LIMITED LIABILITY COMPANY UMITOYS v. NICE FAME TRADING LTD

HCA 2522/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2522 OF 2014

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D E C I S I O N

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A. INTRODUCTION

1.  There are five summonses before the court: –

(1)   The plaintiff’s Summons dated 30 May 2016 (the “Continuation Summons”) for continuation of the injunction order dated 27 May 2016 (the “Injunction”).

(2)   The defendant’s Summons dated 16 June 2016 for leave to amend the Defence (the “Amendment Summons”).

(3)   The defendant’s Summons dated 16 June 2016 for security for costs (second application) (the “Security for Costs Summons”).

(4)   The plaintiff’s Summons dated 17 June 2016 for summary judgment pursuant to Order 14 of the Rules of the High Court (the “Order 14 Summons”).

(5)   The defendant’s Summons dated 4 July 2016 for discharge of the Injunction or a fortified cross undertaking as to damages (the “Discharge Summons”).

2.  In essence, the court has to determine the following issues: –

(1)   Whether judgment should be entered against the defendant? (ie success of the Order 14 application)

(2)   If the Order 14 application fails, whether the Injunction should continue to be in place or be discharged?

(3)   Whether the plaintiff should give security for costs?

(4)   Whether the defendant should have leave to amend its Defence?

B.   RELEVANT BACKGROUND  

3.  The plaintiff is a Ukrainian company in the toys business.  One of the plaintiff’s suppliers is HK Best Toys Industry Company Limited (“HK Best Toys”).  The plaintiff pays HK Best Toys through agency companies, in this case one Eyand Limited.

4.  The plaintiff and HK Best Toys communicate through email correspondence between their representatives, mostly between Jenny (for the plaintiff) and Polly (for HK Best Toys).

5.  In June 2013, the plaintiff placed an order for toys under Pro forma Invoice LT13060827.

6.  Email correspondence were exchanged in July 2013 concerning payment for the plaintiff’s order.

7.  The plaintiff mistakenly caused a payment to be made to the defendant through Eyand Limited and the defendant received the sum of US$135,000.

8.  The defendant is not in the toys business.

C.   RESPECTIVE POSITIONS OF THE PARTIES

9.  The plaintiff’s case is as follows: –

(1)   The payment to the defendant was by mistake, or the defendant has been unjustly enriched.

(2)   The defendant has in fact received and unjustly benefitted from the money deposited into its bank account.

(3)   The money belongs to the plaintiff, intended to be a payment to HK Best Toys.

(4)   The plaintiff is a victim of a scheme of internet fraud and had mistakenly made payment to the defendant as a result of various scam emails.

(5)   HK Best Toys acknowledged that they did not send the scam emails to the plaintiff.

(6)   The plaintiff further caused another payment to HK Best Toys as a result of the mistaken payment.

(7)   The plaintiff and HK Best Toys reported the matter to Hong Kong police and the police in Mainland China.

10.  On the other hand, the defendant’s case is that: –

(1)   Mr Yang Zekui (“Mr Yang”) runs Guangzhou HueYi Trading Company, Limited (“HueYi”) which trades shoes, clothing and a broad range of products in the People’s Republic of China.

(2)   Mr Yang uses the defendant as a corporate vehicle to receive overseas payments.

(3)   The defendant alleges that there were two business orders for shoes placed by an African customer with HueYi.

(4)   The defendant received US$135,000 from Eyand Limited as part payment for HueYi’s shoes orders and shoes were delivered to one Ado Kelvin.

(5)   The defendant denies unjust enrichment.

D.   PLAINTIFF’S SUMMONS FOR SUMMARY JUDGMENT

11.  The defendant submits that the plaintiff’s Order 14 Summons should be dismissed with costs for the following reasons: –

(1)   The court has no jurisdiction to grant summary judgment under Order 14 by reason of the allegations of fraud made against the defendant by the plaintiff.

(2)   There are triable issues in the present case.

(3)   The plaintiff knew that there was a defence by the defendant before the plaintiff took out the Order 14 Summons.

D1. Allegations of fraud

12.  The plaintiff has alleged that the defendant’s defence and evidence was “fake” or a “sham”: –

(1)   The plaintiff alleged that the existence of HueYi’s two shoes orders are inherently incredible;

(2)   The plaintiff deposed that the entire business of HueYi is selling only bags and suitcases, but not shoes or clothing.

