HEITKAMP & THUMANN KG v. LIVING PROFIT TRADING DEVELOP LTD AND OTHERS

CAMP 173/2018

[2019] HKCA 119

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 173 OF 2018

(ON AN INTENDED APPEAL FROM HCA NO 151 OF 2017)

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J U D G M E N T

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Hon Poon JA (giving the Judgment of the Court) :

INTRODUCTION

1.  By a decision dated 8 May 2018, Deputy High Court Judge Marlene Ng (as she then was) (“the Judge”) dismissed the 2^nd defendant’s applications for (i) discharging an injunction order granted to the plaintiff on 19 January 2017 and amended on 27 January 2017 against the 2^nd defendant for freezing its assets of US$500,000 in a bank account (“D2’s 1^st Summons”) and (ii) costs of and occasioned by the injunction order upon its discharge be paid by the plaintiff to the 2^nd defendant (“D2’s 3^rd Summons”).  The 2^nd defendant’s application for leave to appeal against the decision was refused by the Judge on 9 November 2018. 

2.  The 2^nd defendant now renews the leave application before this Court by way of a summons dated 22 November 2018.  Having considered the parties’ submissions, we take the view that the summons for leave to appeal can be disposed of on paper without an oral hearing.  We now hand down our judgment.

BACKGROUND

3.  The plaintiff is a company incorporated in Germany carrying on the business of manufacturing battery cans and inhaler cans and actuators.  It has no business dealing with any of the defendants.  It is the plaintiff’s case that in or about May to July 2016, the Head of Group Accounting and Taxes of the plaintiff (“the Accountant”) was fraudulently deceived by an imposter pretending to be the Chief Executive Officer (“the Imposter”) into believing that the plaintiff was conducting a highly confidential takeover and acquisition project over a logistics company and she was instructed through email to transfer a sum of €3,760,900 (“the Defrauded Sum”) from the plaintiff’s bank account to Hen Yue Trade Limited (“Hen Yue”).  When the Imposter made further request for additional transfer of funds, the Accountant suspected possible fraud and contacted the real CEO who confirmed no such email instruction was ever sent to her whereupon the plaintiff discovered the fraudulent transfer of the Defrauded Sum (“Email Fraud”).  The matter was then reported to the German and Hong Kong police.

4.  On 18 July 2016, the plaintiff obtained an ex parte injunction order against Hen Yue in HCA 1873/2016 restraining Hen Yue from dealing with, disposing of or removing from Hong Kong assets up to the value of the Defrauded Sum.  The ex parte injunction order was continued on inter partes on 22 July 2016.  The plaintiff obtained default judgment against Hen Yue on 23 August 2016 but was only able to recover a sum of HK$8,776.80 from Hen Yue by way of a garnishee order.

5.  On 28 July 2016, the Hong Kong police informed the plaintiff that the Defrauded Sum in the Hen Yue bank account had been exchanged to approximately US$4,150,000 and had been transferred to 3 recipient companies, namely: (i) Oumeisi Limited (“Oumeisi”), (ii) Bentong Trade Limited (“Bentong”), (iii) Pengshunyi Trade Limited (“Pengshunyi”) on 13 July 2016 and out of which a sum of US$2,900,903 was further transferred to 5 recipient companies, namely: (iv) Haiyun Trade Limited (“Haiyun”), (v) Huawenchang Hong Kong Trade Limited, (vi) Mao Hong Da Trading Company Limited, (vii) Welly Smart Trading Limited (“Welly Smart”) and (viii) Kailaite Technology Company Limited.

6.  On 4 August 2016, the Hong Kong police further informed the plaintiff that the 2 sums of US$500,000 each remitted to Oumeisi’s and Bentong’s bank account were further transferred to the accounts of 5 Hong Kong companies.  The 8 Hong Kong companies referred to at [5] above and the 5 Hong Kong companies referred to here were identified as the 2^nd layer recipients.  The plaintiff obtained ex parte injunction orders and garnishee orders against the 2^nd layer recipients and recovered a total sum of HK$7,826,673.72 from the garnishee banks.  According to the bank statements and transaction documents disclosed by the garnishee banks, the plaintiff discovered that there were various withdrawals from Hang Seng Bank (“HSB”) and Hong Kong and Shanghai Banking Corporation (“HSBC”) to 3^rd layer recipients including the defendants herein.  In particular, a sum of US$270,000 and US$230,000 were transferred firstly from Pengshunyi to Haiyun and Welly Smart and then remitted to the 2^nd defendant’s HSBC bank account on 13 July 2016.

