A COMPANY v. W COMPANY AND OTHERS

HCA 477/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 477 OF 2015

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D E C I S I O N

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I. INTRODUCTION

1. The plaintiff is a Eucadorean bank and held accounts with several banks in the United States.  It claimed to be a victim of cyber fraud, which resulted in 13 alleged unauthorised transfers out of its accounts with banks in the United States.  It recovered in whole or in part the funds involved in 5 of those transactions, but a total sum of US$9,235,201.35 was transferred to bank accounts of 4 companies in Hong Kong, ie the 1^st to 4^th defendants, with The Hong Kong and Shangahi Banking Corporation Limited (“HSBC”) and Hang Seng Bank Limited (“HSB”).  Since discovery of the alleged unauthorised transfers, the plaintiff had reported the matter to local and overseas law enforcement agencies, including the Hong Kong Police Force.

2. On 5 March 2015, on the plaintiff’s application, Fung J granted an ex parte injunction against the 1^st to 4^th defendants prohibiting their disposal of assets together with a disclosure order, and an ex parte Norwich Pharmacal order against HSBC and HSB for disclosure of payments into and out of the accounts held by the 1^st to 4^th defendants at HSBC and HSB from 1 January 2005 up to the date of disclosure and the source/destination of such payments.

3. According to the 1^st affirmation of the plaintiff’s solicitor Leung Ka Ying (“Leung”) filed on 6 March 2015 (“Leung 1^st Aff”), 7 of the unauthorised transfers were made to 3 accounts held with HSBC, and one such transaction was as follows:

Leung went on to say the 4^th defendant’s registered office did not match the beneficiary’s address in the SWIFT instruction.  The 4^th defendant had a sole director who was a Chinese citizen, and its registered office was at the registered address of its company secretary.  Even though the 4^th defendant had a valid business registration, it did not appear to carry on business at its address.

4. The Leung 1^st Aff claimed inter alia that the plaintiff should have a valid proprietary claim against the 1^st to 4^th defendants (with whom it had no business or other dealings) on the basis of their receipt of alleged unauthorised fund transfers from the plaintiff’s account in the United States, and that the plaintiff was prima facie entitled to trace the monies transferred into inter alia the 1^st to 4^th defendants’ accounts with HSBC and HSB.  Leung asserted that the plaintiff was also entitled to claim against the 1^st to 4^th defendants for damages suffered as a result of the alleged unauthorised transfers.

5. On 6 March 2015, the plaintiff issued the Writ of Summons in the present action against the 1^st to 4^th defendants.  The Writ of Summons was served on 9 and 10 March 2015.

6. On 10 March 2015, the plaintiff filed inter partes summonses for continuation of the two ex parte orders granted by Fung J on 5 March 2015.  On 13 March 2015, DHCJ Paul Lam SC continued the 2 ex parte orders granted by Fung J on 5 March 2015 until conclusion of the trial of this action or further order of the court.

7. On 20 and 30 March 2015, pursuant to the Norwich Pharmacal Order granted by Fung J and continued by DHCJ Paul Lam SC, HSB and HSBC provided to the plaintiff the account opening documents and other relevant bank records of 1^st, 2^nd and 4^th defendants. 

8. On 30 March 2015, the plaintiff and 3^rd defendant reached a settlement, so the plaintiff would not pursue its claim against the 3^rd defendant and/or against any 2^nd layer recipients of transfers from the 3^rd defendant’s account with HSB.  On 8 May 2015 the plaintiff discontinued its claim against the 3^rd defendant, and on 15 May 2015 the injunction/disclosure order continued by DHCJ Paul Lam SC against the 3^rd defendant was discontinued. 

9. In the meantime on 12 May 2015, the plaintiff filed and served its Statement of Claim against the 1^st, 2^nd and 4^th defendants (collectively, “1^st Layer Recipients”).

10. On 27 May 2015, the plaintiff made an ex parte application for a preservation order and/or mareva injunction together with an order for disclosure of information against 19 2^nd layer recipients (“2^nd Layer Recipients”) for transfers of funds to them from the 1^st Layer Recipients’ accounts with HSBC in respect of the alleged unauthorised transfers had taken place.  Such application was supported by Leung’s 2^nd affirmation, which was eventually filed on 28 May 2015 (“Leung 2^nd Aff”).

11. According to the Leung 2^nd Aff, upon review of the information disclosed under the Norwich Pharmacal order continued by DHCJ Paul Lam SC, the plaintiff identified inter alia the following transfer of funds from the specified HSBC account of the 4^th defendant as a 1^st Layer Recipient (“D4 Account”) (into which the alleged unauthorised transfer of US$1,968,230.25 from the plaintiff’s account in the United States was deposited) to a specified HSBC account of the 19^th defendant (“D19 Account”) as a 2^nd Layer Recipient:

For convenience, the sum of US$70,572 transferred from the D4 Account to the D19 Account on 20 January 2015 is referred to below as the “Specified Fund”.

12. The Leung 2^nd Aff referred to company searches of the 2^nd Layer Recipients which revealed inter alia that (a) the 19^th defendant had 2 individual directors and 1 corporate shareholder all with addresses in Hong Kong, and (b) it was incorporated on 2 May 2006 with a paid up capital of HK$30,000,000.  The Leung 2^nd Aff concluded that “most of the companies are one-man companies held by Chinese citizens who apparently have no connection with Hong Kong.  These directors and/or shareholders have only provided their addresses in the PRC in the relevant annual returns, or have given the same address as the registered address of the respective company”.

