UNIVERSAL CAPITAL BANK v. HONGKONG HEYA CO., LTD

HCA 1211/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1211 of 2015

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D E C I S I O N

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1.  This is an application for summary judgment under Order 14 of the Rules of the High Court (“RHC”). The defendant opposes the application on two bases. First, that it falls foul of Order 14, rule 1(2)(b) which states that summary judgment may not be given in “an action which includes a claim by the plaintiff based on an allegation of fraud” and secondly, that there is a triable issue in any event. If the defendant is correct about the first submission then consideration of the second becomes academic.

THE FACTS

2.  The plaintiff is a bank with its head office in Montenegro.  In August 2014 the bank was deceived by a fraudulent email into transferring EUR410,650.14 to the Hang Seng Bank in Hong Kong.  The Montenegro bank had believed it had received genuine instructions from one of its clients to transfer the money when, in fact, the information had been sent by a fraudster.

3.  It transpired that the money had been transferred to an account in the name of a company, Hong Kong Huisen International Co Limited (“Hong Kong Huisen”), which until then had only a small credit balance.  The Euros were converted to HK$4,238,729.93 and on the following day HK$2,000,000 was transferred to the defendant’s account at The Hongkong and Shanghai Banking Corporation Limited (“HSBC”).

4.  According to the defence, which is supported by an affirmation from Yang Zhi Yong (“Yang”), the defendant company had no knowledge of the source of these funds.  Yang had simply been asked by a friend (“Tsang”) to remit the money, in RMB equivalent, to an account in China in the name of Zhao Pi Yang (“Zhao”), which he did.

5.  Yang describes himself as the “manager” of the defendant company who was acting as the company’s agent when effecting the transfer and exchange. The sole director of the company is Yang’s brother‑in‑law.  The defendant is described as a “paper company”.  Yang claims to have carried out the transaction in good faith and as a favour to Tsang.

(1)  The “fraud” exception

6.  The exception provided by Order 14, rule 1(2)(b) is described in §14/1/1 of Hong Kong Civil Procedure 2016 as follows:

“… Order 14 does not apply to actions which include a claim based on an allegation of fraud. The fraud alleged must have been perpetrated against the plaintiff; and in considering whether an action includes a claim in respect of which an underlying allegation constitutes an allegation of fraud, the Court should have regard to the pleadings as a whole: Menfond Electronic Art & Computer Design Co. Ltd v. Wong Wang Tat Victor (unrep., CACV 18/2013, May 14, 2014, [2014] H.K.E.C. 2014), [20].

In Pacific Electric Wire & Cable Co. Ltd v. Harmutty Ltd [2009] 3 H.K.L.R.D. 94, the Court of Appeal held that O.14, r.1(2)(b) applied to exclude summary judgment proceedings where one claim was based on an allegation of fraud even though there might be another claim which was not.  It also held … that the rule was not confined to excluding actions in which there was a claim for damages for fraud; what was excluded was any action where there was a claim in respect of which the underlying allegations on which the claim was based constituted an allegation of fraud. In that case, although the claims made were framed in respect of constructive trust, resulting trust and money had and received, the claims were based on allegations of fraud which included deliberate dishonesty.”

7.  The rationale for the exception was explained by Kaplan J in Skink Limited (in liquidation) v Comtowell Limited & another [1994] 1 HKLR 26:

“I am thus faced with a stark choice between what I might refer to as the limited interpretation of fraud, apparently favoured in England, or the wider interpretation favoured by Barnett J. [in Peninsula Fur Trading Ltd v George Chen Dah‑shing & others HCA 3550/1987, 14 March 1988, unrep.] in Hong Kong. …

… I can only think that the fraud exception to O.14 was inserted in England and maintained in Hong Kong because the O.14 jurisdiction was wholly inappropriate for cases where the Court had to consider whether a person was guilty of fraud or at the material time had an intention to defraud. Such findings have very serious consequences, and it could not have been thought right that persons should be condemned, as it were, unheard save on affidavit.” (§§43–44)

8.  The issue has very recently been further considered in Zimmer Sweden AB v KPN Hong Kong Limited & another, unreported, CACV 172/2015, 11 January 2016.  Yuen JA stated the “following points [inter alia] are clear”:

(1)  The court should not only consider the Statement of Claim, it should also look at all the pleadings and affirmations.

(2)  The test is “does this action include a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim?”

(3)  It does not matter whether or not the word “fraud” has been used.  One looks at the substance not the mere form.

(4)  The fraud exception would be engaged if the plaintiff would have to allege fraud when rebutting the defence.

(5)  The fraud exception would be engaged where what is alleged is an intentional or reckless dishonest act (or omission) done with the purpose of deceiving.

9.  In a nutshell it is the plaintiff’s case that money was taken from them by fraud but they do not need to, and do not, allege fraud against the defendant company.  Yang may or may not have been a party to the fraud but whether he was or was not does not matter because the plaintiff is prepared to confine its claim against the company for unjust enrichment to which, they submit, there is no credible defence.

10.  In other words they bring this application on the basis that the defendant is an innocent link in an otherwise fraudulent chain.

11.  The plaintiff clearly alleges a fraud was being carried out around the defendant company.  The Statement of Claim refers to “Fraudulent Transfers and Discovery of the Fraud by the Plaintiff” and “The Defendant as the Recipient of part of the Misappropriated Funds”.  It also states that the defendant wrongfully retained part of the misappropriated funds and reserves its right to plead other causes of action in respect thereof.  A fuller picture is contained in the plaintiff’s two affirmations which also include details of two other very similar scams involving transfers of money originally from the plaintiff bank through Hong Kong Huisen to other “paper companies” at about the same time.  The relevance of this is to show a bigger fraudulent picture than one merely confined to this defendant company, being “managed” by Yang.

