BANCO DE CHILE v. YONG MING TAI TECHNOLOGY TRADE CO., LTD AND OTHERS

HCA 2624/2018

[2019] HKCFI 316

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2624 OF 2018

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REASONS FOR DECISION

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Introduction

1.  On 6 November 2018, upon the plaintiff’s ex parte application, Deputy High Court Judge S T Poon (as he then was) made a series of Mareva and proprietary injunction orders against the 1^st to 8^th defendants (the “November 6 Order”), including, as against the 2^nd defendant, inter alia (1) a proprietary injunction restraining it from disposing or otherwise dealing with the sum of HK$3,832,782 (the “said Sum”) transferred by Boruida Trade Co Limited (“Boruida”) into a bank account held by the 2^nd defendant with DBS Bank (Hong Kong) Limited (the “DBS Account”) or its fruits or proceeds; and (2) ancillary disclosure orders. The orders were made against the usual cross-undertaking in damages given by the plaintiff.

2.  On 9 November 2018, the plaintiff issued a return date summons for the continuation of the November 6 Order until trial or further order (the “Return Date Summons”).  On 15 November 2018, the 2^nd defendant issued a summons to discharge the November 6 Order against it, or alternatively, for an order that the plaintiff provide fortification of its cross-undertaking in damages (the “November 15 Summons”).  Both summonses were returnable on 16 November 2018 before L Chan J, who adjourned them by consent between the plaintiff and the 2^nd defendant to this summons day hearing.

3.  At the beginning of the hearing, I was informed by the parties that an agreement had been reached to adjourn the substantive hearing of the Return Date Summons and the November 15 Summons to a date to be fixed with 1 day reserved, save that the 2^nd defendant would seek an immediate order for fortification at this hearing. I gave directions and then proceeded to hear argument on the application for fortification.

4.  In the end, I dismissed the application, but gave an express direction that such dismissal was without prejudice to any future application for fortification.  I gave brief oral reasons and indicated that I would give more detailed written reasons in due course, which I now do.

Background

5.  The plaintiff is a licenced bank incorporated under the laws of the Republic of Chile and is one of that nation’s largest commercial banks.  From its consolidated financial statements, the plaintiff had assets of some US$1.48 billion as at 30 September 2018.

6.  The 2^nd defendant is a company incorporated in Hong Kong engaged in the business of money exchange, money remittance and payment services, and is a Money Service Operator (“MSO”) licenced in Hong Kong by the Commissioner of Customs and Excise.

7.  The plaintiff is said to have been the victim of a sophisticated cyber-attack targeting the SWIFT messaging system that affected the plaintiff on 23 May 2018.  The plaintiff believes that an unauthorised and unknown third party was able to access the plaintiff’s SWIFT messaging service from outside its systems and successfully dispatched fraudulent SWIFT messages to various banks, which caused the transfer of funds belonging to the plaintiff into various bank accounts in Hong Kong.

8.  Two such fraudulent transfers totalling some US$2 million odd were made on 23 May 2018 to an account held by Boruida, a Hong Kong incorporated company, with Hang Seng Bank (the “HSB Account”).

9.  On 10 July 2018, the plaintiff commenced HCA 1621/2018 and on the same day obtained ex parte Mareva and proprietary injunctionsagainst Boruida.  Boruida did not appear at the return date of the injunction, and default judgment was obtained against Boruida on 12 September 2018.  As a result of banking documents obtained pursuant to bankers’ books orders,the plaintiff discovered that inter alia the said Sum had been transferred on 24 May 2018 from the HSB Account to the DBS Account.

10.  In this action, the plaintiff asserts, inter alia, a proprietary claim over the said Sum on the grounds that it is traceable to proceeds of a fraudperpetrated against the plaintiff, and it was on this basis that the November 6 Order was made against the 2^nd defendant. Assuming that the plaintiff can demonstrate at trial that the said Sum is in fact traceable to the proceeds of a fraud against the plaintiff, the 2^nd defendant would be bound by the plaintiff’s interest in the proceeds unless it can show that it was a bona fide purchaser or recipient for value without notice.(See eg Heitkamp & Thumann v Living Profit [2018] HKCFI 1006 at §69.)  

