PACIFIC RAINBOW INTERNATIONAL INC v. SHENZHEN WOLVERINE TECH LTD AND OTHERS

HCA 3023/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3023 OF 2016

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DECISION

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A. Procedural Background

1.  On 18 November 2016, prior to the issue of the writ in this action, the plaintiff applied for and obtained ex parte from Zervos J:

(1) As against the 1^st defendant (a) a proprietary injunction restraining it from inter alia disposing of or dealing with the sum of US$1,443,000[1] (the “said Sum”) which had been paid into its bank account with Hang Seng Bank Limited (“D1’s HSB Account”) from the plaintiff’s bank account with Bank of America Merrill Lynch on or about 10 November 2016 and/or the proceeds of the same; and (b) a Mareva injunction restraining it from inter alia disposing of or dealing with its assets in Hong Kong up to the value of the said Sum, together with a disclosure order on the location and value of its assets (“D1 ex parte order”).

(2) As against HSB, a Norwich Pharmacal order for the disclosure of inter alia information and supporting documents concerning the movements of sums in and out of D1’s HSB Account in the period from 10 November 2016 to the date of service of the order (the “1^st HSB discovery order”).

2.  The writ was issued 3 days later on 21 November 2016, with the 1^st defendant named as the sole defendant.  On 25 November 2016, being the return date of the D1 ex parte order and in default of appearance by the 1^st defendant, Anthony Chan J continued the order with minor amendments until trial or further order.

3.  On 8 December 2016, the plaintiff applied for and obtained ex parte from DHCJ Kent Yee:

(1) Leave to amend the writ by adding the 2^nd, 3^rd and 4^th defendants.

(2) As against the 2^nd defendant, (a) a proprietary injunction restraining it from inter alia disposing of or dealing with the sum of HK$9,176,063 paid into his bank account with Bank of East Asia Limited (“D2’s BEA Account”) from D1’s HSB Account on or about 15 November 2016, and/or its proceeds; and (b) a Mareva injunction restraining him from inter alia disposing of or dealing with its assets in Hong Kong up to the value of the said Sum, together with a disclosure order on the location and value of his assets (“D2 ex parte order”).

(3) As against the 3^rd defendant, (a) a proprietaryinjunction restraining it from inter alia disposing of or dealing with the sum of HK$2,000,000 paid into its bank account with HSB (“D3’s HSB Account”) from D1’s HSB Account on or about 15 November 2016, and/or its proceeds; and (b) a Mareva injunction restraining him from inter alia disposing of ordealing with its assets in Hong Kong up to the value of the said Sum, together with a disclosure order on the location and value of its assets (“D3 ex parte order”).

(4) As against the 4^th defendant, a Mareva injunction restraining him from inter alia disposing of or dealing with its assets in Hong Kong up to the value of the said Sum, together with a disclosure order on the location and value of its assets (“D4 ex parte order”).

(5) As against BEA, a Norwich Pharmacal order for the disclosure of inter alia information and supporting documents concerning the movements of sums in and out of D2’s BEA Account in the period from 15 November 2016 to the date of service of the order (the “BEA discovery order”).

(6) As against HSB, a Norwich Pharmacal order for the disclosure of inter alia information and supporting documents concerning the movements of sums in and out of D3’s HSB Account in the period from 15 November 2016 to the date of service of the order (the “2^nd HSB discovery order”).

4.  On 16 December 2016, being the return date of the D2, D3 and D4 ex parte orders, the 2^nd defendant indicated that he would oppose the continuation of the D2 ex parte order. The 3^rd and 4^th defendants did not appear.  DHCJ Kent Yee adjourned the plaintiff’s return date summons and ordered the continuation of the ex parte orders pending the determination of the summons or further order, but subject to a variation that inter alia the 2^nd defendant be allowed to spend (1) HK$5,000 per week towards ordinary living expenses and HK$10,000 per week towards his ordinary and proper business expenses for a 12-week period; and (2) HK$150,000 on legal advice and representation.  The judge also gave directions for the filing of evidence by plaintiff and the 2^nd defendant.

5.  The plaintiff’s adjourned summons came before me on 16 March 2017.  I was informed by Mr Kerby Lau, counsel for the plaintiff, that the 3^rd and 4^th defendants have since filed acknowledgements of service and have consented to the continuation of the D3 and D4 ex parte orders.  After hearing the parties, I reserved my decision and continued the D2 ex parte order until further order.

B.  Factual Background

6.  The plaintiff, a company incorporated in California, USA, is an importer and wholesaler of raw materials in the food and other industries, and has had a trading relationship with a company known as Xiamen Kingdomway Limited (“KDW”), a supplier of raw materials, since 2010.

7.  The 1^st and 3^rd defendants are Hong Kong incorporated companies.  The 2^nd defendant has been registered as a sole proprietorship under the Business Registration Ordinance (Cap 310) (“BRO”) since 5 August 2015.  The 4^th defendant is and was at all material times the sole director and shareholder of the 3^rd defendant.

