IDEMITSU CHEMICALS (HONG KONG) CO. LTD v. YANQING LTD AND OTHERS

HCA 148/2020

[2024] HKCFI 1075

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 148 OF 2020

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J U D G M E N T

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I.  INTRODUCTION

1.  In January 2020 the Plaintiff (Idemitsu HK) fell prey to a sophisticated phone and email scam. It was tricked into transferring US$2,978,000 to the bank account (the Yanqing account) of the 1^st Defendant (Yanqing) at CMB Wing Lung Bank Limited on 15 January 2020. It was also duped into remitting a total of US$13,171,000 to the bank account (the Zhigang account) of the 2^nd Defendant (Zhigang) at Bank of China (Hong Kong) Limited between 15 and 20 January 2020. Shortly after discovering the fraud, Idemitsu HK started these proceedings against Yanqing and Zhigang to recover the funds paid to their accounts. As information came to light about how monies had been further transferred from the Zhigang account to other accounts, Idemitsu HK joined additional parties as the 3^rd to 32^nd defendants in these proceedings.

2.  Idemitsu HK has since obtained judgments against (or reached settlements with) 28 of the 32 defendants. Four defendants remain: Yanqing, Zhigang, the 10^th defendant (Brilliant One), and the 20^th defendant (Creaton). Creaton has been wound up and Idemitsu HK’s claim against it has been stayed. Idemitsu HK is not pursuing its claim against Creaton in this trial.

3.  Yanqing and Zhigang have never participated in this action. They have not filed any defence despite having been served with the relevant documents at their registered addresses.

4.  Brilliant One received about US$300,000[1] from the Zhigang account on 20 January 2020. Brilliant One was legally represented in these proceedings up to the pre-trial review on 19 December 2023. But on 30 January 2024 Brilliant One’s solicitors ceased to act for it. Brilliant One did not appear in the trial before me.

5.  Brilliant One admits to receiving the US$300,000 from Zhigang. By way of defence, it claims to have changed its position following receipt of the monies. Specifically, Brilliant One says that it used up the US$300,000, because it believed that the monies were part payment for the sale by it of a vessel PL HAU LAAM (the Vessel) to King Chuen International Investments Limited. Brilliant One suggests that it acted throughout in good faith and without wrongdoing, all along thinking that the US$300,000 had been remitted to its account at King Chuen’s instruction by intermediary money changer and remittance agents in Mainland China. It understood from King Chuen that the monies had been so remitted to get around foreign exchange controls in Mainland China. Brilliant One claims to have used the US$300,000 to pay off its creditors in the ordinary course of business.

6.  Idemitsu HK challenges Brilliant One’s entitlement to rely on change of position.

7.  Accordingly, I must determine the following issues:

(1)  Whether Idemitsu HK was induced by fraud into transferring US$2,978,000 to the Yanqing account and US$13,171,000 to the Zhigang account and (If so) with what consequence?

(2)   Whether Idemitsu HK can claim in unjust enrichment against Brilliant One?

(3)  Whether Brilliant One can rely on change of position as a defence?

II.  BACKGROUND

8.  Idemitsu HK is a wholly owned subsidiary of Idemitsu Kosan Co Ltd, a Japanese listed company. Mr Shunichi Kito is Idemitsu Kosan’s president and representative director. Mr Ryozo Takagi was Idemitsu HK’s managing director from July 2019 to March 2020. In the account below, I use the expression “fraudster” to denote the person or persons who perpetrated the scam on Idemitsu HK.

9.  On 15 January 2020, the fraudster telephoned Mr Takagi, purporting to be Mr Kito. Mr Takagi had previously worked under Mr Kito for a year. According to Mr Takagi, the fraudster so closely mimicked Mr Kito’s voice that Mr Takagi was completely taken in. The fraudster instructed Mr Takagi to cooperate with a “Mr Martin Zelner” on the payment of an alleged merger and acquisition being transacted by Idemitsu Kosan. The fraudster identified “Mr Zelner” as the lawyer handling the merger and acquisition transaction. The fraudster warned that the transaction was highly confidential, so that Mr Takagi should not discuss the matter with anyone apart from Mr Kito and Mr Zelner. The fraudster told Mr Takagi to email martin@martinzelner.com for information on payment. Mr Takagi complied.

