GRUPO ARBULU S.L. v. CITY APEX HOLDINGS LTD

HCA 2390/2017

[2018] HKCFI 1351

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2390 OF 2017

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DECISION

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The applications

1.  There are two applications before the Court:

(a) the plaintiff’s summons dated 16 October 2017 for the continuation and variation of the injunction order of Wilson Chan J dated 13 October 2017 (the “Injunction Order”); and

(b) The defendant’s summons dated 8 December 2017 for the discharge of the Injunction Order.

2.  In his written submissions, Mr Jin Pao, counsel for the plaintiff, informed the Court that for the purposes of the hearing, the plaintiff would not pursue the application for variation of the Injunction Order.  That was confirmed by Mr Pao during the hearing.

The relevant facts

3.  The plaintiff is a Spanish company and is, according to its case, the victim of an email fraud. 

4.  The defendant is a BVI company whose sole director and shareholder is Huang Jingyi (“Huang”), a Mainland national.

5.  According to the plaintiff’s case, between 4 and 7 April 2017, itwas deceived by certain fraudsters impersonating as its CEO into transferring a total of EUR 2,330,009 (“Deceived Sums”) from a Spanish bank account to a bank account in the Mainland held in the name of a company called Zhou Sunny Limited (“Zhou Sunny”).

6.  Between 7 and 11 April 2017, nearly all of the Deceived Sums were transferred by Zhou Sunny to Hong Kong bank accounts held by two companies incorporated in Hong Kong, namely HK Guan Yi Co Ltd (“Guan Yi”) and Ning Yuan Industrial (Ningbo) Limited (“Ning Yuan”).  In particular, a total of EUR 2,199,388 was transferred to Ning Yuan.

7.  On 10 and 11 April 2017, a total of EUR 2,172,926.50 was transferred by Ning Yuan to a HSBC bank account of another company incorporated in Hong Kong, Koyer Med (Shanghai) Co Ltd (“Koyer Med”).

8.  On 11 April 2017, a sum of EUR 540,690.00 was converted into HK$4,439,386.55 in Koyer Med’s HSBC account.  After the foreign exchange conversion, on 11 April 2017, the sum of HK$4,411,358 (the “Target Sum”) was transferred from Koyer Med’s HSBC account into the defendant’s bank account held with the China Construction Bank in Hong Kong (the “Target Account”).

9.  On 19 April 2017, the defendant withdrew a sum of HK$9,288,762.76 from the Target Account and converted it into RMB 8,104,445.41.  That sum included the Target Sum.  That sum of RMB 8,104,445.41 was then transferred to Minsheng Fengsheng (Tianjin) Aviation Leasing Co Ltd (“MSFS”).

10.  In his written submissions and during the hearing, Mr Lam, counsel for the defendant, commented on the failure on the part of the plaintiff to exhibit records showing that it had in fact transferred the Deceived Sums to Zhou Sunny.  Mr Pao accepted that those documents had in fact not been exhibited.  He explained that it was because they were voluminous and were in Spanish.  In the end, I granted the plaintiff leave to file a further affirmation within 3 days from the date of the hearing to produce those documents.  I further granted Mr Lam leave to file within 14 days of receipt further submissions, should he want to, to deal with those documents, and Mr Pao to file any reply with 7 days thereafter.  On 8 March 2018, the 4^th Affidavit of Mr Tsui Ming Lun was filed.  Certain records were produced thereby.  No further submission on behalf of the defendant or the plaintiff has been filed.

The Injunction Order

11.  On 13 October 2017, the plaintiff obtained on an ex parte basis the Injunction Order.  It restrains the defendant from removing from Hong Kong or otherwise dispose of or deal with or diminish the value of its assets up to the value of HK$4,411,358 (i.e. up to the value of the Target Sum).  It also contains a proprietary injunction at paragraph 2, which provides that:

“ Further, the Defendant must not in any way dispose of or deal with or diminish the sum of HK$4,411,358.00 (or any part thereof) being funds transferred from the accounts in the name of [KoyerMed] … into the Target Account, in respect of which the Plaintiff claims a proprietary interest.”

