張侃 v. 尚品滙(香港)國際貿易有限公司

DCCJ 4405/2019

[2022] HKDC 731

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4405 OF 2019

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J U D G M E N T

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INTRODUCTION

1.  Arising from this trial are, among others, two issues of some significance: one concerning the implication of the use of a company chop (not the company’s common seal)  in the law of apparent (or ostensible)  authority, and the other concerning the scope of application of section 117 of the Companies Ordinance (Cap 622).

THE PLAINTIFF’S CLAIM AND PLEADED CASE

2.  The plaintiff claims that on 25 March 2015, he advanced to the defendant a loan of US$300,000 (the “Loan”)  at 1.2% per month at the request of the Third Party (“Chen”)  (a director of the defendant)  made on behalf of the defendant under a loan agreement (the “Loan Agreement”)  between the plaintiff and the defendant (via Chen)  on 25 March 2015, contained and/or evidenced by a Chinese document (the “Chinese Document”), with the defendant’s company chops and Chen’s signature.  On 22 March 2016, US$200,000 was repaid.  Thus, the plaintiff commenced the present action for repayment of the remaining US$100,000 with interest based on the Loan Agreement and/or unjust enrichment.

3.  The plaintiff pleads that Chen had the actual authority (including usual or incidental authority)  to enter into the Loan Agreement.  Alternatively, he pleads that Chen had the apparent authority.  Further, the plaintiff relies upon the indoor management rule and section 117 of the Companies Ordinance (Cap 622).

4.  The plaintiff also pleads unjust enrichment.  Assuming that Chen had no authority, actual or apparent, and assuming that the indoor management rule and section 117 of the Companies Ordinance do not assist the plaintiff, the plaintiff specifically pleads that given that Chen should have the knowledge that the defendant should not have received the loan, and that the loan was upon Chen’s instruction transferred out to some other parties unknown to the defendant, there could not be any bona fide change of position by the defendant to which Chen’s knowledge should be attributed.

5.  The plaintiff was the only witness for his case.  By a summons filed on 13 June 2022, he applied for leave to give his evidence via video conference facilities from Shenzhen on the purported ground that he was unable to apply for a visa to come to Hong Kong.  On 4 July 2022, having heard counsel’s submissions, I dismissed the application for lack of sufficient evidence to substantiate the purported ground: see [2022] HKDC 669.  At trial, he physically attended the court to give evidence, and explained that initially he made the application for visa to Huanggang Port, and given that there was still no response to his application and that the trial was imminent without leave for video conference facilities, he asked his friends around and applied to the Shenzhen Municipal People’s Government, and this time the application was successful.  So, here he was.

THE DEFENDANT AND ITS PLEADED DEFENCE

6.  The defendant is a limited company incorporated in Hong Kong, carrying out the business of wholesale and retail of apparels.  It had its office at the Empire Centre (the “Empire Centre Office”)  and its retail store at Prestige Tower (the “Prestige Shop”), both in Tsim Sha Tsui.  At the material times, it had 4 directors, one of whom was Chen, the others being Lin Kaiyang (“Lin”), Jun Wei and Ruan Mianshe (“Ruan”). 

7.  The defendant does not dispute that the US$300,000 was indeed deposited into its account.  The defendant’s defence is that:-

(1)  Chen did not have any actual authority (including usual or incidental authority)  to enter into the Loan Agreement.

(2)  Alternatively, Chen did not have any apparent authority to do so.

(3)  Alternatively, even if Chen did have the apparent authority, it was irrational and/or reckless for the plaintiff to rely on the apparent authority.

(4)  Neither the indoor management rule nor section 117 of the Companies Ordinance, prayed in aid by the plaintiff, would advance the plaintiff’s claim.

(5)  As regards unjust enrichment, there was no receipt, and in any event, there has been a bona fide change of position.

8.  The defendant counterclaims that if the defendant’s payment of US$200,000 was received by the plaintiff, the plaintiff was made by Chen without the defendant’s authority and/or by mistake, and thus is liable to repay the defendant on unjust enrichment.