11.  It is not in dispute that to obtain or sustain an interlocutory injunction over the said Sum, the plaintiff needs only to show a serious issue to be tried in respect of its proprietary claim. In such circumstances, the balance of convenience generally lies in favour of preserving the fund (see eg Pacific Rainbow v Shenzhen Wolverine (unreported) HCA 3023/2016, 2 May 2017 at §39(1)).  The threshold for a serious issue to be tried is not a particularly high one, and in cases such as the present, the plaintiff will often be able to do so on the materials placed before the ex parte judge.  However, it is possible that at the inter partes hearing a defendant can show a defence of such cogency and merit that the court can conclude even at that stage there is in fact no serious issue to be tried.

12.  This is precisely what the 2^nd defendant has sought to do in its evidence filed in support of the discharge application in the November 15 Summons.  In the 2^nd affidavit of Lee En Hui (“Mr Lee”) filed on behalf of the 2^nd defendant, Mr Lee contends that the 2^nd defendant had no direct dealings with Boruida, but rather received the said Sum from oneof its institutional clients known as World Silver RMB Exchange Remittance Limited (“World Silver”), which is also a licenced MSO.  On World Silver’s instructions, the 2^nd defendant then allocated the said Sum to another institutional client (also a licenced MSO) known as Shing Kee Money Exchange Limited (“Shing Kee”).  On Shing Kee’s instructions, the 2^nd defendant then made several currency exchanges and remittances to different beneficiaries in Canada, Australia and Hong Kong using the funds received from World Silver.  The 2^nd defendant said it performed all the necessary due diligence and compliance checks on the transactions and none of them raised any suspicion or required exceptional approval.  Hence, the 2^nd defendant contends that it is plainly a bona fide purchaser or recipient for value without notice.

13.  As mentioned above, the Return Date Summons and the discharge application in the November 15 Summons are to be adjourned for substantive argument on another date.  I am therefore not in a position to form a mature view as to the merits of either application at this stage.  However, I would accept that, on a preliminary view, the case advanced by the 2^nd defendant cannot be said to be without substance, and there is at least a possibility that the 2^nd defendant may succeed in discharging the November 6 Order against it at the adjourned hearing.

14.  With that in mind, I come to the only substantive issue before me - that is, the 2^nd defendant’s application for an immediate order for fortification of the plaintiff’s cross-undertaking in damages.

15.  As to the principles to be applied in considering whether to require fortification, Mr JasonYu, counsel for the plaintiff, referred me to Sun Yanv Superb Jade & Ors (unreported) HCA 813/2014, 23 October 2015, where To J helpfully summarised the authorities at §11:

“ The legal principles applicable to fortification are well settled. The court has a general power to order fortification where it appears just and proper to protect the defendant by making such an order (Chow Chor Leung v Rafaella Sportswear Inc [1990] 1 HKLR 449 at page 453H). Usually, merit of the parties’ case is not a necessary consideration. However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant. The burden of showing the need for fortification and the appropriate quantum falls on the defendant seeking fortification (Hui Chi Ming v Koon Wing Yee[2011] 1 HKLRD 260, at para 45). He must show the likelihood of a significant loss arising as a result of the injunction, and demonstrate why he believes the plaintiff will be unable to make good that loss (Chatwani v Bhimji (No 2) [1992] BCLC 387, at 404). The court will approach these issues by taking a broad view of the evidence, usually without the need of a detailed enquiry. Whilst there is no obligation on the plaintiff to give full and frank disclosure of his own financial means, circumstances might arise where the absence of financial disclosure by a plaintiff might entitle adverse inference as to his ability to meet his cross-‌undertaking in damages to be drawn (Hui Chi Ming (ibid) at para 45).”

16.  As mentioned above, having had sight of the 2^nd defendant’s evidence, I do not think this is a case where it can be said that the plaintiff’s case against the 2^nd defendant is so strong that the 2^nd defendant ought to be deprived of fortification should it otherwise be entitled to such protection.

17.  The question then is whether the 2^nd defendant is able to show a likelihood of significant loss as a result of the November 6 Order against it, and demonstrate why it believes the plaintiff will be unable to make good that loss. 

