negligent, then I doubt that the unconscionability test would, at least normally, be satisfied – at best it would amount to ‘constructive knowledge’.”

25.  In the post Akai context, Falcon Private Bank Ltd v Borry Bernard Edouard Charles Limited & Anor, HCA 1934/2011 (9 July 2012), while making the point that direct knowledge is not required, To J observed:

“102. The concept of knowledge in the context of breach of trust for knowing receipt and knowing assistance and the concept of notice in the context of a bona fide purchaser for value without notice are two different concepts relevant for different purposes. Knowledge is a necessary element which a beneficiary has to establish in a personal claim against a constructive trustee for breach of trust. It includes actual knowledge and blind-eye knowledge. …”

Pleading knowledge

26.  While Mr Pirie argues that the amended statement of claim still fails to plead adequate particulars of knowledge, Mr Bruce maintains that the relevant facts have been pleaded, which should be distinguished from how knowledge is to be proved.  

27.  Mr Bruce submits that even according to the 2^nd defendant’s case, the 1^st defendant was at best a brief acquaintance with the 2^nd defendant and that the 2^nd defendant was asked by the 1^st defendant to exchange a significant amount of money, there is at least a good arguable case that the 2^nd defendant should inquire further into the transaction before proceeding onwards.  Regarding the allegation that the 2^nd defendant was merely making a commercial deal in the transaction, Mr Bruce points out that there is at least a good arguable case that the conduct of the 2^nd defendant does not fall into that category, because he was simply not a moneychanger.  Indeed Mr Bruce expresses doubts as to the true nature of the transaction between the two defendants that day.  He contends that the MSN records of the communications between the two defendants on 9 July 2011 and the days following (that are exhibited to the 2^nd defendant’s affirmation) do not appear to be a complete printout of the chat history file, and that these records show that the 1^st defendant was requiring money from the 2^nd defendant rather than simply requesting a money exchange.  Even if it was a mere money exchange transaction, Mr Bruce argues, there were so many moneychangers in Tsimshatsui where the 1^st defendant was at the time, why was the 2^nd defendant with the “inconvenience” of being in India and not in Hong Kong, approached and chosen to assist?  Moreover, the printout of the HSBC internet daily activity record of D2’s account (as exhibited in the 2^nd defendant’s affirmation) that shows the US$190,000 transferred into the account but without providing the identity of the transferor or transferor account does not seem to be a natural printout but looks like a result of a “cut and paste” job.  In all these circumstances, Mr Bruce submits, the 2^nd defendant should have conducted reasonable inquiry which an honest and reasonable man would have done. 

Whether there was a case of constructive trust

28.  Counsel for the parties have presented contrary arguments on the question of whether there was a case of constructive trust on which the plaintiff can rely as against the 2^nd defendant.  This question is also connected with whether the plaintiff had proprietary right to the sum of US$190,000 after it had been paid into D2’s account.

29.  It seems to me, however, whether there was a constructive trust hinges on how one looks at the facts.  From the prospective of an objective observer, who stands afar from the root of the causes and examine the facts on their face, the plaintiff entered into an agreement for the purchase of goods with FCG through the 1^st defendant as FCG’s agent.  When the plaintiff paid the purchase price into Linawati’s bank account it intended or must in the normal course of events be treated as intending to pass the money’s title to FCG or Linawati and therefore retained no further proprietary interest in it.  The plaintiff could not possibly have intended to impose any trust on the money with which its proprietary interest would be retained.  When the goods were not delivered, the plaintiff of course would like to recoup the money and the law helps it in equitable tracing by attaching a resulting trust to the money.  In this situation, it would not be possible for the law to construct and impose a trust on the money as if the 1^st defendant owed the plaintiff a fiduciary duty in respect of the money.

30.  On the other hand, from the angle of the plaintiff, and for that matter, the angle of the 1^st defendant, the so called agreement for sale and purchase of goods, indeed the whole thing, was but a scam utilized by the 1^st defendant to deceive the plaintiff so that it would part with the sum of money.  There had not been any intention on the part of the 1^st defendant to deliver any goods.  There could not have properly been any intention on the part of the plaintiff (had it known) to pass the money or any interest in it to the 1^st defendant or any nominee of his for the receipt of the money.  From this angle, right from the start the plaintiff could not have the intention to part with the money or its proprietary interest; it would have the 1^st defendant return the money soonest possible; and the 1^st defendant must have known this intention of the plaintiff to be vested with a fiduciary duty towards it to return the money.  Viewed in this manner, the plaintiff would be correct in saying that there was a constructive trust and it had retained the proprietary interest in the money.  Anyone who had received the money would be affected by this trust and should return it to the plaintiff except when he has changed his position as to make it unjust and unconscionable to order him to do so.  Pausing here, in this situation, it can also be said that unless the recipient is affected by “knowing receipt”, he is entitled to keep the money.  But the burden of proof in the two different ways of looking at the matter differs: for “change of position” it would be for the recipient to prove why it is unjust and unconscionable for him to return the money, while for “knowing receipt” it would be for the claimant to prove that the recipient had such knowledge that it would be unjust and unconscionable for him to keep the money.