9.  The defendant’s only witness was Ruan, one of its directors.  His unchallenged evidence was that he had been the largest shareholder of the defendant, holding 4.5% of the shareholding in his own name and 40.5% in the name of Lin, his nephew.  He further told the court that he had been in control of the defendant, and the other directors would have to seek his approval when negotiating with suppliers and customers, although when he was not in Hong Kong, he entrusted the day-to-day operation to the manager of the defendant, and entrusted Chen with the authority to withdraw from the defendant’s bank account (by giving him the passcode device for the defendant’s online banking)  so that the defendant would be able to pay the employees’ salaries, overheads and other costs and expenses.  But they would still have to seek his approval over the phone for other matters.  When asked why he did not entrust the manger with the passcode device for online banking, he gave an answer that made much sense to me, namely, for money, he would prefer a director/shareholder than an outsider, and because the other directors/shareholders were not in Hong Kong, Chen was the only option available for him.  Given that he had been the largest shareholder and he was the only witness who would have the personal knowledge of how the defendant was managed and operated, I accept his evidence in this respect.

THIRD PARTY CLAIM AGAINST CHEN

10.  The defendant has issued a Third Party Notice against Chen seeking indemnity from Chen if the defendant would be liable to the plaintiff’s claim. Substituted service of the Third Party Notice has been effected on Chen. Despite Chen’s default of acknowledging the service, an order has been made that the question of the liability of Chen to indemnity the defendant be tried at this trial.

ISSUES

11.  Therefore, the issues for me to determine are:-

(1)  Whether Chen had any actual authority to enter into the Loan Agreement;

(2)  If not, whether Chen had any apparent authority to do so;

(3)  If Chen had apparent authority to do so, whether it was irrational or reckless for the plaintiff to rely on the apparent authority;

(4)  Whether the plaintiff can invoke the indoor management rule;

(5)  Whether the plaintiff can invoke section 117 of the Companies Ordinance;

(6)  Whether the defendant was unjustly enriched and has no defence;

(7)  Whether the plaintiff was unjustly enriched in receiving the defendant’s payment of US$200,000; and

(8)  Whether the defendant has a claim against Chen for indemnification.

ISSUE (1)  – WHETHER CHEN HAD ACTUAL AUTHORITY

12.  In respect of actual authority, the articles of association of the defendant must be the starting point.

13.  Article 18(h)  of the articles of association states that:-

“Without prejudice to the general powers conferred by the preceding Article and the other powers conferred y these Articles, it is hereby expressly declared that the Directors shall have the following powers, that is to say, power:-

(h)  To borrow money on behalf of the Company…”

14.  There is no evidence to the effect that this article had been modified or waived.  Thus, it was the board of directors that had the power to borrow. However, I see neither any board resolution to borrow the Loan nor any resolution to authorise Chen to do so. 

15.  I also fail to see how the power to borrow could be incidental or implied as alleged by the plaintiff when the articles of association set out so clearly that it was the board of directors that had the power to borrow.  In any event, I do not accept that being in charge of the operation and business of the defendant would entail a power to borrow, especially when the loan amount was a significant sum.  Also, I rely on Ruan’s evidence (which I accept as mentioned above)  that Chen was only entrusted with the power to withdraw money from the defendant’s bank account to pay the defendant’s costs and expenses.  There is no evidence that he entrusted Chen with any power to borrow on behalf of the defendant.

16.  Therefore, Chen had no actual authority.

ISSUE (2)  – WHETHER CHEN HAD APPARENT AUTHORITY

17.  The legal principles in respect of apparent authority were discussed in Thanakharn Kasikorn Thai Chamkat (Mahachon)  v Akai Holdings Ltd (No 2) (2010)  13 HKCFAR 479 at §§43-71 per Lord Neuberger NPJ (delivering the unanimous judgment of the Court of Final Appeal).  In gist:-

(1)  That a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;

(2)  That such representation was made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract relates, and in principle, such a person making such representation can be the agent himself although practically, this should be “very rare and unusual” and it is hard to conceive any such circumstances;

(3)  That the contractor was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and

(4)  That under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent. 

