DBS BANK (HONG KONG) LTD v. TIAN WEN QUAN

HCA 3228/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3228 OF 2016

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D E C I S I O N

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1.  This is the Defendant’s (Tian) application to discharge the ex parte proprietary injunction (Order) granted against him in favour of the Plaintiff (Bank) on 8 December 2016. The Order restrains Tian from, inter alia, dealing with the sum of HK$3,388,000 (Sum) transferred into a securities account held by him on 13 October 2016.

2.  Pursuant to a Consent Order dated 12 January 2017, Tian made a payment into court in the sum of HK$3,388,000 (Payment) upon which the Order ceased to have effect.  Pursuant to the Consent Order, the Payment represents the Sum “and/or any money or property that represents the proceeds thereof”, and this discharge application is treated as an application to release the Payment.

3.  On 23 June 2017, the Bank filed a Summons seeking leave to amend its Statement of Claim.  Hence, there were 2 applications before the court.  The Bank’s Summons was adjourned for argument due to time constraint at the hearing.  However, Tian only opposes part of the amendment[1], and the merits of the Bank’s case as set out in the proposed amendments were ventilated at the hearing. 

Background

4.  The background facts are uncontroversial and can be briefly stated as follows.  The Bank is the victim of an identity fraud, whereby an imposter purported to be one of its customers, Mr Cai, gave instructions on 13 October 2016 to transfer away funds in Mr Cai’s account with the Bank.  As a result of the fraud, the Bank was induced to transfer sums of over US$12.6 million to a bank account held by H2H Trading Co Ltd (H2H), which was unrelated to Mr Cai. 

5.  The proceeds of fraud were then further transferred to various other entities.  The discovery from third parties obtained by the Bank revealed that one such further transfers had gone into Tian’s account with a bank on 13 October 2016 by way of the Sum.  The Sum was then further transferred to Tian’s securities account with Futu Securities International (Hong Kong) Ltd (Account) on the same day.

Tian’s case

6.  In short, Tian’s case is that he received the Sum as part of a currency exchange transaction arranged by his friend, Ms Li Shu Ren (Li), without knowledge of the fraud.  The money was then used to purchase shares on behalf of Li, and those shares have remained in the Account.

7.  Tian says that these are bona fide transactions on both his part and that of Li.  On behalf of Tian, Mr Man SC, appeared with Mr Lam, submitted that although the Bank challenges Tian on his lack of knowledge of the fraud, it has given no particulars other than the fact that Tian had received the Sum.  The Bank’s challenge is untenable and should not have been made. 

8.  Further, Tian and/or Li had bona fide supplied consideration for the Sum.  They are therefore bona fide purchasers for value without notice.  This means that there is no serious issue to be tried for any claim against Tian.

Issues

9.  There are 2 broad issues in this application. It is contended by Tian, firstly, that damages are adequate remedy in this case and the balance of convenience is against the continuation of the Order.  

10.  Secondly, there are strong merits in Tian’s case such that there is either no serious issue to be tried in respect of the Bank’s causes of action or that the relative strength of the cases tilts against the continuation of the Order in the balance of convenience.  For this issue, I shall have to examine the 3 causes of action of the Bank: dishonest assistance, knowing receipt and money had and received.  In addition, the court needs to consider Tian’s case on bona fide purchaser for value without notice (Bona Fide Purchaser in short). 

Applicable principles for interlocutory injunction

11.  There is no controversy that the American Cyanamid principles apply to the grant of a proprietary injunction, namely, an applicant must show that: (a) there is a serious issue to be tried on the merits of his claims; (b) the balance of convenience is in favour of granting an interlocutory injunction; and (c) it is just and convenient to grant the injunction.