10.  On the same day, this time impersonating Mr Zelner, the fraudster sent Mr Takagi a fake document entitled “Full Authority to Act/Ryozo Takagi” with what appeared to be Mr Kito’s signature. By the document, Mr Kito ostensibly authorised Mr Takagi to act on Idemitsu Kosan’s behalf in all matters relating to forthcoming payments. The cover email to the document stated that Mr Zelner worked out of Martin Zelner Law Office LLC. There is in fact a real lawyer named Mr Martin Zelner. But he works as an attorney with Cox Padmore Skolnik & Shakarchy LLP, has a wholly different email address, and has had no involvement at all in this matter. Nevertheless, acting on the false Mr Zelner’s instructions, Mr Takagi transferred US$2,978,000 to the Yanqing account and an initial tranche of US$2,990,000 to the Zhigang account.

11.  On 16 January 2020, as the pretend Mr Kito, the fraudster told Mr Takagi to await further instructions from Mr Zelner. The phone number shown in the caller display of Mr Takagi’s telephone was that of Idemitsu Kosan. At 4.29 pm, Mr Takagi received an email from the fake Mr Zelner to transfer US$3,977,000 to the Zhigang account. Mr Takagi did so on the next day.

12.  On 20 January 2020, the false Mr Kito told Mr Takagi (and the fake Mr Zelner confirmed by email) to pay further tranches of US$2,226,000 and US$3,978,000 into the Zhigang account. Mr Takagi did so on the same day. Thereafter, at 3:47 pm on 20 January 2020, Zhigang transferred US$300,000 to Brilliant One’s bank account.

13.  The fraudster also instructed Mr Takagi to transfer further sums to bank accounts in the UAE. Mr Takagi obeyed. However, those transfers are not the subject matter of these proceedings.

14.  On 3 February 2020, the false Mr Kito telephoned Mr Takagi that Idemitsu Kosan would be sending US$100,000,000 to Idemitsu HK. Mr Takagi was instructed to negotiate overdraft facilities with Idemitsu HK’s bank on the strength of that supposedly incoming US$100,000,000, to enable Idemitsu HK to make further payments straightaway. As Mr Zelner, the fraudster then emailed a document entitled “Fund Transfer/ Ryozo Takagi”. The document was seemingly signed by Mr Kito and dated 3 February 2020. It stated that Idemitsu Kosan would be transferring US$100,000,000 to Idemitsu HK on 6 February 2020.

15.  Mr Takagi submitted the document to Idemitsu HK’s bank. Unknown to Mr Takagi, the bank forwarded the document to its office in Japan which in turn sought confirmation from Idemitsu Kosan. The fraud then unravelled. Upon learning from the bank what was apparently going on, Mr Yoshitaka Onuma, executive officer and general manager of the financing and accounting department of Idemitsu Kosan, informed Mr Takagi that Idemitsu Kosan had never sent the document. Mr Kito in turn confirmed that he had not signed the document, was not handling any merger and acquisition transaction, and never instructed Mr Takagi to transfer monies in January and February 2020.

16.  Idemitsu HK started these proceedings on 6 February 2020. It obtained Mareva injunctions against Yanqing and Zhigang. It discovered that, as at 6 February 2020, the Yanqing account held HK$465,355.17, US$91.96, A$125.99, and €8.37. The Zhigang account held HK$15,608.49, €8.61, and US$56.68 as at the same date. By these proceedings, Idemitsu HK seeks recovery of the US$2,978,000 transferred to the Yanqing account, the US$13,171,000 transferred to the Zhigang account, and the US$300,000 transferred by Zhigang to Brilliant One. At the trial before me, Idemitsu HK stated that it was only claiming against Yanqing, Zhigang, and Brilliant One in unjust enrichment.