7.  On 19 January 2017, the plaintiff commenced the present action against the defendants and obtained an ex parte injunction order against them whereby, among other things, the 2^nd defendant was restrained from dealing with or disposing of, dealing with or diminishing the value of any of its assets up to US$520,000 or its HK$ equivalent in the 2^nd defendant’s bank account.  The court also granted a disclosure order against the defendants (“Disclosure Order”) and a disclosure order against HSBC (“HSBC Disclosure Order”) to enable the tracing of the Defrauded Sum.

8.  On 27 January 2017, L Chan J amended the ex parte injunction order (“Amended Injunction Order”) and continued the same until judgment or further order with liberty for the defendants to apply to discharge or vary the injunction order upon notice to the plaintiff’s solicitors (“the Inter Partes Order”).

9.  Pursuant to the HSBC Disclosure Order, HSBC on 21 February 2017 provided the identity documents of the 2^nd defendant and bank statements of its bank account for the period between July 2016 and January 2017.  On 26 April 2017, the plaintiff served the writ of summons, the Amended Injunction Order and the Inter Partes Order on the 2^nd defendant outside jurisdiction at her address in Beijing, Mainland China.

10.  The plaintiff pleaded (a) a proprietary claim of traceable proceeds (US$500,000) of the Defrauded Sum by “backward tracing” such that the 2^nd defendant held the traceable proceeds on trust for the plaintiff, (b) a claim in personam based on constructive trust and knowing or unconscionable dealing with or receipt of US$500,000, (c) a claim in personam based on dishonest assistance in breach of trust by Hen Yue, Pengshunyi, Haiyun and Welly Smart in respect of the Defrauded Sum, and (d) a claim in personam for money received and unjust enrichment of US$500,000.

11.  On 31 August 2017, the 2^nd defendant through her solicitors filed a summons to discharge the Amended Injunction Order and the Inter Partes Orders (collectively “Injunction Order”) (“D2’s 1^st Summons”) on the grounds that (a) the plaintiff did not have any good arguable case and/or (b) there was no real risk to dissipation of assets, or to vary the Injunction Order by reducing the monetary limit of assets frozen thereunder to US$250,000.

12.  On 19 September 2017, the 2^nd defendant filed a summons (D2’s 2^nd Summons) for deletion of, or alternatively stay of, the Disclosure Order.  On 15 September 2017, Chow J stayed the Disclosure Order pending the determination of D2’s 1^st Summons.

13.  On 13 November 2017, the plaintiff filed a summons asking for various reliefs including the Injunction Order be continued or alternatively, the 2^nd defendant to make payment into court or provide an undertaking to make payment or deliver a Cashier Order of US$500,000 to secure the recovery of the said sum from the 2^nd defendant.

14.  On 14 November 2017, the 2^nd defendant filed a summons (D2’s 3^rd Summons) seeking to discharge the Injunction Order with costs occasioned by the Injunction Order and costs of application of D2’s 3^rd Summons be to the 2^nd defendant.

15.  On 1 December 2017, the 2^nd defendant filed her defence.  She pleaded that she was a bona fide purchaser for value without notice given her distinct family background, her well-situated financial state and her history of US and Hungary immigration activities since 2014.  She denied any knowledge of the Email Fraud and/or that the sums were originally the plaintiff’s assets. She claimed that the 2 sums of money in question were remitted to her bank account through foreign exchange transactions handled by a Beijing money broker called Hua Kaiqing (“Hua”) engaged by her/her husband.  Further, the fact that the sum of US$500,000 had been idling in her account for about one year until she discovered the injunction order showed that there was no actual or pretended risk of dissipation of the funds.

16.  The summonses taken out by the plaintiff and the 2^nd defendant were heard together by the Judge on 23 January 2018.  She handed down her decision on 8 May 2018. 