The plaintiff’s claim against the defendant

12.  The Writ herein was issued on 16 October 2017.  The Statement of Claim was filed on 26 January 2018 and later amended on 12 February 2018.  The claim is based upon the fund flow summarized above and the inferences which the plaintiff avers may be drawn therefrom.  A number of causes of action have been pleaded.  They include knowing receipt of the Deceived Sums (or part thereof), dishonest assistance, and restitution based upon unjust enrichment or money had and received.  The plaintiff seeks inter alia a “declaration that the Defendant holds the Target Sum … and/or any property representing all or part of the said amount … for the Plaintiff”, and delivery up to the plaintiff of the same. 

13.  During the hearing, Mr Pao informed me that for the purposes of the hearing, the plaintiff would not be alleging or inviting the Court to find that the defendant had contemporaneous unconscionable knowledge that the Target Sum represented any proceeds of crime.  He invited me to focus on the cause of action based upon restitution, which cause of action, he submitted, was receipt but not knowledge based.

The defendant’s case on discharge

14.  The main evidence in support of the defendant’s application to discharge comes from Huang’s 2^nd affirmation. Its case is summarized as follows.

15.  Huang and her husband (“Chen”) own substantial businesses in the Mainland. The defendant is a BVI company acquired by Huang in March 2015 for the sole purpose of the acquisition of a private aircraft.

16.  Under the hire and purchase agreement between the defendant and MSFS for the acquisition of the aircraft (the “HP Agreement”), the defendant has to from April 2016 onwards pay to MSFS rent in the total sum of RMB 97,634,873.16 by 12 instalments.  Clause 8 of the HP Agreement provides that until full payment of all rents and relevant fees payable thereunder, MSFS remains the sole owner of the aircraft.  But upon full payment of those sums, clause 19 provides that the defendant will automatically become the owner of the aircraft.

17.  Before the execution of the HP Agreement, MSFS allowed the defendant to choose between two methods of effecting the instalment payments: in US dollars outside the Mainland (offshore), or by remitting payments to the onshore account of MSFS within the Mainland (onshore).  Huang and Chen chose the onshore option.

18.  MSFS only accepted payment made by the defendant.  It also requested payments to be remitted from outside the Mainland.  For those reasons, Huang and Chen had to arrange funds from their own sources in the Mainland to the Target Account so that the defendant could settle the rental instalments.

19.  Due to foreign exchange restrictions and control in the Mainland, Huang and Chen enlisted the services of foreign exchange traders to assist in the remittance of funds to the defendant in Hong Kong.  Whenever remittances were required, Chen would transfer money to bank accounts in the Mainland designated by the foreign exchange traders. Those traders would then arrange to have the corresponding amounts in Hong Kong dollar transferred directly to the Target Account (or indirectly through Huang’s Hong Kong account with the HSBC).  Huang and Chen did not know the holders of those accounts in the Mainland which the foreign exchange traders designated.  Nor did they know the entities which the foreign exchange traders used to transfer funds to the Target Account.

20.  The defendant followed the same course of conduct when it settled the 5^th rental instalment payable to MSFS (and indeed other instalments).  On 11 April 2017, Chen transferred the sums of RMB 4,000,000 and RMB 4,511,700 to two bank accounts in the Mainland designated by the foreign exchange traders.  Later on the same day, the corresponding sums in Hong Kong dollars, namely the Target Sum and the amount of HK$4,988,587, were transferred into the Target Account via the accounts of Koyer Med and Luxy Technology Co, Ltd.  Huang and Chen did not know those two companies.

21.  So in short, it is the defendant’s case that the Target Sum was received by it as a result of its use of what has been described variably as the “underground foreign exchange system” or “underground banking system”.  In Huang’s own words at paragraph 28 of her 2^nd affirmation, “… my husband and I have been using the PRC foreign exchange services to circumvent [emphasis added] the foreign exchange control and restrictions in the PRC for the purposes of settling the rental payments relating to the Aircraft on behalf of the Defendant.”  She said that they had no knowledgeof any email fraud that might have been perpetrated upon the plaintiff.  The sums they received were subsequently transferred by the defendant in its name to MSFS to settle the 5^th rental instalment pursuant to the HP Agreement.

22.  Mr Lam submitted that on the facts, “there is no serious issue to be tried (let alone a good arguable case) on any of the Plaintiff’s claims against the Defendant.  In the circumstances, the Injunction Order should not be continued and ought to be discharged.”

