CHANG ANNA I-NO v. CAIBAOLONG TRADING LTD AND OTHERS

HCA 431/2018

[2023] HKCFI 2782

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 431 OF 2018

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BETWEEN

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J U D G M E N T

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1.   Introduction

1.1  The plaintiff is and was at all material times a housewife residing in the USA. She claims to be a victim of an online fraud perpetrated by one Mr Wang Jiang Qiang (“Wang”).

1.2  In or around early July 2016, the plaintiff received a friend request from Wang on Facebook. Their friendship developed rapidly. At the end of August 2016, Wang told the plaintiff that he was working as an investment consultant at The Hongkong and Shanghai Banking Corporation Limited (“HSBC”). Wang persuaded the plaintiff, and she agreed, to become his client. Wang intimated that he would invest in derivatives for the plaintiff and sent to her an application form to open an investment account at HSBC.

1.3  Between 6 September and 25 October 2016, at the requests of Wang, the plaintiff by 17 separate transactions transferred a total sum of US$1,883,000 (“Impugned Sum”) to eight HSBC bank accounts (collectively “1^st Tier Accounts”)[1], all of which were in the names of third parties. The first 14 transactions were made by the plaintiff between 6 September and 12 October 2016 on the understanding that the sums were for investment purposes. The last three transactions, done on 25 October 2016, were made by the plaintiff on the understanding that such sums were required as a security deposit by the Hong Kong Government to allow repatriation of funds back to her account in the USA.

1.4  Wang had promised the plaintiff that the sums invested by her, along with the profits generated, would be returned to her by 27 October 2016. However, Wang became unreachable after the last transfer made by plaintiff on 25 October 2016, and none of the sums transferred by the plaintiff (or any of the profits purportedly generated) had been returned to the plaintiff.

1.5  Subsequently, upon confirming with HSBC that (1) Wang was never an employee and (2) no investment account was ever opened in the plaintiff’s name, the plaintiff reported the matter to the Hong Kong and USA authorities.

1.6  The plaintiff was informed by the Commercial Crime Bureau of the Hong Kong Police that the funds transferred by the plaintiff into the 1^st Tier Accounts were further dissipated to the bank accounts of the 1^st to 6^th defendants (collectively “2^nd Tier Accounts”). The plaintiff was further told that the 2^nd Tier Accounts had been frozen by the Hong Kong Police.

1.7  The plaintiff then instructed solicitors and commenced proceedings against the 1^st to 6^th defendants on 21 February 2018. Final judgments have been entered against all the defendants except the 4^th defendant.

1.8  This is the trial of the plaintiff’s claim against the 4^th defendant. A sum of HK$697,274 (“Sum”) was transferred from four of the 1^st Tier Accounts to the 4^th defendant’s account at HSBC (“D4’s HSBC Account”)[2]. On 26 April 2018, the plaintiff learned from the police that the 4^th defendant was in the process of applying to unfreeze its bank account. On 11 May 2018, the plaintiff obtained a Mareva injunction (up to the Sum) against the 4^th defendant.

1.9  The 4^th defendant was legally represented until 9 August 2023. The 4^th defendant did not appear at the trial. As I was satisfied that the 4^th defendant has been properly served with the requisite documents, I decided to proceed in its absence.

1.10  At the trial, the plaintiff was represented by Mr Martin Wong of counsel.

1.11  I remind myself that where, as here, the trial is conducted in the absence of a defendant, the plaintiff has an obligation to fairly present its case and identify points of factual or legal note which may be of benefit of the absent defendant: China Citic Bank International Ltd v Cheuk Shuk Hing & Ors [2022] HKCFI 3646 §6.

2.   The pleaded issues and the evidence called

2.1  In his written opening submissions, Mr Wong confined the plaintiff’s claim to a personal claim premised on her pleaded case on unjust enrichment.

2.2  The Sum was transferred from four of the 1^st Tier Accounts by nine transfers to D4’s HSBC Account between 12 to 26 October 2016, the details of which are set out at the plaintiff’s witness statement §18 (“9 Transfers”).

