THE YERRID LAW FIRM v. QIANSBAIZI TRADING LIMITED AND ANOTHER

CACV 170& 313/2021, [2023] HKCA 788

On Appeal From [2021] HKCFI 620 & [2021] HKCFI 1578

CACV 170/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 170 OF 2021

(ON AN APPEAL FROM HCA No 2271 of 2019)

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CACV 313/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 313 OF 2021

(ON AN APPEAL FROM HCA No 2271 of 2019)

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(Heard together)

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REASONS FOR JUDGMENT

and

DECISION ON COSTS

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Hon G Lam JA (giving the Reasons for Judgment and Decision on Costs of the Court):

1.  These two appeals were brought by the 2^nd defendant, Tin Tat Trading Co Ltd (“Tin Tat”), to set aside the default judgment entered by the plaintiff against it and the garnishee order in respect of Tin Tat’s bank accounts obtained by the plaintiff on the strength of the judgment.

2.  At the conclusion of the hearing, we made an order, allowing the appeals, that the default judgment and garnishee order be set aside upon Tin Tat paying into court US$200,000 within 28 days, with liberty to apply.  The question of costs was reserved.  We now give the reasons for our judgment and our decision on costs.

Background

3.  The plaintiff is a US law firm.  Its case is that in October 2019, some unknown person hijacked its email communication with a client and, impersonating the client and using certain confusingly similar email addresses, gave the plaintiff instructions to transfer funds to a bank account maintained in the name of the 1^st defendant with China CITIC Bank International Ltd (“China Citic Bank”) in Hong Kong.  The plaintiff, unaware of the fraud, instructed its bank to effect the transfer.  Payment in the sum of US$2,569,817.95 was made on 28 October 2019.  The plaintiff did not discover the fraud until 13 November 2019.

4.  The plaintiff subsequently learnt that the money paid into the 1^st defendant’s account had been transferred out in five tranches to other bank accounts, including one sum of US$200,000 transferred to Tin Tat’s account held also with China Citic Bank.

5.  On 9 December 2019, the plaintiff caused a writ of summons to be issued in the High Court against the 1^st defendant and against Tin Tat as the 2^nd defendant.  Based on claims in money had and received, unjust enrichment and constructive trust, the plaintiff seeks as against Tin Tat a number of reliefs, including damages in the sum of US$200,000, a declaration that Tin Tat holds the US$200,000 it received as trustee for the plaintiff, an order that Tin Tat pays the US$200,000 to the plaintiff, and an order that Tin Tat accounts as constructive trustee to the plaintiff for the US$200,000.

6.  The 1^st defendant is a company incorporated in Hong Kong on 27 February 2019, with its sole director and shareholder being one Zhang Qianli (張千里) (“Zhang”) who resided at a specified address in Guangdong Province.  Tin Tat is also a Hong Kong company, incorporated on 17 May 2017, with its sole director and shareholder being one Li Yin Tat, who resided at a specified address in Hong Kong.

7.  The writ was duly served on the 1^st defendant, and also on Tin Tat on 11 December 2019 by being left at its registered office.  No notice of intention to defend having been filed, final judgment was entered on 20 January 2020 against the 1^st defendant for US$2,569,817.95 and against Tin Tat for US$200,000 together with interest and costs.  On 13 March 2020, in enforcement of the judgment against Tin Tat, a Master granted a garnishee order nisi in respect of Tin Tat’s credit balances in its accounts at China Citic Bank.

8.  On 7 May 2020, Tin Tat applied by summons for an order to set aside the default judgment.  The application was heard and dismissed by Master Rebecca Lee on 14 October 2020, who also made absolute the garnishee order.

9.  Tin Tat’s appeal was dismissed by Deputy High Court Judge Paul Lam SC (“judge”) in a decision in writing issued on 19 March 2021 (“Decision”).[1] Tin Tat appealed to this court as of right in respect of the dismissal of its application to set aside the default judgment (CACV 170/2021).  It also appealed, with leave granted by the judge,[2] in respect of the garnishee order (CACV 313/2021).  As the second appeal essentially stands or falls with the first, and the grounds relied upon are the same, it is not necessary to distinguish between them in the following discussions.