17.  Relying on the principle of “backward tracing”, the Judge took the view that the close temporal proximity of the remittance of money from Pengshunyi to Haiyun and Welly Smart and then to the 2^nd defendant’s account on 13 to 14 July 2016 and the failure of the said parties to defend the plaintiff’s legal action demonstrated a good arguable case supporting the plaintiff’s case: [70] – [79] of the Decision.  Further, the Judge observed that the 2^nd defendant had been unable to produce any contemporaneous documentary evidence nor offer any satisfactory explanation to support her case that she relied on money brokerage services and the remittance of the 2 sums of money were handled by her money broker as part of the foreign exchange transactions.  All these cast doubts on the veracity of her defence of bona fide purchaser for value without notice: [80] – [83] of the Decision.  With such inherent evidential weaknesses in the defence case, the Judge took the view that there was likewise a good arguable case that the 2^nd defendant held the sum of US$500,000 on constructive trust for the plaintiff and it was unconscionable for the 2^nd defendant to retain such money.  

18.  The balance of convenience necessarily fell in favour of the plaintiff as the victim of the Email Fraud and the Judge saw no basis to discharge the Injunction Order: [84] of the Decision.

19.  As regard to the plaintiff’s claim in personam and Mareva injunction, based on her earlier findings and conclusion on “backward tracing” and evidential weakness in the defence case of bona fide purchaser for value without notice, the Judge found a good arguable case that (i) the sums from Haiyun and Welly Smart received by the 2^nd defendant were traceable proceeds of the Defrauded Sum and (ii) 2^nd defendant knew the Defrauded Sum was transferred because of mistake: [88] to [91] of the Decision.  By the same token, the Judge also found a good arguable case for the plaintiff’s claim based on constructive trust and knowing/unconscionable receipt: [92] of the Decision. 

20.  Turning to the plaintiff’s cause of action in personam based on dishonest assistance, the Judge found that there was enough, at the interlocutory stage, to demonstrate a good arguable case of drawing inference that the 2^nd defendant might be dishonest and might have knowledge of the fraud: [96] of the Decision.  

21.  On the matter of risk of dissipation, the Judge found that such risk could be inferred in all the circumstances of the case and the balance of convenience was in favour of the plaintiff and therefore, the Injunction Order should stand: [102] of the Decision. 

22.  For the above reasons, the Judge set aside the Disclosure Order with costs to the 2^nd defendant and the Injunction Order be varied to the extent that the amount of the 2^nd defendant’s assets frozen be reduced from US$520,000 to US$500,000 with costs to the plaintiff. As to the plaintiff’s summons for relief sought with the continuation of the Injunction Order, it became not necessary but since the 2^nd defendant took an inappropriate stance, the proper order was no order as to costs of such summons.

23.  The 2^nd defendant sought leave to appeal against the Decision on 8 May 2018 which was refused by the Judge in the decision handed down on 9 November 2018 (“the Leave Decision”).  In brief, the 2^nd defendant sought to challenge almost all findings and conclusions made by the Judge.  The Judge maintained her view that given there were good arguable contention of “backward tracing” that the court was entitled to draw inference especially when useful evidence from the 2^nd defendant would be hard to come by and considering the inherent weaknesses in the 2^nd defendant’s defence of bona fide purchaser for value without notice, there was no reasonable prospect of upsetting the court’s exercise of discretion in refusing to vary/discharge the Injunction Order.

DISCUSSION

24.  Under section 14AA of the High Court Ordinance, Cap 4, leave to appeal will not be granted unless the court is satisfied that: (a) the appeal has a reasonable prospect of success; or (b) there is some other reason in the interests of justice why the appeal should be heard.  Reasonable prospect involves the notion that the prospect of success must be “reasonable” and therefore more than “fanciful” without having to be “probable”: SMSE v KL [2009] 4 HKLRD 125 at [17].

25.  Further, the refusal to vary or discharge the injunction was an exercise of discretion of the court.   The Court of Appeal will only interfere with an exercise of discretion in the limited circumstances set out by Lord Diplock in Hadmor Productions Ltd v Hamilton [1983] 1 AC 191 at p.220B-F, see also the recent judgment of the Court of Final Appeal in SPH v SA [2014] 3 HKLRD 497 at [65].

26.  The 2^nd defendant advanced the following grounds of appeal :

(1) In considering the proprietary injunction of US$500,000, the Judge was wrong in accepting the proposition of “backward tracing” and erred in finding the temporal proximity of the figures in the bank statements that could be evidence of an evidential “black hole” designed to frustrate the plaintiff’s claim by the 2^nd defendant.  The Judge also erred in finding “evidential weakness” in the defence of bona fide purchaser for value without notice.