13. The Leung 2^nd Aff also stated that “the registered addresses of most of the [2^nd Layer Recipients] are the same as the registered addresses of their respective company secretaries”. But such information in relation to the 19^th defendant revealed that:

From 12 to 20 May 2015, staff of the plaintiff’s solicitors visited (and took photographs of) the registered addresses of the 2^nd Layer Recipients shown in the company searches. The Leung 2^nd Aff noted that upon such site visits, “none of the [2^nd Layer Recipients], except for [the 16^th defendant] and [the 19^th defendant], appear to exist and/or carry on any real business”.  On 19 May 2015, the plaintiff’s solicitors conducted business registration searches of the 2^nd Layer Recipients, which revealed inter alia that the 19^th defendant had a valid business registration.

14. The Leung 2^nd Aff claimed that the 2^nd Layer Recipients bearing the same name as the beneficiaries of the transfers from the 1^st Layer Recipients “are mere corporate vehicles for the receipt of the dissipation of funds obtained through the fraudulent scheme.  In any event, given that the [1^st Layer Recipients] …… do not seem to have any actual business activities as they appear to be mere corporate vehicles which do not have any business activities, …… the [2^nd Layer Recipients] will not qualify as a bona fide purchaser for value for the funds they received from the [1^st Layer Recipients].  Hence it is unlikely that the [2^nd Layer Recipients] will have any defence to the tracing claims by the Plaintiff” (my emphasis).

15. Leung asserted in the Leung 2^nd Aff that the plaintiff should have a valid proprietary claim against each of the 2^nd Layer Recipients “on the basis of their receipt of the unauthorised transfers from the [1^st Layer Recipients]” and for damages suffered as a result of the transfers.  It was also said that the plaintiff was prima facie entitled to trace the monies transferred from the 1^st Layer Recipients to the monies held at the respective accounts of the 2^nd Layer Recipients (including the D19 Account).  On such basis, it was suggested that the 2^nd Layer Recipients should be joined as the 5^th to 23^rd defendants in the present action and the Writ of Summons should be amended accordingly.

16. Leung confirmed in paragraph 34 of the Leung 2^nd Aff that “[she has] advised the Plaintiff, and the Plaintiff understands that, when making applications to the Court on a without notice basis, it is under an obligation to provide the Court with full and frank disclosure of all relevant matters”, and amongst other matters Leung highlighted in paragraph 41 of the Leung 2^nd Aff that “[the 16^th defendant] and [the 19^th defendant] appear to exist as real companies and/appear to be carrying on real business at their registered addresses”.

17. On 27 May 2015, DHCJ Seagroatt granted an ex parte preservation order and/or mareva injunction together with a disclosure order against 19 2^nd Layer Recipients for transfers of funds from the specified accounts of the 1^st, 2^nd and 4^th defendants with HSBC (including the D4 Account) in respect of the alleged unauthorised transfers that had taken place (“Ex Parte Injunction Order”).  Each of the 2^nd Layer Recipients was restrained from removing from Hong Kong and/or dealing with, disposing of or diminishing the value of its assets up to a specified limit.  In the case of the 19^th defendant, the specified limit was US$70,572.  Under the Ex Parte Injunction Order, the 2^nd Layer Recipients were also required to disclose information in relation to specified transfers of funds into their specified bank accounts.  In the case of the 19^th defendant, the relevant transaction was as follows:

18. On the same day, DHCJ Seagroatt granted an ex parte Norwich Pharmacal order against HSBC and HSB for disclosure of payments into and out of the accounts held by the 2^nd Layer Recipients at HSBC and HSB from 1 January 2015 up to the date of disclosure (“Ex Parte Norwich Pharmacal Order”). 

19. Pursuant to leave granted by DHCJ Seagroatt on 27 May 2015, the plaintiff filed the Amended Writ of Summons on 28 May 2015.  The Amended Writ of Summons added the 2^nd Layer Recipients as the 5^th to 23^rd defendants, and in the Amended Indorsement of Claim the plaintiff claimed:

(a) against the 1^st, 2^nd and 4^th defendants (ie the 1^st Layer Recipients) for damages for alleged unlawful receipt/ retention of the total sum of US$9,139,412.07 that belonged to the plaintiff but was transferred to the specified bank accounts maintained by such defendants with HSBC in Hong Kong between 13 and 21 January 2015 pursuant to alleged false/unauthorised instructions purportedly given on behalf of the plaintiff (including the alleged unauthorised transfer of funds in relation to the 4^th defendant set out in paragraph 3 above);

(b) against the 5^th to 23^rd defendants (ie the 2^nd Layer Recipients) for damages for their alleged unlawful receipt/retention of US$3,284,118 that belonged to the plaintiff but was transferred to the specified bank accounts maintained by such defendants with HSBC and HSB (including the D19 Account) between 13 and 23 January 2015 from the specified accounts of the 1^st, 2^nd and 4^th defendants with HSBC (including the transfer of the Specified Fund from the D4 Account to the D19 Account in paragraph 17 above);

(c) alternatively, against all defendants for money had and received in respect of the alleged unauthorised transfers described above;

(d) further or alternatively, against all defendants for the amounts received by each of them in respect of the alleged unauthorised transactions on the basis of unjust enrichment;

(e) ancillary relief by way of declaration, account, injunction, equitable compensation and other reliefs.

20. On 28 May 2015, the plaintiff filed an inter partes summons for continuation of the Ex Parte Injunction Order against the 5^th to 23^rd defendants until conclusion of the trial of the present action or further order of the court (“1^st Summons”).  On 29 May 2015, the plaintiff filed an inter partes summons for continuation of the Ex Parte Norwich Pharmacal Order against HSBC and HSB (“2^nd Summons”).

21. On 8 and 9 June 2015, the 16^th and 19^th defendants respectively through solicitors filed acknowledgment of service giving notice of intention to defend the plaintiff’s claim. 

22. On 9 June 2015, the plaintiff discontinued its claim in the present action against the 5^th defendant.  On 12 June 2015, the Ex Parte Injunction Order against the 5^th defendant was discharged.