17.  Idemitsu HK has not yet obtained the full amounts due to it under the default judgments or settlement agreements reached with the 28 defendants mentioned in [2] above. Idemitsu HK may never receive all such monies. Nonetheless, Idemitsu HK is prepared to simplify matters and to claim against Zhigang the sum of US$13,171,000 less the amounts claimed by idemitsu HK against the 3^rd, 4^th, 5^th, 6^th, 7^th, 8^th, 9^th, 11^th, 12^th, 13^th, 14^th, 15^th, 16^th, 17^th, 18^th, 19^th, 21^st, 22^nd, 23^rd, 24^th, 25^th, 26^th, 27^th, 28^th, 29^th, 30^th, 31^st and 32^nd defendants in the Re-Amended Writ of Summons. The amounts so pleaded are more than the total monies recovered by Idemitsu HK from the latter 28 defendants. Consequently, in this trial, Idemitsu HK is reducing its claim against Zhigang to US$13,171,000 less the amounts of (1) US$4,323,098.70, (2) HK$1,322,091.51, and (3) €258,205.

III. DISCUSSION

A.  Issue (1): Whether Idemitsu HK was induced by a fraudulent scheme into transferring US$2,978,000 to the Yanqing account and US$13,171,000 to the Zhigang account and (If so) with what consequence?

18.  At trial, I heard evidence from Mr Kito, Mr Takagi, Mr Onuma and Mr Junichiro Takada (who took over from Mr Takagi as Idemitsu HK’s managing director on 1 April 2020). Based on their evidence, I have no doubt that the phone and email scam took place and was later discovered as set out in section II of this Judgment. It is apparent from their evidence that Idemitsu HK was deceived into transferring US$2,978,000 into the Yanqing account and a total of US$13,171,000 into the Zhigang account.

19.  What is the legal consequence of such fraudulent inducement?

20.  To establish unjust enrichment, a plaintiff must show that (1) a defendant was enriched, (2) such enrichment was at the plaintiff’s expense, (3) the enrichment was unjust, and (4) none of the defences to unjust enrichment (such as change of position) apply. See Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, at [67] (Ribeiro PJ).

21.  It follows from the fact that Idemitsu HK was duped into transferring monies that elements (1), (2) and (3) for an action in unjust enrichment are established against Yanqing and Zhigang. Neither Yanqing nor Zhigang having raised (much less adduced evidence in support of) any defence to a claim in unjust enrichment, element (4) is also established against them. It follows that, as against Yanqing and Zhigang, Idemitsu HK’s claim in unjust enrichment succeeds. There will be judgment against (a) Yanqing for US$2,978,000 and (b) Zhigang for US$13,171,000 minus the amounts of (i) US$4,323,098.70, (ii) HK$1,322,091.51, and (iii) €258,205.

22.  I note that, according to Mr Onuma’s evidence, in making the payments induced by the fraudster, Idemitsu HK may have used pooled funds managed by Idemitsu International (Asia) Pte Ltd (Idemitsu SG), Idemitsu Kosan’s Singapore subsidiary. By agreement between Idemitsu HK and Idemitsu SG, the former can use such pooled funds. As between Idemitsu HK and Idemitsu SG, the monies so used are accounted for as a loan to the former by the latter. This means that, even if Idemitsu SG provided funds to enable Idemitsu HK to make payments to the Yanqing or Zhigang accounts, Idemitsu HK was the legal owner of the monies paid out of such funds into the Yanqing or Zhigang accounts.

B.  Issue (2): Whether Idemitsu HK can claim in unjust enrichment against Brilliant One?

23.  Idemitsu HK transferred US$13,171,000 to the Zhigang account in four tranches (that is, (1) US$2,990,000, (2) US$3,977,000, (3) US$2,226,000 and (4) US$3,978,000). It is unclear from the evidence whether the Zhigang account was in credit when the initial tranche was remitted by Idemitsu HK. If there was some money in the Zhigang account then, it is not apparent on the evidence how much there was. Apart from the four tranches and the amount of US$150,005.38 (identified as “REM CORRECT”) credited to the Zhigang account on 22 January 2020, no other monies appear to have been paid into the Zhigang account between 15 January 2020 (the date of the first tranche) and 23 January 2020.