8.  The root of these proceedings is what appears to have been an email fraud perpetrated on the plaintiff.

9.  On 22 March 2016, the plaintiff placed an order with KDW for materials for a sum of US$1,480,000.  On or about 8 November 2016, the plaintiff received an email purportedly from one Belinda Han, the general manager of KDW’s international trade department, asking if the plaintiff could make early payment for the goods to assist with KDW’s cash flow issues, in return for a 2.5% discount from the original price.

10.  The plaintiff agreed, and on 10 November 2016, the plaintiff received a further email purportedly from Ms Han directing payment to be made to the 1^st defendant, which was said to be a subsidiary of KDW.  The email attached a payment authorisation and revised invoice instructing payment to be made to D1’s HSB Account.  On the belief that the emails were genuine, on 15 November 2016, the plaintiff remitted the said Sum into D1’s HSB Account.

11.  On 16 November 2016, the plaintiff sent to Ms Han an email with the bank confirmation slip showing the remittance, whereupon it was discovered that neither Ms Han nor anyone at KDW had sent the emails on 8 and 10 November 2016 and had never authorised payment into D1’s HSB Account. In fact, KDW had no business transactions or dealings with the 1^st defendant.

12.  From the information obtained pursuant to the 1^st and 2^nd HSB discovery orders and the BEA discovery order, it can be seen to some extent what happened to the said Sum.

13.  Insofar as D1’s HSB Account was concerned:

(1) Prior to 15 November 2016, there was an equivalent of several thousand Hong Kong dollars (in various currencies) in the account.

(2) After the said Sum was transferred into the US dollar account of D1’s HSB Account on 15 November 2016 (a Tuesday), the bulk of it was immediately converted and deposited into the Hong Kong dollar account of D1’s HSB Account.

(3) On the same day, the following transfers were made out of D1’s HSB Account:

Time:	Recipient:	Amount (HKD)
3:02 pm	D2’s BEA Account	HKD 4,358,400
3:14 pm	D3’s HSB Account	HKD 2,000,000
3:36 pm	D2’s BEA Account	HKD 4,807,663
Total:		HKD 11,166,063

(4) The remaining balance in the account at the end of 15 November 2017 was back to several thousand Hong Kong dollars (in various currencies).

14.  Insofar as D2’s BEA Account is concerned:

(1) Prior to receipt of HK$4,358,385 and HK$4,807,648 (after deduction of presumably bank charges of HK$15 for each transfer) totalling HK$9,176,033 on 15 November 2016, there was an equivalent of around HK$74,400 in D2’s BEA Account (in various currencies). It should be mentioned that the HK$9,176,033 was deposited into the Hong Kong dollar savings sub-account in D2’s BEA Account (and unless otherwise stated, references to D2’s BEA Account below are references to the Hong Kong dollar savings sub-account).

(2) On 17 November 2016, the 2^nd defendant made the following transfers out of D2’s BEA Account:

Time:	Recipient:	Amount (HKD)
2:32 pm	Liu Haishen	HKD 2,000,000
2:34 pm	D3’s HSB Account	HKD 2,580,000
2:35 pm	Gain Net Trading Co Ltd (“GNT”)	HKD 2,000,000
2:35 pm	Wang Qin Fa	HKD 288,000
2:36 pm	Treasure Praise Ltd	HKD 400,000
Total:		HKD 7,268,000

(3) On 21 November 2016 (a Monday), being the first weekday after the plaintiff obtained the D1 ex parte Order, the sum of HK$1,671,560 was converted into CAD 290,000 and transferred into the Canadian dollar savings sub-account in D2’s BEA Account, which had a pre-existing balance of CAD 12,011. The sum of CAD 300,000 was then remitted overseas to an account held by the 2^nd defendant in Canada with the National Bank of Canada (“D2’s Canadian Account”).

(4) As a result of the above transfers and other minor transfers and withdrawals, and no further funds having been deposited, the remaining balance of D2’s BEA Account as at 30 November 2016 was equivalent to around HK$158,672 (in various currencies).

15.  Insofar as D3’s HSB Account was concerned:

(1) Prior to receipt of the sum of HK$2,000,000 from D1’s HSB Account on 15 November 2016, there was HK$155,723.95 and US$23.26 in D3’s HSB Account.

(2) On 15 November 2016, the 3^rd defendant made the following transfers out of D3’s HSB Account:

Time:	Recipient:	Amount (HKD)
3:32 pm	HK Chung Wai TDG ;Co (“HK TDG”)	HKD 300,000.50
4:05 pm	Yan Hongyan	HKD 1,114,206.00
4:59 pm	Dragon Communication Company	HKD 265,750.00
5:02 pm	Icare Therapeutic Equipment Ltd (“Icare”) (wholly-owned by the 4th defendant)	HKD 785,600.50
Total:		HKD 2,465,557.00

(3) On the same day, there were also what appears to be unrelated deposits of HK$330,000 into the account. As a result of these deposits and transfers out of D3’s HSB Account, the remaining balance in the HKD account at the end of 15 November 2016 was HK$20,001.95 (the USD balance remaining unchanged).

