UNA TRADING FZE v. PAK FEI TRADE LTD AND OTHERS

HCA 966/2018 and HCA 1048/2018
(HEARD TOGETHER)
[2022] HKCFI 1920

HCA 966/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 966 OF 2018

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AND

HCA 1048/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1048 OF 2018

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(HEARD TOGETHER)

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J U D G M E N T

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1.  The Plaintiff, UNA Trading FZE (“UNA”) is a member of a group of companies that deals in Caterpillar construction machinery and their maintenance in various countries. UNA itself is based in Dubai. In April 2018 UNA fell subject to computer fraud. It appears that access was obtained to details including the password of UNA’s chief financial officer and as a consequence a number of transfers were made to the Defendants in HCA 966/2018 (“HCA 966”):

(1)  US$3,133,831.83 to the 1^st Defendant;

(2)  US$2,046,320 to the 2^nd Defendant;

(3)  US$2,975,100 to the 3^rd Defendant;

(4)  US$2,330,596.55 to the 4^th Defendant, Mega Wealth Chance Limited (“Mega”).

2.  In HCA 966 UNA claims a declaration that the Defendants hold the monies they received on constructive trust, alternatively they are liable for knowing receipt, alternatively money had and received and the normal orders for an account.  Only Mega acknowledged service of the writ. Default judgments have been entered against the first three Defendants. Mega filed a defence.  The pleaded defence is as follows:

(1)  It alleged that Luk Kit San (“Luk”) of Mega had been approached in March 2018 by a man calling himself Lin Dayou (“Lin”), who held himself out as representing UNA.  Lin told Luk that UNA wished to purchase exclusive watches for resale.  Luk contacted Sam Hung Hing Sum (“Hung”), who operates a watch company at the Holiday Inn Golden Mile in Nathan Road, Happywise Watch & Jewellery Company (“Happy Wise”), to discuss Hung supplying Mega with watches for sale to UNA.

(2)  On 20 April 2018 UNA transferred US$2,330,541.68 to Mega.

(3)  At Hung’s request Mega remitted US$2,214,014.50 to Hong Kong Numismatic Promotion Company Limited (“Numismatic”), which is a company owned by Hung. Luk collected watches from Happy Wise and passed them to Lin.

(4)  Mega had no knowledge of the fraud.

3.  From December 2019 to January 2020 Mega filed three witness statements.  A year ago Mega’s solicitors came off the record. Mega did not appear at the trial of HCA 966.

4.  HCA 1048/2018 (“HCA 1048”) was commenced against Happy Wise, Hung and Numismatic (together the “HCA 1048 Defendants”).  Hung owns Happy Wise and Numismatic.  Happy Wise has operated since 2007 a shop in the Holiday Inn Golden Mile, which sells high value watches.  The watches are either parallel imports, Happy Wise not being an authorised dealer for any brand, or second hand watches.  This is not in dispute.  It is the HCA 1048 Defendants’ case that Hung was approached in about the end of March 2018 by Sin Kam Fu (“Sin”), who he had known for about 20 years.  Sin was a retired policeman, who Hung understood worked for a trading company called Mega.  Sin told Hung that Mega wished to buy in excess of US$2 million watches for a Dubai client, who wanted them as an investment.  Hung agreed to source them.  This he did.  Hung agreed with Sin that payment needed to be made before the watches were handed over.  Hung decided to use Numismatic to receive the monies.  It was his evidence that this was because there had been a spate of cases in Tsim Sha Tsui in which watch shops had received forged cashier’s orders.  He thought it prudent not to use Happy Wise to receive the funds in case he encountered a similar problem as it would jeopardise Happy Wise’s credit rating.  HK$17,353,441.34 was paid into Numismatic’s account on 20 April 2018 without any problem.  Watches produced by Patek Philippe, Rolex and Jaeger LeCoultre were passed to Sin in two batches.  The first took place on 24 April 2018.  There is a video of Sin collecting watches from the shop under the supervision of Hung’s Brother Danny Hung Shui Wang (“Danny”).  Hung was in Japan at the time.  The second batch were handed over to Sin on 30 April 2018.

5.  The HCA 1048 Defendants at trial did not dispute that UNA had been the subject of a fraud.  They assert that the Happy Wise was a bona fide purchaser for value of the monies transferred by Mega to Numismatic on 20 April 2018.  UNA disputes this.  It contends first that in order for Happy Wise to establish its defence it has to demonstrate that it entered into a legally binding agreement with Mega to supply watches.  Secondly, that no such agreement was concluded.  Thirdly, Happy Wise were not acting bona fide.