Tin Tat’s case

10.  Tin Tat’s case is as follows.  Tin Tat operated in business as the “receiving agent” of its principal, Fuyau Investment Management (Hong Kong) Co Ltd (“Fuyau”), a money service operator in Hong Kong licensed under the Anti-money Laundering and Counter-terrorist Finance Ordinance (Cap 615) (“Ordinance”). 

11.  A number of money service operators had formed themselves into a loose association called “Hui’s Alliance” (許氏聯盟).  Firms within the alliance operated in a similar mode, used similar forms for application for remittance, shared services provided by the same “back office”, and, significantly for the purposes of this case, shared access to a common pool of bank accounts held by different receiving agents.  The firms could operate using different or the same trade names.  The most common trade name used by shops within the Hui’s Alliance was “Hui’s Brothers Exchange and Remittance Company” (許氏兄弟找換匯款公司) (“Hui’s Brothers”).  Fuyau used this trade name in its business of money exchange and remittance at least in its shop in Tai Po (another trade name, “Hing Yip”, was used by its shop in Wan Chai). 

12.  Under the Ordinance, each money service operator has to have a licence and has to specify in its application to the Customs and Excise Department (“C&E”) for the licence, inter alia, the bank accounts to be used for operating the money service.  Tin Tat had four accounts at China Citic Bank all of which it authorised Fuyau to use for the purpose of its money service.  By a form (Form 6) submitted in February 2019 together with supporting documents, Fuyau notified C&E of a change in the particulars under its licence, namely, the addition of Tin Tat’s four bank accounts at China Citic Bank for use in operating Fuyau’s money service with effect from 12 February 2019.

13.  In the normal course of Fuyau’s business, a transaction for money exchange and remittance from Hong Kong to Mainland China would normally be conducted in the following manner:

(1)  Fuyau would inform its client of the applicable exchange rate for the transaction.  Once the client agreed the rate, Fuyau’s staff would complete a form called “Application for Remittance” (滙款申請書).

(2)  Fuyau’s client would pay over the amount to be remitted, either in cash to Fuyau or by bank transfer to the receiving agent specified by Fuyau.

(3)  After the receipt of funds from the client, Fuyau would arrange for the equivalent amount in RMB to be transferred from its agent(s) in the Mainland to the client’s designated bank account(s) in the Mainland.

14.  In the present case, the US$200,000 claimed by the plaintiff was paid by the 1^st defendant as the client, to Tin Tat as the receiving agent, for remittances in equivalent amounts in RMB to be made in the Mainland, in these circumstances:

(1)  On 31 October 2019, Zhang, on behalf of the 1^st defendant, approached a Hui’s Brothers money service shop in Sheung Shui for the purposes of remitting a total sum of US$200,000 in three tranches (RMB300,000, RMB200,000 and RMB916,000) to the designated accounts of three individuals in the Mainland, namely, Zhang, 曾絲慧 and 岐治國. 

(2)  By way of checking identities, the shop obtained copies of Zhang’s identity card issued by the Mainland authorities, his Visa Permit and Exit-Entry Permit for travelling to and from Hong Kong and Macau, as well as the 1^st defendant’s Business Registration Certificate, Incorporation Form, and Certificate of Incorporation.

(3)  As three recipients were involved, three Applications for Remittance were filled out, and signed by Zhang as the client. 

(4)  In each of the forms, the shop specified “中信田達”, meaning Tin Tat’s account at China Citic Bank, as the account to which the client should transfer his funds.  Tin Tat was named because it had an account at China Citic Bank, where the client also held its funds.

(5)  At 11:55 on that day, the sum of US$200,000 was transferred from the 1^st defendant’s account to one of Tin Tat’s accounts at China Citic Bank.

(6)  Upon confirmation of receipt of funds in Hong Kong, arrangements were made for agents in the Mainland, namely, two individuals named張希霖 (Zhang Xilin) and 李宗堅 (Li Zhongjian), to effect payment of the equivalent sums in RMB on the same day to the three designated accounts in Mainland banks.