Illegality in circumventing the foreign exchange control

23.  According to a Memorandum of Law prepared on behalf of theplaintiff, the method of foreign exchange remittance adopted by the defendantinvolves clear contraventions of certain specific laws and regulations in the Mainland. The conclusion is expressed as follows:

“ In general, the mode of remittance as described in the Affirmation is unlawful and hence Ms. Huang and her husband would be subject to administrative penalties imposed by the PRC foreign exchange control authority (currently being the State Administration of Foreign Exchange). Such administrative penalties include mandatory repatriation of remittance amount back to China, monetary fine and ‘black-listing’.”

24.  No contrary expert evidence has been adduced on behalf of the defendant. Indeed, Mr Lam accepted for the purposes of this hearing that the engagement in the underground foreign exchange system “may be” (Mr Lam’s words) illegal.

25.  Under Hong Kong law, operating a “money service” (which include changing and remittance services) without a licence is a criminal offence — see section 29 and Part 1 of Schedule 1 of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Cap 615.

Relevant applicable principles for the grant of the Injunction Order

26.  The applicable principles are well established.  There must be a good arguable case on the merits in order to support a Mareva injunction.  “A good arguable case” does not mean a case which is more likely to succeed on a balance of probabilities, but one that is more than barely capable of serious arguable.  On the other hand, to support a proprietary injunction, the lower threshold of a serious issue to be tried is sufficient—see Hong Kong Civil Procedure 2018 at para 29/1/66, Zimmer Sweden AB v KPN Hong KongLtd, unreported, HCA 2264/2013, 2 May 2014 at paras 76 – 77, and DBS Bank (Hong Kong) Limited v Tian Wen Quan, unreported, HCA 3228/2016, 12 October 2017 at para 11.

27.  The requirements for Mareva relief, in addition to a good arguable case on the merits, are assets within the jurisdiction, and the existence of a real risk of dissipation of those assets to render any judgment nugatory.

28.  On what should not be allowed in applications for a Mareva injunction, my attention has been drawn to Derby & Co Ltd v Weldon [1990] 1 Ch 48, where Parker LJ at page 58 gave the following warning:

“ It is to be hoped that in future the observations of Lord Diplock and Lord Templeman will be borne in mind in applications for a Mareva injunction, that they will take hours not days and that appeals will be rare. I do not mean by the foregoing to indicate that argument as to the principles applying to the grant of a Mareva injunction should not be fully argued. With a developing jurisdiction it is inevitable and desirable that they should be. What, however, should not be allowed is (1) any attempt to persuade a court to resolve disputed questions of fact whether relating to the merits of the underlying claim in respect of which a Mareva is sought or relating to the elements of the Mareva jurisdiction such as that of dissipation or (2) detailed argument on difficult points of law on which the claim of either party may ultimately depend. If such attempts are made they can and should be discouraged by appropriate orders as to costs.”

The plaintiff’s restitutionary claim

29.  This is the claim which Mr Pao invited the Court to focus on.  This I will do.

30.  A restitutionary claim can be proprietary in nature.  The claim is to vindicate the property rights of the claimant.  As explained in Virgo, The Principles of the Law of Restitution (3^rd ed, 2015) (at pages 559 – 560):

“ The most important feature of the action to vindicate property rights is that it forms part of the law of property and has nothing to do with the principle of reversing the defendant’s unjust enrichment. Consequently, it is not necessary to show that the defendant has been unjustly enriched at the claimant’s expense. Once the claimant has shown that the defendant has property, whether it be chattels, land, intellectual property rights or, most importantly, money, in which the claimant had a proprietary interest at the time of receipt, nothing else needs to be proved to establish the claimant’s cause of action. If the defendant has the claimant’s property, he or she should return it, or its value, to the claimant.”

31.  A defendant to a restitutionary claim has two potential defences: bona fide purchase for value without notice, and change of position.  It is the merits of these two defences on the facts of this case which the present application really turns on.  Mr Pao submitted that there is at the very least a good arguable case that the defendant is entitled to neither of those two defences.  On the other hand, Mr Lam submitted that even on the evidence available at this stage, both of those defences are open and available to the defendant, and the plaintiff has failed to establish any serious issue to be tried on the merits of its proprietary claim.

Whether the Target Sum represented traceable proceeds of the Deceived Sums

32.  Before turning to the defences, the first matter that I need to consider is whether the evidence supports the plaintiff’s claim to the requisite threshold that the Target Sum represents part of the Deceived Sums.  In this regard, Mr Pao invited me to draw the inference from the amount and time proximity of the relevant transfers that it does.  In particular, adopting the “first-in-first-out rule”, Mr Pao demonstrated from the HSBC account statement of Koyer Med for the month of April 2017 that the Target Sum was funded by the relevant transfers from Ning Yuan. 