18.  As to the likelihood of significant loss, Mr Lee’s evidence was that, inter alia:

“ In [the 2^nd defendant’s] line of business, liquidity is crucial to our bottom line and the injunction is likely to result in a significant loss since it has (and will continue to) reduce [the 2^nddefendant’s] liquidity to do the hedging necessary to conduct our business. As a result, we had not been able to capture more favourable exchange rates in anticipation of movements in the market ahead of our client’s currency needs and had to conduct significantly more on-the-spot currency conversions at a less favourable rate than usual. These cause both a direct loss to [the 2^nddefendant] as we had been significantly hindered in the ability to capture better foreign exchange rates, which directly affect our already very thin profit margin, and also the indirect loss of losing business as we had been unable to offer competitive rates.

As at the date hereof, the [November 6 Order] is still in force, and because of that, the disruption is continuing. I anticipate the disruption shall continue until the injunction is discharged. For the same reason, the loss suffered by [the 2^nddefendant] by reason of the injunction is increasing and shall continue to increase until the injunction is discharged.

[The 2^nd defendant’s] profit is dependent on our liquidity and our ability to identify favourable rate hedges. Our typical profit margin on each transaction is approximately 0.18%. Hence, based on the funds earmarked by DBS Bank, we have been suffering an opportunity cost of HKD6,899.01 per transaction day.” (emphasis added)

19.  As seen above, the burden of showing not only the need for fortification but also the appropriate quantum falls on the defendant seeking fortification.  Mr Lee has put forward in his affidavit a figure of HK$6,899.01 per “transaction day”, which appears to have been calculated by multiplying the said Sum of HK$3,832,782 by 0.18%, said to be the “typical profit margin on each transaction”.  It is wholly unclear, however, what is meant by a “transaction day”, or how many “transactions days” there are typically in a week or a month.  In his skeleton argument, Mr Felix Ng, counsel for the 2^nd defendant, interpreted Mr Lee’s evidence to mean that the 2^nd defendant’s “estimated … daily opportunity cost in loss [sic] FX trading [was] HK$6,899.01 per day”, which would give a loss of some HK$206,970 per month.  I am not convinced that such an interpretation is justified or borne out by Mr Lee’s evidence. In any event, I do not understand Mr Ng to have pressed this point in oral submission.

20.  Rather, Mr Ng referred the court to the decision of Samtani v Samtani [2012] 4 HKLRD 872, where Deputy High Court Judge Queeny Au-Yeung (as she then was) adopted a rate of 5% per annum, being the best lending rate for borrowing funds to invest, as an estimate of loss of the ability to use preserved funds pending trial (in the absence of a better estimate of actual loss). Mr Ng thus sought fortification in the amount of HK$200,000 (presumably a ballpark figure reached by multiplying HK$3,832,782 by 5%) by way of payment into court.

21.  Whilst I am prepared to accept as a rough estimate a rate of 5% per annum as the estimated loss of the use of the said Sum, it is important to consider the period to be covered by the fortification.  The adjourned hearing of the Return Date Summons and the discharge application is likely to take place within 3 to 4 months. It is unknown at this stage whether the November 6 Order will be discharged or continued until the trial of the action.  Even if the court were to reserve its decision, there is likely to be a determination within 6 months.  If the November 6 Order were to be discharged within 6 months, then the estimated loss suffered by the 2^nd defendant would be no more than HK$100,000 (being half of HK$200,000).  On the other hand, if the injunction were to be continued until the conclusion of the action, then the estimated loss is likely to be substantially greater and will depend on how long it would take for the trial to be concluded. This is a matter which, at this stage, I am unable to form any firm view.

22.  As to whether the plaintiff will be unable to make good that loss, Mr Ng emphasised that although the plaintiff appeared to be a bank with substantial assets, it is a foreign entity based in Chile and has no branch office or assets in Hong Kong.  This was not disputed by Mr Yu.  Mr Yu argues, however, that the test for ordering fortification is different from that for security for costs under Order 23, rule 1 of the Rules of the High Court (“RHC”).  The mere fact, he says, that a plaintiff is a foreign plaintiff with no assets in the jurisdiction, which would ordinarily be sufficient for ordering security for costs (save in cases where the claim is almost unimpeachable), is not enough to justify an order for fortification.  Rather, the defendant must demonstrate a real risk that the plaintiff will be unable to make good that loss. Given the standing and assets of the plaintiff and the modest amount of the estimated loss between now and the adjourned hearing, it was unrealistic to suggest that the plaintiff would be unable or unwilling to do so.  Hence, although the sum sought by the 2^nd defendant as fortification posed no practical difficulty for the plaintiff, Mr Yu objected to the application on principle.