(2) In considering the Mareva injunction on personal claim of dishonest assistance for EUR3,760,900, the Judge, by wrongly relying on “backward tracing” and her erroneous finding of “evidential weakness” on the defence of bona fide purchaser for value without notice, wrongly held that mere inference of dishonest knowledge was sufficient at the interlocutory stage.  By the plaintiff’s failure to plead or allege any material facts of assistance or dishonesty, the plaintiff’s claim should be struck out.  Further, the Judge misunderstood the law and evidence of risk of dissipation of assets and failed to find that the money remained idle in the 2^nd defendant’s account for about one year was clear evidence of no risk of dissipation.

(3) In considering the interlocutory injunction, the Judge wrongly “laboured sympathy” on the plaintiff and failed to appreciate that the 2^nd defendant was also an innocent victim caught in the fire line of the conspirators.  The Judge also failed to consider whether damages would be adequate remedy for the plaintiff’s claim and make the right decision to discharge the Injunction Order.  And the Judge misunderstood the meaning of “balance of convenience” by taking a convenient stand in resolving conflicting evidence on affidavit.

(4) The Judge failed to exercise discretion to award part of costs of the 2^nd defendant’s 1^st and 3^rd summons to the 2^nd defendant as the plaintiff persisted in excessive ex parte injunction of US$520,000 instead of US$500,000.  The Judge also failed to award costs to the 2^nd defendant when finding the plaintiff’s summons as unnecessary given the Inter Partes Order was allowed to be continued.

27.  On ground 1, we note that the Judge had engaged in a detailed discussion of the legal basis of “backward tracing” and how it was applied in this case: [70] to [79] of the Decision and [24] of the Leave Decision.  We cannot see any error in her reasoning and findings.  By applying the principle of “backward tracing”, the Judge was entitled to reach her findings that the temporal proximity of the multiple deposits and withdrawals in/from the 2^nd defendant’s bank account made closely in time demonstrated a good arguable case supportive of the plaintiff’s case subject to the defence of bona fide purchaser without notice.

28.  Regarding the defence of bona fide purchaser for value without notice, as the Judge explained, the court was not persuaded because the 2^nd defendant was unable to provide contemporaneous documents to prove that there existed foreign exchange transactions with the money broker on 13 July 2016.  The 2^nd defendant was also unable to offer any explanation about the contradictions of the available bank statements and her defence case.  Because of such evidential weakness in the 2^nd defendant’s case, the Judge found that the balance of convenience fell in favour of the plaintiff and refused to discharge the Injunction Order.  We take the view that the Judge was perfectly entitled to reach her findings on the evidence and see no basis to interfere.

29.  Further, as rightly pointed out by the Judge at [26] to [28] of the Leave Decision, the threshold for setting aside a proprietary injunction on the basis of no serious question to be tried is a high one of demonstrating that the claim is liable to be struck out.  We agree with the Judge that none of the arguments put forward in the intended grounds of appeal as to the misunderstanding of the defence evidence on the alleged loss of hand phone and the time sequence of transfer exchange could assist the 2^nd defendant any further in this regard.  Ground 1 has no reasonable prospect of success.

30.  As to ground 2, we note that the Judge had expressly reminded herself that the high threshold in proving the element of “dishonesty” which required unconscionable knowledge to be shown at trial and the existence of a good arguable defence does not necessarily negate a good arguable case. Yet, at the interlocutory stage, the Judge, based on her earlier analysis of backward tracing and evidential weakness of the bona fide purchaser defence, was satisfied that there was a good arguable case of drawing inference that the 2^nd defendant might be dishonest and might have knowledge of the fraud at the interlocutory stage.  In this regard, the Judge had rightly followed the approach in Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & ors HCA3023/2016, (unreported, 2 May 2017) at [74] – [75] :

“ 74. The principles above on assessing probabilities and the drawing of inferences in cases where serious misconduct is alleged (as in the present case) are of course well established. However, these principles must be viewed in the context of deciding whether there is a good arguable case at the interlocutory stage. The court is not making any findings of fact, but merely taking a view as to whether, on the materials now before the court, a case has been shown that is ‘…barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success’. That said, in taking such a view, the court will take into account all of the circumstances, including the inherent improbabilities of serious misconduct.