(4) As mentioned above, on 17 November 2017, the sum of HK$2,580,000 was transferred from D2’s BEA Account into D3’s HSB Account.  Prior to the receipt of this sum, the balance in the account was HK$3,551.95 and again US$23.26 in D3’s HSB Account

(5) On the same day after the receipt of the sum, the 3^rd defendant made the following transfers out of D3’s HSB Account:

Time:	Recipient:	Amount (HKD)
4:44 pm	Tims Printing Company Limited	HKD 1,364,001.00
4:46 pm	HK TDG	HKD 100,000.00
4:48 pm	Li Xiru	HKD 450,000.50
4:53 pm	Icare	HKD 300,000.50
5:01 pm	Icare	HKD 367,000.50
Total:		HKD 2,581,002.50

(6) As a result of these transfers out of D3’s HSB Account (and no deposits having been made), the remaining balance in the HKD account at the end of 17 November 2016 was HK$2,314.45 (the USD balance remaining unchanged).

C.  The plaintiff’s case

16.  The plaintiff’s case against the defendants, as pleaded in its amended statement of claim dated 21 February 2017, may be summarised briefly as follows.

17.  The plaintiff paid the said Sum to the 1^st defendant by reason of fraud, and as a result, the 1^st defendant held the said Sum as constructive trustee for the plaintiff.

18.  The plaintiff, as the equitable owner of the said Sum, is entitled to trace such part of the said Sum and/or its proceeds as are in the hands of each of the 2^nd and 3^rd defendants, who holds the same on trust for the plaintiff;

19.  Further or alternatively, each of the 2^nd and 3^rd defendants received parts of the said Sum knowing that the same were proceeds of fraud, and each of the 2^nd, 3^rd and 4^th defendants dishonestly assisted the 1^st defendant’s breach of its duties as constructive trustee by receiving and/or dissipating the said Sum or parts thereof.

20.  Further, the 1^st, 2^nd and/or 3^rd defendants have been unjustly enriched at the expense of the plaintiff as the plaintiff paid the said Sum to the 1^st defendant by reason of a mistake of fact, and the 1^st, 2^nd and/or 3^rd defendants have no entitlement to the same.

21.  Further, the 1^st, 2^nd, 3^rd and/or 4^th defendants conspired to injure the plaintiff using unlawful means by their participation in the fraud and/or the dissipation of the proceeds of the fraud.

22.  The plaintiff claims against, amongst others, the 2^nd defendant for inter alia (1) a declaration that he holds the sums traceable to the said Sum on trust for the plaintiff; (2) restitution of such part of the said Sum as received by him; (3) equitable compensation and/or damages in the amount of the said Sum or to be assessed; and (4) accounts and inquiries.

D.  The 2^nd defendant’s case

23.  By his 2^nd affirmation dated 10 February 2017 and his pleaded defence dated 7 March 2017, the 2^nd defendant contends, in essence, that he had no knowledge or involvement in the 1^st defendant’s fraud, if any, and he is in any event a bona fide recipient for value without notice. His case may be summarised as follows.

24.  Since 2005, the 2^nd defendant has been engaged in the mobile phone manufacturing and trading business.  In 2009, he started a business in Shenzhen that operated a factory to manufacture, assemble, refurbish and repair mobile phones and liquid crystal displays for mobile phones on an OEM basis.

25.  In 2012, the 2^nd defendant changed his business model, and has since, in business partnership with a “Mr Zhen”, been buying second-hand and defective mobile phones and mobile phone parts for repair, refurbishment and resale in Shenzhen and overseas.  He acquired East Winner International Limited (“East Winner”), a Hong Kong incorporated company, in March 2012 and registered his sole proprietorship in 2015 for the purpose of this business.

26.  The 2^nd defendant met the 4^th defendant (the sole shareholder and director of the 3^rd defendant) in around May or June 2010 through colleagues, and his business dealings between the 3^rd and 4^th defendants have primarily been the grey market exchange of Hong Kong dollar and RMB due to currency controls in Mainland China.

27.  The 2^nd defendant met one Ma Xue Du (“Mr Ma”), now the shareholder and director of 1^st defendant, in 2010.  Mr Ma was one of the 2^nd defendant’s previous customers in respect of D2’s previous OEM business, although they had not kept in contact after the 2^nd defendant ceased to take OEM orders.

28.  For the 2^nd defendant’s present business, he needs to visit regularly the Shenzhen Tong Tian Di Mobile Phone Market, and on one such occasion in or around July 2016, he met Mr Ma again.