18.  In respect of (2)  above, it is “very rare and unusual” to have the agent himself to make such a representation.  In this regard, in Thanakharn Kasikorn Thai Chamkat (Mahachon)  v Akai Holdings Ltd (No 2), supra, at §71, Lord Neuberger specifically set out two conditions for such “very rare and unusual” circumstances:-

(1)  That the principal had given the alleged agent the authority (actual or apparent)  to make the representation in question; and

(2)  That the representation must be clear and unequivocal, judged by reference to the practical realities of the particular case.

19.  In support of his plea of apparent authority, the plaintiff relies on the following matters:-

(1)  Chen was a director of the defendant.

(2)  To the best of the plaintiff’s knowledge, he was involved in the operations and/or day-to-day affairs of the defendant.

(3)  Chen was a founding member of the defendant holding 37.5% of the shareholding of the defendant.

(4)  Chen was a signatory to the defendant’s Memorandum of Articles of Association.

(5)  The plaintiff was first introduced to Chen in or around 2014 through a mutual friend.  Since then, the plaintiff had been accompanied by Chen to visit the the Empire Centre and the Prestige Shop.  During those visits, the plaintiff was introduced to and met with the defendant’s staff who invariably addressed Chen as “Boss Chen” (陳老闆).

(6)  On several occasions, Chen, on behalf of the defendant, granted discounts to the plaintiff for his retail purchases with the defendant.

(7)  Chen signed the Chinese Document as “經手人”, “For and on behalf of [the defendant]”, with the company chops of the defendant stamped on it.

20.  I do not think that the status of Chen being a major shareholder, a founding member and/or a director in charge of the day-to-day business (for example giving discounts and managing staff)  could in itself be taken as any sort of representation from the defendant.  In any event, the plaintiff admitted that he did not know at the time of the Loan Agreement that Chen was a major shareholder and a founding member.  Thus, (1)-(6)  above, alternatively or cumulatively, give the plaintiff no mileage at all.

21.  For (7), in reliance on TS Office System Ltd v Wing Kee Produce Ltd[2015] 1 HKLRD 479, the plaintiff’s counsel, Mr Keith Tam, contended that in this context of (1)-(6), Chen’s stamps of the company’s a rectangular chop “For and on behalf of [the Company]… Authorised Signature(s)” (the “defendant’s Authorised Signature Chop”)  and the company’s round chop bearing the defendant’s Chinese and English names (the “defendant’s Name Chop”)  constituted a representation by the defendant that Chen had authority to enter into the Loan Agreement. 

22.  TS Office System Ltd v Wing Kee Produce Ltd, supra, was an appeal from the Small Claims Tribunal.  In that case, it was found that a clerk at the reception was permitted by the defendant company to use the company’s chop.  In his decision dismissing the appeal, having referred to Laws of Companies in Hong Kong by Stefan Lo and Charles Qu (2013 ed)  at §12.053 where it was said that “the stamping of the chop could be relevant to matters relating to the apparent authority of the person” (emphasis added), Louis Chan J found that the defendant company’s permission to use the chop, as opposed to the mere use of the chop, was a representation to the outsiders that the clerk “had authority to act for the defendant in situations where the use of the defendant’s rubber chop would suffice” (emphasis added): see §32. Probably due to the way the matter and the arguments were presented, his Lordship did not analyse whether the outsider was indeed induced by the representation, but then jumped to analyse whether it was irrational for the outsider to rely on the clerk’s apparent authority, and concluded that it was irrational.   

23.  I draw the following points from this case:-

(1)  The mere use of the company chop, per se, did not constitute any representation for the purpose of apparent authority.  I think this must be right, because an employee may get the company chop without the company’s proper approval, or anyone may readily purchase such a company chop crafted in those chop and stamp booths in the office areas (like those in lane behind Pedder Street in Central).  In doing so, the employee (or that person)  is simply making the representation by himself.  In such circumstances, the company did not give the alleged agent any actual or apparent authority to make such a representation.

(2)  The permission to use the chop is only a factor to be considered.  It “could be relevant” but is not conclusive.

(3)  The representation constituted by the permission to use the company chop is that the apparent agent “had authority to act for the defendant in situations where the use of the defendant’s rubber chop would suffice”.  In other words, the permission to use the company chop is not a blank cheque for the apparent agent to act on behalf of the company in all respects.  It is only for situations where the use of the chop would suffice.  

