LIU KE MIAN LORRAINE v. DE XIN DA TRADING CO., LTD

HCMP1481/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 1481 OF 2016

(ON AN INTENDED APPEAL FROM HCA NO. 2352 OF 2015)

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JUDGMENT

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Hon Chu JA giving the Judgment of the Court:

1. By two summonses both filed on 13 June 2016, the defendant applies for: (1) leave to appeal against the decision ("the Decision") of To J ("the Judge") given on 3 May 2016 granting the defendant leave to defend upon payment into court of HK$15 million, being the full amount claimed by the plaintiff; and (2) leave to file and use in the intended appeal the third affirmation of Fong Hoi Kuen (方海娟的第三份非宗教式誓章, “Fong’s third affirmation”).

Background

2. In the action in the court below, the plaintiff’s primary claim against the defendant for the sum of HK$15 million is in restitution being money had and received by the defendant and to which the defendant had been unjustly enriched at the plaintiff’s expense. 

3. The facts of the case can be briefly stated.  On 23 September 2015, the plaintiff’s husband (“Derrick”) was kidnapped in Beijing.  In order to obtain his release, on 24 September 2015, the plaintiff, on the instruction of the kidnappers, caused four sums totalling HK$15 million to be paid into the defendant’s HSBC bank account (“defendant’s account”).  After the money was deposited, Derrick was released and returned to Hong Kong.  Report of the incident was made to the public security bureau of Beijing and the Hong Kong police.  

4. On 12 October 2015, the plaintiff issued the writ in the action below, and obtained an ex parte Mareva injunction freezing the defendant’s account. On 16 October 2015, the injunction was continued until after trial or further order.

5. The plaintiff applied for summary judgment.  On 3 May 2016, the Judge granted leave to the defendant to defend on condition that the full amount claimed be paid into court within 28 days.  The defendant’s application for leave to appeal was refused by the Judge on 30 May 2016. 

The defendant’s defence

6. The defendant is a Hong Kong company incorporated in March 2014 with a paid up capital of HK$10,000.  It is owned by a Mainland resident, Madam Zhang Peizhen (“Zhang”), who is the sole shareholder and director.

7. The defendant’s case is that it carries on an unlicensed or “underground” currency exchange business, buying and selling principally Hong Kong dollars and Renminbi. The defendant produced a statement of the defendant’s account for the day of 24 September 2015, which showed that within that day, there were some 82 transactions involving receipt of over HK$109 million and payment out of about HK$190 million.

8. The defendant does not dispute receipt of the four sums of money that the plaintiff had caused to be deposited into its account.  According to the affirmations made by Fong Hoi Kuen, who is the defendant’s manager, on 24 September 2015, the defendant through its employee, Jiang Haihang (江海航, “Jiang”), received instruction from a known client, Ye Zhaowen (葉兆文, “Ye”), to convert HK$15 million into Renminbi and to pay the same into a Shenzhen bank account held by a person called Hu Yue (胡越, “Hu”).  The exchange rate was agreed at 0.821. 

9. In due course, four sums in the total amount of HK$14,999,805 were received by the defendant’s account.  This was HK$195 short of HK$15,000,000, due probably to bank charges.  The defendant waived the difference, and arranged for two persons, Wang Weiping (王偉萍) and Wang Weixuan (王偉旋), to each make two deposits into Hu’s Shenzhen bank account.  The total amount deposited was ¥12,315,000. 

10. In summary, the defendant’s case is that it acted as an innocent intermediary and that the funds received by it had been paid over to a third party.  Its defence is that there is no unjust enrichment and there has been a change of position in good faith.

The Judge’s decision

11. The Judge held that, to establish its defence of no unjust enrichment and change of position in good faith, the defendant has to prove: (1) it operates an unlicensed currency exchange business; (2) the funds were received in the normal course of its business; and (3) the funds were paid out in the normal course of its business pursuant to purpose for which they were received[1]. 