29.  Since that time, the 1^st and 2^nd defendants entered into 9 transactions between August 2016 and November 2016 for the sale and purchase of 3 models of Blackberry phones. These 9 orders were placed by Mr Ma on behalf of the 1^st defendant with either the 2^nd defendant or Mr Zhen, through face-to-face meetings or by telephone.  The 2^nd defendant has set out particulars of these transactions in a schedule to his affirmation, and has exhibited some purchase orders, invoices and delivery notes.

30.  The sums received by the 2^nd defendant from the 1^st defendant relate primarily to the 8^th and 9^th orders, which were for the sale and purchase of a total of 32,787 units of Blackberry phones:

Order	Date of order	Order amount
No. 8	11 November 2016	RMB 5,680,848 (approx. HK$6.41 million)
No. 9	15 November 2016	RMB 4,499,163 (approx. HK$5.08 million)
Total		RMB 10,180,011 (approx. HK$11.5 million)

In respect of these orders, the 2^nd defendant has also set out in a schedule particulars of the orders he placed with his suppliers to fill the orders and has exhibited some purchase orders, invoices and delivery notes.

31.  Payment for these two orders, together with an outstanding balance from the 7^th order of RMB160,650, was received by the 2^nd defendant on 15 November 2016:

(1) HK$4,358,400 and HK$4,807,663 directly from D1’s HSB Account into D2’s BEA Account; and

(2) upon the 2^nd defendant’s request, HK$2,000,000 to the 3^rd defendant, who then provided the equivalent of RMB 1,784,000 to the 2^nd defendant in cash in the Mainland to enable him quickly to pay his Chinese suppliers.

32.  The subsequent transfers out of D2’s BEA Account on 17 and 21 November 2016 were payments to the 2^nd defendant’s suppliers and “for his [own] genuine and ordinary living and business expenses”:

(1) The transfer of HK$2,580,000 to the 3^rd defendant on 17 November 2016 was for the purpose of currency exchange, with the equivalent of RMB 2,301,360 being provided to him in cash in the Mainland. The 2^nd defendant exhibited a supporting “invoice confirmation” for the exchange signed by the 2^nd and 3^rd defendants dated 17 November 2016.

(2) The transfer of HK$2,000,000 to GNT on 17 November 2016 was again for the purpose of currency exchange, with an equivalent sum of RMB 1,784,000 remitted into “the 2^nd defendant’s accounts in the Mainland”. In support, the 2^nd defendant exhibited a WhatsApp message history with GNT’s representative and remittance receipts from GNT dated 17 November 2016.

(3) The transfer of HK$2,000,000 to Liu Haishen on 17 November 2016 was payment made under the instructions of one Liu Jie, one of the 2^nd defendant’s suppliers. The 2^nd defendant exhibited an excerpt of the WeChat conversation between himself and Liu Jie showing such instructions.

(4) The transfers of HK$288,000 to Wang Qin Fa and HK$400,000 to Treasure Praise Ltd on 17 November 2016 were again upon the instructions of a supplier of the 2^nd defendant for mobile phone parts.  The 2^nd defendant also exhibited an excerpt of the WeChat message history with the supplier.

(5) The transfer of CAD 300,000 to his Canadian bank account was, first, for his own use, as he has family members living in Canada and travels there frequently; and (2) for financial planning, as he anticipates there to be an appreciation of the Canadian dollar.

33.  As to the timing of the transfers out of D2’s BEA Account, the 2^nd defendant points out that the D2 to D4 ex parte orders were not obtained until 8 December 2016, several weeks after the transfers.  Further, he had no prior knowledge of the D1 ex parte order. In the circumstances, there was nothing sinister about the timing of the transfers, including the transfer to D2’s Canadian Account on 21 November 2016.

34.  Since being served with the D2 ex parte order, the 2^nd defendant has been in touch with Mr Ma by way of WeChat, telephone and a face-to-face meeting.  The 2^nd defendant has exhibited an excerpt of a WeChat conversation and a CD-ROM containing a recorded telephone conversation with Mr Ma.  These conversations show that the 2^nd defendant had previous business dealings with the 1^st defendant in the months prior to the alleged fraud, that the 1^st defendant assured him that he was unaware of any problem with the funds, and that he urged the 1^st defendant to seek legal advice and to inform the court that the business transactions between them were genuine.

35.  A flowchart showing the movement of funds based upon the BEA and HSB discovery orders as well as the 2^nd defendant’s own evidence (which, for the avoidance of doubt, is not admitted by the plaintiff) is contained in the annexure to this decision.

E.  Principles for Proprietary and Mareva Injunctions

36.  There is no dispute between the parties as to the relevant principles upon which the court will order an interim proprietary injunction and a Mareva injunction, or the differences between the two types of injunctions. See eg Lewin on Trusts 19^th edition at §§38-10 to 12; Zimmer Sweden AB v KPN Hong Kong Limited & Or (unreported) HCA 2264/2013, 2 May 2014 at §§72 to 77.