6.  I accept that UNA has demonstrated that it was defrauded of the sums paid into the HCA 966 Defendants’ bank accounts.  Ribeiro PJ explains in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd[1], the criteria that must be satisfied for a plaintiff to succeed with an unjust enrichment claim to restitutionary relief.  The criteria involving consideration of the following matters:  was the Defendant enriched, was the enrichment at the Plaintiff’s expense, was the enrichment unjust and are any of the defences to such a claim applicable.  I am satisfied that Mega was enriched, it was at UNA’s expense and Mega’s enrichment was unjust.  Mega has not, of course, made out a defence.  Accordingly, I will give judgment in the following terms in HCA 966:

(1)  A declaration that the 4^th Defendant holds the sum of US$2,330,596.55 received by it on or about 20 April 2018 from the Plaintiff on trust for the Plaintiff as constructive trustee and is liable to return the said sum to the Plaintiff.

(2)  An order that the 4^th Defendant returns the said sum or such part of it as it retains to the Plaintiff forthwith.

(3)  The 4^th Defendant pay the Plaintiff interest on the said sum from 20 April 2018 to 20 June 2022 inclusive at 1% over Hong Kong prime rate and thereafter at the judgment rate until payment.

(4)  The 4^th Defendant pay the Plaintiff’s costs of the action such costs to be taxed if not agreed.

7.  The claim in HCA 1048 is in my view unsustainable.  There is no dispute that Mega paid Happy Wise (through Numismatic) HK$17,353,441.34.  Happy Wise has produced invoices identifying the watches it sold to Mega and their unit price.  Mega received copies of the invoices and chopped them.  Although UNA does not concede that Happy Wise ever transferred watches to Mega in exchange for the significant payment it received, as I will explain later there is no credible reason for rejecting the HCA 1048 Defendants’ evidence that Happy Wise did so.  Indeed Mega has in documents I refer to below acknowledged this.

8.  UNA disputes Happy Wise’s bona fide purchaser defence on two grounds.  First, that in HCA 966 Mega’s defence pleads that it was a director of Mega, Luk, not Sin, who negotiated the purchase with Hung and it was Luk, who collected all the watches on 27 April 2018 from Happy Wise’s shop.  Witness statements were filed by Mega in HCA 966 supporting this case.  The statements are not, of course, evidence as the witnesses were never called.  UNA argues that it is entitled to rely on the Defence at least as evidence that calls into question Happy Wise’s case.  If Happy Wise’s version of events is true one would not expect Happy Wise to be able to explain why Mega would have alleged that Luk rather than Sin dealt with Hung and collected the watches.  I would note that it was not suggested to any of Happy Wise three witnesses at trial, Hung, Danny and a shop assistant Tang Chun Man (“Tang”), that their evidence about watches being collected by Sin was false.  UNA’s attack on what the video evidence of a handover of watches on 24 April 2018 is, as I will explain later, different and more nuanced.  If, as I do, one proceeds on the basis that the money was paid to Mega pursuant to a fraud perpetrated on UNA and Mega has not defended the claim, Mega’s case, such as it is, must sensibly be viewed with caution.  The suggestion that Mega’s version of how Mega came to purchase watches from Happy Wise justifies concluding that Happy Wise did not enter into a legally binding contract with Mega seems to me without substance or merit.  It turns on reading Mega’s defence as alleging that it entered into an agreement with Happy Wise as UNA’s agent, which is not true.  From this foundation Ms Leung argued that it followed that an agreement between Mega and Happy Wise on the terms alleged by Happy Wise, namely, an agreement by Mega, as principal, to buy the agreed watches from Happy Wise cannot have been concluded and, therefore, Happy Wise has not established the necessary agreement to succeed on its bona fide purchase for value defence.  Central to this argument is the submission that in order to succeed Happy Wise must demonstrate that the agreement it alleges was concluded and this it cannot do so because what it alleges differs from Mega’s case as pleaded by it in its Defence in HCA 966.  UNA does not suggest either that the agreement between Mega and Happy Wise (and clearly there was one) was bogus (a matter I return to later) or that if the HCA 1048 Defendants’ case is factually correct Mega must be assumed to have entered into the agreement with Happy Wise as part of conspiracy and, whatever Happy Wise understood the position to be, this in some way prevents an agreement as alleged by Happy Wise having been concluded.  If, as I do, I accept Happy Wise’s explanation of what took place between it and Mega as set out in its Defence and its witness statements it seems to me that what Mega pleaded in HCA 966 is not of sufficient probative value, if it constitutes evidence at all, to justify the court concluding that there was no contract of sale between Mega and Happy Wise.