12.  Mr Vincent Law, representing the plaintiff, accepts all the above but submits that as no allegation of fraud is made or relied on Order 14, rule 1(2)(b) does not apply.  The question therefore is — does the underlying allegation of fraud on which the claim is based constitute an allegation of fraud?  In particular, an allegation of fraud against this defendant.

13.  Mr Law seeks to distinguish the authorities relied on by Mr Vincent Lung, counsel for the defendant (Zimmer Sweden,supra, Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd & others [2009] 3 HKLRD 94 and A‑1 Business Ltd v Chau Cham Wong Patrick & another [2009] 5 HKLRD 579) on a single and simple basis.  Namely, in each of the above cases there was an allegation of dishonesty of some sort against the defendant.  In the present case there is none and there will be none.  In Zimmer Sweden it was alleged that the defendant had forged documents and falsified invoices; in Pacific Electric there was deliberate falsification of financial accounts and in A‑1 Business misappropriation of funds by the defendant.

14.  In the present case it is correct to say that, as against the defendant company, there is no allegation of fraud or dishonesty.  Neither is it alleged that the part played by Yang was a sham.  Yang is not being sued and the facts alleged against him are confined to the onward arrangement to transfer money received by the defendant company to a third party.

15.  Mr Vincent Lung on the other hand submits that the Zimmer Sweden case is on “all fours” with the present case.

16.  As further examples of the underlying allegation of fraud he relies on:

(1)  the plaintiff throughout describes the funds as “stolen money”;

(2)  the plaintiff’s affirmation suggests that the defendant was “ultimately controlled or employed by the masterminds of the fraudulent scheme perpetrated against the plaintiff”;

(3)  the defendant complying with the request to exchange HK dollars (from an unknown source) into RMB (to an unknown recipient) is at least “reckless”; and

(4)  in reality, in order to rebut the defendant’s claim of “good faith” it will have to allege that the transaction in the company’s name was fraudulent.

(2)  Decision on “fraud exception”

17.  I have come to the conclusion that Order 14, rule 1(2)(b) does not create a bar to the plaintiff’s application for summary judgment.

18.  The following points may be validly made:

(1)  The underlying reason for the fraud exception is to prevent summary judgment in a case where serious allegations of dishonesty are made or implied against a party to the proceedings so that such a party may have an opportunity to answer the allegations, or put in a more familiar way, “have his day in court”.

(2)  The defendant company here has no need of such protection.  First, it is a “paper” company but secondly and more importantly, no allegations of dishonesty/fraud are made against it.  Further, no similar allegations are made against its “operator” Yang.

(3)  Although, as agreed by the plaintiff and conceded by counsel for the defendant, the movement of the money out of Montenegro and into the PRC is a plain and obvious scam, the legal route being taken by the plaintiff to recover its money does not necessarily involve any party to that scam.  The plaintiff seeks recovery from the defendant, not Yang.

(4)  Whilst it is true that the Hong Kong courts have adopted a fairly wide and liberal interpretation of “fraud” when considering the application of Order 14, rule 1(2)(b), it should not be applied automatically merely because there are allegations of fraud or dishonesty in the bigger picture.  The question remains, does the underlying allegation of fraud (which does exist here) on which the claim is based (which it is not in this case) constitute an allegation of fraud against the defendant?  It seems that the answer to this question in this case is in the negative.

(5)  To say otherwise would take away from a plaintiff an opportunity to utilize the Order 14 procedure in cases where it might be clearly merited.

(3)  Order 14 principles

19.  Having now rejected the “fraud exception” it is necessary to return to the Order 14 application.

20.  In a nutshell the defendant company’s defence is as follows.

21.  Yang, as the defendant’s manager effected a HK$2 million currency exchange as a favour to his friend, Tsang, into RMB in favour of a person not known to him, namely Zhao.  Yang agreed to use the defendant’s account.  Yang acted as the defendant’s agent and the defendant would be liable to repay Yang the sum of HK$2 million after the transaction.  Therefore the defendant had changed its position giving it a defence to the plaintiff’s claim.

22.  Secondly, the defendant raises the defence that as he was merely doing a friend a favour the defendant was a bona fide purchaser and recipient of the HK$2 million.

23.  I regard both of these defences to be of minimal substance.  Given that the defendant is a corporate vehicle of little substance it is at best tenuous to rely on its good faith in such a transaction.

24.  As for the defence of “change of position” Mr Vincent Law points to the dubious nature of the evidence purporting to show that a payment out was made from the defendant’s account in support of the necessary element of “detriment” suffered by it.

25.  To examine the evidence further, in the context of an Order 14 application, would be unwise.  It is sufficient to say, and in my judgment can be safely said in this case, that the defences raised are low in substance and suspicious.

26.  However, given that summary judgment should only be granted in the clearest of cases I consider this to be a case where the plaintiff has come close to but not actually reached that position.  It is not a defence which can be dismissed as “incredible” at this stage.  The defence is entitled to an opportunity to have its credibility tested in court.

27.  I consider the proper and fair order to make in these circumstances is to grant conditional leave to defend.

(4)  Order

28.  Leave to defend is granted conditional upon the payment into court by the defendant the sum claimed, namely HK$2 million within 28 days of this decision being handed down, pending trial or other resolution.

29.  In the event of the condition being met the costs of these Order 14 proceeding shall be in the cause.  If the condition is not met within time summary judgment may be entered for the plaintiff with costs, to be taxed if not agreed.