23. On 11 June 2015, the 19^th defendant filed the 1^st affirmation of its director (“D19 Director”) in compliance with the disclosure order in the Ex Parte Injunction Order.  On 17 June 2015, the 19^th defendant filed the D19 Director’s 2^nd affirmation for discharge of the Ex Parte Injunction Order (“D19 2^nd Aff”).

24. On 19 June 2015, the 1^st and 2^nd Summonses were returnable before me as Summons Judge (“Hearing”).  At the Hearing,

(a) leave was granted for the plaintiff to withdraw the 2^nd Summons with no order as to costs;

(b) Ms Law, counsel for the plaintiff, applied for continuation of the Ex Parte Injunction Order against the 19^th defendant (save and except that the plaintiff no longer required (i) restriction on disposal of assets in respect of any monies in other accounts held by the 19^th defendant with any other bank in Hong Kong apart from the D19 Account, and (ii) disclosure of information by the 19^th defendant);

(c) Ms Tam, counsel for the 19th defendant, applied for discharge of the Ex Parte Injunction Order.

25. Ms Tam lodged her written submissions and list of authorities shortly before the Hearing.  However, Ms Law only handed up her written submissions and list of authorities during the Hearing.  In the circumstances, I reserved my decision, and granted the following orders at the Hearing:

(a) the Ex Parte Injunction Order against the 19^th defendant (except for paragraphs 1(1)(b)(ii) and 2 thereof) be continued in the interim until the handing down of this Decision in respect of the 1^st Summons as between the plaintiff and the 19^th defendant;

(b) paragraph 2 of the Ex Parte Injunction Order as between the plaintiff and the 19^th defendant be set aside.

26. Before I proceed to deal with the 1^st Summons as between the plaintiff and the 19^th defendant, Ms Tam complained that in addition to the sum of US$70,572 in the D19 Account frozen by HSBC, another sum of US$70,572 in the 19^th defendant’s account with HSB was also frozen by HSB, which meant a total sum of US$141,144 was frozen under the Ex Parte Injunction Order vis-à-vis the 19^th defendant.  This unfortunate outcome was possibly due to infelicitous wording in paragraph 1(1)(b)(ii) of the Ex Parte Injunction Order.[1] At the Hearing, Ms Law confirmed that the plaintiff (a) intended to freeze only one sum of US$70,572, and (b) would immediately liaise with HSBC and HSB to clarify the matter.[2]  Hopefully, such misunderstanding would be cleared by removal of paragraph 1(1)(b)(ii) of the Ex Parte Injunction Order against the 19^th defendant.

II.  UNDISPUTED MATTERS

27. For the purpose of the 1^st Summons as between the plaintiff and the 19^th defendant, the following matters were not in dispute:

(a) the Ex Parte Injunction Order against the 19^th defendant concerned the Specified Fund held in the D19 Account;

(b) pursuant to the Ex Parte Injunction Order, a sum of US$70,572 in the D19 Account was frozen by HSBC;

(c) the bank statement dated 29 January 2015 in respect of the D4 Account (“D4 Statement”) recorded the following transactions:

CCY	Date	Transaction Details	Deposit	Withdrawal
USD	20 Jan	DEPOSIT BIB-HK DINGFENG II LTD	70,572.46
		WITHDRAWAL BIB- TO [D19 Account]		70,572.00
	21 Jan	DEPOSIT	1,968,211.85

(d) according to paragraph 17 and annexure “MAMM-4” of the statement dated 5 May 2015 given by a forensic security auditor (who provided security services to the plaintiff) to the Hong Kong police, an unauthorised transaction instruction was sent via SWIFT on 20 January 2015, and a debit of US$1,968,230.25 was transmitted on 21 January 2015 from the plaintiff’s bank in the United States to the D4 Account;

(e) according to the bank statements of the D19 Account, the 19^th defendant maintained an average of US$1,091,188.13 in such account from January to June 2015, which was well in excess of the amount of the Specified Fund.

III.  19^th DEFENDANT’s CASE

28. The 19^th defendant noted the sum of US$70,572.46 was deposited into the D4 Account by HK Dingfeng II Ltd (which entity had nothing to do with the plaintiff) and an almost identical sum (save for US$0.46) was transferred out of such account to the D19 Account on 20 January 2015.  These transactions happened on the day before the alleged unauthorised transfer of US$1,968,211.35 into the D4 Account on 21 January 2015.  On such basis, the D19 2^nd Aff suggested the Specified Fund was obviously sourced from HK Dingfeng II Ltd instead of the plaintiff, and it was deposited into the D4 Account and then transferred out to the D19 Account before the alleged fraudulent transfer from the plaintiff to the D4 Account was made.

29. The D19 Director went on to explain that the Specified Fund represented part payment of a genuine business transaction.  By a sales confirmation made with Hua Heng Fruit Company Limited (“Hua Heng”) dated 7 January 2015, the 19^th defendant was to sell and Hua Heng was to buy 149,000 kgs of pistachios at the price of US$1,221,800 (with cargo fee of US$2,550 for 6 cargoes).  The 19^th defendant produced 4 sale invoices all dated 7 January 2015 covering 6 cargoes of pistachios issued to Hua Heng.  One such sale invoice was invoice no W2015010060 for US$197,225 (“Invoice”).  On the face of the Invoice, a deposit sum of US$39,300 had been paid, leaving an outstanding balance of the sale price of US$157,865.  The 19^th defendant also produced several invoices by the cargo handling company Alliance Star International Logistics Ltd.  By reference to the cargo numbers, the cargo handling invoices could be cross-matched to the 4 sale invoices.