37.  For an interim injunction to protect a claim for trust property, the principles in American Cyanamid Co v Ethicon Ltd[1975] AC 396apply, although irremediable damage need not necessarily be shown and the court will readily find that the balance of convenience favours the preservation of the fund pending trial. See eg Lewin (supra) at §38-14; A v C [1981] QB 956; CY Foundation Group v Cheng Chee Tock & Ors [2012] 1 HKLRD 532 at §§14, 37.

38.  On the other hand, for a Mareva injunction, a plaintiff must show a real risk of unjustifiable dissipation of those assets, such that any judgment or award would then go unsatisfied. Such a risk must be supported by some credible material and should not be too readily inferred. See eg Eastman Chemical Limited v Heyro Chemical Company Limited [2012] 3 HKLRD 307 at §26.

39.  The threshold in terms of the substantive merit of the claim is also different for the two types of injunction:

(1) For an interlocutory injunction, the court need only be satisfied that the claim “is not frivolous or vexatious, in other words, that there is a serious question to be tried.” (American Cyanamid (supra) at 407).  If the opposing party seeks to show there is no serious issue to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out. See eg Yifung Properties Ltd & Ors v Manchester Securities Corp and Ors (unreported) CACV 258/2015, 9 September 2016, at §20.

(2) On the other hand, a higher threshold is required for a Mareva injunction. A claimant needs to show a good arguable case “in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success”: “The Niedersachsen” [1983] 1 WLR 1412. This test has been adopted in Hong Kong: see eg Grupo Pacifica Incorporada v Worldwide Marine Product Ltd & Ors (unreported) CACV 217/2015, 28 January 2016 at §5.1.

40.  Notwithstanding the higher threshold in terms of the substantive merits for a Mareva injunction, it is important to bear in mind Parker LJ’s observations in Derby & Co Ltd v Weldon (No 1) [1990] Ch 48 at 58:

“It is to be hoped that in future the observations of Lord Diplock and Lord Templeman will be borne in mind in applications for a Mareva injunction, that they will take hours not days and that appeals will be rare… What… should not be allowed is (1) any attempt to persuade a court to resolve disputed questions of fact whether relating to the merits of the underlying claim in respect of which a Mareva is sought or relating to the elements of the Mareva jurisdiction such as that of dissipation or (2) detailed arguments on difficult points of law on which the claim of either party may ultimately depend.”

41.  Although a plaintiff may have had at the ex parte stage a good arguable case, the defendant may be able to put up a defence and evidence of sufficient cogency as to “water down” the merits of the claim to an extent that it no longer amounts to a good arguable case (or even a serious issue to be tried). See eg Arrow ECS Norway AS v Xin Cheng Holdings (International) Company Limited (unreported) HCA 239/2016, 12 May 2016 at §§46, 61.

42.  That said, the existence of a good arguable defence does not necessarily negate a good arguable case. This was fairly accepted by Ms Lau, as it is entirely possible to have, at the interlocutory stage, both the claim and the defence being more than barely capable of serious argument and not necessarily having a better than 50% chance of success. For a Mareva injunction, there is no requirement that the plaintiff show that he has a “much better” case or argument than the defendant.  See eg Kazakhstan Kagazy plc v Arip [2016] 2 All ER (Comm) 711, CA, at §25.

F.  Preliminary Observations

43.  Before examining whether the proprietary and Mareva injunctions in the D2 ex parte order should be continued, I make the following observations.

44.  First, although the plaintiff has through the BEA discovery order and the 1^st and 2^nd HSB discovery orders been able to ascertain the movements in and out of the 1^st to 3^rd defendants’ HSB and BEA accounts, the orders do not enable the plaintiff or the court to see what happened to the sums after they had been remitted out of those accounts but otherwise remain in the hands of the defendants — for instance, in other bank accounts or in the form of cash or other assets outside the jurisdiction (and therefore not covered by the disclosure order in the Mareva injunction).  The persons in the best position to provide that information are the defendants themselves.  That is why in cases such as the present, disclosure orders are often sought and almost invariably granted by the court requiring a recipient of trust monies to make full disclosure as to the whereabouts and what, if anything, has become of such monies or their proceeds. To date, however, no such disclosure has been sought from the 2^nd defendant.  In the circumstances, the court does not have a complete picture of what has happened to the said Sum.

45.  Second, as mentioned above, on 16 December 2016, the court continued the D2 ex parte order subject to a variation that (1) the 2^nd defendant be allowed to spend (1) HK$5,000 per week towards ordinary living expenses and HK$10,000 per week towards his ordinary and proper business expenses for a 12-week period; and (2) HK$150,000 on legal advice on representation.  The allowance draws no distinction between funds subject to the proprietary or the Mareva injunction. I am informed by Mr Lau (who did not appear at that hearing) that no issue was raised by the plaintiff’s legal representatives as to the constraints generally imposed on the release of funds that are subject to a proprietary claim to pay for legal costs. See eg Wharf Limited & Ors v Lau Yuen How & Ors (unreported) HCA 1535/2008, 21 January 2010 at §13, applying Ostrich Farming Corporation Ltd v Ketchell [1997] EWCA Civ 2953 (10 December 1997).

