SOLYDA S.R.L. (a company incorporated in Italy) v. WU GE AND ANOTHER

HCA 161/2019

[2021] HKCFI 1825

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 161 OF 2019

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DECISION

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1.  This is the application of Solyda S. R. L. (“the plaintiff”) for summary judgment against Wu Ge (“D1”) in a proprietary claim in respect of USD360,000 (“the Sum”) and/or assets derived therefrom held by D1 as constructive trustee, and further and/or alternatively, in unjust enrichment.

Background

2.  The plaintiff is an Italian subsidiary of a Germany-based company which was the victim of an email fraud.  It was deceived into transferring €500,000 into the account of Om Yu Cho Cleaning Service Company Limited (“OYC”) with Standard Chartered Bank (“SCB”) on 15 October 2018.

3.  OYC converted the €500,000 into USD578,100.70 the following day which amount was deposited into OYC’s USD account.  On the same day (16 October 2018), inter alia, the Sum was withdrawn and transferred from OYC’s USD account to D1’s account with SCB (“D1’s account”) (“the onward payment”).

4.  Based on SCB’s disclosure of information on 22 November 2018 and 30 January 2019 pursuant to court orders, the plaintiff commenced the present action on 30 January 2019 against inter alia D1 for recovery of the onward payment and obtained a Mareva injunction and a disclosure order against D1.

5.  The statement of claim was filed on 3 June 2019.

6.  D1 filed her defence on 10 September 2019 based on bona fide purchaser for value without notice and/or change of position.

7.  On 27 August 2019, the Sum was paid into court for the discharge of the Mareva injunction.

Applicable legal principles

8.  The applicable legal principles are not controversial. Both parties adopted the principles stated in Li Chuen Kwai v Po Lam Construction Development Limited, unreported, HCA 2376/2013, 24 September 2014 at §§11-12.     

The plaintiff’s case

9.  The plaintiff demonstrated through relevant banking statements obtained from disclosure orders that the Sum is traceable back to the €500,000.  It is clear that it has a sustainable proprietary claim in respect of the Sum.

The defence

10.  Ms Sharon Yuen, counsel for D1, raised 3 issues: (1) that D1 is a bona fide purchaser for value without notice and/or she has changed her position; (2) illegality; and (3) absence of a properly pleaded case for the plaintiff’s proprietary claim.

(1)   Bona fide purchaser for value without notice

11.  In outline, the relevant background to this defence is as follows.

(a)  D1 is a housewife and a PRC national residing in Beijing.  In late 2016 she came to Hong Kong with a view to purchasing life policies and a friend who worked for the Prudential Insurance Co in Hong Kong (“Prudential”) introduced her to her boss, a Mr Choi who was Prudential’s regional director.

(b)  The payment issue was discussed during her meeting with Mr Choi as D1 was aware of the foreign exchange policy in China which imposes an annual limit of USD50,000 on the exchange amount for PRC individuals.

(c)  Mr Choi said he could introduce his friend Michelle Wang (“Michelle”) to help as Prudential customers from the PRC have all used the currency exchange company in Hong Kong owned by Michelle’s classmate (“the Company”) (which Mr Choi himself had visited in Yuen Long) to exchange and pay premiums for their insurance plans.      

(d)  D1 was introduced to Michelle that same evening who informed D1 that her classmate was a shareholder in the Company which has a Hong Kong licence for conducting foreign exchange.  D1 was told:

(i)  that Michelle would arrange everything;

(ii)  all D1 had to do was to remit RMB to designated accounts in China according to Michelle’s instructions;

(iii)  after receiving notice of D1’s remittance, Michelle would arrange for USD to be transferred to D1’s bank account in Hong Kong with the relevant remittance notice the same day and the transaction would usually complete the following day;

(iv)  the Company would make separate arrangements to bring the RMB remitted by D1 out of China itself.

(e)  D1 purchased 3 insurance policies for herself and her family members from Prudential with premiums payable in USD.  The premium for one of the policies was due on 1 November 2016 and the premium for the remaining 2 policies on 1 December 2016.  The total annual premium is approximately USD312,000.

(f)  Prior to 15 October 2018, D1 had successfully carried out several transactions through Michelle in the manner described.

12.  According to D1, on 15 October 2018:

(a)  D1 told Michelle that it was time to pay the insurance premiums and she wanted to transfer USD360,000 to Hong Kong but was quoted an exchange rate for RMB which was less advantageous than the rate applied on the previous occasion.

(b)  When D1 questioned the rate, Michelle was able to offer a slightly lower rate after “quoting a few shops”. D1 agreed to the new proposed rate and provided details of her SCB account to Michelle.

(c)  D1 was given instructions for the remittance of 5 specified amounts totalling RMB2,544,480 to 3 designated PRC bank accounts of 3 individuals (“PRC payees”) which she carried out that same afternoon.