(4)  Even if there is such a representation, the court should still ask whether the outsider is induced by such a representation.  I would think that in TS Office, supra, had his lordship been addressed on this question, he may not even have to rule on the irrationality argument, but may instead have ruled that given that it was the clerk at the reception only, the outsider would not have been induced by the representation in any event.

24.  In the present case, according to Ruan’s evidence in cross-examination, the defendant’s Authorised Signature Chop was kept in the finance department in the Empire Centre Office, while the defendant’s Name Chop was put at the front desk of the Prestige Shop up for grab by any staff and Chen there.  Further, according to Ruan, he did not know how Chen obtained the defendant’s Authorised Signature Chop from the finance department.  There is no evidence to contradict him in this respect, and I accept his evidence here.  Thus, at least in respect of the defendant’s Name Chop, the use of it was authorised by the defendant, while there is no or no sufficient evidence to prove that the use of the defendant’s Authorised Signature Chop was permitted by the defendant.  But it still begs the question whether or not the Loan Agreement in the present circumstances was an agreement for which such a chop would be sufficient.  I think not, for the following reasons:-

(1)  The Loan amount was a significant amount.

(2)  Chen all along appeared, at the very most, to be in charge of the wholesale and retail business.  He had never appeared as also responsible or empowered to borrow on behalf of the defendant.

(3)  It was unusual for a shop to request a loan from a customer.

(4)  The Loan was the first between the plaintiff and purportedly the defendant. 

(5)  Simply the representation from the staff that Chen was their boss obviously was insufficient, given that the staff had no authority to represent the defendant.

(6)  In my view, for such borrowing, which was not in the usual course of dealings between the parties and which was for the first time in such circumstances, the use of the company chop, even by a director, would not be sufficient.   

25.  Therefore, the defendant’s permission to Chen to use the defendant’s Name Chop constituted no requisite representation made for the purpose of apparent authority, namely, that Chen “had authority to act for the defendant in the Loan Agreement in the circumstances”.

26.  As a footnote to paragraph 24(4)  above, namely, the Loan was the first between the plaintiff and purportedly the defendant, the plaintiff’s oral evidence in the cross-examination was initially that on 25 March 2015, it was the first time and all of a sudden, Chen asked for loan from the plaintiff, and so he arranged for the transfer of money around noon that day.  But later, when asked why it appeared that the time of the transfer shown on the transfer slip was 10:46 am (or 10:48 am as the copy of the slip was not very clear), the plaintiff then said that before 25 March 2015, there had been telephone conversations where Chen had already asked for loan from the plaintiff.  When asked for an explanation for this inconsistence, the plaintiff then said that he meant that over the telephone conversations Chen was asking if the plaintiff had money, and he understood this to mean that Chen would like to borrow from the plaintiff.  Insofar as necessary, I prefer the plaintiff’s initial version that it was only on 25 March 2015 that Chen asked the plaintiff to advance loan for the first time all of a sudden.  The matters happened 6-7 years ago, and it is not surprising that the plaintiff would be confused about the time.  But his memory as to the suddenness by which Chen sought loan from the plaintiff should be more reliable, without reference to the exact time.  In any event, despite the inconsistence, the fact remains that the Loan was the first loan between the plaintiff and purportedly the defendant.

27.  As regards the stamp of the defendant’s Authorised Signature Chop, there is no evidence to show that the defendant was permitted to use it.  On the contrary, it was Ruan’s unchallenged evidence that he did not know how Chen get this chop from the finance department.  Thus, the use of this chop was Chen’s own representation, by himself, that he had the authority to enter into the Loan Agreement.  Bearing in mind Lord Neuberger NPJ’s emphasis made in Thanakharn Kasikorn Thai Chamkat (Mahachon)  v Akai Holdings Ltd (No 2), supra, at §71 that it would be “very rare and unusual” to conceive any circumstances where the apparent agent was the one who made the requisite representation himself, I fail to see how the use of this chop could give rise to any apparent authority, as I see no any such “very rare and unusual” circumstances here.