15.  There was a twist in Tin Tat’s case in that it initially said the money service involved in this case was Fuyau.  In its reply affirmation, however, it confessed that it had made a mistake in its earlier evidence because the Sheung Shui shop was actually operated not by Fuyau as Tin Tat’s deponents initially thought, but by another company within the Hui’s Alliance called Wanyuen Investment Development (Hong Kong) Co Ltd (“Wanyuen”), which operated the Sheung Shui shop also in the name of Hui’s Brothers.  Fuyau and Wanyuen appear to have at least one common director.  It is said that Wanyuen did not itself or through its own registered receiving agents have an account in China Citic Bank, and therefore “borrowed” Tin Tat’s account, through matching by the Hui’s Alliance back office, for the purpose of receiving the client’s funds for this transaction.

16.  Tin Tat said that it had no knowledge of and had nothing to do with the fraud allegedly perpetrated on the plaintiff.  Wanyuen bona fide engaged in a money exchange and remittance transaction with the 1^st defendant as its customer, and Tin Tat had simply received the US$200,000 as ad hoc receiving agent for Wanyuen.  The Mainland agents had paid equivalent amounts in RMB to the recipients designated by the 1^st defendant.  As such, Tin Tat said that it had defences in ministerial receipt and as bona fide purchaser for value without notice.

The judge’s decision

17.  It was common ground that the default judgment was regular.  The judge noted that the power to set aside a regular default judgment is discretionary and that while the court should consider various relevant circumstances, the most important consideration, generally speaking, is whether the defendant can show a defence which has a reasonable prospect of success or, in other words, a defence that could well be established.[3]

18.  The judge noted the various criticisms made by the plaintiff on the evidence filed by Tin Tat in its initial affirmation, but was ultimately satisfied, having regard to the supplemental evidence filed in response, that Tin Tat had adduced “credible evidence to support its case on the primary facts”.[4]  The judge accepted that on that basis it was arguable that Tin Tat merely received the money as receiving agent for Fuyau or Wanyuen and that as such it had not been enriched as it had an obligation to account to its principal.  If the matter had stopped there, there would be a defence with a real prospect of success.[5] 

19.  The judge went on to observe, however, that Tin Tat was “not a receiving agent of Wanyuen”.[6] By using Tin Tat to receive money, there was a breach by Wanyuen of section 40 of the Ordinance.  It was unlawful for Wanyuen to use Tin Tat’s account to operate its money service business, and Tin Tat received the sum of US$200,000 as a result of such unlawful act.  Applying the cases of Arrow ECS Norway AS v M Yang Trading Ltd & others [2018] HKCFI 975 and Barros Mattos Junior v MacDaniels Ltd [2005] 1 WLR 247, the judge held that because of the wrongful and illegal act involved, Tin Tat had failed to show any defence with a reasonable prospect of success.[7]

20.  Accordingly, the judge dismissed Tin Tat’s appeal.

The appeals

21.  In this court, counsel for Tin Tat advanced the following grounds of appeal and contentions against the Decision:

(1)  Illegality, without more, does not bar restitutionary defences.  Barros precludes a wrongdoer from relying on the change of position defence, but has no application to the defence of bona fide purchase.  Illegality is only relevant if it has the effect of rendering void the legal obligation pursuant to which value was provided.  Here, there is no suggestion that breach of section 40 rendered the contract for exchange and remittance void or unenforceable.  In any event, whether or not it did so is a matter that should go to trial: Tokić DOO v Hong Kong Shui Fat Trading Ltd & others [2022] HKCFI 217, §§42-48.  It was submitted that DBS Bank (Hong Kong) Ltd v Pan Jing [2020] 4 HKC 395 which was inconsistent with this analysis was wrongly decided.  Likewise, the “wrongdoer” analysis in Barros does not extend to the defence of ministerial receipt.  If the agent only has knowledge of the facts that give rise to the illegality and nothing more, that should not defeat the defence of payment over, i.e. the “weak version” of ministerial receipt: Li v Liu [2022] NSWCA 67, §94.  Illegality should not bar the defence unless it affects the validity of the agency.