12.  The modern approach is to weigh the strength of the cases and the impact granting or not granting an injunction will cause, and to determine which course is likely to cause the least irremediable prejudice to one party or the other.  Lord Hoffmann explained in National Commercial Bank Jamaica Ltd v Olint Corpn Ltd [2009] 1 WLR 1405, §§16-18 :

“... The purpose of such an injunction is to improve the chances of the court being able to do justice after a determination of the merits at the trial. At the interlocutory stage, the court must therefore assess whether granting or withholding an injunction is more likely to produce a just result. ... that means that if damages will be an adequate remedy for the plaintiff, there are no grounds for interference with the defendant’s freedom of action ...

... The basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other. ...

Among the matters which the court may take into account are the prejudice which the plaintiff may suffer if no injunction is granted or the defendant may suffer if it is; the likelihood of such prejudice actually occurring; the extent to which it may be compensated by an award of damages or enforcement of the cross-undertaking; the likelihood of either party being able to satisfy such an award; and the likelihood that the injunction will turn out to have been wrongly granted or withheld, that is to say, the court’s opinion of the relative strength of the parties’ cases.”

13.  There is no dispute that serious issue to be tried is not a high threshold.  Further, the court does not resolve in interlocutory injunction applications conflicts of evidence on affidavit, or decide difficult questions of law which call for detailed arguments and mature consideration.

Whether damages adequate remedy for the Bank

14.  Although the Bank has a proprietary claim over the Sum, it is a claim to be distinguished with, eg, a proprietary claim over a wedding ring or any property of a unique character.  Money is probably the most fungible asset.  There is therefore considerable weight in Mr Man’s submission that the Bank is in truth only interested in monetary compensation.  That is consistent with the fact that the Bank was content to have the Payment secured in substitution of the Order.  Further, there is no evidence that Tian is not good for the damages or there is any risk of dissipation, said Mr Man. 

15.  The court was referred to Bouvier v Accent Delight International [2016] 1 LRC 60, a judgment of the Court of Appeal of Singapore (its highest court).  At §164, the Court set out its reasons for refusing to grant a proprietary injunction over what was referred to as the “Toulouse-Lautrec sale proceeds” (a specific fund which was said to be impressed by a trust) :

“... And to the extent that the injunctions are limited to the Toulouse-Lautrec sale proceeds, even assuming there is a serious question to be tried as to the respondents’ claims for proprietary relief in respect of those sale proceeds, two factors tilt the balance of convenience against granting even such limited injunctions, namely: (a) the Toulouse-Lautrec sale proceeds constitute a fungible asset—money—as opposed to unique property or property that cannot be readily purchased or substituted on the market (see para [157], above); and (b) on the evidence before us, there is simply nothing to suggest that it would be beyond Mr Bouvier's means to meet a monetary judgment for the amount of the Toulouse-Lautrec sale proceeds, and in the final analysis, that is all that the respondents seek where those sale proceeds are concerned. We therefore refuse to grant the respondents the interlocutory proprietary injunctions which they seek.”

16.  On the other hand, Ms Chan SC, appeared for the Bank, submitted that the evidence shows that Tian has no fund available to him to satisfy the Bank’s claim.  Firstly, the document shows that Tian had only HK$610.05 in his bank account prior to receiving the Sum.  Secondly, Tian had to borrow from friends at high interest rate to make the Payment.

17.  Mr Man informed the court that the shares in the Account are now worth about HK$10 million, and he undertook to file an affirmation to support what he said.  However, the difficulty is that the shares do not belong to Tian beneficially, and they can be readily sold. 

18.  In the premises, whilst I accept that the Bank can be adequately compensated by damages, there is doubt over Tian’s ability to meet such damages.  Therefore, I am not prepared to order the release of the Payment without considering the strength of the parties’ cases.

Underground currency exchange transaction

19.  Before dealing with the Bank’s causes of action, I should say a few words about the currency exchange transaction in question (Transaction).  In my view, the evidence before the court is compelling and reasonably well supported by contemporaneous documents.  Driven by the desire to recover its loss, the Bank’s refusal to accept the evidence can be understood.  However, it is not in a position to adduce evidence to contradict what is before the court.  Despite Ms Chan’s valiant attempt to criticise some aspects of Tian’s evidence as inadequate, I have to accept for the present purpose that the Sum was received as part of an underground money exchange transaction to circumvent the exchange control of the Mainland. 