ISSUE (3)  – IRRATIONAL OR RECKLESS

28.  For the sake of completeness, assuming that there were apparent authority, I shall briefly analyse whether it would be irrational or reckless for the plaintiff to rely on such apparent authority.  While mere failure to conduct company search would not be irrational or reckless, in the present case, it was not the mere failure to conduct company search, but it was the failure in the context of a borrowing which was not in the usual course of dealings between the parties.  Although such context has not been pleaded as particulars in support of irrationality and recklessness, one has to read pleadings as a whole.  Such context has indeed been pleaded as part of the factual matrix against which one would understand the defendant’s case.  In my view, in this context, it was irrational or reckless for the plaintiff not to conduct a company search to see if there were any other directors, or not to seek some formal board resolution.  

ISSUE (4)  – INDOOR MANAGEMENT RULE

29.  The indoor management rule adds nothing here.  As Dawson J in Northside Developments Pty Ltd v Registrar-General (1989-1990)  170 CLR 146 at 198, cited with approval by Lord Neuberger NPJ in Thanakharn Kasikorn Thai Chamkat (Mahachon)  v Akai Holdings Ltd (No 2), supra, at §59, “[t]he rule is thus dependent upon the operation of normal agency principles; it operates only where on ordinary principles the person purporting to act on behalf of the company is acting within the scope of his actual or ostensible authority”.  As I have found that Chen did not have any apparent authority, the indoor management rule does not assist the plaintiff.

ISSUE (5)  – SECTION 117 OF THE COMPANIES ORDINANCE

30.  Section 117 of the Companies Ordinance provides that:-

“(1)  Subject to section 119, in favour of a person dealing with a company in good faith, the power of the company’s directors to bind the company, or authorize others to do so, is to be regarded as free of any limitation under any relevant document of the company.

(2)  For the purposes of subsection (1)  -

(a)  a person deals with a company if the person is a party to any transaction or any other act to which the company is a party;

(b)  a person dealing with a company is presumed, unless the contrary is proved, to have acted in good faith;

(c)  a person dealing with a company is not to be regarded as acting in bad faith by reason only of the person’s knowing that an act is beyond the directors’ powers under any relevant document of the company; and

(d)  a person dealing with a company is not required to inquire as to the limitations on the power of the company’s directors to bind the company or authorize others to do so.

…

(6)  In this section, relevant document, in relation to a company, means

(a)  the company’s articles;

(b)  any resolutions of the company or of any class of members of the company; or

(c)  any agreements between the members, or members of any class of members, of the company”

31.  While the expression “directors”, in plural, is used, one view is that applying section 7 of the Interpretation and General Clause (Cap 1), this should also include “a director”, in singular.  However, section 2 of the Interpretation and General Clause provides that the Ordinance does not apply if the contrary intention appears from the ordinance in question.  Thus, I have to determine what the legislative intent of section 117 of the Companies Ordinance is.

32.  If section 117 of the Companies Ordinance applies to a single director, this would mean that an act carried out by a single director would be sufficient to bind the company, effectively doing away with the need for outsiders to establish actual or apparent authority on the individual director with whom they deal and meaning that each individual director would be able to represent the board in its external dealings despite lack of authorisation by the board: see Companies Ordinance (Cap 622): Commentary and Annotations 2018 at §117.03-117.04.

33.  It is a matter of statutory interpretation.  The starting point is that “the court’s task is to ascertain the intention of the legislature as expressed in the language of the statute…. Having regard to its context and purpose.” “There is a general presumption that the legislature does not intend to make changes to the common law.  A piece of legislation may impliedly displace the common law.  In considering whether a statute has this effect, the court will consider the extent to which the legislative purpose would be undermined by the common law continuing to operate alongside it.  Another factor in determining whether the common law is displaced is to consider whether the statute or provision is intended to form a complete code or scheme for dealing with a matter; where legislation sets out a comprehensive legislative scheme, the general law may be taken to be excluded”: see Lui Ming Lok v Ng Im Fong Loretta [2020] HKCFI 1243 at §§43-44 per Coleman J. 