24.  There are then two possible scenarios to consider.

25.  If the Zhigang account had no monies or was in deficit when the first tranche came in, the US$13,171,000 would not have become mixed with any monies belonging to Zhigang (or anyone else) between the remittance of the first tranche on 15 January and 20 January when the US$300,000 was transferred from the Zhigang to Brilliant One’s account. On this scenario, one can follow the US$300,000 at common law from Idemitsu HK’s hands into the Zhigang account and thence to Brilliant One’s account. However, the evidence is that immediately before the receipt of the US$300,000, Brilliant One’s account was in credit to the amount of US$458,286.59. The US$300,000 transferred from Idemitsu HK via the Zhigang account into Brilliant One’s account consequently became mixed with the monies in Brilliant One’s account at the time of the transfer. At that time of admixture, following at common law would no longer be available and Idemitsu HK would then only be able to claim an equitable interest in the US$300,000 remitted into Brilliant One’s account.

26.  On the other hand, if the Zhigang account was in credit when the first tranche was remitted, the monies transferred by Idemitsu HK would have become mixed with the monies in the Zhigang account. It would not be possible to follow Idemitsu HK’s interest in the US$300,000 from the Zhigang account to Brilliant One’s account as a matter of common law. It would only be possible to trace Idemitsu HK’s interest in the US$300,000 in equity. That means that Idemitsu HK would only be able to claim an equitable proprietary interest in the US$300,000 in Brilliant One’s account.

27.  Thus, whether one assumes the scenario in [25] or [26] above, Idemitsu HK would only have an equitable interest in the US$300,000 immediately after transfer to Brilliant One’s account. Does this have a consequence on Idemitsu HK’s claim in unjust enrichment? I do not think that it matters that Idemitsu HK’s proprietary interest in the US$300,000 is equitable in nature.

28.  Although unjust enrichment is a common law cause of action, I do not understand elements (1), (2) and (3) in Shanghai Tongji as limited to a defendant’s being enriched by a benefit recognised at common law, as opposed to a benefit recognised in equity. Enrichment should be understood pragmatically. Regardless of whether Idemitsu HK can assert a legal or equitable proprietary interest in the US$300,000 wrongly transferred to Brilliant One’s account, then subject only to a defence of change of position, it would be unjust for Brilliant One (1) to retain any part of the US$300,000 transferred and (2) to be enriched thereby at Idemitsu HK’s expense. Absent a defence, Brilliant One should be required to make restitution of the US$300,000.

29.  Before considering whether Brilliant One is entitled to rely on change of position as a defence, I add two footnotes to the analysis in [28] above.

30.  First, from the vantage of the law of unjust enrichment, Idemitsu HK’s position relative to Brilliant One can be characterised as a situation of indirect enrichment. Idemitsu HK directly enriched Zhigang which in turn directly enriched Brilliant One. Idemitsu HK only indirectly enriched Brilliant One. It might be argued that, in allowing a direct cause of action in unjust enrichment by Idemitsu HK against Brilliant One, I am violating a cardinal rule of the law of unjust enrichment that there should be no leapfrogging.　 It might be suggested that a plaintiff (such as Idemitsu HK) should not be allowed to jump over its immediate enrichee (Zhigang) and sue an indirect or remote enrichee (Brilliant One) in unjust enrichment. Compare Greatworth Industrial Limited v Sun Fook Kong Construction Limited & another HCCT No 45 of 2003, 4 April 2006 (Reyes J), at [54] and [55]. See also Goff & Jones on Unjust Enrichment (10^th ed, 2022), at §3-64, questioning whether there is any “broadbrush rule” against leapfrogging.

31.  But I do not believe that the present circumstance is one of impermissible leapfrogging. This is not a situation of a party X acting under a contract with a counterparty Y (immediate enrichee) to confer a benefit on a third-party Z (indirect enrichee) and the contract between X and Y thereafter breaking down for some reason (for example, frustration or total failure of consideration). The position here is more analogous to that in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL). There, a solicitor wrongly used his firm’s funds to obtain gambling chips from a casino. The firm did not claim against the solicitor (immediate enrichee) who was not worth suing. The firm instead brought an action against the casino (indirect enrichee) in unjust enrichment. The firm was found to have a cause of action in unjust enrichment against the casino, subject only to the casino’s defence of change of position. The plaintiff firm’s proprietary interest in (1) the firm’s monies and (2) the gambling chips into which the firm’s monies had been converted, entitled the firm to leapfrog the solicitor and proceed directly against the casino.