(2)  Barros is a controversial decision, and has been criticised for laying down an overly rigid approach that denies the change of position defence for any illegality that is not de minimis.  Reliance is placed on Tokić; Lesnina H DOO v Wave Shipping Trade Co Ltd [2022] 2 HKLRD 727, §§46-60; Solyda Srl v Wu Ge & another [2021] HKCFI 1825, §§34-36; Goff & Jones on Unjust Enrichment (10^th ed), §27-63; Burrows, The Law of Restitution (3^rd ed), pp 542-543.  The question was also raised in O’Neil v Gale [2013] EWHC 644 (Ch) at §68 whether Lord Goff’s reference to “wrongdoer” in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 580C should be taken as referring to all forms of illegal conduct or only such as constitute wrongdoing vis-à-vis is the claimant.  The correctness of Barros is not fit for summary determination in interlocutory applications such as these.

(3)  Barros was based on the decision in Tinsley v Milligan [1994] 1 AC 340, but following Monat Investment Ltd v All Person(s) in Occupation of Part of the Remaining Portion of Lot No 591 in Mui Wo DD 4 No 16 Ma Po Tsuen, Mui Wo, Lantau Island [2023] HKCA 479, Tinsley v Milligan is no longer good law in Hong Kong.  It follows that Barros should no longer stand.  The factors-based approach applicable instead, following Patel v Mirza [2017] AC 467, is fact-sensitive and not fit for summary determination.

(4)  Even if the reliance principle in Tinsley v Milligan is applicable, Tin Tat does not have to rely on any illegal conduct for its defence.  All it has to plead for ministerial receipt is that (i) it was Wanyuen’s agent, and (ii) it received the money in its capacity as such agent.  Tin Tat is not seeking to enforce an illegal contract.  The money exchange and remittance transaction had already been completed.

22.  In response, counsel for the plaintiff submitted, in summary, as follows:

(1)  The requirement of good faith applies not only to the defence of change of position but also to the defences of ministerial receipt and bona fide purchase.  There is no reason in principle or policy why the illegality doctrine applies to preclude only the former but not the latter. Bona fide purchase is the paradigm change of position defence.[8]  The “weak version” of the defence of ministerial receipt, based on payment over to the principal, is also essentially a change of position defence.[9]  There is no distinction between the “weak” and “strong” versions of ministerial receipt that justifies applying the illegality doctrine to the former but not the latter.

(2)  Here, there is “statutory illegality”[10] by implication, in the sense that the agency arrangement between Wanyuen and Tin Tat and the contract between the 1^st defendant and Wanyuen were both prohibited and illegal because of the breach of section 40.  Allowing money service operators to use bank accounts not notified to C&E would take relevant transactions outside the purview of C&E and hinder any investigation necessary, undermining the purpose of the licensing requirement and defeating the supervisory regime.  Accordingly, the court should not lend its aid to the agency arrangement or the money service contract.

(3)  Alternatively, as a secondary case, in relation to “common law illegality”, the plaintiff contends that Tinsley v Milligan is still good law in Hong Kong but is content, in this court, to proceed on the basis of Patel v Mirza.  Even so, the illegality should bar Tin Tat from relying on its defences given (a) the purposes of section 40 would otherwise be undermined, (b) the illegality is grave, (c) the illegality is central to the agency arrangement and the money service contract, (d) there is no evidence that the breach of section 40 was inadvertent or that there was any reasonable excuse under section 40(3), and (e) the consequence of denying Tin Tat its defences would simply be that it had to repay to the plaintiff money to which it was never entitled on its own behalf, and there would be no double jeopardy for Tin Tat since the same illegality would prevent Wanyuen from recovering from Tin Tat.