12. The Judge was satisfied that the defendant has demonstrated an arguable case that it has been carrying on an unlicensed or “underground” currency exchange business[2]; and that the transfers made by the Wangs are referable to the HK$15 million received by the defendant[3].

13. While conscious of the difficulties and constraints faced by the defendant in proving its case because of the illegal nature of its business, the Judge nevertheless had serious doubt on the credibility of the defendant’s evidence because of the economy of its evidence.[4] For reasons that he had elaborated[5], the Judge was of the view that the defendant failed to produce credible evidence to support its defence that the funds were received with specific instructions to transfer them to Hu’s account, and were so transferred pursuant to those instructions in the normal course of its business.  The Judge concluded (at §26) that:

“On the state of the evidence, I am not satisfied that the Defendant has discharged the burden of proving its payments to Hu were in the normal course of its “underground” currency exchange business or for the purpose of discharging the obligation for which the funds were received in such a business. A genuine currency exchange merchant could be liable for money had and received and paid out in the ordinary course of his business, if it was not paid out for the purpose of discharging the obligation for which it was received. Here, there is no credible evidence of the source of payment in and no credible evidence of payment out and the purpose of the payment out. The fact that the Defendant is an “underground” currency exchange merchant is neither here nor there. The defence, though possible, is shadowy at best.”

Test for granting leave to appeal

14. The threshold for granting leave to appeal under section 14AA(4) of the High Court Ordinance, Cap. 4, is trite. Leave will only be granted if the applicant satisfies the court that the intended appeal has a reasonable prospect of success, or there is some other reason in the interest of justice that the appeal should be heard. Reasonable prospect of success involves the notion that the prospect of succeeding must be more than fanciful, without having to be probable: SMSE v. KL [2009] 4 HKLRD 125.

Proposed grounds of appeal

15. The defendant advances four grounds of appeal in the draft notice of appeal.  They are:

(1)   The defence is not shadowy.  The defendant was not involved in Derrick’s kidnap. When the Mareva injunction was served on the defendant some 20 days after the defendant’s receipt of the HK$15 million, the defendant’s account still had about HK$12 million.  On such objective evidence, it is probable that the defendant was an innocent agent and had received the funds in the course of its business.  There is thus a triable issue that the defendant was an intermediary which had not been enriched so that the claim in restitution cannot succeed.

(2)   When considering the defence of change of position, the Judge was over critical of the defendant’s evidence, focusing excessively on the lack of detailed evidential links between the transactions in question.  Having regard to the “underground” nature of the defendant’s business, it is not surprising that the defendant would not have kept all written records of transactions.  The documentary evidence produced by the defendant shows that the Wangs paid ¥12,315,000 into Hu’s account by four sums made shortly after each of the four deposits into the defendant’s account.  This cannot be mere coincidence, and supports an arguable case that the defendant was an intermediary and had changed its position.

(3)   The defendant is impecunious and it is impossible to meet the condition imposed by the Judge.

(4)   As a result of the Mareva injunction, the plaintiff is substantially secured to the extent of HK$12 million.  It would not be in the interest of justice to subject the defendant to a condition that has the effect of denying its right to defend the claim.    

Proposed Grounds 2 and 3 

16. Proposed Grounds (1) and (2) can be dealt with together.  They relate to the Judge’s conclusion that the defendant’s case and the defence is shadowy. 

17. In refusing leave to appeal, the Judge pointed out that given his acceptance that the defendant was at the material time a substantial on-going business, the fact that there was HK$12 million in its account 20 days after the event was neither here nor there[6]. We agree.

18. As explained by the Judge[7], his decision to grant conditional leave to defend is principally due to the defendant’s failure to adduce credible evidence to show that the HK$15 million it had received was paid to Hu in the normal course of its currency exchange business for the purpose of discharging obligation for which the funds were received.  In his Reasons for Decision on the summary judgment application (at §§23 to 15), the Judge alluded to the absence of affirmation evidence from Jiang who was directly involved in the transaction on the defendant’s behalf, and the lack of evidence relating to Ye, who is a known client, and his past dealings with the defendant, as well as the Wangs and their role and involvement in the defendant’s business.  The Judge also pointed to the failure to adduce supporting documentary evidence on the transaction in question or the defendant’s past dealings with Ye, such as internal records, books and accounts, noting that it was impossible that a currency exchange business with daily turnover to the tune of HK$190 million would be operated and managed without any records or accounting documents.    