33.  On the other hand, Mr Lam highlighted to me a number of missing links in the evidence.  I note however that whilst there might be some such missing links, there is nothing amongst the evidence which is positively inconsistent with the inference which Mr Pao invited me to draw.

34.  Having considered the evidence, parties’ submissions, the amount and time proximity of the relevant transfers, and the absence of any evidence that is positively inconsistent with the inference, I accept Mr Pao’s submissions that the evidence supports a good arguable case that the Target Sum represents the traceable proceeds of part of the Deceived Sums.

Bona fide purchase for value without notice

35.  The nature and elements of the defence are summarized in Lewin on Trusts (19^th ed)at para 41-117, that:

“ If trust property is wrongfully transferred to a purchaser taking with notice of the trust then, whether such notice is actual, imputed or constructive and whether or not he gave full value, and whether or not he acquired a legal estate, he is bound to the same extent and in the same manner as the person from whom he bought. The rule applies not only to trusts properly so called but also to purchasers with notice of any equitable incumbrance … But a bona fide purchaser for value of a legal estate without notice of the trust defeats the equitable interest of the beneficiaries,and so enables the purchaser and the successors in title to defend both proprietary and personal claims in relation to property transferred in breach of trust. The following requirements need to be satisfied:

(1) there is a purchase for value;

(2) of the legal estate in property;

(3) in good faith;

(4) without notice;

(5) at the time or transfer of the legal estate.”

36.  In Virgo, citing Lipkin Gorman (a firm) v Karpnale [1991] 2 AC 548, it is explained at page 659, in the context of this defence, that:

“ The defendant cannot be considered to have provided value for the property if it was transferred pursuant to an illegal transaction.”

37.  In Lipkin Gorman, a partner of the plaintiff firm of solicitors withdrew cash from the firm’s client account and used the money to fund his gambling at the defendant club.  In an action by the plaintiff against the defendant for restitution of the monies, the House of Lords rejected the defendant’s defence that it had provided valuable consideration for those monies because the gaming contract between the defendant and the partner was illegal and void under the Gaming Act 1845. 

38.  The facts in DBS Bank (Hong Kong) Limited v Tian Wen Quan were similar to what we have here.  The plaintiff was the victim of an email fraud. Part of the funds which it was defrauded of were traced to the accounts of the defendant.  The defendant denied knowledge of any fraud, and said that he received the relevant funds as part of his use of the underground foreign exchange system (which operation was similar to what Huang has described in the present case).  In respect of the defendant’s claim that he had bona fide supplied consideration for those funds, Anthony Chan J, having considered the illegal nature of the transactions, held at paragraph 37 of his Judgment that “I therefore see no answer to the illegality point, which would defeat [the defendant’s] Bona Fide Purchaser claim.”

39.  Mr Lam tried to distinguish Lipkin Gorman.  He submitted that the wagering contracts in that case were rendered void by the Gaming Act 1845.  In the present case, he submitted that there is in contrast no evidence showing that any transactions of the nature described by Huang were void (as opposed to having been tainted by illegality only).  There is further no evidence suggesting that Huang or Chen has incurred any criminal liabilities as a result of those transactions.  Mr Lam submitted that “the illegality of the underground foreign exchange transaction is no bar to a finding that the Defendant (and Mr. Chen) is a bona fide purchaser for value without notice”, and that “there was no unjust enrichment and the Defendant has a complete defence to the Plaintiff’s claim”.

40.  I have considered Mr Lam’s submissions.  The expert evidence at this stage shows that the underground foreign exchange transactions are illegal. The defence of bona fide purchase for value therefore has to be viewed and considered in this light.  I see no difference in this regard whether Huang and Chen at the same time also incurred criminal liabilities.  Further, Mr Lam has produced to me no authority which for the purpose of this defence draws the distinction between “illegal transactions” and “transactions having been tainted by illegality”.  In particular, no authority has been shown to me in support of the proposition that for the purpose of this defence, only those considerations that were transferred pursuant to illegal and void transactions should be disregarded.