Knowing Receipt

20.  It is important to bear in mind at the forefront that the Order was based on a proprietary claim.  I agree with Mr Man’s analysis of the Amended Statement of Claim that of the 3 causes of action pleaded by the Bank, knowing receipt is clearly a proprietary claim.  Money had and received is a personal claim (see Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, at 572F).  There is disagreement between the parties whether dishonest assistance gives rise to a proprietary claim, but for the reason stated below it is not important to resolve that argument. 

21.  For both knowing receipt and dishonest assistance, a mental element has to be established, respectively, unconscionable knowledge and dishonesty.  There can be no argument that there is a higher burden in satisfying the latter.  Tian says that the Bank has no case against him even on the guilty knowledge for knowing receipt, and therefore it is unnecessary to consider that for dishonest assistance. 

22.  On unconscionable knowledge, I agree with Mr Man that the test is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt: Lewin on Trust, 19^th edn, §42-073.  In the context of commercial transaction, constructive knowledge would only suffice if on the facts actually known to the defendant, a reasonable person would either have appreciated that the transfer was probably (as distinct from possibly) in breach of trust or would have made inquiries or sought advice which would have revealed the probability of breach of trust: Lewin, §42-076.

23.  I have to say that the guilty knowledge alleged against Tian is tenuous.  In substance, it is suggested that Tian had received a large sum of money from a total stranger with no legitimate reason such that an honest person would have made enquiry about the provenance of the funds. 

24.  Firstly, the Bank’s case ignores the Transaction.  It is a matter of common sense that, more likely than not, the transferor of the exchanged funds in such a transaction would be unknown to the recipient.  Secondly, as part of the Transaction Tian was told, and he expected, to receive a large sum of money in Hong Kong dollars.  What took place was as expected.  I do not see the reason why Tian should make enquiry over the provenance of the funds. 

25.  The court was referred to the Decision of Arrow ECS Norway AS v Xin Cheng Holdings Co Ltd, HCA 239/2016, 12 May 2016, §§29 to 33.  The facts of that case are quite similar to those before the court.  It too was a case of fraud and as a result of which the plaintiff’s money was transferred into the hands of many parties, including those of Xin Cheng.  Xin Cheng’s case was that the plaintiff’s funds were received by it as part of an underground currency exchange. 

26.  Relying on HKSAR v Yan Siuling (2012) 15 HKCFAR 146, the court held that the mere fact that a defendant was in receipt of funds remitted through an underground banking system is not sufficient to establish the requisite knowledge to defeat a defence of bona fide purchaser for value without notice. 

27.  I agree with Mr Man that it must follow that the mere receipt of such funds would not amount to unconscionable knowledge for the purpose of knowing receipt (let alone dishonesty).

28.  In the premises, there is no serious issue to be tried in respect of this cause of action.

Dishonest Assistance

29.  Given the lack of guilty knowledge to support this cause of action, there is likewise no serious issue to be tried.

30.  Out of deference to the submissions made, it appears to me from the authorities cited to the court that the better view is that dishonest assistance is only a personal claim: see in particular the analysis in Lewin, §40-015.  The distinction with knowing receipt is that the defendant is not in possession of trust property.  Rather, his liability arose from the breach of trust which he had induced or assisted with dishonesty.

Money had and received

31.  Relying heavily on Lipkin Gorman, Ms Chan argued that based on this cause of action, and where the Bank’s money had gone into the hands of a third party, it is entitled to a proprietary claim against that party which does not require any guilty knowledge.  The only defences to this proprietary claim are Bona Fide Purchaser and change of position. 

32.  There is much force in Mr Man’s complaint that this proprietary claim has not been pleaded and it was only advanced in Ms Chan’s skeleton arguments.  However, I am not inclined to reject this argument solely on technical ground because the evidence and authorities before the court allow that argument to be determined. 