30. The D19 Director further explained it was not uncommon for the 19^th defendant to receive payment in the course of business from customers in Mainland China by way of several tranche payments through different entities.  As a commercial seller, the 19^th defendant would accommodate its customers’ payment methods so long as all sale invoices were duly settled.  In accordance with such usual practice, the 19^th defendant agreed with Hua Heng to accept tranche payments through different entities for the aforesaid pistachio sale, and Hua Heng would inform the 19^th defendant through “wechat” messages or other means the amount(s) that would be transferred to the 19^th defendant’s bank accounts.

31. The D19 Director stated that the general manager of Hua Heng was Huang Xue Ming (as evident from his name card).  On 20 January 2015, the 19^th defendant’s sales manager received a “wechat” message of “黃學明27293+70572” from a “Dee 哥陳廣強” of Hua Heng (as evident from a screen capture image of such “wechat” message).  The D19 Director explained that such “wechat” message meant Hua Heng’s Huang Xue Ming had arranged for 2 sums of US$27,293 and US$70,572 (ie the Specified Fund) to be transferred to the 19^th defendant as part payment.  The sum of US$70,572.46 was remitted via HK Dingfeng II Ltd to the D4 Account, and the Specified Fund was transferred to the D19 Account on the same day.  But the 19^th defendant did not know HK Dingfeng II Ltd and/or the 4^th defendant at all.

32. The 19^th defendant also produced 11 receipts with dates from 7 January to 13 February 2015 issued to Hua Heng for part payment of the 4 sale invoices for the aforesaid pistachio sale, leaving an outstanding balance of the sale price of US$246,850.54 as at 23 March 2015.  One of the receipts issued by the 19^th defendant to Hua Heng dated 20 January 2015 was for the sum of US$97,865 (ie the 2 payments of US$27,293 and US$70,572 referred to above) (“Receipt”).  According to the Invoice, the outstanding sum after payment of the deposit was US$157,865.  Taking into account receipt no 66525 dated 19 January 2015 issued to Hua Heng for part payment in the sum of US$60,000, the outstanding balance under the Invoice was reduced to US$97,865, which corresponded to the statement on the face of the Receipt that the sum of US$97,965 was received for payment of “INV W2015010060 [ie the Invoice] 尾數貨款”. 

33. As for the deposits of US$82,000, US$82,000, US$41,000 and US$39,300 (in the total sum of US$244,300) stated on the face of the 4 sale invoices for the aforesaid pistachio sale to have been received by the 19^th defendant, the D19 2^nd Aff disclosed 2 receipts nos 66486 and 67228 dated 7 and 8 January 2015 respectively for the sums of US$136,971.40 and US$107,389 (totalling US$244,360.40) which, save for a minor difference of US$60.40, was almost the same as the total deposit sum in 4 sale invoices (including the deposit sum of US$39,300 in the Invoice).

34. Ms Tam submitted that the 19^th defendant carried on active and genuine business, and the Specified Fund was received as part payment from Hua Heng to settle the Invoice in respect of the aforesaid pistachio sale in the usual course of business.  She argued there was no evidence to show that the 19^th defendant had knowledge of or had participated in any fraudulent activity.  Likewise, there was no risk of dissipation of the Specified Fund given the substantial funds in the D19 Account.  In the circumstances, Ms Tam submitted that the Ex Parte Injunction Order against the 19^th defendant should be immediately discharged.  But notwithstanding a demand letter by the 19^th defendant’s solicitors to the plaintiff’s solicitors dated 13 June 2015, the plaintiff still insisted on continuation of the Ex Parte Injunction Order against the 19^th defendant.

IV.  PLAINTIFF’s CASE

35. The plaintiff relied on the Leung 1^st and 2^nd Affs.  It claimed there was a good arguable basis to say that the Specified Fund originated from an unauthorised transfer of funds from the plaintiff to the D4 Account and subsequently transferred from such account to the D19 Account.  The plaintiff therefore alleged the 19^th defendant was a 2^nd Layer Recipient, and a proper subject for a proprietary tracing claim by the plaintiff.

V.  DISCUSSION

36. As explained in paragraph 16 above, the plaintiff was well aware of its duty to make full and frank disclosure in applying for the Ex Parte Injunction Order.  I reiterate and adopt the legal principles discussed in paragraphs 94-98 of my decision in Sin Yuk Hung v Sin Tung San.[3]

37. It is also useful to refer to Mortimer JA’s summary of the legal principles in Fenn Kar Bak Lily v Goh Kim Lay & anor,[4] which are relevant to the issues at hand:

‘9. It is unnecessary to repeat what has been said many many times before. A Mareva injunction is a draconian order which if made unjustly can cause incalculable damage to defendants. The order is one which should be regarded as unusual. It is designed for the preservation of assets in good commercial claims. As this court said in Tamco Electrical & Electronic (Hong Kong) Ltd. v. Ng Chung-fai Stephen [1994] 1 HKLR 178 at 191 L41 :

“... these wholly exceptional orders were devised for use in rare and extreme cases.”

10. As the application is ex parte the duty on the party applying and its legal advisers is stringent.  As Scott, J. said in Columbia Picture Industries Inc. v. Robinson [1987] Ch 38 - cited in Tamco at 192 :

“... since it was frequently accompanied by a Mareva injunction, it could have the effect that the defendant’s business would be destroyed without the defendant being in a position to apply to the court for the order to be set aside before it was executed; that, therefore, applicants for an order of such severity were under a strict duty to make to the court a full and frank disclosure of all matters that could be relevant and, having obtained the order, neither to act oppressively, nor abuse their power in executing the order.”

Further, there are two other matters relevant to this appeal.  First, it is not a sufficient disclosure to put before the judge a pile of papers.  He may not have the time to read them and to digest them in detail.  It is the duty of legal advisers and counsel to call the judge’s attention to everything that he must see.  Intergraph Corporation v. Solid System CAD Services Ltd.  1993 F.S.R. 617.