32.  Second, in suggesting that it should not matter whether Idemitsu HK’s proprietary interest in the US$300,000 is legal or equitable in nature, I acknowledge my indebtedness to Professor Lusina Ho’s criticism of the distinction between common law and equitable tracing in her chapter on “Unjust Enrichment and Equity” in Bant, Barker and Degeling eds, Research Handbook on Unjust Enrichment and Restitution (Elgar, 2020). At 138-9 (omitting footnotes), Professor Ho writes:

“Rules on tracing provide an example where applying a unified set of rules, in particular the more advanced equitable rules, to both common law and equitable claims, will bring about significant improvement in the law. Tracing rules at common law have traditionally required a clean substitution of assets and have been understood not to allow a plaintiff to trace through mixed funds in bank accounts. The equitable rules are not so limited, but have been thought to be available only if the plaintiff’s assets are subject to a trust or fiduciary relationship. In the past, courts have stretched the fiduciary concept to allow plaintiffs to take advantage of the equity. The most controversial example is when a thief is held to be a fiduciary in order to invoke the constructive trust as a mechanism for relief.

The main argument advanced in favour of assimilation is that both sets of tracing rules are based on the principle of unjust enrichment. This argument was adopted in Lipkin Gorman v Karpnale Ltd in relation to claims for money had and received brought after tracing at common law, but rejected in relation to equitable tracing, where Lord Browne-Wilkinson in Foskett v McKeown held that the proprietary claim upon equitable tracing was a matter of hard-nosed property rights. The debate continues ... Nonetheless, its resolution does not affect the assimilation of common law and equitable tracing. After all, Lord Millett, who expressly rejected the principle of unjust enrichment as governing equitable tracing, was a staunch supporter for merging the tracing rules. Lord Steyn shared the same view on the fusion of tracing rules, and their observations have since drawn a following in judicial dicta. The enthusiasm to break away from the unnecessary constraints of law and equity should be welcomed. In particular, it Is high time the tracing rules were fused, and the old terminology of money had and received replaced with a modernised label that reflects the true nature of the claim.”

In this vein, it would seem highly artificial if the ability to bring an action in unjust enrichment hinged on whether the relevant “enrichment” involves property of a legal or equitable character. In practical terms, it should make no difference.

C.  Issue (3): Whether Brilliant One can rely on change of position?

33.  To establish a defence of change of position, Brilliant One must show the following:

(1)  There is a link between the receipt of the benefit and Brilliant One’s change of position so that, but for the receipt of the benefit, Brilliant One’s position would not have changed.

(2)  Brilliant One changed its position in good faith.

(3)  Brilliant One changed its position in circumstances which make it inequitable for Brilliant One to be required to make restitution to Idemitsu HK.

See Zhang Kan v SPH (Hong Kong) International Trading Co Ltd [2023] 4 HKLRD 544, at [28] (Godfrey Lam JA).

34.  I am not satisfied on the evidence that any of elements (1), (2) or (3) have been shown.

C.1  Is there causation?

35.  By a Bill of Sale dated 10 January 2020, Brilliant One apparently transferred “all shares and full title in the [V]essel and her boats and appurtenances to the buyer [King Chuen], free of all encumbrances, mortgages and maritime liens and other debts or claims whatsoever”. The Bill of Sale recites that it was drawn up “in consideration of the sum of USD 900.000.00 [from King Chuen], the Receipt whereof is hereby acknowledged”. Thus, on its face, the Bill of Sale evidences the Vessel’s sale to King Chuen and the latter’s full payment of the purchase price long before the US$300,000 was transferred to Brilliant One’s account on 20 January 2020.

36.  By a Protocol of Delivery dated 19 January 2020, Brilliant One delivered the full title and risk in the Vessel to King Chuen and the latter accepted delivery of the same, “free and clear from all encumbrances, mortgages and maritime liens or any other debts or claims whatsoever”. The document indicates that King Chuen had fully paid for and taken delivery of the Vessel, well before the US$300,000 was remitted to Brilliant One’s account on the following day. If so, it is difficult to see how Brilliant One can have regarded the US$300,000 paid into its account as somehow part of the purchase price for the Vessel.