41.  Mr Lam has referred me to Arrow ECS Norway AS v Xin ChengHoldings (International) Company Limited, unreported, HCA 239/2016, 12 May 2016.  The facts in that case were again similar to what we have here.  It was again a fight between the victim of an email fraud and a subsequent recipient of part of the traceable proceeds as a result of his use of the underground foreign exchange system.  There is however one crucial difference between that case and our present one: whilst there is un-contradicted evidence before me on the illegality of the underground foreign exchange system under Mainland law, there was none before Au-Yeung J in Arrow ECS Norway.  The conclusions reached by Her Ladyship will therefore have to be understood in that light: see paragraphs 33 and 35 of her Ladyship’s Judgment:

“ 33. … at this stage, the plaintiff does not purport to say that D18was party to the Fraud in the sense of being one of the conspirators,as opposed to a mere recipient. There is also no evidence as towhat PRC law has been breached and its effect on the remittances to D18.”

“ 35. D18 has purported to show that it has provided consideration (through the PRC subsidiary in the form of RMB) for the equivalent amount of US dollars that it received. On the current evidence, D18 appeared to be a bona fide purchaser for value without notice.” (emphasis added)

42.  It should further be noted accordingly that in Arrow ECS Norway, when counsel was making submissions on, and when Her Ladyship was considering the issues of “good faith” and “illegality”, their emphasis was not on any illegality that the underground foreign exchange system gave rise to, but on the illegality in connection with the offence commonly known as money laundering under section 25 of the Organized and Serious Crimes Ordinance, Cap 455 (“OSCO”).  This becomes obvious when one reads paragraphs 29, 30, 37, 38, and 43 to 45 of the Judgment.  I will come back further to this point when I consider below the defence of change of position.

43.  Mr Lam referred the Court to the Decision of B Chu J in BR CAT International Co Ltd v Hongkong Proof Import and Export Trading Co, Limited & Others, unreported, HCA 1023/2014, 22 September 2017.  Arrow ECS Norway was referred to B Chu J, which Her Ladyship relied upon.  On the face of the judgment in BR CAT International, one again sees no reference to any evidence on the illegal nature of the underground foreign exchange system.  B Chu J simply recorded her understanding that transactions under that system would be illegal under the law of Mainland China, and that such transactions “may be considered illegal under the Mainland law”—see paragraphs 92 and 97 of Her Ladyship’s judgment.  The emphasis in that judgment was again on illegality in connection with the source of the funds (see paragraphs 96 and 97), but not any illegality which the underground foreign exchange system gave rise to.  The latter issue has simply not been specifically raised by counsel for Her Ladyship’s consideration. 

44.  Issues like: the exact nature of the underground foreign exchange system, whether the related transfers were illegal or merely tainted thereby, whether they were as a result void or voidable, and consequentially whether the defendant for the purpose of the defence of bona fide purchaser for value can be regarded as such, will no doubt have to be canvassed furtherduring any trial in this action.  This is however not the stage to resolve them.  The issue now is whether a good arguable case has been made out.  On the evidence before me, and having considered the authorities cited and summarized above, I accept Mr Pao’s submission that it has been.  I reject Mr Lam’s submission that the evidence at this stage supports “a complete defence” of bona fide purchaser for value, to the extent that there is no serious issue to be tried on the merits of the plaintiff’s restitutionary claim.  

45.  For completeness, I record that Mr Pao has made a subsidiary point that, in any event, no consideration moved from the defendant (as the transfers originated from Huang and Chen).  Given my conclusion above, there is no need for me to consider this point.  Suffice for me to say, on the strength of Lewin on Trusts (para 41-120) and Macmillan Inc v Bishopsgate Investment Trust (No 3) [1995] 1 WLR 978 (page 1001G–H, as cited by B Chu J in BR CAT International at paragraph 102), that there is force in Mr Lam’s submissions that this limb of Mr Pao’s submissions ignores the fact that the defendant was the nominee of Huang and Chen.  If this had been the only point relied upon by Mr Pao, my finding on the strength of the defence of bona fide purchase for value would have been different.

Change of position

46.  In Lipkin Gorman, Lord Goff observed at page 579F–H that:

“ … 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, on facts such asthose in the present case, 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.”

47.  In support of his submissions that this defence of change of position is not available to the defendant, Mr Pao made two points:

(a) The Target Sum was not for example given to the charity.  It was paid over to MSFS pursuant to the HP Agreement as part of the instalment payments for the acquisition of the aircraft.  Applying the concept of “surviving assets”, Mr Pao submitted that there had in fact been no change of position; and

(b) Independently, even if there had been a change of position, as the change involved significant illegality, the Court should not allow the payment of the Target Sum to MSFS to be relied upon as a defence.