2.3  In its Defence, the 4^th defendant pleaded that it was a bona fide recipient or purchaser for value without notice, relying on the factual averments that the Sum was part of the amounts received by it in the carrying out of a currency exchange business operated by Bloomingville Hong Kong Limited (“Bloomingville”).

(1) It is pleaded that the 4^th defendant is and was at all material times solely owned by Mr Fan Wai Nam (“Fan”). Since 2015, Fan had authorized Bloomingville to use D4’s HSBC Account for its currency exchange business.

(2) In particular, it is pleaded that between 12 and 27 October 2016, D4’s HSBC Account received through 12 transactions (which included the 9 Transfers) a total sum of US$763,066. It is pleaded that those 12 transactions all related to one Mr Chen Ji Lin (“Chen”), and upon receipt of moneys deposited into D4’s HSBC Account, equivalent sums of RMB (at the applied exchange rates) were remitted by Bloomingville’s mainland network to accounts designated by Chen in the PRC (“Chen’s Transactions”).

(3) The 4^th defendant had no knowledge of the fraud perpetrated by Wang or the fact that the plaintiff’s moneys had been transferred to the 1^st Tier Accounts.

2.4  In the Reply, the plaintiff pleaded that the Chen’s Transactions were unlawful as a matter of PRC law, and as a result, there was no valid consideration paid in exchange of the Sums admittedly received by the 4^th defendant.

2.5  The plaintiff herself gave evidence.

2.6  The parties also obtained leave to adduce expert evidence on whether the Chen’s Transactions were contrary to PRC law and the consequences of any such contravention under the relevant PRC law. By an order made at the pre-trial review, the Joint Expert Report is deemed as evidence in the trial without calling the two experts to give evidence.

3.   The plaintiff’s factual evidence

3.1  The plaintiff adopted her witness statement as her evidence. In gist, she gave evidence along the lines of §§1.1 to 1.6 and 2.2 above. She confirmed that she did not know the 4^th defendant or Fan and did not have any dealings, business or otherwise, with the 4^th defendant. She also did not know Bloomingville or its owner Mr Moo Meng Kwong and did not have any dealings with Bloomingville.

3.2  I accept the plaintiff’s evidence.

4.   The disputed expert evidence

4.1  It is the opinion of the 4^th defendant’s expert that the provisions of PRC law considered by the plaintiff’s expert have no application to the Chen’s Transactions, as Articles 18 of the Basic Law provides, inter alia, that “National laws shall not be applied in the Hong Kong Special Administrative Region except for those listed in Annex III to this Law. The laws listed therein shall be applied locally by way of promulgation or legislation by the Region.” He also opined that there had not been any investigations or findings of any convention in the PRC.

4.2  Conversely, as summarized in Mr Wong’s written opening submissions, the opinion of the plaintiff’s expert is that the Chen’s Transactions were illegal under PRC law as none of the entities engaged in the activity, including the 4^th defendant and Bloomingville, were licensed to conduct such activities.

4.3  According to the plaintiff’s expert, such contraventions may give rise to the imposition of an administrative fine, criminal consequences and civil liabilities.

4.4  Mr Wong relied on DBS Bank (Hong Kong) Ltd v Pang Jing [2020] 4 HKC 395. As I understand Mr Wong, where, as here, both parties have adduced expert evidence, he is not invoking section 59(3) of the Evidence Ordinance Cap 8 (and RHC Order 38, rule 7) to adduce DBS Bank as evidence for the purpose of proving PRC law. Rather, he is inviting me to come to the same conclusions (based on the evidence of the present case) as those reached at DBS Bank §§32 to 40, in particular where DBS Bank also considered similar provisions as those considered by the experts in the present case.

4.5  Mr Wong clarified in closing that he is only relying on the opinion of the plaintiff’s expert that, under PRC law, the Chen’s Transactions attract the imposition of an administrative fine (ie the finding made in DBS Bank).