31.  There is also another way of viewing the facts to support a case of constructive trust.  The plaintiff intended to pay the money to Linawati for the purchase of the goods.  The plaintiff never intended the money to be passed to the 1^st defendant.  Insofar as the 1^st defendant obtained or received the money, he knew the money was for the express or implied purpose of purchasing the goods.  That purpose was attached to the money and the 1^st defendant obtained the money with that constructive trust imposed on it.  When the 1^st defendant caused the money to be transferred into D2’s account he acted contrary to that purpose and committed a breach of trust.  Worse still when he caused the 2^nd defendant to arrange the two sums in cash to be paid to him in exchange for the money that he had caused to be transferred into D2’s account.

32.  At this interlocutory stage, I am not able to resolve this difficult controversial point whether in the circumstances of the facts of this case with a definitive finding yet to be made, there was a constructive trust with proprietary interest in the money that the plaintiff is entitled to trace, or there was merely a resulting trust. In any event, I am not persuaded that the reliance on the factual interpretation referred to in the two immediate preceding paragraphs, together with the dictum of Lord Browne-Wilkinson, is unable to present or establish such a strong arguable case for the plaintiff’s claim as to justify the discharge of the Mareva injunction merely for this reason.

33.  Moreover, it is common ground that D2’s account had been frozen at the behest of the police since sometime in July 2011 after a report of theft had been made, although counsel for both parties are not able to tell me the legal basis or mechanism of how that was done.  The Mareva injunction was at most a continuation of the status quo and does not cause more, as opposed to longer, inconvenience to the 2^nd defendant.

34.  Regarding the application to strike out, in view of what I have said it is obvious that this is not a plain and obvious case that the claim is bad or must fail that warrants this court to make an order to bar the plaintiff from pursuing remedies against the 2^nd defendant.

35.  By reason of the matters aforesaid, I am of the view that there is no justification for me to discharge the Mareva injunction, let alone striking out the statement of claim. 

Other complaints of the 2^nd defendant

36.  Mr Pirie also complains of an absence of proper pleading of knowledge and that there was material non-disclosure in that the plaintiff failed to bring to the attention of the court the 2^nd defendant’s change of position as a perfectly good defence.

37.  The skeleton argument dated 12 July 2012 of Mr Felix Hoe, counsel for the plaintiff, submitted to the judge hearing the application for Mareva injunction ex parte did not mention any possible defence that the 2^nd defendant might have.  On the contrary, it submitted that there was a good arguable case against the 2^nd defendant. However, the affidavit filed on behalf of the plaintiff, ie, the affidavit of Mr Bruno Yiu, specifically referred to the fraud perpetrated by the 1^st defendant and exhibited a copy each of the Reasons for Verdict and the Reasons for Sentence of the District Judge who convicted the 1^st defendant.  The evidence of the 2^nd defendant (as PW5) at the trial was mentioned.  The 1^st defendant approached the 2^nd defendant over the long-distance phone (and later MSN) when the 2^nd defendant was in India on 9 July 2011, informing him that the 1^st defendant was about to complete a deal in Hong Kong.  He asked the 2^nd defendant to covert some US dollars into Hong Kong dollars for him.  The rate of exchange was agreed.  The 2^nd defendant later had confirmation on the internet that a sum of US$190,000 had been transferred into his D2’s account and he made arrangements with his currency exchanger friends for the 1^st defendant to collect HK$1 million from one place and the remaining balance from another (see paras 18 to 20 of the Reasons for Verdict).  If I may say so, these facts clearly present a case of “change of position” that the 2^nd defendant might have and the surrounding circumstances.  There is no evidence that the judge did not know these facts when granting the Mareva injunction sought by the plaintiff.  I do not accept Mr Pirie’s argument that there was a material non-disclosure justifying the discharge of the Mareva injunction.

38.  On the complaint of inadequate pleading of knowledge, Mr Bruce concedes, in view of at least what he submits (see para 27 above), that the particulars of the circumstances under paragraph 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, because at least there must be a better record from HSBC than the daily activity sheet regarding D2’s account and a better or more complete MSN chat record than the present one the 2^nd defendant has exhibited, which may throw better light on the circumstances surrounding the transaction between the two defendants on that eventful day of 9 July 2011.

39.  Mr Pirie also argues by raising a rhetorical question: even if the 2^nd defendant were to make inquiry with the 1^st defendant and even with Linawati, what would have been disclosed to him that would give him such knowledge as to make knowing receipt available to the plaintiff?  He submits that the 1^st defendant would not have confessed his fraudulent design to him and that Linawati would not have told him anything suspicious either.  I do not accept this argument about Linawati.  She was the holder of the account into which the sum of US$195,156 was deposited and from which a sum of US$190,000 was transferred to D2’s account.  According to the evidence she gave as PW9 in the District Court at the trial of the 1^st defendant, she did not seem to have knowledge of an agreement for the sale of electronic goods having been made between her or her company with the plaintiff and she did not seem to have knowledge why such a large sum of money of over US$190,000 was paid into her account.  When she questioned the 1^st defendant, he asked her to transfer it to another HSBC account, ie D2’s account, which she did.  See para 28 of the Reasons for Verdict.  I would have thought that any reasonable inquiry with Linawati will likely raise doubts in the mind of an honest and reasonable man upon her revelation of these circumstances to the inquirer.

Conclusion

40.  By reason of the matters aforesaid, I consider that there was a good arguable case to sustain the Mareva injunction and I reject the contention that there was material non-disclosure before the ex parte judge.  In the circumstances, I think it right to let the Mareva injunction continue in the same terms until after the trial of this action or until further order.  The 2^nd defendant’s application is dismissed. I make an order nisi that the 2^nd defendant pay the plaintiff the costs of their two respective applications before me, to be taxed if not agreed.