9.  UNA relies on the following matters in its written closing as demonstrating that Happy Wise was not a bona fide purchaser:

“(1) Each of the 1048 Defendants’ witnesses gave evidence that it was not Happy Wise’s business practice to take a photographic record of its inventory. In particular, Sam Hung explained that to do so would mean a lot of work for his staff. This however stands in stark contrast to what is actually shown on Happy Wise’s official website: see Affirmation of Lo Sze Man Xenia dated 31 July 2018.

(2) Each of the witnesses confirmed that they were unable to tell from the video of the handover of the watches at Happy Wise’s shop on 24 April 2018 that the watches which Happy Wise claimed they were selling were the ones that were actually sold, despite the value of the transaction (over HK$17 million).

(3) Tellingly, in light of the incident concerning Happy Wise/ Yau On Pawn Shop and Graff, Hung Shui Wang Danny agreed that he ought to have taken better care or precaution in handling the sale of watches in these proceedings.

(4) Importantly, there was and is no record to distinguish between an unworn and a worn watch prior to their sale to Mr Sin (or that Mr Sin was told of such fact), and no evidence to show that the watches had been taken out of their packaging for the purposes of inspection and verification with the 2 invoices (which, on the face of them, do not identify the condition of the watches). It was however acknowledged that watches of different conditions could fetch very different prices. And although the defence witnesses did not agree or were evasive as to whether a watch that was accompanied with the original presentation box (as opposed to just a shipping box), certificate of origin and warranty (packaged in a leather pouch so far as Patek Philippe watches are concerned) could fetch a very different price from just the watch itself, it is very likely that they would have made a difference to the ultimate selling price.

(5) All the 1048 Defendants’ witnesses tried to downplay UNA’s point about how unusual it was for the handover to proceed without inspection of the watches. This is contrary to common sense, let alone a transaction that was worth over millions of dollars. The alleged confidence of Mr Sin in Sam Hung is not a reasonable explanation at all.

(6) Further, given that the boss was not present at handover and they took the extra steps to videotape the handover, what was actually recorded only shows the indifference between buyer and seller. It is submitted that the video is of no probative value at all.

(7) As to why Sam Hung would immediately associate Mr Sin (an ex-police officer whom he trusted and respected) with potential scam after the latter provided him with Mega Wealth’s BR and credit advice. In cross-examination, he came up with the new answer that it was the practice he has adopted for all new customers. However, no satisfactory explanation was given as to why he failed to mention this in his witness statements. Clearly, it was an afterthought as he tried to better his original explanation because it made no sense.

(8) Sam Hung’s oral testimony was that he had initially asked his suppliers, Mr Nader and Mr Justin, to give evidence in support of Happy Wise in these proceedings. He then said they refused on grounds of a belief that they would be forced to ‘disclose a lot of information’ which would ‘affect their business in the future’. This testimony is at odds with what was said in his supplemental witness statement, however, where he said that he had not asked them why they refused to attend court to give evidence at all. Either way it can be inferred that there is something about his business that Sam Hung is not being forthcoming about.

(9) Last but not least, the Court is invited to draw adverse inferences from the absence of evidence from Mr Sin, clearly the counterparty to this purported transaction would not even come forward to assist.”

10.  As I have mentioned Happy Wise called three witnesses. All in my view gave straightforward and credible evidence.  Nothing in their answers suggested evasiveness or shiftiness, which could justify the court concluding that their version of events should not be accepted.  The suggestion, for example, that the absence from the video of the collection of the first batch of watches on 24 April 2018 of an invitation by Danny or Tang for Sin to take the watches out of the boxes and inspect them, or Sin asking to inspect them, is so suspicious that it supports the inference advanced by Ms Leung along the lines that the HCA 1048 Defendants must have suspected the purchase was dubious, but said nothing because they did not want to jeopardise a lucrative deal, is purely speculative.

11.  There is nothing that in my view can fairly be described as direct evidence that the HCA 1048 Defendants had doubts about the propriety of the deal.  Ms Leung submitted that Hung’s evidence that he requested that the purchase price be paid into Numismatic’s bank account because of concerns he had because of other watch companies in Tsim Sha Tsui having had problems with dishonoured cashier orders demonstrates that Hung suspected the proposed sale was problematic.  This does not seem to me to justify any inferences about the propriety of Mega’s offer.  Hung’s decision is readily explained by prudence.

12.  I was not referred to any of the leading authorities on the drawing of inferences of serious misconduct.  I explain the principles in [22]–[23] of my decision in ChinaCulture.Com Limited v Lam Ting Ball, Paul & others[2]. I say this:

“22. … I am mindful of the observations of Ribeiro PJJ in Nina Kung v Wong Din Shin[3] on the need for a disciplined approach to the drawing of inferences, in particular inferences of serious misconduct.