46.  On 16 December 2016, being the same day as the first return date hearing, the 2^nd defendant filed his affirmation disclosing the location and value of his assets in Hong Kong. It does not appear from the continuation order that the affirmation was before the court at the hearing. The totality of his assets (of an individual value in excess of HK$20,000) in Hong Kong is said to be:

(1) The balance in D2’s BEA Account (including savings, current and other accounts) of HK$148,565.11;

(2) One ordinary share (being the entire issued share capital) in East Winner, to which no value has been ascribed;

(3) A Porsche 911 Carrera Cabriolet motorcar estimated at around HK$250,000 to HK$320,000;

(4) An equitable interest in a landed property (under construction) in Tai Po valued at HK$525,000, being the deposit paid by the 2^nd defendant under a pre-sale of a not yet completed property at a total price of HK$5,250,000.

47.  At the hearing, I inquired with Ms Lau as to when the motorcar was purchased and when the deposit was paid for the property in Tai Po.  Ms Lau informed the court, upon instructions, that both were acquired prior to the receipt, and paid for without the use, of any of the monies traceable to the said Sum.

48.  I was also informed by Ms Lau that pursuant to the variation, the 2^nd defendant was in the process of obtaining the release from BEA of the balance of HK$148,565.11 in his account to pay for his legal costs and living and business expenses (as he was entitled to do under the variation order, notwithstanding that the balance or the bulk of it was subject to the original proprietary injunction).

49.  Assuming that the 2^nd defendant’s disclosure of his assets is true and correct, that would leave the share of East Winner (the value of which is unknown), the motorcar and the interest in the Tai Po property as the only assets of the 2^nd defendant in Hong Kong restrained by the D2 ex parte injunction.

G.  Credibility and cogency of the 2^nd defendant’s evidence

50.  The present case is somewhat different from ordinary commercial disputes where the court would normally have to decide between two (or more) competing versions of events. Here, the plaintiff seeks to trace and recover monies it has paid to the 1^st defendant due to an apparent fraud and which have subsequently been transferred onwards to the 2^nd and 3^rd defendants. The plaintiff has no personal knowledge of the circumstances or the reasons why the monies were transferred to the 2^nd and 3^rd defendants, or whether the 2^nd to 4^th defendants are participants in the apparent fraud or are in fact innocent parties. These are matters known only to the defendants themselves.  At this stage, the court can only look at the 2^nd defendant’s version of events and form a broad brush view as its credibility based on inherent probabilities and whether it is supported by the contemporaneous materials which have been (or which should have been) disclosed by the 2^nd defendant.

51.  The premise of the 2^nd defendant’s case is that he is a legitimate businessperson who has been operating a legitimate business for a number of years, and the transactions between him and the 1^st defendant were, at least to the best of his own knowledge, genuine transactions entered into in the course of that business.

52.  As mentioned above, it is the 2^nd defendant’s evidence that he has been conducting his present business of buying and selling second-hand mobile phones and parts in partnership with one “Mr Zhen” since 2012. The sole proprietorship was also established in 2015 for that purpose.

53.  However, as submitted by Mr Lau, the supporting evidence in this regard is sparse:

(1) No financial information, such as accounts or tax assessments, has been produced for the sole proprietorship or for East Winner, the latter having allegedly been involved in the business since 2012. Given the alleged scale of the trading business as described by the 2^nd defendant, plainly such documents should exist.

(2) Further, the only banking records of the 2^nd defendant before the court are those obtained by the plaintiff pursuant to the BEA discovery order, in which the entries prior to 15 November 2016 have been redacted by BEA (as the order required only discovery of those transactions from 15 November 2016 onwards).

(3) There are also inconsistencies in the documents, which raise questions as to the nature of the 2^nd defendant’s business.  As pointed out by the plaintiff in its reply evidence, the account opening form of D2’s BEA Account signed by the 2^nd defendant on 11 August 2015 (some 6 days after the sole proprietorship was registered under the BRO) declared that the 2^nd defendant’s business was “trading (dry food)”. There is no mention, however, in the 2^nd defendant’s evidence that he or the sole proprietorship was ever involved in the dry food business.  Rather, the 2^nd defendant contends that the sole proprietorship was established for the purpose of the mobile phone business.

(4) Although the 2^nd defendant has referred to his business partner in the Mainland as one “Mr Zhen”, the 2^nd defendant has not disclosed his full name, nor has Mr Zhen made any statement to support the 2^nd defendant’s case.

54.  As mentioned above, in support of the transactions that the 2^nd defendant is said to have entered into with his suppliers and the 1^st defendant, the 2^nd defendant has exhibited a number of purchase orders, receipts and delivery notes, including, in particular, documentation relating to the 8^th and 9^th orders.