11. Secondly, the plaintiff must put before the judge the grounds for his claim, the amount of the claim and any obvious matters of fact or law which could be raised by the defendant against the making of an order.  As was said in Tamco at 191.6 :

“The court itself bears a heavy responsibility, which it must discharge in unusual circumstances, without the benefit of adversary argument, and for just this reason the applicant’s solicitors and counsel come under a duty to assist the judge so as to ensure, so far as possible, that the court does not make an order which perpetrates an injustice against the absent party.” “

38. In short, a plaintiff in discharge of his duty to make full and frank disclosure “should fairly state the points made against him by the defendant” and “[the] plaintiff should also bring to the court’s attention any points that could have been made by the defendant, even if not yet made, at the time of the ex parte application provided that: (a) the point is one that the defendant would reasonably be expected to raise in due course; and (b) the point is not one that can be dismissed as without substance of importance”.[5]

39. It was common ground that it was not mentioned in the Leung 2^nd Aff and/or Ms Law’s skeleton written submissions placed before DHCJ Seagroatt on 27 May 2015 that a sum almost identical to the Specified Fund (save for US$0.46) was transferred from a third party (and not the plaintiff) into the D4 Account and the Specified Fund was transferred from the D4 Account to the D19 Account both on 20 January 2015, ie a day before the alleged unauthorised transfer was deposited in the D4 Account on 21 January 2015. 

40. Ms Law accepted that such information was only found on page 2 of the D4 Statement annexed as part of the copy account opening documents and bank records of the 1^st Layer Recipients received from HSBC and produced as exhibit “LKY-2” of the Leung 2^nd Aff.  However, there were altogether 35 exhibits to the Leung 2^nd Aff which together comprised close to 900 pages.

41. Ms Law in her oral submissions at the Hearing accepted the matters set out in paragraph 39 above were material, but argued there was sufficient disclosure in the manner described in the above paragraph.  In my view, Ms Law was quite right to concede that the matters set out in paragraph 39 above were material.  The matters set out in paragraph 39 above, if properly disclosed, would have raised debate as to whether the source of the Specified Fund was from the plaintiff or some third party, and those matters must have been necessary and relevant matters to be placed in the scales of the weighing operation to enable the judge dealing with the ex parte application to exercise his discretion properly.  On such basis, they ought to have been properly disclosed to DHCJ Seagroatt when the plaintiff applied for the Ex Parte Injunction Order.

42. In my view, the duty to make such material disclosure was not satisfied by the approach adopted by the plaintiff as explained in paragraph 40 above.  It is the duty of legal advisers and counsel to call the judge’s attention to everything that he must see if there is a mass of material,[6] and to point out to the judge at the ex parte hearing any points which are to the plaintiff’s (applicant’s) disadvantage, which the judge should take into account in considering whether or not to grant the injunction.[7] After all, it is difficult for a judge on an application for an ex parte injunction at short notice to grasp all the relevant points.  The duty to disclose cannot simply be fulfilled by exhibiting voluminous documents without making any distinct reference to the points in the body of the supporting affidavit itself or when addressing the judge at the often short hearing.[8]

43. This was the very fallacy of the Leung 2^nd Aff since the information in paragraph 39 above was tucked away in the midst of voluminous exhibits without having such matters highlighted to DHCJ Seagroatt.  Not only were these matters not referred to in the body of the Leung 2^nd Aff, such affirmation asserted “it is unlikely that the [2^nd Layer Recipients, ie including the 19^th defendant] will have any defence to the tracing claims by the Plaintiff”, and as part of the purported compliance with the obligation to give “full and frank disclosure of all relevant matters” such affirmation only mentioned vis-à-vis the 19^th defendant that it “appear to exist as real companies and/or appear to be carrying on real business at their registered office”.  Further, Ms Law’s written skeleton submissions for the ex parte hearing on 27 May 2015 made no mention of the matters in paragraph 39 above, and did not draw attention to the facts/matters and authorities referred to in paragraphs 52-70 below. Rather, it was submitted that “[the] evidence against the [2^nd Layer Recipients, which included the 19^th defendant] is practically incontrovertible”.

44. In my view, there was material non-disclosure on the part of the plaintiff.  Where material non-disclosure is established, the court will ensure that the party seeking to obtain the injunction is deprived of any advantage derived from a breach of the duty as to the disclosure.  This has a two-fold purpose: (a) to deprive the wrongdoer of any advantage improperly obtained, and (b) to serve as a deterrent to ensure that applicants realise they have a duty of disclosure and the consequences if they fail in such duty.[9]

45. In Tiong Kiung Sing v Sam Boon Peng Yee,[10] Chung J reiterated the principles set out in the above paragraph but went on to say as follows:

“18. Nonetheless, the court retains a discretion not to discharge the ex parte order, or to make a new order on terms. A typical example where the discretion will be so exercised is:

(a) the non-discloser is innocent; and

(b)  an injunction would still have been granted had the facts been properly disclosed.”

46. Ms Law submitted that notwithstanding any suggestion of material non-disclosure, the plaintiff had a reasonable cause of action against the 19^th defendant because:

(a) it was plain the Specified Fund was transferred from the D4 Account (and not from HK Dingfeng II Ltd) to the D19 Account on 20 January 2015;

(b) even though HK Dingfeng II Ltd transferred a similar sum of US$70,572.46 to the D4 Account on the same day, it did not necessarily mean this was the source of the Specified Fund, and in any event there was a difference of US$0.46;

(c) it did not matter that the alleged unauthorised transfer from the plaintiff to the D4 Account only arrived on 21 January 2015, and the authorities showed that the order in which the transactions occurred (ie the deposit of the alleged unauthorised transfer into the D4 Account and the transfer of the Specified Fund out of the D4 Account) was not relevant.