(d)  Michelle then sent D1 a “remittance receipt” for USD 360,001.53 payable from the account of “Hampton Trade Limited” the same day but the USD would only be credited to D1’s account the following day.

13.  D1 contacted her account manager at SCB the following day who confirmed receipt of USD 360,000 for her account.

14.  D1 explained that she had set up an automatic transfer for payment of the premiums from funds in her account.

15.  SCB’s bank statement for D1’s account dated 6 December 2018 (“the December 2018 statement”) shows the following entries under “Account Activities”:      

16.  D1 only discovered that her SCB account had been frozen upon receiving the injunction order on 4 May 2019. She immediately contacted Michelle who provided her with the following explanation[1]:

“Michelle stated that she exchanged foreign currency for clients through proper channels of the Company, and showed me the invoice of another customer exchanged foreign currency with the Company to prove that she was telling the truth. There is now produced to me a copy of the foreign currency exchange invoice of another customer presented by Michelle to me on 15 October 2018[2] at page 30 of WG-1.” (Emphasis added)

17.  WG-1 is an invoice issued by Ying Fat Company Licence No. 12-06-00071 with a Yuen Long address dated 18 January 2018.

18.  D1 submitted that it is at least triable that (1) D1 is a bona fide purchaser without notice of the sum of USD360,000 where she gave RMB2,544,480 as value for the purchase of USD360,000 from the Company (“the subject transaction”); and (2) D1 had bona fide changed her position as she transferred RMB2,544,480 to the PRC payees in reliance on her anticipated receipt of USD 360,000.

19.  Mr Ernest CY Ng, counsel for the plaintiff, identified 5 factual deficiencies in D1’s evidence which he submitted are sufficient to defeat D1’s defence:

(a)  There is no evidence to show that the Company operated by Michelle’s classmate is a licensed money changer:

(i)  there is nothing to link the Ying Fat invoice produced by Michelle to the Company;

(ii)  instead, she chose to exhibit the Ying Fat invoice concerning a transaction for a different customer conducted 17 months earlier which makes little sense rather than the subject transaction.

(b)  There is no evidence that the Company actually conducted the subject transaction:

(i)  the Company is not expressly mentioned in the WeChat exchanges on 15 October;

(ii)  Michelle’s remarks quoted in §12 (b) above would suggest that she was shopping around for the best rate. That could mean that other entities might have been selected; and

(iii)  no remittance form from the Company was ever provided.

(c)  There is no evidence that the transaction was an exchange at all:

(i)  the contents of the “remittance receipt[3]” is not reflected in any of D1’s banking records;

(ii)  while D1 did not care about the ‘minor discrepancy’ of USD1.53 between the amount shown on the remittance receipt and the amount of the subject transaction, from a bank’s perspective, it does matter as the exact amount deposited must be recorded in the bank statement.

(d)  There is a lack of objective evidence of payment of premium for the insurance policies:

(i)  the plaintiff highlighted the following matters: the timing of the receipt of USD360,000, the timing of the due date[4] of the policies and the timing of the payment in HKD;

(ii)  the 3 withdrawals shown on the December 2018 statement marked “Prudential Hong Kong …” should not be taken at face value in the absence of any receipt from Prudential which could easily have been produced.

(e)  D1’s enquiries were wholly inadequate when she was well aware of potential illegality. D1 described her enquiries at §14 of the affirmation in these terms:

“… I would be remitting RMB to a designated account in the Mainland China according to the instructions of a professional foreign exchange company that was legally licensed in Hong Kong. I thought that as the Company is legally licensed, it would use legal channels to remit RMB out of the country for exchange. Moreover, the Company’s reputation was promising as it often serves Prudential’s customers. I continued to chat with Michelle and asked how her classmate obtained legal exchange channels to operate the Company as this kind of company is rare in Mainland China. However, maybe it had something to do with their trade secret, Michelle did not disclose anything.”

20.  The ostensible reason for the subject transaction described in the WeChat exchanges between D1 and Michelle was that “it was time to pay the insurance premiums”.  In fact, immediately prior to the subject transaction, D1 had approximately USD640,000 in her SCB account.  Those funds were more than sufficient to defray not only the 2018 premiums but also the 2019 premiums, with change.

21.  There was no particular reason for D1 to engage in the transaction at that point in time especially when the exchange rate would not seem to have been particularly favourable[5] causing her to question it.  It would not appear that any part of the USD360,000 was required in order to defray the 2018 premiums.

22.  As shown in December 2018 statement, the closing balance as at 6 November 2018, stood at almost USD 1 million. On 6 December 2018 USD320,000 was converted into HKD2,497,280 and, through “phone banking”, 3 withdrawals were then made in favour of Prudential.  While the series of numbers assigned to the 3 Prudential payments correspond to the policy numbers of the certificates, it was not the prescribed method of payment in terms of date and currency.