34.  First, the language used is “the power of the company’s directors”, not “the power of the company’s directors or a director thereof” or the like. Further, the explanatory memorandum for this section did not indicate in any manner that the apparent authority would be displaced in this context.  On the contrary, §5 of the Annex to the Report of the Bills Committee on Companies Bill of the Legislative Council (LC Paper No CB(1)  222111-12)  (to which Mr Tam very fairly drew my attention)  suggested that section 117 was “in addition to the common law indoor management rule, which may still have application in some circumstances”.  As canvassed above, the indoor management rule depends on the operation of common law agency principles.  This suggests that the Legislative Council’s understanding of section 117 was not to displace any common law rule in respect of the need for actual or apparent authority on the directors.

35.  Second, in respect of the purpose of section 117, it is in my view to strike a fine balance between on the one hand, the need to protect outsiders dealing with the company in good faith and on the other hand, the need to protect the company from directors or a director acting outside their authorities.  To achieve this purpose, the legislature had good reason, and I find that it did intend, to limit the application of section 117 to “directors”, in plural:-

(1)  If section 117 would apply to a single director, the protection for the company would, in my view, be reduced to a claim by the company against the single director only, because section 117 would bind the company to the transaction entered into by that single director, practically leaving the company no defence to the outsider’s claim.

(2)  I have not overlooked that the company may raise a defence of absence of good faith against the outsider.  However, it is a heavy burden on the company to prove that the person was not dealing in good faith.  First, section 117(2)(b)  provides a presumption that the person was acting in good faith.  Second, by section 117(2)(c), the person is not regarded as acting in bad faith only by reason of his knowledge that the act is beyond the directors’ powers, and by section 117(2)(d), and the person is not required to inquire as to the limitations on the power of the company’s directors.  In other words, if section 117 applies to a single director, the company cannot defend by merely raising that the outsider knew or ought to have known that the act is beyond that single director’s powers, or that the outsider should have conducted a company search and would have known that the single director would not have the power. To rebut the presumption of good faith, the circumstances leading to the subject transaction would have to be examined.  However, these circumstances would often be the dealings between the outsider and the wrongful director himself, and the company may well be hamstrung forensically especially when the wrongful director is uncooperative for his own personal interest or even like the present one, in default of the proceedings.  This would, in my view, cause over-protection to outsiders dealing with the company and leave the company in most of the cases unprotected, at the mercy of a single director, and at the expense of the interests of all the shareholders.  While the company may claim against the wrongful director for loss and damages, practically, as I just said, the director may well be in default, and may even have run away (like the present case)  before the company commences any claim against him.

(3)  Is there any difference when the power is exercised by one more director to bind the company?  The difference is that in the usual course of things, to have more than one director to act together irregularly or outside their powers to bind the company is not as easy as one.  It is an internal check-and-balance.  Each director owes duties to the company, and before a director would join another to act irregularly or outside his power, he would have to think twice about his own personal situation (eg by joining the other director, what benefit he could gain and what loss he may suffer; or whether the other director may become a whistle-blower when certain things happen).

(4)  Applying section 117 to “directors” would not overburden the outsiders dealing with the company.  The easy way out for outsiders is that they should seek proper evidence for the authority, for example, a board resolution, or at the very least, to seek one more director’s confirmation of the act.  Further and in any event, the outsiders dealing with that single director are still protected by the usual common law agency principles like apparent authority.

36.  Therefore, in my view, the application of section 117 is intended to be applicable to the directors.  It has no application to a single director.

37.  In the present case, only Chen purported to act on behalf of the Company.  Thus, this section is not applicable.

ISSUE (6)  – UNJUST ENRICHMENT AND BONA FIDE CHANGE OF POSITION

38.  There is no dispute that the money was deposited into the defendant’s bank account on 25 March 2015.  There is also no dispute that the next day, on 26 March 2015, the money was transferred out to three parties unknown to the defendant and the plaintiff at all.  According to Ruan’s evidence, only after the defendant received a demand letter from the plaintiff’s solicitors dated 22 September 2016, he discovered the deposit and the transfers, and then made enquiry with the finance department of the defendant and was told that the transfer was made upon Chen’s instructions.  I accept this evidence given that the next-day transfers did not affect the overall balance and thus would not catch the attention of Ruan, who, as the “boss” in control, would be more interested in overall picture, until the plaintiff’s demand letter.  I also accept that it was Chen who gave instructions for the transfers given that the passcode device had been passed to Chen so that Chen could operate the defendant’s bank account, and there was no reason for the defendant or any of its other officer or staff to transfer the money to these three parties unknown to the defendant.