37.  It might be argued that, whatever the Bill of Sale and Protocol of Delivery acknowledge on their face, Brilliant One delivered the Vessel in anticipation that it would only be receiving full payment of the purchase price from King Chuen in due course. There is no evidence of this. But, it any event, the present circumstances cannot be a case of anticipatory change of position.

38.  Assume (contrary to the Bill of Sale and Protocol of Delivery) that Brilliant One only expected King Chuen to pay outstanding monies due on the Vessel after 19 January 2020. In fact, King Chuen never paid such monies from its own funds. King Chuen appears to have used monies diverted from Idemitsu HK to pay off Brilliant One instead. On this hypothesis, King Chuen continues to be in debt to Brilliant One. It is open to Brilliant One to pursue King Chuen for any outstanding part of the Vessel’s sale price. Brilliant One opted to give up possession of the Vessel to King Chuen even though it had not been fully paid. Brilliant One thus took the commercial risk that it would not be paid. On those premises, why should Brilliant One be allowed to treat Idemitsu HK’s US$300,000 as fulfilling its expectation that King Chuen would eventually be paying for the Vessel in full? In reality, there has been no change of position, anticipatory or otherwise, as far as Brilliant One is concerned. Brilliant One is still awaiting the fulfilment by King Chuen of its part of the sale agreement for the Vessel. That was the position before Idemitsu HK’s US$300,000 was transferred and that remains the position today.

39.  Brilliant One pleads, in the alternative, that it used the US$300,000 “in its usual and ordinary course of business so as to meet its usual and/or anticipated operational expenses and financial obligations”. But that is likewise flawed as a basis for invoking change of position. The fact that a defendant has spent money is insufficient to ground change of position where the expenditure was incurred by the defendant in the ordinary course of business. It is not a detriment to pay off a debt which one will have to pay off at some time or other. See Lipkin Gorman v Karpnale Ltd, at 580 F–G. See also Goff & Jones (10^th ed, 2022), §§27-10, 27-12, and 27-13 stating that, to qualify as a change of position, an expenditure must be extraordinary, and referring to Australian and Canadian authority that defendants cannot invoke change of position where (as stated by Brilliant One to have been the case) monies received were spent on ordinary or usual expenses.

40.  More specifically, Brilliant One claims to have changed its position by paying the following expenses:

17/01/2020	US$109,054.89 as salary to the Vessel’s crew members for the month of December 2019
20/01/2020	US$13,707.09 for the Vessel’s fuel oil bunkering
20/01/2020	US$60,008.62 as management fees for a vessel
21/01/2020	US$56,496.30 as salary to crew members of a vessel for the month of December 2019
21/01/2020	HK$582,892 as shipping agency fees incurred in October, November, and December 2019 for loading cargo in Hong Kong
22/01/2020	Bonus to staff for the year 2019.
22/01/2020	US$85,195.66 as shipping agency fees for discharging and loading cargo in Vietnam
22/01/2020	US$25,007.09 for the repair and maintenance of the Vessel
22/01/2020	US$46,647.42 as seamen’s wages in respect of a vessel for the month of October 2019 and as management fees for the Vessel
22/01/2020	US$433,352.58 for outstanding sums due to Po Lun Shipping (HK) Co Ltd in connection with the purchase of the Vessel by Brilliant One in 2019.
23/01/2020	Payment of wages and salary to a He Hongde

There is no evidence that any of the foregoing items were other than ordinary expenditures incurred in the normal course of Brilliant One’s business. There is nothing to suggest that, but for the receipt of the US$300,000, Brilliant One would not have incurred any such expenses. To the contrary, it will be seen that most of the expenses pleaded concern debts which came into existence before 20 January 2020.

C.2  Has there been good faith?

41.  I am unable to find that there has been good faith on Brilliant One’s part.

42.  Idemitsu HK and Brilliant One (prior to its solicitors’ ceasing to act) filed expert evidence on the law in Mainland China relating to foreign exchange controls. Both parties’ experts agreed that it was contrary to the law in Mainland China for a person to employ unofficial money changers and remittance agents to circumvent foreign exchange controls in Mainland China. The experts disagreed on the extent to which a recipient in Hong Kong of foreign exchange remitted through unauthorised intermediaries would be liable under Mainland China law. Brilliant One not having appeared at the trial, its expert did not give evidence before me. However, Idemitsu HK’s expert (Mr Ma Chen) attended the trial to speak to his report.