33.  The assessment of this claim depends on the 2 defences of Bona Fide Purchser and change of position. 

Bona Fide Purchaser

34.  The arguments here rest within a narrow compass (bearing in mind the low threshold for serious issue to be tried).  It is not disputed that the provision of valuable consideration in exchange for the disputed property is one of the constituents of this defence.  Ms Chan submitted that there was no valid consideration provided because: (i) the Transaction was illegally under Mainland law and would not be enforced by Hong Kong court; and (ii) no consideration moved from Li. 

35.  Before dealing with the arguments, it should be mentioned that it is not important that Tian had received the Sum on trust for Li.  This is because the defence of Bona Fide Purchaser applies where the recipient acts as a nominee and holds on trust for the purchaser and both of them had no notice of the plaintiff’s claim: Lewin, §41-120.  As explained by Millett J (as he then was) in Macmillan Inc v Bishopsgate Investment Trust Plc (No 3) [1995] 1 WLR 978 at 1001H:

“It is not necessary that the purchaser should obtain the legal estate and have the same vested in himself. It is sufficient if he has the legal estate transferred to a trustee or nominee for him. Provided that neither he nor his nominee has notice of the prior equitable interest, he will take free from it, for he has the better right to the legal estate.”

36.  In answer to the illegality point, Mr Man sought to dissect the Transaction and argued that there was no illegality in that Li had paid her RMB 3 million into an account in Mainland (Mainland Account) designated by the exchange agent before the Sum was paid by H2H into Tian’s account.  When H2H made that payment or passed on trust money, it was not in exchange of Li’s RMB.  Instead, it had already received the consideration for which the Sum was then paid.  Hence, Li’s payment involved no illegality, said Mr Man. 

37.  With respect, the facts should be viewed with common sense.  For the present purpose, I see no good reason to make the fine distinction over Ms Li’s payment.  There can be no doubt that her payment in RMB was made in exchange, and in anticipation, of an equivalent sum in Hong Kong dollar to be paid to Tian in Hong Kong.  The Transaction should be viewed as a whole.  I therefore see no answer to the illegality point, which would defeat Tian’s Bona Fide Purchaser claim. 

38.  For completeness, I am unable to accept Ms Chan’s argument that no consideration moved from Li.  Ironically, that argument was also premised on a dissection of the Transaction.  It was said that Li paid her money to the Mainland Account, and therefore such payment was not linked to H2H payment of the Sum.  For the same reason for which I rejected Mr Man’s argument, this argument is also rejected. 

Change of position

39.  Mr Man relies on the fact that Li had paid RMB 3 million into the Mainland Account in return for the Sum, which constituted a change of position that would defeat any bare proprietary claim based on money had and received. 

40.  With respect, this a valid argument to which the Bank has no answer, save for the criticisms over Tian’s factual case (see para 19 above).  I must therefore hold that there is no serious issue to be tried in respect of the Bank’s proprietary claim based on money had and received. 

Conclusions

41.  Given the conclusion that there is no serious issue to be tried in respect of all of the Bank’s proprietary claims, the Payment must be released.  Even if I were wrong, in my view the merits of the cases are so tilted in favour of Tian that the release of the Payment would best serve the justice of this case.  I so order. 

42.  I make an order nisi that the costs of and occasioned by this application be to Tian with a certificate of 2 counsel, to be taxed if not agreed.

43.  I am grateful to counsel for their assistance.

Further submissions made by the Bank

44.  After a finalised draft of this decision was prepared, further submissions were received from the Bank by way of a letter from its solicitors dated 20 September 2017.  Such action was strongly rebuked by Tian’s solicitors as improper.  I agree with Tian that there was no or no adequate justification to take the unusual course of making uninvited submissions to the court after the conclusion of a hearing (see To Pui Kui v Ng Kwok Piu, CACV 281/2012, 21 August 2014, §§56-58).

45.  In any case, I see no reason to change my mind on the determination of this application.  However, as a result of the additional submissions, the handing down of this decision has unfortunately been delayed.