‘187. In HKSAR v Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling. Dealing with an allegation that senior SFC officers had deliberately and improperly terminated an investigation in order to avoid compromising the standing of the subject of the investigation who was acting as an expert witness in a criminal trial in which the SFC was interested, his Lordship stated:

“… that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts”. (at §72)

Reflecting the Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 principle he added:

“In the particular circumstances, it was for the respondent to establish as a compelling inference that very senior officers of the SFC had deliberately and improperly terminated the investigation into Meocre Li’s conduct for the ulterior purpose alleged, sufficient to overcome the inherent improbability that they would have done so.” (Ibid.)

It will be convenient to refer to the principle adopted in these cases as “the HKSAR v Lee Ming Tee & Securities and Futures Commission principle”.’

23. An allegation of wilful misconduct by a director of a power for an improper purpose is a serious one.  As these passages make clear the necessary inference can only be drawn from proven facts, which make the inference compelling.  It is not sufficient to identify a series of wrongs and mistakes committed over time and invite the court to conclude that by virtue of their number it is probable that something more than negligence or indifference was their cause. This is to invite speculation and conjecture.  It is necessary for the court to find facts, which assessed in context are indicative, in the present case, of the Defendants’ attitude and motives.  Context includes how a person or a company normally conducts its affairs.  If it is normally casual and unsophisticated, it is difficult to infer anything about the motives for dealing with a particular transaction in a casual and unsophisticated manner. Similarly, if the facts can credibly be explained as mistakes or errors of judgment an inference of, in the present case, conscious non-compliance by the Directors with their duties, or recklessness indifference to doing so, cannot properly be made.”

13.  It seems to me that UNA’s submission, which I have quoted above invites the court to indulge in speculation and conjecture.  It is not helped that in the case of the first matter, taking of photographs, none of the Defendants’ witnesses were asked about the website and the affirmation referred to does not state that the website shows photographs of watches.

14.  What the video shows is a number of Patek Phillipe watches and one Rolex in boxes used, according to the HCA 1048 Defendants’ witnesses, for transporting watches, which allow the face of the watch to be seen.  I note that the transcript records those present discussing the fact that the next door premises were being renovated and the smell of paint thinner was unpleasantly strong and the door had to be left open, which probably would not have encouraged Sin to stay longer than was necessary.  One can see and hear Danny and Tang checking the model number on the box against what I assume (they were not asked) was either the invoice or some other list with the watch reference numbers on them.  The watch boxes were then given to Sin.  It is correct that Sin is not shown collecting presentation boxes or watch certificates.  Danny and Tang said this was not unusual as they were bulky and Sin had taken delivery of eight watches.  Hung and Tang were not asked if Sin ever collected the boxes and the certificates.  Danny said he did not know.

15.  The third matter referred to is an occasion in about 2018 when Happy Wise purchased a valuable diamond and Yau On, a pawnshop owned by Hung’s Father, sent it to GIA for certification, and it was identified as a diamond that Graff had reported as stolen.  It was Hung’s unchallenged evidence that he received repayment from his customer and saw no reason to spend money defending an action brought by Graff in the United Statements for delivery up of the diamond.  Nothing can be inferred from this one incident about the bona fides of the sale of the watches.  The submission simply serves to illustrate the artificiality of UNA’s attack on the HCA 1048 Defendants’ bona fide, which involves pointing to minor matters that of themselves demonstrate nothing of substance, and inviting the court to conjecture that viewed cumulatively they suggest that the HCA 1048 Defendants must have had doubts about the sale and consequently their case that the sale was bona fide fails.  The fallacy of this approach is further illustrated by the 8^th complaint.  The discrepancy between what is said in Hung’s supplemental witness statement and his oral evidence (hardly an uncommon feature of evidence in civil trials) does not tell the court anything useful about the sale of the watches Hung says he purchased from Mr Nader and Justin Gruenberg.  As UNA does not suggest the sale to Mega was bogus it is difficult to see what difference their evidence would have made.  Ms Leung argued that it had not been demonstrated that the watches recorded on the two invoices had been given to Mega.  I can see no reason not to accept the HCA 1048 Defendants’ evidence that they were given to Sin or read anything material into Mr Nader and Mr Gruenberg not giving evidence.  Neither can much be read into Sin’s unsurprising unwillingness to give evidence to support Hung’s evidence as this would have resulted in him having to explain how he was involved in the receipt by Mega of sums fraudulently obtained from UNA.

16.  It seems to me that the HCA 1048 Defendants have demonstrated that their sale of the watches to Mega was bona fide. I will dismiss the Action and make a costs order nisi that the Plaintiff pays the HCA 1048 Defendants’ costs such costs to be taxed if not agreed with a certificate for one counsel.