4.6  I have no hesitation in preferring the evidence of the plaintiff’s expert. I accept the evidence of the plaintiff’s expert and find as a fact that the Chen’s Transactions are unlawful as a matter of PRC law and have exposed each of Bloomingville and the 4^th defendant to liability for an administrative penalty[3].

4.7  As submitted by Mr Wong (and as canvassed in the section following), the opinion of the 4^th defendant’s expert that the PRC law provisions considered by the plaintiff’s expert has no application in Hong Kong is quite beside the point.

5.   Analysis

5.1  As stated at §2.1 above, Mr Wong has confined the plaintiff’s claim to a personal claim premised on unjust enrichment. In approaching a personal unjust enrichment claim, one has to ask four questions, namely (1) was the 4^th defendant was enriched, (2) was the enrichment at the plaintiff’s expense, (3) was the enrichment unjust, and (4) are any of the defences applicable (for which the 4^th defendant bears the burden to establish): She Ching Yan v Cai Yunxiang & Ors [2023] HKCFI 592 at §65.

5.2  Mr Wong has provided very detailed submissions. I have no doubt that he has fulfilled the obligation envisaged in China Citic: §1.11 above.

5.3  I am satisfied that the 4^th defendant was enriched by its receipt of the Sum and that there is an unjust factor on the facts of this case, namely the fraud perpetrated by Wang on the plaintiff.

5.4  As stated at §2.3 above, the defence raised by the 4^th defendant is that, by reason of the Chen’s Transactions, it was a bona fide purchaser for value without notice.

5.5  Two matters were specifically canvassed by Mr Wong. The first is where, as here, the 4^th defendant was not a direct recipient of the Sum from the plaintiff, whether it can be said that the enrichment was at the plaintiff’s expense. Secondly, Mr Wong addressed the availability of the defence of bona fide purchaser on the facts of the present case.

(a) Whether enrichment at the expense of the plaintiff

5.6  At RPB SA v Xingwangyi Trade Ltd & Ors [2022] HKCFI 2541 §23, DHCJ Jonathan Chang SC dealt with the “at the expense” question in the circumstances where the relevant defendants in that case were, as here, not direct recipients as the Stolen Funds were remitted by the plaintiff to the 1^st Tier recipient, namely the HRJ Account.

5.7  The learned Judge referred to AXHT Co Ltd v Freeway Finance Co Ltd [2020] 4 HKLRD 133 §43 and held that the requirement that enrichment “at the expense of a plaintiff” may be satisfied if the property received by the defendant from a third party is one into which the plaintiff can trace an interest.

5.8  I further accept Mr Wong’s submissions that:

(1) Where property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient that the property is recoverable and traceable in equity; and

(2) the plaintiff, as a victim of a fraud, is entitled to assert a proprietary claim against a recipient in so far as the fraudulently obtained funds are traceable into hands of the recipient unless the latter can establish he is a bona fide purchaser for value without notice.

5.9  I have considered Mr Wong’s analysis of the fund flows from four of the 1^st Tier Accounts into D4’s HSBC Account (set out at §17 of his Opening Submissions) by reference to the general principles on tracing summarized at Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd [2023] HKCFI 1292 §§18-19. At the trial, Mr Wong very fairly accepted that there are some evidential obstacles in his reliance on the punitive presumption rule and confined his case to tracing under the first in first out rule (“FIFO Rule”). Without the punitive presumption rule, the traceable proceeds are in the sum of US$560,240.90 (as opposed to US$638,825.60 had the punitive presumption rule been applicable).

5.10  As analyzed by Mr Wong, the traceable proceeds applying the FIFO Rule comprise:

Date of Receipt by D4	1st Tier Account	Traceable Amount
12/10/2016	Account of Mr Wang Ding Zhi	US$98,702.00
13/10/2016	Account of Mr Wang Ding Zhi	US$89,702.00
12/10/2016	Account of Mr Sheng Yang	US$87,903.00
13/10/2016	Account of Mr Sheng Yang	US$29,164.93
14/10/2016	Account of Mr Sheng Yang	US$54,820.97
26/10/2016	Account of Mr Wu Dong Gang	US$99,974.00
26/10/2016	Account of Mr Li Huarun	US$99,974.00
	Total	US$560,240.90

5.11  I accept Mr Wong’s analysis under the FIFO Rule and find that the plaintiff can trace the Impugned Sum to part of the Sum totaling US$560,240.90, which finding, in applying RPB, satisfies the “at the expense” question.