Surviving assets

48.  Mr Pao relied on paragraph 27-16 of Goff & Jones, The Law of Unjust Enrichment, where the concept of surviving assets in the context of the defence of change of position is explained as follows:

“ Where a defendant buys an asset which remains in his hands at the time of the action, either in its original form or in the form of a substitute asset, the defence is disallowed to the extent that he is still enriched. In Lipkin Gorman (A Firm) v Karpnale Ltd,Lord Templeman said that a defendant who buys and retains a car suffers no greater detriment than the decline in value of the car between the date of purchase and the date of proceedings; in Credit Suisse (Monaco) SA v Attar [1], the defence was denied to a defendant who had bought shares which had increased in value since the date of purchase, and which had in fact been sold by the time of the action; and similarly in Fistar v Riverwood Legion and Community Club Ltd [2], the defence was denied to a defendant who had spent money renovating his house and had then sold it for Aus $230,000 more than its purchase price a yearpreviously, an increase which greatly exceeded the amount which had been spent on the renovation.”

49.  In reply, Mr Lam submitted that until performance of the HP Agreement, MSFS remained the sole owner of the aircraft.  But given paragraph 18 of the same (which provides that the defendant will automatically be the owner of the of the aircraft upon payment of all rents and relevant fees under the HP Agreement), there can be no denial that the Target Sum survives as a contractual benefit which the defendant acquires and retains under the HP Agreement. 

50.  I therefore do not accept Mr Lam’s submission that “the Defendant has changed its position in good faith to its detriment” (emphasis added) to the extent that the evidence even at this stage demonstrates the existence of a complete defence.  I find that the plaintiff has a good arguable case that the defence of change of position is not available to the defendant.

Illegality in the context of “change of position”

51.  Given the conclusion which I have reached above on the issue of surviving asset, there is in fact no need for me to consider the separate issue of illegality.  I will only deal with the point briefly below.

52.  In Lipkin Gorman, Lord Goff observed at page 580 as follows:

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

53.  In Barros Mattos Junior v General Securities and Finance Co Ltd [2005] 1 WLR 247, Laddie J, following and applying Lipkin Gorman, held that if the change of position was wrongful, the court would not allow the recipient of the stolen funds to rely on it.  In that case, the change of position was the exchange of stolen money into local currency in breach of Nigerian law. 

54.  In Burrows, A Restatement of the English Law of Unjust Enrichment, it is stated at pages 117 and 121 that:

“ But the defendant does not have this defence if—

(a) the change of position—

(b) …

(ii) involved significant criminal liability …

In Barros Mattos Jnr v MacDaniels…it was thought that criminal liability in incurring the change of position was an absolute bar to the defence, subject to the possibility that minor illegality mightbe ignored under the de minimis principle. This seems too rigid a view and has been criticized by, eg, the Law Commission CP No. 189, The Illegality Defence, A Consultative Report (2009) paras 4.60–4.62. The criminality may be relatively trivial (and yet more than de minimis) so that denying the defence may impose too harsh a sanction. The better view therefore is that the defendant should only be disqualified from the defence by illegality where the criminality is significant and not trivial …

The reference by Lord Goff in Lipkin Gorman to the defence not being available to a wrongdoer is best interpreted as making the point—irrelevant to restitution for unjust enrichment—that change of position is not a defence to restitution for a tort or other civil wrong …”

55.  On the defence of change of position, Mr Lam made three main points:

(a)   He invited me to concentrate upon the very transfer of the Target Sum by the defendant to MSFS. That was the transaction which caused the change in position on the defendant’s part.  Concentrating on that transfer, and ignoring the preceding transactions involving the use of the underground foreign exchange system, he submitted that there was no criminal liability in incurring the change of position;

(b)   Further, relying on Tinsley v Milligan [1994] 1 AC 340, which remains good law in Hong Kong despite the UK Supreme Court decision in Patel v Mirza [2016] UKSC 42, Mr Lam submitted that as there is no need for the defendant to plead and rely on any illegality relating to the use of the underground foreign exchange system in setting up the defence of change of position, that defence would be open to the defendant; and

(c)   In any event, the better view in law is that Lipkin Gorman in this regard should be interpreted as making the point that the change of position is not a defence to restitution for a tort or other civil wrong, but is otherwise irrelevant to restitution for unjust enrichment.  As the present case concerns restitution for unjust enrichment, Lipkin Gorman is irrelevant.