75. I accept for present purposes that the 2^nd defendant has presented an arguable defence to the plaintiff’s claims. However, for the reasons I have set out above, the 2^nd defendant’s evidence is far from conclusive, and indeed raises a number of questions that will have to be investigated at the trial. I am of the firm view that the plaintiff has maintained a good arguable case for its claims of knowing receipt, dishonest assistance and conspiracy using unlawful mean against the 2^nd defendant, including the inferences to be drawn as to the requisite knowledge and state of mind of the 2^nd defendant. It follows that the plaintiff has also demonstrated a good arguable case on its claim of unjust enrichment.” (emphasis added)

We are satisfied that the Judge had made her ruling in accordance with settled principles of law and we see no merit in the 2^nd defendant’s argument.

31.  On the matter of risk of dissipation, the Judge’s findings were based on her conclusions about the evidential weakness in the bona fide purchaser for value without notice and the good arguability of the dishonest assistance claim.  As the Judge was entirely correct on these matters as explained above, we see no basis to disturb the Judge’s conclusion on risk of dissipation in the plaintiff’s favour.

32.  On ground 3, the 2^nd defendant’s allegation that the Judge erred in adopting a wrong approach to ruling the interlocutory injunction application is wholly unmeritorious.  The Judge correctly set out the legal principles of proprietary injunction in [55] to [57] of the Decision and rightly applied the same in allowing the Injunction Order to be continued.

33.  The 2^nd defendant also complained that the Judge had failed to consider if damages would be an adequate remedy for the plaintiff’s claim and had she so considered, she should have discharged the Injunction Order.  The Judge dealt with the complaint at [30] of the Leave Decision :

“ In the absence of any suggestion D2 had assets in Hong Kong other than frozen funds that P could seize if it were successful in the action, I do not even begin to see how damages could be an adequate remedy and/or why P should forgo preservation of assets over which it had a good arguable case of a proprietary claim.”

We agree with the Judge. 

34.  As the 2^nd defendant is out of jurisdiction and as rightly pointed out by the Judge at [102] of the Decision that “the amount now remaining in the D2 Account was only slightly more than the cap of US$500,000 under the Injunction Order”, we have no doubt that on proper exercise of the discretion, the Injunction Order must be continued until judgment or further order to be made for preservation of assets in the 2^nd defendant’s bank account.

35.  We can see no merit in the 2^nd defendant’s complaint that the Judge misunderstood the meaning of “balance of convenience”.  As the Judge found a good arguable case in favour of the plaintiff’s claim, it was open to the Judge to weigh the balance of convenience in favour of the plaintiff.  Regarding the 2^nd defendant’s allegation that the Judge had unfairly sympathized with the plaintiff as a victim of fraud, it was a bare assertion and groundless.  In all, ground 3 has no reasonable prospect of success.

36.  The 2^nd defendant’s complaint against the costs order in ground 4 was sufficiently answered and rightly rejected at [41] of the Leave Decision which we will not repeat herein.  It is trite that the appellate court will not interfere with the exercise of a judge’s discretion in the award of costs unless it is shown he has failed to exercise the discretion, or has exercised it upon a false principle, or has not exercised it judicially, or the exercise of discretion is demonstrably flawed.  As we found no error in law or principle, we see no basis to interfere with the Judge’s decision on costs.

37.  To conclude, 2^nd defendant has failed to satisfy this Court that the Judge’s exercise of discretion in varying and continuing the Injunction Order was wrong in law or legal principle. Nor can we see any basis to suggest that the Judge failed to take relevant consideration into account.  On the contrary, as far as we can see, the Judge was plainly right in refusing the 2^nd defendant’s application.

DISPOSITION

38.  We are not satisfied that the 2^nd defendant’s intended appeal has any reasonable prospect of success.   Nor is there any other reason in the interest of justice why the appeal should be heard.  Accordingly, we dismiss the 2^nd defendant’s summons dated 22 November 2018.

39.  As the 2^nd defendant’s applications are wholly unmeritorious, we make an order pursuant to Order 59 rule 2A (8) of the Rules of the High Court, Cap 4A, that no party may under rule 2A (7) request the determination of this Court to be reconsidered at an oral hearing inter partes.

40.  Costs should follow event.  We order the 2^nd defendant to pay the costs of the plaintiff summarily assessed at the sum of HK$38,000.00.