23.  What is shown in the December 2018 statement sits uncomfortably with D1’s evidence that the premiums were payable in USD and that she had set up an automatic transfer for payment of the premiums. Apart from the absence of corroborative evidence from third parties, the deficiencies identified by the plaintiff are borne out by the evidence.  But the question for determination is whether the defence is credible rather than whether D1 should be believed. 

24.  For the bona fide purchaser for value without notice and/or change of position defence, the issue is whether D1 could be said to be acting in good faith and genuinely did not believe that she was engaging in any use of “underground banking” in the circumstances described in §§11-12 above.

25.  Having given the matter considerable thought, while I have serious misgivings and consider the prospects of D1 ultimately succeeding to be low, the possibility of D1 being able to establish her defence cannot be disregarded altogether.  In my view, this is a borderline case, if verging on moonshine.

(2)      Illegality

26.  The plaintiff submitted that if there is a triable defence, the issue of illegality would arise. The plaintiff has exhibited an Opinion dated 16 September 2020 from DeHeng Law Offices who have opined that the transaction is illegal as a matter of PRC law.

27.  The plaintiff relies on the decision of DBS Bank (Hong Kong) Limited v Pan Jing [2020] 4 HKC 395 which held that a defendant could not be considered to have provided value for the property if it was transferred pursuant to an illegal transaction. 

(A) Foreign illegality

     (a) Defence of bona fide purchaser without notice

28.  The Pan Jing case involved facts that are somewhat different.  The defendant who lived on the Mainland entered into a sale and purchase agreement with the Hong Kong supplier and decided to purchase USD150,000 in part to pay for the Hong Kong transaction.  He asked his friend and colleague X whom he had known for many years to facilitate the currency purchase and exchange for him and transferred the equivalent of USD150,000 in RMB into X’s account in the PRC, relying on X to deal with matters properly and legally.  As the defendant found out afterwards, X transferred that sum to Y’s account in the PRC and later the same day the defendant’s account was credited with USD150,000.

29.  The judge found that the defendant who professed to be primarily a technical person unfamiliar with exchange transactions, was also an experienced businessman, who had built up and sold a successful business.  He held that it was not credible to suppose that the defendant did not know how the exchange would be effected and rejected the submission that a triable issue was raised in that respect.

30.  In the present case, as I have come to the conclusion that there is a triable issue of fact whether D1 acted in good faith and had no reason to believe that the subject transaction was illegal, the Pan Jing decision is distinguishable in so far as this defence is concerned.

     (b) Defence of change of position

31.  In relation to the change of position defence, Pan Jing followed Barros Mattos Junior & Ors v MacDaniels Limited & Ors [2005] 1 WLR 247 where the defendants could not rely on change of position where they had been in breach of foreign exchange regulations.

32.  It has been said that the issue to what extent illegal conduct precludes a defendant from relying on the defence is a “developing point of law”[6] 

33.  D1 highlighted the fact that remarks to the effect that “there is a serious argument over the correctness of Barros” have been made in a number of authorities[7].

34.  In Ryder Industries Limited (formerly Saitek Limited) v Chan Shui Woo (2015) 18 HKCFAR 546 at §56 Lord Collins NPJ approved the statement in Johnston on The Conflict of Laws in Hong Kong, 2nd edition[8] that “a more flexible approach having regard to the seriousness of the foreign illegality is required to determine whether public policy and comity really require enforcement of the contract to be denied”. Lord Collins held  that there is no basis in authority or principle for holding that every breach of foreign law will result in unenforceability[9].

35.  Barros has also been criticised[10] for being overly rigid due to its absolute approach that all kinds of illegality (save de minimus ones) would deny the defence: see Andrew Burrows, A Restatement of the English Law of Unjust Enrichment (at p. 121) stating that the better view is that the defendant should only be disqualified from the defence by illegality where the criminality is significant and not trivial.

36.  Given the state of the authorities, it is hardly appropriate for this issue to be decided in a summary manner.

 (B) Domestic illegality

37.  It is D1’s case that the transaction was conducted by the Company which is a licensed Hong Kong money changer and that the transaction is governed by Hong Kong law. It was submitted that there is at least a triable issue that a licensed Company was being used.

38.  The plaintiff submitted that the evidence supported the view that D1 was transacting with Michelle and not the Company and noted that no evidence of any contract with the Company was adduced.

39.  As the matter has to go to trial given my view set out in §§25 and 35 above, it is unnecessary for the court to express any view on this issue.

Conclusion

40.  Given that I consider D1’s defence to be extremely shadowy, leave to defend must be conditional on full payment of the Sum into Court.

41.  As earlier noted, D1 paid the Sum into Court in order for the injunction against her to be discharged. I will therefore order that the money paid into court be treated as payment under §39 above.

Order 

42.  Accordingly, it is ordered that the plaintiff’s summons dated 29 October 2020 be dismissed; D1 be granted leave to defend, conditional on full payment of the Sum into Court; the amount paid into Court by D1 on 27 August 2019 for the discharge of the injunction be treated as such payment. There is to be an order nisi that costs of this application be costs in the cause.