5.12  I further accept Mr Wong’s submissions that whether the traceable sum remains in the D4’s HSBC Account is immaterial, as the 4^th defendant’s liability for unjust enrichment crystallized at the time of receipt, and any subsequent disposal has no bearing on the plaintiff’s prima facie claim based on unjust unrichment.

(b) Whether defence of bona fide purchase available

5.13  On facts similar to those of the present case, the availability of the defence of bona fide purchaser for value without notice has been subject to a detailed analysis at She Ching Yan §§78-113, which also involved a claim by a victim of an online fraud against one of the 2^nd tier recipients (the 18^th defendant) who raised the defence that the money deposited into her bank account was pursuant to a currency exchange arrangement with one Mr Ma, by which in exchange for the sum deposited, she transferred RMB from her bank account in the PRC to a bank account designated by Mr Ma also in the PRC.

5.14  In She Ching Yan, in granting summary judgment against the 18^th defendant, DHCJ Winnie Tsui held as follows:

(1) a distinction between domestic and foreign illegality has to be made and the latter is governed by conflict of laws principle: Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544 (She Ching Yan §82);

(2) the relevant foreign exchange transaction concerned a foreign illegality (She Ching Yan §§90-92);

(3) applying Ryder, the relevant impugned transaction was a “Type 2” case, namely one where “the performance of the contract requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed” (She Ching Yan §§101-103);

(4) for “Type 2” cases, the relevant contract will not be given effect regardless of its proper law and the defences of change of position and bona fide purchaser for value without notice are not available (She Ching Yan §§108-113).

5.15  I agree with Mr Wong that the same analysis should apply in the present case. It is also in that context that I agree with Mr Wong’s submissions that the opinion of the 4^th defendant’s expert that the PRC foreign exchange law has no direct application in Hong Kong is quite beside the point: §4.6 above.

5.16  Like She Ching Yan §§42 and 60 (I should mention in passing that the finding of foreign illegality in She Ching Yan was based on DBS Bank as the plaintiff there had relied on section 59(3) of the Evidence Ordinance Cap 8), I have found that the Chen’s Transactions are unlawful as a matter of PRC law. I also agree with the analysis at She Ching Yan §§120-125 that the Chen’s Transactions fall within the rubric of a “Type 2” case, and as a result, it is not open to the 4^th defendant to rely on the Chen’s Transactions in its defence of bona fide purchaser.

6.   Disposition

6.1  For the above reasons, I find that the plaintiff has established her case premised on unjust enrichment, and in particular, the bona fide purchaser defence is not available based on the averments pleaded in the Defence.

6.2  I therefore enter judgment in favour of plaintiff for the sum of US$560,240.90. The 4^th defendant shall pay interest, at the rate of HSBC prime rate + 1%, from the respective receipt date of each tranche (as set out at §5.10 above) to the date of judgment and thereafter at judgment rate until payment.

6.3  In relation to costs, the 4^th defendant is to pay to the plaintiff the costs of the action (including any costs reserved), to be taxed if not agreed.

6.4  I also accede to Mr Wong’s invitation to continue the Mareva injunction against the 4^th defendant for six months from the date of the judgment or further order of the court to allow time for the plaintiff to execute the judgment (She Ching Yan §137).

6.5  Pursuant to an order dated 30 July 2019, the plaintiff had on 26 August 2019 paid into court HK$500,000 as security of the 4^th defendant’s costs. I order that the sum of HK$500,000 (together with any interest accrued thereon) be paid out and released to the plaintiff’s solicitors.

6.6  I thank Mr Wong for his assistance.