Ms Law went further to make the bold assertion that “it is no defence for [the 19^th defendant] to argue that there is no reasonable cause of action by [the plaintiff] for the reasons stated in” the D19 2^nd Aff.

47. The first point to note is that irrespective whether Ms Law’s contentions in the above paragraph were correct or not, they do not do away with or overcome the duty to give full and frank disclosure of material facts and matters for the purpose of seeking the Ex Parte Injunction Order. 

48. Secondly, Ms Law accepted there was no credible basis to suggest there was any dissipation of assets on the part of the 19^th defendant.  Rather, as Leung agreed, the 19^th defendant appeared to exist as a real company and/or appeared to be carrying on real business as its registered office.  The company search results revealed that the 19^th defendant had a local address with a local shareholder as well as paid up capital of HK$30,000,000. Further, even in the D19 Account alone, there was an average balance of US$1,091,188.13 for the period from January to June 2015.  On such basis, I cannot see how the umbrella assertion in paragraph 24 of the Leung 2^nd Aff, ie “given that most of the companies or individuals controlling the companies herein do not seem have any apparent link to Hong Kong there is a real risk of dissipation by each of the [2^nd Layer Recipients] ……”, had any application to the 19^th defendant.

49. But Ms Law submitted that risk of dissipation was irrelevant where the plaintiff sought to recover its property, and its claim was for a proprietary injunction or preservation order.[11] But to establish such claim, it had to be shown there was property which was bona fide the subject matter of the cause or matter, and something ought to be done for the

security of that property.  Indeed, tracing is a process to determine what happened to a person’s property, and it has been described as being “not a matter of court discretion but of property rights”.[12] Lord Millet in Foskett v McKeown stated:[13]

“…… We speak of tracing money into and out of the accocunt, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There is simply a series of debts and credits which are causally and transactionally linked. We also speak of tracing one asset into another but that too is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it …… Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property.”

50. In the circumstances, I am unable to see how the mere fact that the Specified Fund was transferred from the D4 Account to the D19 Account on 20 January 2015 would assist. Indeed, paragraph 13 of the Leung 2^nd Aff placed before DHCJ Seagroatt in respect of the plaintiff’s application for the Ex Parte Injunction Order expressly premised the plaintiff’s proprietary tracing claim on identified transfers of funds from the 1^st Layer Recipients’ accounts “after the unauthorised transfers took place” (my emphasis), which included the transfer of US$70,572.46 from the D4 Account to the D19 Account rather than on the basis that such payment was to be covered by the subsequent alleged unauthorised transfer of US$1,968,211.85 made into the D4 Account. The former contention (on which the tracing claim as explained in the Leung 2^nd Aff rested) meant the Specified Fund was actually sourced from the alleged unauthorised transfer of funds from the plaintiff to the D4 Account, but this was not supported by the timing of the relevant transfers.

51. Thirdly, Ms Law went on to argue that it did not mean the similar sum of US$70,572.46 transferred by HK Dingfeng II Ltd into the D4 Account was the source of the Specified Fund.  In my view, such argument was specious given (a) the almost identical amount of the sum deposited by a third party, ie HK Dingfeng II Ltd, into the D4 Account and the Specified Fund transferred out from such account to the D19 Account (but for the de minimis difference of US$0.46), (b) the temporal proximity of these 2 transactions (ie they happened on the same day), (c) the fact that both these 2 transactions took place before the alleged unauthorised transfer of the plaintiff’s funds into the D4 Account, and (d) the further evidence adduced by the 19^th defendant which demonstrated the transfer from HK Dingfeng II Ltd was for the 19^th defendant’s business.  There was, quite simply, paucity of evidence to show that the Specified Fund was likely to be sourced from the transfer of US$1,968,211.85 from the plaintiff into the D4 Account made a day later on 21 January 2015 rather than from the transfer of US$70,572.46 from HK Dingfeng II Ltd into the D4 Account effected on 20 January 2015.

52. Fourthly, I am not persuaded that the order or timing of the alleged unauthorised transfer from the plaintiff to the D4 Account (which only arrived on 21 January 2015) and the transfer of the Specified Fund out of the D4 Account (which occurred the day before) was irrelevant. 

53. In support of such proposition, Ms Law referred to Snell’s Equity as follows:[14]

“(d) Payment systems.  Special difficulties may arise where the trustee misapplies the claimant’s money and passes it through a series of bank accounts, each linked by a network of payment systems.  The problem may be to identify the funds misapplied at the outset with the funds of similar value deposited in the defendant’s account at the end of the tracing process.  The claimant may succeed even without exact proof of each transactional link between himself and the defendant.  The inference that the sum in the defendant’s account represents the proceeds of the claimant’s money would be stronger if the trustee has arranged the sequence of payments or if they are part of systemic scheme for laundering funds.  The inference may even stand where the sum was paid to the defendant before it was reimbursed by the misapplication from the claimant’s account.  Where defendant is a wrongdoer, he cannot defeat the possibility of tracing against him by creating an evidential “black hole” designed to frustrate the claimant’s action against him.” (my emphasis)

54. The learned text cited Agip (Africa) Ltd v Jackson & ors[15] and Relfo Limited (in Liquidation) v Varsani[16]in support of the above proposition.