23.  In addition, by respondent’s notice, the plaintiff contended that the judge’s order should be upheld on alternative grounds based on the facts.  Thus it was submitted that since the judge found that Tin Tat was not a receiving agent of Wanyuen,[11] Tin Tat had no obligation to account to Wanyuen, and the defence of ministerial receipt was not open to Tin Tat.  The arrangements whereby members of Hui’s Alliance could share access to the bank accounts of receiving agents were based on a bare assertion, and not sufficient to establish an agency relationship between Wanyuen and Tin Tat.  The plaintiff also submitted that the evidence was ambivalent as to on whose behalf the Mainland agents paid the funds in RMB.  It was said that in so far as the judge found that Tin Tat acted in good faith, he was wrong to do so because Tin Tat allowed third parties to use its accounts in breach of section 40.

Discussion

24.  It is convenient to deal with the points raised by the respondent’s notice first.  As Mr Ernest Ng who appeared on behalf of the plaintiff recognised, where the judge below has held in an interlocutory matter such as this that there are reasonable prospects for the defendant to make out its case on the facts, there is a high threshold for the plaintiff to overcome before it can persuade the appellate court to take a different view and conclude that the factual case was not sufficiently arguable to go to trial: Greater China Capital Inc v Gbtimes Ltd [2018] 1 HKLRD 210, §§4-5. 

25.  Mr Ng submitted that the judge’s conclusion on the facts was plainly wrong, but with respect we do not accept the plaintiff’s submission that the application to set aside the default judgment should be rejected on the facts.  Whilst criticisms can justifiably be levelled at the quality and scope of Tin Tat’s evidence, there is some documentary evidence consistent with its core case, including: (i) Form 6 and its annexures evidencing the arrangements for Tin Tat’s accounts to be used by Fuyau; (ii) C&E’s acknowledgment of receipt of Form 6; (iii) the money service licences of both Fuyau and Wanyuen, for operation of branches under the name of Hui’s Brothers; (iv) the three forms of application for remittance (under the name of Hui’s Brothers) which specified Tin Tat’s account for receiving the client’s funds and which also referred to the Hui’s Alliance (許氏聯盟) with an official website and contact details; (v) copies of identity documents relating to the 1^st defendant collected by the shop by way of due diligence; (vi) transfer slips issued by China Citic Bank showing the transfer of US$200,000 by the 1^st defendant to Tin Tat; (vii) Mainland fund transfer and banking records showing transfers of the corresponding sums in RMB by the two Mainland agents to the three Mainland destination accounts.

26.  On the basis of these documents and the affirmation evidence of the Manager of Tin Tat, Chen Aowei, and of the common director of Fuyau and Wanyuen, Chan Cheung Choi, the judge was entitled to come to the view that there were reasonable prospects for Tin Tat to establish its factual case.  That view cannot be said to be plainly wrong.  As to the statement in the Decision at §23 that Tin Tat “was not a receiving agent of Wanyuen”, read in context the judge was clearly making the point there that Tin Tat was not a registered receiving agent of Wanyuen, in the sense that C&E had not been notified that Tin Tat’s bank accounts would be used in connection with the money service operated by Wanyuen.  It should also be noted that the evidence that it was Wanyuen rather than Fuyau that was the money service operator in the transaction in question came from Tin Tat’s own confession in its reply affirmation, and that the illegality point was not taken by the plaintiff in its evidence or even at the hearing before the Master, but only in the argument advanced before the judge.

27.  In these circumstances we took the view that the plaintiff had not overcome the hurdle for persuading us that we should take a different view from the judge on the facts.  The shortcomings in Tin Tat’s evidence, however, did in our view leave one with some doubt and a host of questions concerning the facts.  In light of that we considered it just and appropriate that the default judgment should not be set aside outright but only on condition that Tin Tat paid the principal amount of the claim into court.

28.  As to the illegality point relied upon by the judge in dismissing Tin Tat’s appeals notwithstanding that he accepted Tin Tat had real prospects of success in establishing its factual case, we did not think that the position was so clear as to justify dismissing Tin Tat’s applications. 

29.  Section 40 of the Ordinance provides:

“ (1) If there is any change in the particulars that are provided to the Commissioner in connection with a licensee’s application under section 30 or 31, the licensee must notify the Commissioner in writing of the change within one month beginning on the date on which the change takes place.