13.  By Order 14, rule 1(2) of the Rules of the High Court, it is provided that: –

“Subject to paragraph (3) this rule applies to every action begun by writ other than –

(a) …

(b)   an action which includes a claim by the plaintiff based on an allegation of fraud …”

14.  In Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016, the Court of Appeal held that: –

“The court should determine whether ‘the fraud exception’ applies at the time when the application for summary judgment is heard. Therefore the court should not be restricted to a consideration of the statement of claim only, but should examine all relevant materials existing at the time of the hearing, including subsequent pleadings and the affidavits. (per Yuen JA at paragraph 18(1))

… The defence was that the defendants had received the money as proceeds of sale in a bona fide transaction where it had sourced goods from the three suppliers and on-sold them to Kosona. Such a defence would provide a complete defence to the plaintiff’s claims. In order to maintain its claims, the plaintiff has alleged that the 1^st defendant had not in fact sourced goods from two of the three suppliers at all, that the third supplier did not exist, and that one of the suppliers had declared that an invoice (purporting to be from that supplier and exhibited by the 1^st defendant in support of its defence) was ‘fake’; in other words, the plaintiff has alleged that the transaction was a sham. … even if the plaintiff has not asserted that the defendants were parties to the fraud practised in Sweden to obtain the money, it has clearly asserted that the defendants are parties to a fraud to keep the money transferred to them, which is the subject matter of its claims.” (Emphasis supplied) (per Yuen JA at paragraphs 19.2 and 19.3)

15.  In the present case, the plaintiff has alleged that the defendant’s shoes transactions were “fake” or a “sham”.  It has asserted that the defendant is a party to a fraud to keep the money transferred to it, which is the subject matter of the plaintiff’s claim.  Applying the above principles, I agree that the “fraud exception” is clearly engaged in this case and therefore this court has no jurisdiction to hear the plaintiff’s Order 14 application.

D2. Triable issues

16.  Further, I agree with the defendant that there are clearly triable issues in the present case.

17.  It is trite that in an application for summary judgment, the burden is on the defendant to satisfy the court with respect to the claim that there is a triable issue.  However, it is not necessary for the defendant to prove that it will succeed in its defence.  The test at this stage is simply whether the defendant’s assertions are believable.  The threshold is not high.  The defendant need not present all the evidence it intends to adduce at trial, but must adduce such evidence as to make the defence, not only arguable, but believable.

18.  The defendant’s defence is that the defendant had received the money as proceeds of sale under a bona fide business transaction, namely, being the balance payment for the two orders by Kelvin Ado.  Upon receiving the same, the defendant paid over the sum to the supplier of HueYi in good faith for the two orders.  Thus, there was a change of position and it is unjust to allow restitution.

19.  I agree that the defendant’s defence is not only arguable but also believable as it is, to a large extent, supported by the contemporaneous documents.  It is similar to the defence raised in Zimmer Sweden AB v KPN Hong Kong Ltd, Ibid.  As quoted above, at paragraph 19.2 of that case, Yuen JA held that that defence would provide the defendant a complete defence to the plaintiff’s claim.

20.  In the circumstances, I agree that there are clearly triable issues in the present case.

D3. For the plaintiff to succeed, the defendant must have no defence

21.  Practice Note 14/7/3 of the Hong Kong Civil Procedure 2017 provides that: “If before the issue of the summons the plaintiff knows that the defendant is relying upon a contention which would entitle him to unconditional leave to defend, he cannot properly invoke the jurisdiction of the court under O.14 to give him summary judgment, for neither he nor anyone on his behalf can make the affidavit in support stating that ‘in his belief there is no defence to the claim or part to which the application relates’ (see r.2(1)).  The belief that must be deposed to is, not that the ground of defence relied upon is not good, or substantial or has been raised very late or will in all probability fail at the trial, but that there is no defence to that claim or part.  If, therefore, notwithstanding such knowledge, the plaintiff proceeds under O.14, the application should be dismissed”.

22.  The solicitor acting for the plaintiff deposed in his affidavit that he believes“that there is no triable issue in the present case and that the Defendant has no defence to this action”. However, prior to the plaintiff making the present application for summary judgment by summons, the defendant had already served on the plaintiff a draft Amended Defence, which was attached to the Summons seeking leave to amend the Defence.

23.  Thus, knowing that the defendant has a defence, the plaintiff still chose to embark on and continue with the present application.  In the circumstances, I agree that the present summary judgment application by the plaintiff should be dismissed with costs to the defendant.