56.  On (a), I find that there is good argument that on the facts of this case, Mr Lam’s proposition is too narrow, and that it is artificial to look at the transfer by the defendant to MSFS in isolation without regard to the illegality surrounding and leading to that transfer. 

57.  On (b), I find that there is good argument that the defendant will have to plead and rely on the use of the underground foreign exchange system to prove causation: see Virgo at page 682:

“ There must be a causal link between the receipt of the benefit by the defendant and his or her change of position, so that, but for its receipt, the defendant’s position would not have changed.”

58.  I come back here to the case of Arrow ECS Norway.  At paragraph 37 of the judgment, Au-Yeung J recorded counsel’s submissions on the defence of change of position as follows:

“ … it is at least arguable that the defence of change of position would not apply to D18 for 3 reasons:

…

(c)   D18 needs to plead illegality in its defence, ie the participation in the underground banking system that could contravene ss.25 & 25A of [the Organized and Serious Crimes Ordinance].”

Counsel’s submissions were not directed towards any illegality which the underground foreign exchange system gave rise, but towards the illegality in connection with OSCO.  It was in that context that Au-Yeung J observed at paragraph 45 of her Judgment that:

“ 45. By reason of D18’s explanation of the flow of funds in paragraphs 19 – 24 above, there is no need for D18 to plead any illegal conduct [emphasis added] to be able to satisfy the court that it has a defence as bona fide purchaser for value without notice.”

It is quite clear that that by “illegal conduct”, Au-Yeung J was referring to the illegal conduct of money laundering under OSCO.  So viewed, Arrow ECS Norway is not authority for the proposition that there is no need for the defendant here to plead and rely on the use of underground foreign exchange system to prove causation.  If anything, Au-Yeung J in fact observed that the defendant would have to provide “explanations on the flow of funds” – i.e. the use of the underground foreign exchange system.

59.  On (c), it invovles a developing point of law.  I note that in DBS Bank (Hong Kong) Limited v Tian Wen Quan, even though the defence of change of position had not been taken in the course of the application, Anthony Chan J on 7 December 2017 granted leave to appeal on the point as to whether, in light of the illegality of the relevant transaction under Mainland law, the defendant could rely on change of position to defeat the plaintiff’s proprietary claim based on money had and received or the case of Lipkin Gorman.  On 1 February 2018, the Court of Appeal further allowed the defendant to proceed with the appeal based on that ground.

60.  I also take heed of the warning given by Parker LJ in Derby & Co Ltd v Weldon.  The scope and correctness of Lipkin Gorman on the defence of change of position ought not to be finally decided at this stage.

61.  Having considered all the authorities and counsel’s submissions, I find that the plaintiff also has a good arguable case that the defence of change of position is not open to the defendant.

Risk of dissipation

62.  Mr Lam submitted that the plaintiff has failed to prove any risk of dissipation on the part of the defendant.  In response, Mr Pao referred me to paragraph 49 of Au-Yeung J’s judgment in Arrow ECS Norway AS that:

“ The nature and financial standing of the defendant’s business and the length of time it has been in business are relevant. Stronger evidence of potential dissipation will be needed where the defendant is a long-established company with a reasonable market reputation than where little or nothing is known or can be ascertained about it. Gee on Commercial Injunctions, 5^th ed (2004), §12.039(2)–(3) at p 354.”

63.  Mr Pao further submitted that the defendant is a BVI company.  It was set up for the sole purpose of acquiring the aircraft under the HP Agreement.  It apparently carries no other business.  It has been involvedon multiple occasions in the use of the underground foreign exchange system to transfer funds.  He submitted, and I agree, that the evidence supports a real risk of dissipation.

Disposal

64.  For the reasons set out above, I allow the plaintiff’s application for the continuation of the Injunction Order.  I dismiss its application for variation of the same.  I also dismiss the defendant’s summons for the discharge of the Injunction Order.

Costs

65.  The plaintiff has not pursued its application for variation, which I have dismissed.  Despite its pleaded case, it for the purposes of this application focused only upon the cause of action of restitution, which stance Mr Pao only made clear in his written submissions.  I note that in his written submissions, Mr Lam dealt with quite extensively the other pleaded causes of action.  In the circumstances, I make the following order nisi: that 70% of the costs of the plaintiff’s summons be the plaintiff’s cost in the cause, and that the costs of the defendant’s summons be the plaintiff’s cost in the cause.