55.  In his submissions, Mr Lau made a number of criticisms as to the credibility of the documentation produced by the 2^nd defendant. I bear in mind that commercial men are not lawyers and do not create and retain perfect documentation in anticipation of future litigation. Moreover, commercial practice in the Mainland (where the 2^nd defendant’s suppliers appear to be based) may be different from that in Hong Kong. That said, I must say that there is some force to Mr Lau’s criticisms:

(1) First of all, the alleged purchase orders, delivery notes and invoices between the 2^nd defendant and both of his suppliers were handwritten notes on identical or near identical blank printed forms headed “送貨單” (ie Delivery Note).  The forms appear to be those sold in notepads at stationery shops.  It is not easy to discern which document is a purchase order, an invoice or an actual delivery note.

(2) The forms were addressed to “劉老闆” or “劉總” (presumably, the 2^nd defendant), signed by one “李明” (“Mr Li”) or “熊彰” (“Mr Xiong”) (presumably, the two suppliers) and chopped with the chop of the 2^nd defendant (without signature). The forms appear therefore to have been provided by the suppliers. However, no explanation was given by the 2^nd defendant as to why two independent suppliers used identical or near identical forms, or indeed, why the transactions were documented in such a manner.

(3) Whilst the use of such informal documentation might be unsurprising if one were dealing with small amounts, this was plainly not the case here: on the face of the documents, the dealings between the 2^nd defendant and these suppliers over a period of some 4 months were in the millions of RMB, with the amount of one transaction alone (on 30 September 2016) being RMB 3,194,500. On any view, the unusual form of such documentation (to use a neutral term) gives rise to legitimate questions as to its authenticity.

(4) In respect of the transactions between the 1^st and 2^nd defendants, the documentation appeared more conventional. The invoices, delivery notes and purchase orders were printed under the 2^nd defendant’s letterhead and signed and chopped by both the 1^st and 2^nd defendants.  Nonetheless, a number of questions arise from the documents.

(5) For instance, none of the delivery notes issued by the 2^nd defendant, including those relating to the 8^th and 9^th orders, provide for a delivery address showing where the mobile phones were to be delivered, other than “SZ”, presumably meaning Shenzhen.  The receipts purportedly issued by the truck drivers also contain no information as to the delivery destination. Not only is it unclear how the drivers would have known where to deliver the goods, but the result is that it is unknown even now where, if anywhere, the goods have been delivered.

(6) Further, as pointed out by Mr Lau, the address in the invoices issued to the 1^st defendant, including those for the 8^th and 9^th transactions, was in Thomson Commercial Building, which is not the address stated in the 2^nd defendant’s business registration record, the D2’s BEA Account opening form or in the 2^nd defendant’s affirmations. The Thomson Commercial Building address is rather the registered address of East Winner.  Whilst not in itself importing anything sinister, this and the other inconsistencies and inadequacies in the documents are matters which will need to be investigated at the trial.

(7) Mr Lau also points out that from the documentation, the manner in which the 2^nd defendant dealt with his suppliers and the 1^st defendant was different from what the 2^nd defendant stated as the “rule of thumb…in the Mainland electronics trading market”, that is, “現金收現貨” (cash on delivery). The 2^nd defendant’s own evidence suggests that there was in effect a running account between him and the 1^st defendant. However, no contemporaneous documents have been shown as to the existence of such a running account, which is somewhat surprising given the amounts involved. Rather, a running account has only been reconstructed in the schedules to the 2^nd defendant’s affirmation evidence. The only indications that payment had not been made in full were manuscript notations initialled by the parties on the invoices.

(8) According to the delivery notes, the 2^nd defendant did not deliver the goods for the 8^th and 9^th orders, the prices for which were RMB 5,680,848.00 and RMB 4,499,163.00 respectively (totalling approximately, HK$11.5 million), until 15 and 16 November 2016 respectively. However, the 1^st defendant effected payment of HK$11,176,063 (comprising the HK$9,176,063 remitted into D2’s BEA Account and the HK$2,000,000 remitted to D3’s HSB Account) by the afternoon of 15 November 2016.  The payment purportedly also covered a previously outstanding balance of RMB 160,650. After the payment, an amount of RMB 382,816 (approximately, HK$432,000) remained outstanding.

(9) Mr Lau submitted that not only was this inconsistent with the rule of thumb of cash delivery, but also it was incredible for the 1^st defendant to have made such a substantial payment to the 2^nd defendant before the goods were fully delivered.  Whilst there may not be anything necessarily suspicious in the manner in which the 1^st and 2^nd defendants dealt with each other, it would at least suggest a significant degree of trust and confidence between them.  Given that the 1^st defendant has so far failed to appear or defend the very serious allegations against it, the 2^nd defendant’s relationship with it (or with Mr Ma) is plainly a matter to be investigated at the trial.