55. In Agip (Africa) Ltd, Mr Zdiri, an Agip (Africa) Ltd employee, fraudulently changed the name on a payment order of $518,822.92 to Baker Oil Services Ltd, a puppet controlled by Mr Jackson and other accountants, who acted on clients’ instructions.  On Friday 4 January 1985 Mr Zdiri took the altered payment order to Banque du Sud in Tunisia which executed it by debiting Agip (Africa) Ltd’s account, and by telex instructed Lloyds Bank in London to credit Baker Oil Services Ltd’s account with $518,822.92 with a value date of Monday 7 January 1985, and also by telex gave instructions to its correspondent bank in New York to reimburse Lloyds Bank with a similar amount.  Lloyds Bank acted on those instructions, and on 7 January 1985 credited Baker Oil Services Ltd’s account with the sum and, in doing so, took a delivery risk since it made the payment 5 hours before the opening of business in New York and before confirmation of the receipt of cover.  In the meantime, Agip (Africa) Ltd discovered the fraud, and Lloyds Bank received a telex from Banque du Sud in Tunisia which attempted to stop payment or get Baker Oil Services Ltd to reverse it on the ground that the payment had been made in error.  Baker Oil Services Ltd refused to make a refund.  All but $43,000 was then paid on to unknown parties.  Agip (Africa) Ltd sued Mr Jackson and others for return of the money.

56. At first instance, Millett J at p 286 held that:

“Nothing passed between Tunisia and London but a stream of electrons. It is not possible to treat the money received by Lloyds Bank in London or its correspondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money. The Banque du Sud merely telexed a request to Lloyds Bank to make a payment to Baker Oil against its own undertaking to reimburse Lloyds Bank in New York. Lloyds Bank complied with the request by paying Baker Oil with its own money. It thereby took a delivery risk. In due course it was no doubt reimbursed, but it is not possible to identify the source of the money with which it was reimbursed without attempting to follow the money through the New York clearing system ……” (emphasis added)

57. Emphasis was placed on the “delivery risk” approach to tracing, ie that a party in the tracing chain made a payment in reliance on a promise made by an earlier intermediary to reimburse him.  On such basis, Millett J at pp 289-290 held this did not prevent tracing in equity:

“There is no difficulty in tracing the plaintiffs’ property in equity, which can follow the money as it passed through the accounts of the correspondent banks in New York or, more realistically, follow the chose in action through its transmutation as a direct result of forged instructions from a debt owed by the Banque du Sud to the plaintiffs in Tunis into a debt owed by Lloyds Bank to Baker Oil in London.”

On appeal, the English Court of Appeal accepted that there was no difficulty about the mechanics of tracing in equity on those facts. 

58. At paragraph 63 in Relfo Limited (in Liquidation), Arden LJ (with whom Gloster and Floyd LJJ agreed) held that Agip (Africa) Ltd was authority for the proposition that monies held on trust could be traced into other assets even if those other assets were passed on before the trust monies were paid to the person transferring them, provided that that person acted on the basis that he would receive reimbursement for the monies he transferred out of the trust funds.  It was on such basis that the decision in Agip (Africa) Ltd demonstrated that in order to trace money into substitutes it as not necessary that the payments should occur in any particular order, let alone chronological order.  As Arden LJ explained,

“…… As Mr Shaw submits, a person may agree to provide a substitute for a sum of money even before he receives that sum of money. In those circumstances the receipt would postdate the provision of the substitute. What the court has to do is establish whether the likelihood is that monies could have been paid at any relevant point in the chain in exchange for such a promise. I see no reason in logic or principle why this particular way of proving a substitution should be limited to payments to or by correspondent banks.” (my emphasis)

59. In Relfo Limited (in Liquidation), the liquidator of Relfo Limited sued Mr Varsani, a friend of its former director Mr Gorecia.  Relfo Limited owed some £1,400,000 to the tax authority for outstanding tax, whereupon Mr Gorecia wrongfully caused Relfo Limited to pay £500,000 out of its bank account to a Latvian account of Mirren Ltd, and then on the same day Intertrade Group LLC paid $878,469 (being the dollar equivalent of £500,000 less an amount representing 1.3%) from a Lithuanian bank account to Mr Varsani’s bank account in Singapore.  Shortly after, Mr Varsani gave Mr Gorecia $100,000.  There was no specific transaction passing between the Mirren and Intertrade accounts to show how the Relfo/Mirren payment was translated into the Intertrade payment which went to Mr Varsani’s account in Singapore.  The liquidator argued this was all connected, and the $100,000 was Mr Gorecia’s reward for diverting Relfo Limited’s funds for Mr Varsani’s benefit, so Relfo Limited retained a title in equity over the funds that Mr Varsani held, that Mr Varsani was on notice of the facts at all times and so was a constructive trustee, and that even if tracing was not possible the payments were connected enough to base an unjust enrichment claim.

60. The complications that arose in respect of the tracing claim in Relfo Limited (in Liquidation) included:

(a) after the Relfo/Mirren payment, Mirren Ltd’s account was dissipated but none of the withdrawals was made to Intertrade Group LLC, so it was not possible to identify a coherent line of payments from Relfo Limited to Mr Varsani;

(b) the payments were not all in chronological order;

(c) the sum transferred from Relfo Limited and the sum ultimately paid to Mr Varsani did not match.[17]

61. But the English Court of Appeal held that the evidential gaps and possible chronological anomalies did not prevent the liquidator of Relfo Limited from being able to trace the money in equity or prevent the court from concluding that the money paid to the defendant was substituted proceeds.  It was said that the court was entitled to draw an inference not only that Relfo Limited’s monies had passed to the intermediaries’ accounts but that they were the source of the monies paid to Mr Varsani.

62. The English Court of Appeal accepted the judge had plenty of material from which to draw such inference, eg (a) the similarity in amount and timing of the Mirren/Intertrade payments, (b) the difference of 1.3% might have been a commission, (c) Mr Varsani gave no consideration for the Intertrade payment, (d) Mr Gorecia authorised the payment from Relfo Limited’s account intending it should lead to payment to Mr Varsani by means to be devised by Mr Gorecia’s Ukranian contacts, and (e) the factual background of prior dealings between Mr Gorecia and the Varsani family, between Mr Gorecia and the Varsani family and between Mirren Ltd and Intertrade Group LLC.  The English Court of Appeal at paragraph 61 upheld the first instance finding of fact that Mirren Ltd agreed to transfer the credit balance on its account to another person(s) at some future date for Intertrade Group LLC making the Intertrade payment.  But the English Court of Appeal made clear that whether a court would be able to draw such inference in a particular case would always depend on the circumstances.