Receipt?

39.  The defendant’s counsel, Mr Benjamin Chain, argued that the receipt by the defendant of the Loan was ministerial receipt only.  Ministerial receipt is a defence available to agents only, or at most, to those who would immediately have the obligation to pay over to someone else upon the receipt (and in some cases, it is said that an actual payment over is required): see Goff & Jones, The Law of Unjust Enrichment (9^th ed)  Chapter 27. 

40.  Whether the defendant received the Loan as an agent or with an immediate obligation to pay over is a question of fact.  As it is raised by the defendant, the burden of proof lies upon it.  Mr Chain asked me to infer such an agency relationship between Chen as the principal and the defendant as his agent, based on:-

(1)  the fact that it was Chen who directed the plaintiff to make the payment into the defendant’s account and who withdrew money from the same account; and

(2)  the fact that there was no basis for the plaintiff reasonably to believe that he was lending money to the defendant (given the lack of actual and apparent authority and in any event the irrationality and recklessness in relying on any apparent authority), despite the plaintiff’s evidence that he requested that the Loan be made to the defendant. 

41.  I agree.  To me, Chen simply took the defendant’s account as a conduit to channel his unauthorised borrowing to persons designated by him.  He hid behind the defendant, wearing the defendant as his white gloves, and in legal term, as his nominee or agent.  Further, on my finding that there was no apparent authority, the plaintiff knew or ought to have known (had he acted reasonably or rationally)  that the real borrower was not the defendant.  Mr Tam raised objection on the ground that the facts in paragraph 40(1)  and (2)  above are not pleaded as particulars in support of the plea of ministerial receipt.  I accept that the plea of ministerial receipt could have been better particularised. But the plaintiff did not seek any further and better particulars, and more important, the essential facts in paragraph 40(1)  and (2)  have been pleaded as the factual matrix in the defence.  What Mr Chain asked me to do is to infer from these pleaded facts the legal consequence of agency relationship.  Thus, I do not think that Mr Tam’s objection is a valid one.

42.  Therefore, I find that the receipt by the defendant of the Loan was a ministerial receipt.

Bona fide?

43.  For the sake of completeness, I shall also analyse whether the change of position was bona fide.  There is no dispute that it was a change of position when the money was transferred out on the instructions of Chen.  The issue is whether the change of position was made bona fide.  The knowledge of the defendant is crucial.

44.  The defendant is a corporate entity.  It does not have knowledge on its own.  It acquires knowledge through its agents like directors and sometimes employees.  Here, Chen’s knowledge was that the Loan was borrowed without proper authority and the Loan should therefore not be transferred to those unknown parties for no apparent reasons.  Chen in fact exercised fraud against the defendant, in that he knew that he did not have the authority or was reckless as to his lack of authority.  

45.  The question would be whether or not Chen’s such knowledge should be attributed to the defendant.  The law is clear: where the defendant claims against Chen for loss and damage as a result of this fraud, knowledge would not be attributed to the defendant, but where a third party (the plaintiff here)  claims against the defendant, Chen’s knowledge would be attributed to the defendant: see Moulin Global Eyecare Trading Ltd v CIR(2014)  17 HKCFAR 218 at §§77-79, 106; Bowstead & Reynolds on Agency (22^nd ed)  at §8-209(c).

46.  In the circumstances, Chen’s knowledge should be attributed to the defendant. The change of position suffered by the defendant with such knowledge cannot in any sense be bona fide. 