(2) For the purposes of subsection (1), particulars that are provided in connection with a licensee’s application under section 30 or 31 include particulars notified under that subsection.

(3) The Commissioner must, as soon as reasonably practicable after receiving a notification under subsection (1), amend any relevant particulars in the register if necessary.

(4) A licensee who, without reasonable excuse, contravenes subsection (1) commits an offence and is liable on conviction to a fine at level 5.”

30.  It may be noted that section 40 does not prohibit a new bank account from being used by a money service operator, but only requires that notice of any change of particulars (such as the use of a bank account not hitherto specified) be given to C&E within one month of the change.  Assuming this was the first time Wanyuen used Tin Tat’s bank account for its business, the breach would not occur until a month after 31 October 2019 if and when Wanyuen failed to give notice to C&E.  There was, at least arguably, no initial illegality when Tin Tat received the funds, giving rise, on its case, to an obligation to account to Wanyuen.  What impact such subsequent illegality caused by a failure on the part of Wanyuen to notify should have on Tin Tat’s defences to the plaintiff’s restitutionary claims has to be assessed in the light of the principles adopted in Monat.

31.  Further, as Mr Pao SC submitted on behalf of Tin Tat, the reasoning and the decision in Barros appears to be based on Tinsley v Milligan.  In Arrow,[12] Chow J considered himself bound to accept Tinsley v Milligan as representing the law in Hong Kong and that the decision in Barros was the logical consequence of applying Tinsley v Milligan.  Given that this court[13] has recently (well after the judge’s Decision in this case) held in Monat that the “range of factors” approach in Patel v Mirza should be adopted in place of the “reliance” principle in Tinsley v Milligan, the scope of the illegality bar to the change of position defence must also be open to review.  Further, Tin Tat had raised arguments, which could not be summarily dismissed within the scope of an appeal such as these, on the proper sphere of application of the illegality bar in relation to the defences of bona fide purchase and ministerial receipt and on the correctness of Barros itself.

32.  Even before Monat, it has been stated by different judges in successive recent first instance decisions that the correctness of the Barros approach is not suitable for summary determination.  Thus in Solyda at §36, DHCJ Le Pichon said that given the state of the authorities, it was “hardly appropriate for this issue to be decided in a summary manner”.  This was echoed by DHCJ Laurence Li SC in Tokić at §52 and by DHCJ Victor Dawes SC in Lesnina at §59.  We share this view, which accords with the general approach of this court.  As stated by Lord Collins in AK Investment CJSC v Kyrgyz Mobil Tel Ltd [2011] UKPC 7 at §84: “The general rule is that it is not normally appropriate in a summary procedure (such as an application to strike out or for summary judgment) to decide a controversial question of law in a developing area, particularly because it is desirable that the facts should be found so that any further development of the law should be on the basis of actual and not hypothetical facts”.

33.  Accordingly, having concluded that the legal arguments raised by Mr Pao based on the facts contended for by Tin Tat had reasonable prospects of success, we did not think it appropriate to go further into the debate on the basis of evidence that had not been tested and was in any event far from complete.  Whilst we acknowledge the able assistance rendered by counsel in their written submissions which were evidently based on a wealth of research, the resolution of the questions raised must await the appropriate occasion.

34.  For these reasons, we allowed the appeals and made the order referred to in §2 above at the hearing.

Costs

35.  As to costs:

(1)  The default judgment being a regular one, we consider that the costs of the application before the Master should be to the plaintiff in any event. 

(2)  As for the costs of the appeal to the judge, we note that the legal arguments raised by Tin Tat now were not, or at least not in any significant detail, advanced before the judge.  This might have been due to the fact that the illegality bar was only raised by the plaintiff in its submissions opposing the appeal.  Nevertheless, having regard to the scope of the arguments before the judge, we consider the fair order to be: the plaintiff’s costs be in the cause.

(3)  The costs of the appeals to this court (including the costs of the leave and stay application below which were ordered by the judge to be in the cause of the appeals) will be in the cause, with a certificate for two counsel.