43.  Where (as here) the amount involved is less than RMB 5,000,0000, Mr Ma clarified that the recipient of funds in Hong Kong would technically be administratively liable to a fine or penalty in Mainland China for obtaining foreign exchange through unauthorised intermediaries. The fine or penalty would roughly be between 30% and 100% of the funds received. Mr Ma conceded, however, that it was unlikely that the Mainland Chinese authorities would enforce the fine or penalty against (say) a director of Brilliant One if the latter should travel to Mainland China. Mr Ma stressed that, as the amount involved was below the threshold of RMB 5,000,000, there could only be what he called “administrative” (as opposed to criminal) liability.

44.  I accept that, by its own admission in the evidence filed during the interlocutory stages of this litigation, Brilliant One knew that King Chuen would be engaging unauthorised intermediaries to transfer the US$ purchase price for the Vessel from Mainland China to Brilliant One’s Hong Kong account. But, given Mr Ma’s evidence, I do not think that such knowledge means that there was criminal wrongdoing on Brilliant One’s part as a matter of PRC law. Further, I doubt that merely being “administratively” liable under PRC law as the recipient of foreign exchange obtained via unauthorised intermediaries, is sufficient to constitute bad faith, disentitling Brilliant One from invoking change of position, as a matter of Hong Kong law.

45.  What is of greater concern is the need for companies in Hong Kong to comply with standards of proper corporate governance. Brilliant One turned a blind eye to the possibility that its bank account was being used for money laundering. In this day and age, proper governance means that companies should ascertain that the sources of monies received into their account are bona fide.

46.  The discipline of “know your client” is an important aspect of the fight against money laundering. It was therefore incumbent on Brilliant One to inquire (1) who the “ZHIGANG TRAD” that paid US$300,000 into its account was and (2) what the purpose of the money so remitted was supposed to be. The evidence is that Brilliant One did not ask questions. It merely treated the monies received into its account as freely available for its use, despite not having an idea of the precise provenance of the funds. Given the failure to make even basic inquiries as to the source of the remitted monies and to observe common sense standards of corporate governance, I cannot conclude that Brilliant One acted in good faith as a matter of Hong Kong law.

C.3  Would it be inequitable for Brilliant One to pay Idemitsu HK?

47.  It follows from the discussion in sections III.C.1 and C.2 above that it would not be inequitable for Brilliant One to make restitution to Idemitsu HK of US$299,998.07 (that is, the precise amount credited to Brilliant One’s account on 20 January 2020).

48.  Idemitsu HK submits that the sale of the Vessel by Brilliant One to King Chuen was bogus and should therefore be ignored. It is unnecessary for me to deal with this allegation in light of the conclusion that I have reached. In other words, even on the footing that the sale of the Vessel was genuine, Brilliant One would still not be able to rely on change of position.

C.4  Summary

49.  Brilliant One’s defence of change of position fails.

IV.  CONCLUSION

50.  There will be Orders as follows:

(1)  Yanqing is to pay US$2,978,000 to Idemitsu HK.

(2)  Interest is to run on the US$2,978,000 at 1% per annum over the HSBC best lending rate from 15 January 2020 to the date of this Judgment and thereafter at the judgment rate until full payment.

(3)  Zhigang is to pay US$8,402,570.13[2] to Idemitsu HK.

(4)  Interest is to run on the US$8,402,570.13 at 1% per annum over the HSBC best lending rate from 20 January 2020 to the date of this Judgment and thereafter at the judgment rate until full payment.

(5)  Brilliant One is to pay US$299,998.07 to Idemitsu HK.

(6)  Interest at 1% p.a. over the HSBC best lending rate is to run on the US$299,998.07 from 20 January 2020 to the date of this Judgment and thereafter at the judgment rate until full payment.

(7)  The Injunction granted by Mr Justice Coleman on 24 April 2020 is to continue against Yanqing, Zhigang, and Brilliant One for six months from the date of this Judgment or until further order.

51.  I will now hear counsel on costs and consequential orders.