23.  Mr Yu also argued that, in addition to its claims against the 2^nddefendant, the plaintiff had strong and genuine proprietary claims against the other defendants in this action, funds held by which in Hong Kong have been, or were likely to be, captured by the November 6 Order.  I should say immediately, however, that I do not accord much weight to this submission in the absence of any undertaking from the plaintiff (which was not forthcoming) to retain those funds or at least part of those funds in Hong Kong.

24.  Although I accept that the test laid down in the authorities for fortification is different from that for security for costs under RHC Order 23, rule 1, where the plaintiff is a foreign party with no assets in the jurisdiction, that would in my view be a factor of significant weight in favour of fortification.  For instance, in Taihan Global Holdings Limited v Lau Siu Ming & Ors(unreported) HCA 1687/2011, 25 November 2011, the plaintiff’s parent company, a publicly listed company in South Korea, offered to assist the plaintiff by offering a cross-undertaking in damages. It was pointed out, however, that there were qualifications toTEC’s independent auditor’s report which suggested that TEC may have to undergo certain restructuring.  In requiring the plaintiff to provide fortification, Deputy High Court Judge Lok (as he then was) observed at §16:

“ No matter what is its financial position, TEC is still a foreign company and the 3^rdDefendant may have difficulty in enforcing the undertaking as to damages in a foreign jurisdiction. In my judgment, if the Plaintiff is asking the court to protect its interest by freezing the assets of the 3^rdDefendant before the determination of the merits of the claim, it is only fair to ask the Plaintiff to provide the same protection to the 3^rdDefendant in the case that the latter succeeds in its defence and has to enforce the undertaking as to damages.”

25.  I respectfully agree with those observations.  In the absence of cogent factors pointing the other way, I do not see why a defendant should be any less entitled to the protectionof fortification if he were entitledto the protection of security for costs from the same plaintiff.  It seems to me that the underlying rationale is similar, and moreover, the potential loss from an interlocutory injunction may be far greater than the potential loss of irrecoverable costs.

26.  That said, whilst the plaintiff being a foreign entity with no assets in the jurisdiction is a factor of significant weight, it is not necessarily conclusive. The question remains whether the estimated lossto be suffered is a significant one and whether there is a real risk that the defendant will be unable to enforce, or at least have difficulty enforcing, the plaintiff’s cross-undertaking in damages (whether due to the plaintiff being a foreign entity or for any other reason), should it be entitled to do so.

27.  In the end, I found that the balance weighed against ordering fortification in the circumstances of this case, at least at this stage. As mentioned above, given the short period between now and the adjournedhearing of the Return Date Summons and the discharge application in the November 15 Summons, the loss tothe 2^nddefendant is likely to be modest.  Given the plaintiff’s standing as a banking institution with substantial assets, and there being no suggestion that it is under any financial difficulty or uncertainty, there is no real risk that, if called upon, it would be unable to make or delay in making good that amount of loss and be in breach of its undertaking to this court.  For that reason, I dismissed the application for an immediateorder for fortification.

28.  As mentioned above, the situation may be different, however, if the November 6 Order against the 2^nd defendant were to be continued until trial at the adjourned hearing.  Given the large number of defendants, the trial of the action may be years away, and the potential loss to the 2^nd defendant is likely to be substantially greater. However, that is a matter that the judge at the adjourned hearing will be in a better position to determine. 

29.  It is for this reason that I gave an express direction that my dismissal of the application for immediate fortification was without prejudice to any future application.  Such a direction was also intended to avoid potential arguments of abuse of process or whether fortification can be ordered subsequent to the initial cross-undertaking being given —see eg Hui Chi Ming (ibid) at §18 et seq.