E.   PLAINTIFF’S SUMMONS TO CONTINUE AND DEFENDANT’S SUMMONS TO DISCHARGE THE INJUNCTION

24.  The defendant submits that the Injunction should be discharged for the following reasons: –

(1)   The plaintiff does not have a good arguable case, or its once good arguable case is watered down by the defence.

(2)   There is no real risk of dissipation of assets by the defendant.

E1.  No “Good arguable case”

25.  As stated above, the defendant’s defence is to a large extent supported by the contemporaneous documents of the defendant and third parties, including the following: –

(1)   On 4 May 2013, an African customer on behalf of one Ado Kelvin placed the first order for shoes from HueYi and paid a cash deposit of US$20,000 (Invoice number 20130504010).

(2)   On 5 May 2013, HueYi ordered shoes from Chaozhou Yongjinxing in order to fulfil the first order (Serial number JYG0505).

(3)   On 10 May 2013, the same African customer on behalf of Ado Kelvin placed the second order for shoes from HueYi and paid a cash deposit of US$20,000 (Invoice number 20130510013).

(4)   On 10 May 2013, HueYi ordered shoes from Chaozhou Yongjinxing in order to fulfil the second order (Serial number JYG0512).

(5)   On 20 May 2013, another customer known as M Y Diallo (the “Other Customer”) ordered shoes from HueYi (Invoice number 2013052025).

(6)   On 20 May 2013, HueYi ordered shoes from Chaozhou Yongjinxing in order to fulfil the order from the Other Customer (Serial number JYG0521).

(7)   On 10 June 2013, the African customer on behalf of Ado Kelvin made further payments in cash for the first order and the second order of US$20,000 and US$24,800 respectively.

(8)   On 16 July 2013, Mr Yang’s elder sister (“Ms Yang”) received a telephone call from an English speaking man stating that he would deposit US$135,000 into the defendant’s bank account on the next day.

(9)   On 17 July 2013, Ms Yang received another telephone call from the English speaking man saying that he had paid the sum of US$135,000 into the defendant’s bank account as balance payment for Invoice numbers 20130504010 and 20130510013.  Immediately, by way of online banking, Ms Yang confirmed that a sum of US$135,000 had indeed been deposited into the defendant’s bank account for the two orders.

(10)   As the balance payment for the two orders had been made, on 18 July 2013, by way of online banking, Ms Yang paid US$200,000 to Chaozhou Yongjinxing from the defendant’s bank account.  This sum was paid as balance payment for the shoes ordered to fulfil the first order and the second order and as part payment for the shoes ordered by the Other Customer.

(11)   On 20 July 2013, the shoes ordered under the first order and the second order were delivered directly by Chaozhou Yongjinxing to the designated shipper of Ado Kelvin (Sea Freight Shipping Order Number 0001054 and Sea Freight Shipping Order Number 0001055 respectively).

(12)   On 20 September 2013, the Other Customer made the balance payment for his order to HueYi in cash as the defendant’s account at that time had already been frozen.

(13)   On 20 September 2013, HueYi made the balance payment of US$94,989 to the supplier in cash as by that time the defendant’s account had already been frozen.

(14)   On 21 September 2013, the shoes were shipped to the Other Customer via TS Cargo Shipping.

26.  Thus, there is strong support that the defendantbona fide believed that it had received the balance payment for the two orders from the African customer, it then paid out the sum to a supplier in good faith to settle the price of the shoes, which were eventually delivered to Ado Kelvin.

27.  I agree that even if the court is to take the plaintiff’s case at its highest that there was indeed an internet fraud such that the money was mistakenly credited to the defendant’s account, the plaintiff may not be entitled to the restitution of the same.  As the defendant received the money in the bona fide belief that it was proceeds of sale and has subsequently parted with the same in good faith with full consideration, there may well have been a change of position and the money cannot be recovered.

28.  In the case of Arrow ECS Norway AS v Xin Cheng Holdings (International) Co Ltd, HCA 239/2016 (Decision dated 12/05/2016), the plaintiff was the victim of an email and telephone scam.  The plaintiff claimed against the defendant for, inter alia, unjust enrichment in respect of the money paid to the defendant as a result of the fraud.  The defendant’s defence was that it had no knowledge of the fraud, had bona fide supplied consideration for the monies received, and has changed its position in good faith.  Taking both parties’ evidence into consideration, Au-Yeung J found that the good arguable case that the plaintiff there once had on the merits was much watered down by the arguable defence of the defendant.