19. In respect of the timing and the amount of the deposits made by the Wangs into Hu’s account, the Judge, while acknowledging that they might not be coincidental, was concerned with the total absence of evidence to show that the Wangs’ made the deposits pursuant to the defendant’s instructions which originated from Ye.  It was observed that there was, for instance, no evidence from Jiang on Ye’s specific instructions, no evidence on any instructions that the defendant gave to the Wangs or on the arrangement or settling of accounts between the defendant and the Wangs.

20. In our view, the defence of change of position in good faith to a claim in restitution is fact sensitive.  To set up the defence, not only must a defendant show that his position has changed, but he must also demonstrate that his position has so changed that it would be inequitable in all the circumstances to require him to make restitution or to make restitution in full.  As stressed by Lord Goff in Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548, 580F-G, the mere fact that a defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay.  It is also to be remembered that in a summary judgment application, where the defendant contends he has a good defence to the claim, his affidavit should condescend upon particulars. 

21. It is clear from the Judge’s Reasons for Decision on the summary judgment application that he had given due regard to and made allowance for the “underground” nature of the defendant’s business when assessing the sufficiency and credibility of the evidence on the defendant’s case.  Notwithstanding that, he was skeptical of the economy of the defendant’s evidence and took the view that the defendant failed to adduce credible evidence to show that the HK$15 million it had received was paid to Hu in the normal course of its currency exchange business for the purpose of discharging obligation for which the funds were received. 

22. We do not think the submissions made by Mr Chiu and Mr Wong on behalf of the defendant in the present application have shown that the Judge was wrong in his assessment of the evidence, let alone plainly wrong.  We are of the view that the Judge’s criticisms of the gaps in the defendant’s evidence, and his conclusion that the defendant’s defence is shadowy are justified.  Proposed Grounds (1) and (2) are not reasonably arguable.   

Proposed Grounds (3) and (4)

23. Proposed Grounds (3) and (4) are related, both directed at the condition imposed by the Judge.  The defendant also seeks to adduce Fong’s third affirmation to make good the argument that it is impossible for it to meet the condition.  Relying on Kwong Key Construction & Engineering Ltd v. Sunlink Ltd [2003] 4 HKC 300, at 305 and 306, it is argued that it would not be practical to prepare and file in advance an affirmation on the defendant’s means because the Judge did not indicate that conditional leave to defend would most likely be given.

24. From the transcript of the summary judgment application hearing, it can be seen that the after hearing counsel’s submissions, the Judge indicated in no unambiguous term that he considered the defence was shadowy and that it was a case for conditional leave.  He went on to state that the condition should involve payment into court of the full amount claimed and that the Mareva injunction should then be discharged. 

25. In our view, given what the Judge had said, it would be incumbent upon the defendant’s legal representatives to there and then inform him that the defendant wished to be heard on its ability to meet the condition to be imposed by the court, and to ask for an opportunity to file evidence on the defendant’s financial ability, if they had not come prepared with it.  However, no such submission or request was made on behalf of the defendant.  Counsel for the defendant only asked for 28 days to make payment into court.  Mr Chiu and Mr Wong explained that the defendant’s legal representatives thought at the time that the Judge was pronouncing his ruling on the application, as opposed to making an indication.  However, even if it appeared that the Judge had decided that it was a case to grant leave to defend conditional upon payment into court of the full sum claimed, it was no impediment to the legal representatives requesting the Judge to withhold making the formal order until after the defendant was given an opportunity to adduce evidence on its financial ability.