47.  Thus, the defence of bona fide change of position would not be made out.

48.  In coming to this conclusion, I have considered Mr Chain’s argument that in determining the bona fide of the change of the position, I should look at all the circumstances including the fault of the payer, for example, if it is a payment by mistake, whether the mistake is self-induced on the payer’s own part.  The fault of the payer is relevant only if the recipient had notice of it.  Otherwise, this would effectively be opening a back door to the legal position in Hong Kong (which Mr Chain accepted)  that the approach of relative fault of the payer and the recipient has no place in Hong Kong: see Dextra Bank U& Trust Co Ltd v Bank of Jamaica [2002] 1 All ER 193 (Comm)  (Privy Council)  at §45; Credit One Finance Ltd v Yeung Kwok Chi [2020] HKCFI 2450 at §70 per Recorder Eugene Fung SC; Lo Ka Yi v Yat Fung Precious Metals Manufactory Co Ltd [2021] HKCFI 1475 at §27 per DHCJ Le Pichon.  In the present case, assuming that it was the plaintiff’s mistake, even a genuine mistake, clearly, Chen knew this, and his such knowledge would be attributed to the defendant.  This would mean that there would still be no bona fide on the part of the defendant.

49.  It remains for me to say that Mr Chain, in his closing submission, submitted that there is an “alternative approach” one can approach the matter – Chen stole the money from the defendant, and so the change of position was not caused by the defendant itself, or there was no absence of bad faith on the part of the defendant (but on Chen only).  Given my finding of ministerial receipt, I need not rule on this “alternative approach”.  In any event, I agree with Mr Tam that Mr Chain should not be permitted to pursue this approach because it had not been pleaded, and it should have been, given that this approach involves the allegation of stealing by Chen and the state of knowledge of the defendant in such circumstances.

Conclusion

50.  Given my finding that the defendant’s receipt was ministerial, the plaintiff’s cause of action of unjust enrichment also fails. 

THE DEFENDANT’S COUNTERCLAIM

51.  The defendant counterclaims for the refund from the plaintiff of the US$200,000 paid on 22 March 2016.  This counterclaim is mounted on the basis that the defendant would succeed in its defence, as it now has.  The logic is this: if the defendant is only a ministerial recipient (as I now have found), then the defendant itself has never received the Loan; however, despite there being no Loan, Chen caused the defendant to pay US$200,000 to the plaintiff without any proper basis (given that there was no Loan Agreement between the plaintiff and the defendant absent any actual and apparent authority and application of the indoor management rule and section 117 of the Companies Ordinance).   I accept that this counterclaim is a valid claim.

52.  To this counterclaim, the only defence raised by the plaintiff is that the US$200,000 was the defendant’s partial repayment of the Loan upon the instructions of Chen, whose state of mind and knowledge should be attributed to the defendant.  So, it must follow that when (as I have found)  there was no Loan between the plaintiff and the defendant, this defence to counterclaim fails. 

53.  In the circumstances, the defendant succeeds in its counterclaim.

THIRD PARTY CLAIM AGAINST CHEN

54.  On the finding that Chen did not have any proper approval by the defendant in respect of the Loan Agreement, and that Chen was at least reckless as to whether he had the authority (see §44 above), Chen breached his fiduciary duty owed to the defendant to act bona fide in the best interest of the defendant. He would be liable to indemnify the defendant for any loss and damages suffered as a result.  However, given my findings above, the defendant has suffered no loss and damage.  Rather than dismissing the third party claim as Mr Chain suggested, I think the better course in the circumstances is to make no order on the third party claim save that costs be to the defendant, so as to better reflect that the defendant does have a proper claim against the third party.

CONCLUSION

55.  In the circumstances, I make the following order in respect of the action between the plaintiff and the defendant:-

(1)  The plaintiff’s claim be dismissed.

(2)  The defendant’s counterclaim be allowed.  The plaintiff do pay the defendant US$200,000 or the Hong Kong Dollar equivalent at the time of payment, with pre-judgment rate of 1% above prime rate accruing from the date of the counterclaim, that is, 3 March 2017.

(3)  There be judgment interest on (2)  above at judgment rate.

(4)  A costs order nisi that the costs of the action be to the defendant to be taxed if not agreed, with certificate for counsel.

56.  In respect of the third party claim between the defendant and Chen, I make the following order:-

(1)  There be no order on the third party claim except (2)  below.

(2)  Costs of the third party claim be to the defendant to be taxed if not agreed, with certificate for counsel.