29.  Likewise, in the present case, I agree that the good arguable case that the plaintiff once had on the merits is much watered down by the defendant’s arguable defence.

E2.  No “Real risk of dissipation of assets”

30.  As to risk of dissipation, a useful summary of the principles has been helpfully set out by DHCJ Winnie Tam, SC at paragraph 26 of Eastman Chemical Ltd v Heyro Chemical Co Ltd (No 2) [2012] 3 HKLRD 307, to which I refer.

31.  In the present case, I agree that the plaintiff has no “solid evidence” to show that there is a real risk that the defendant would dissipate its assets in order to defeat the plaintiff’s claim.

32.  On the other hand, there is some evidence to show that the defendant is a company with a long-established business and with a reasonable market reputation.

(1)   The defendant was established in 2012 in order to facilitate the business transactions of HueYi, which was also established in 2012 in the PRC.

(2)   Before the establishment of HueYi, Mr Yang and Ms Yang had already started running the current business under the name of科比since 2003.

(3)   From 2012 up to now, HueYi has continued to operate its trading business.

(4)   In 2015, after the present proceedings had begun, HueYi started to launch a platform at the Alibaba website for selling bags in order to further expand its business.

33.  As stated by Au-Yeung J in Arrow ECS Norway AS v Xin Cheng Holdings (International) Co Ltd, Supra, at paragraph 49:

“49. 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. …”

34.  In summary, in the present case, notwithstanding an initial good arguable case, there is a good arguable defence shown that the defendant has changed its position without notice of the fraud.  Further, there is no solid evidence of risk of dissipation of assets.  Accordingly, I agree with the defendant that the Injunction should be discharged.

F.   DEFENDANT’S SUMMONS FOR SECURITY FOR COSTS

35.  My decision to discharge the Injunction must constitute a change of circumstances such that the question of security for costs should be reconsidered.

36.  The defendant submits that the application for security for costs should be allowed for the following reasons: –

(1)   The plaintiff is a foreign company: its central management and control is in Ukraine.  

(2)   The plaintiff cannot demonstrate that it has a high probability of success at trial.

F1.  The plaintiff is ordinarily resident out of jurisdiction

37.  Pursuant to Order 23, rule 1(1)(a) of the Rules of the High Court, where it appears to the court that the plaintiff is ordinarily resident out of the jurisdiction, the court may order the plaintiff to give such security for the defendant’s costs of the action as it thinks just.

38.  Whether a company is ordinarily resident out of the jurisdiction is to be decided by reference to the location of its central management and control [see: Insurance Co of the State of Pennsylvania v Grand Union Insurance Co Ltd [1988] 2 HKLR 541, at 544H]

39.  In the present case, there is clear evidence that the plaintiff is ordinarily resident out of jurisdiction: –

(1)   The registered address of the plaintiff is in Ukraine.

(2)   The central management and control of the plaintiff is in Ukraine.

(3)   The plaintiff carries out all its business out of the jurisdiction.

F2.  Merits of the plaintiff’s claim

40.  On the merits of the plaintiff’s claim, I repeat my view stated in paragraphs 25 to 29 above.  In the premises, I agree that at this stage the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial.

41.  Accordingly, having regard to all the circumstances of this case, I consider it just that the plaintiff should give security for the defendant’s costs of the action. 

42.  Adopting a “broad-brush” approach and noting that “sufficient” security does not mean complete security, I would assess the appropriate amount of security for costs to be given up to the stage of the exchange of witness statements to be HK$160,000.

G.   DEFENDANT’S AMENDMENT SUMMONS

43.  During the hearing, counsel for the plaintiff confirmed that the plaintiff has no objection to the defendant’s application for leave to amend its Defence.

H.   CONCLUSION

44.  For the reasons set out above, I order as follows: –

(1)   The Order 14 Summons be dismissed;

(2)   The Injunction be discharged;

(3)   The plaintiff do give security for the defendant’s costs in this action up to the stage of the exchange of witness statements in the sum of HK$160,000 by paying the said sum into court within 14 days from the date of this order; and

(4)   Order in terms of the Amendment Summons.

45.  I further order that the defendant’s costs of the Order 14 Summons, the Security for Costs Summons, the Continuation Summons and the Discharge Summons be paid by the plaintiff, such costs are to be taxed if not agreed.

46.  The orders as to costs set out in paragraph 45 above are nisi and shall become absolute in the absence of any application within 14 days to vary the same.

47.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.