26. We reiterate the long established practice the Court of Appeal had set out in Muhammad Ibrahim v. Asmat A M Khan (unreported) CACV 146 of 1985, 18 December 1985, at §24 (see also Tadano South China Co Ltd v. Brightfold Ltd and Another (unreported) CACV152/2006, 17 August 2006 at §13; and Hong Kong Civil Procedure 2016 Vol. 1 §§14/4/16 & 14/4/46), namely,

“[I]f [those advising parties seeking leave to defend] do not come prepared with evidence it is incumbent on them at least to indicate that the Defendant wishes to call evidence. In other words, they must raise any relevant issue of fact before the judge. It would make a mockery of the Order 14 procedure if a Defendant were entitled to remain silent about his lack of means at the time of the imposition of the condition and to raise it for the first time in the Court of Appeal: he could so raise it only if he obtained leave to adduce fresh evidence, and he would not be permitted to adduce fresh evidence upon an issue of fact which was not directly raised in the Court below. There had to be an end to litigation and a party who failed to adduce his evidence at the proper time could not be heard to complain if the decision went against him.”

27. We are, accordingly, not prepared to allow the defendant’s application to adduce Fong’s third affirmation.

28. Even if we were to admit Fong’s third affirmation, we do not think it would assist the defendant in advancing proposed Grounds (3) and (4).  A defendant seeking to avoid or limit a financial condition on account of his impecuniosity, is required to make and frank disclosure and to put sufficient and proper evidence before the court, including not only did he not have the money himself, but that he was unable to raise it from anywhere: MV Yorke Motors v. Edwards [1982] 1 WLR 444, Kwong Key Construction & Engineering Ltd v. Sunlink Ltd, supra, at 306.  Fong’s third affirmation falls far short of meeting these requirements. 

29. Importantly, there is no objective support to the assertion that Zhang is unable to obtain funds to enable the defendant to meet the condition, which is the difference between HK$15 million, being the condition imposed by the Judge, and HK$12 million, being the amount frozen by the Mareva Injunction. 

30. Further, as Mr Chow for the plaintiff pointed out, the assertion that the defendant has no associates or no ability to raise funds through other sources is incompatible with the defendant’s case which saw third parties, such as the Wangs, being involved in the funds for the operation of the defendant’s business.  The defendant’s case suggests that the defendant has financial resources other than the defendant’s account.

31. There is no merit in the proposed Ground (3) and (4).  

Conclusion on the defendant’s applications

32. In short, none of the proposed grounds of appeal enjoys reasonable prospect of success. There is also no other reason in the interest of justice for the intended appeal to be heard.  We therefore refuse to grant the defendant leave to appeal.

33. For the reasons that we have given, we dismiss both of the defendant’s summonses.

34. As the defendant’s application for leave to appeal is totally without merit, we further make an order under Order 59 rule 2A(8) of The Rules of the High Court, Cap. 4A, that no party may under rule 2A(7) request our determination to be reconsidered at an oral hearing inter partes.

Costs

35. Applying the normal rule of costs follow event, we order the defendant to pay the plaintiff the costs of this application. 

36. We have considered the plaintiff’s statement of costs for summary assessment.  We note that this is not a complex leave application, and that the papers and arguments are substantially the same as those before the Judge both at the initial hearing and in the leave application.  We consider, on a party-and-party basis, there should be reduction to the time spent on attendances on client and counsel and on perusal of documents.  Further, the costs of drafting the statement of costs should not be allowed: see Practice Direction 14.3 paragraph 13.  Taking a broad-brush approach, we summarily assessed the plaintiff’s costs at HK$32,000.

[1] Reasons for Decision on the summary judgment application at §11.

[2] Reasons for Decision on the summary judgment application at §17.

[3] Reasons for Decision on the summary judgment application at §21.

[4] Reasons for Decision on the summary judgment application at §22.

[5] Reasons for Decision on the summary judgment application at §§23to 25.

[6] Reasons for Decision on the application for leave to appeal at §3.

[7] Reasons for Decision on the application for leave to appeal at §4.