63. Here, the facts as known were a far cry from Agip (Africa) Ltd and Relfo Limited (in Liquidation).  Not only was there no evidence at all of any agreement to transfer any part of the credit balance in the D4 Account following the alleged unauthorised transfer of US$1,968,230.25 from the plaintiff on 21 January 2015 to another person(s) at some future date for the 4^th defendant making the payment of the Specified Fund to the D19 Account, there was additionally a transfer deposit of US$70,572.46 from a third party into the D4 Account on the very same day, the quantum of which was almost identical to the Specified Fund that was paid out from the D4 Account to the D19 Account.  In my view, there was no arguable “black hole” created to frustrate the plaintiff’s claim, and it could not arguably be said to be transmutations that directly resulted from a fraudulent transfer.

64. In my view, these were significant and telling facts that took the circumstances of the present case outside the principles discussed in Agip (Africa) Ltd and Relfo Limited (in Liquidation), which held that payments need not be in chronological order on the premise that the intermediary paid out money in the expectation that it would be reimbursed.  There was, quite simply, no evidence from which inference could be drawn that the 4^th defendant was expecting reimbursement when the Specified Fund was paid out of the D4 Account.  Further, the transfer deposit by HK Dingfeng II Ltd on the same day of such payment spoke loudly against any such inference.

65. Ultimately, the court will look at the transaction as a whole to determine whether the Specified Fund paid into the D19 Account amounted to substitute proceeds.  In my view, the 19^th defendant had filled in the evidential gaps by providing information about the aforesaid pistachio sale to Hua Heng and about the payments received for such sale.

66. Ms Law complained that:

(a) there was no evidence that Hua Heng was a genuine company, and the name card of Huang Xue Ming was potentially self-serving;

(b) it was unclear why the transferor of the Specified Fund was not specified as Hua Heng in the D19 Statement;

(c) the Receipt was for the amount of US$97,865 and not for US$70,572;

(d) other evidence allegedly in support of the 19^th defendant’s case, such as the screen capture image of the “wechat” message, was neither here nor there;

(e) there was no evidence that the pistachio cargoes were delivered to Hua Heng.

67. In my view, there is no merit to these criticisms. The 19^th defendant explained the aforesaid pistachio sale in quite some detail, and produced the sales confirmation, invoices, invoices for cargo handling charges, receipts and the name card of Hua Heng’s general manager in support of such explanation.  The cargo handling invoices referred to specific cargo numbers that could be cross-matched to those stated in the invoices.  There was little basis to say these cargoes did not exist and were not the subject matter of sale to Hua Heng. 

68. There was also clear evidence that Hua Heng was a company in Mainland China.  It is common knowledge that the PRC authorities exercise exchange control, and the D19 Director explained how payments were usually made by purchasers in Mainland China, ie by tranche payments via third parties.  This explained why the transferor was not Hua Heng but some third party.  There was nothing before me to suggest that such usual payment method as accepted and acted on by the 19^th defendant had any sinister connotations.  Moreover, the “wechat” message referred to “Huang Xue Ming” (which corresponded to the name card of Hua Heng’s general manager) and advised there would be 2 such tranche payments for the invoices in respect of the aforesaid pistachio sale.  This supported the 19^th defendant’s explanation that the transfer of US$70,572.46 by HK Dingfeng II Ltd to the D4 Account and the onward transfer of US$70,572 from the D4 Account to the D19 Account were contextually and transactionally linked to Hua Heng and the aforesaid pistachio sale.  In my view, it is inappropriate to say that such name card and “wechat” message were neither here nor there. 

69. As regards the Receipt for the sum of US$97,865, not only the “wechat message” explained there would be 2 transfers in the sums of US$27,293 and US$70,572 (totalling US$97,865) to the 19^th defendant from Hua Heng, the facts and matters set out in paragraphs 31-33 above further explained how the Specified Fund was utilised to settle the outstanding balance of the Invoice. 

70. All of the above matters suggested that the aforesaid pistachio sale was a genuine business transaction, and there was no or insufficient countervailing evidence from which one can draw any contrary inference.  In coming to such view, I also bear in mind (a) the 19^th defendant’s substantial paid up capital, (b) the substantial credit balance in the D19 Account over the period from January to June 2015, and (c) the plaintiff’s acknowledgment that the 19^th defendant carried on real business at its address.

71. In all the circumstances, by reason of the above analysis and the reasons discussed above, I find there was lack of good arguable case on the plaintiff’s proprietary tracing claim for the preservation/injunction order, and the plaintiff also failed in its duty to give material disclosure.  Also, there was insufficient evidence of any real risk of dissipation of assets to support any mareva injunction against the 19^th defendant.  Hence, the Ex Parte Injunction Order should be discharged, and I see no basis for re-grant of the preservation order and/or mareva injunction against the 19^th defendant.

VI.  CONCLUSION

72. In respect of the 1^st Summons, I order that the Ex Parte Injunction Order be discharged as between the plaintiff and the 19^th defendant.  There is no reason why costs should not follow event.  I therefore grant a costs order nisi that the plaintiff shall pay the 19^th defendant costs of (a) the 1^st Summons as between the plaintiff and the 19^th defendant and (b) the 19^th defendant’s application to discharge the Ex Parte Injunction Order (including all costs reserved if any) on indemnity basis to be taxed if not agreed.