(10) Mr Lau also levelled a number of other criticisms in relation to the documentation and the manner in which the transactions were entered into which he submits give rise to serious doubts about their authenticity or genuineness.  It is unnecessary for me to set them out here in detail, save as to say that these will be matters for trial. 

(11) Finally, Mr Lau also submitted, correctly, that even if the 1^st defendant did in fact purchase mobile phones from the 2^nd defendant using the said Sum, it does not necessarily follow that the 2^nd defendant was unaware or had no notice that the funds for the purchase price came from an illicit source. It is necessary to have regard to all of the circumstances surrounding the alleged transactions to ascertain the 2^nd defendant’s knowledge and state of mind.

56.  I consider next how the 2^nd defendant dealt with the funds that he received, whether directly or indirectly, from the 1^st defendant.  This would undoubtedly have a bearing, at least at this stage, on the credibility of the 2^nd defendant’s case that he received them in good faith and in the normal course of business.

57.  From the records of D2’s BEA Account and the 2^nd defendant’s own evidence, it can be seen that:

(1) There was a balance of only around HK$74,000 in D2’s BEA Account prior to the remittance of HK$9,176,033 from the 1^st defendant on 15 November 2016.

(2) The 1st defendant remitted a further HK$2,000,000 on the same day to the 3^rd defendant, which was converted to RMB and made available to the 2^nd defendant in the Mainland.

(3) Two business days later on 17 November 2016, sums totalling HK$7,268,000 were transferred out of D2’s BEA Account. However, of those sums:

(a) HK$2,580,000 and HK$2,000,000 were remitted for the purpose of currency exchange to RMB for the 2^nd defendant in the Mainland; and

(b) The 2^nd defendant remitted HK$2,000,000, HK$288,000 and HK$400,000 directly to third parties, supposedly on his suppliers’ instructions.

(4) On 21 November 2016, HK$1,671,560 was converted into CAD 290,000 and transferred into the Canadian dollar savings sub-account in D2’s BEA Account, which had a pre-existing balance of CAD 12,011. A sum of CAD 300,000 was then transferred overseas into D2’s Canadian Account.

58.  It can be seen, therefore, that other than HK$2,688,000, which was transferred directly to third parties, the bulk of the HK$11,166,063 received from the 1^st defendant was in fact transferred to the 2^nd defendant himself outside of the jurisdiction in the Mainland and in Canada.

59.  As to the funds remitted to himself in the Mainland, the 2^nd defendant said in his affirmation that they were being used for ordinary living and business expenses. Other than the HK$2,000,000 received through the 3^rd defendant that was said to have been used to make partial payment to his suppliers to fill the 8^th and 9^th orders, no particulars have been given as to what has happened to the other sums. From the receipts purportedly issued by Mr Li and Mr Xiong, some RMB 6.1 million had been paid to Mr Li and Mr Xiong on or after 15 November 2016.  It is possible that the funds transferred to the Mainland were used to make those payments, although the 2^nd defendant does not say so expressly. In any event, the inadequacies of these receipts have already been discussed above.

60.  In the absence of a convincing explanation, the hasty withdrawals and transfers out of D2’s BEA Account inevitably gives the impression of an attempt to dissipate the funds received from the 1^st defendant, or at least to frustrate their recovery by moving them out of the jurisdiction. The coincidental timing of the transfer of CAD 300,000 to D2’s Canadian Account, being the first business day after the D1 ex parte order was made, only adds to that impression, notwithstanding the reasons given by the 2^nd defendant for the transfer and his evidence that he was unaware of the D1 ex parte order at the time.

61.  I have considered the 2^nd defendant’s explanation that he needed cash in RMB in the Mainland to pay his suppliers and operating costs and that there was no point for him to keep much cash in Hong Kong, other than living expenses.  Although the defendant said he travelled frequently between Hong Kong, Shenzhen, Canada, the United States and Japan for his business, and that he grew up in Canada and has family members living in Canada, it is not in dispute that he is now based in Hong Kong. In the annual returns of East Winner and in the account opening form of his BEA account, he gave his residential address as a flat in Mei Foo Sun Chuen.  He also owns a motorcar in Hong Kong and has paid the deposit for a residential unit in Tai Po. And yet, other than his asset disclosure affirmation, which clearly does not represent the whole of his assets, his financial position is opaque.  When viewed against the speed in which the monies from the 1^st defendant have been moved out of the jurisdiction, plainly there are serious questions that need to be answered.

62.  As to the transfers totalling HK$2,688,000 to third parties purportedly on the instructions of the 2^nd defendant’s suppliers, other than short excerpts of WeChat conversations, which do not contain any context or information as to the underlying transactions, there is no explanation at all as to the basis of those payments.  The true nature and purpose of those payments will have to be investigated at the trial.

63.  Finally, as to the 2^nd defendant’s conversations with Mr Ma of the 1^st defendant on WeChat and on the telephone, which seem to suggest that there was no wrongdoing on the part of either the 1^st and 2^nd defendants, in the light of all the circumstances, they plainly cannot be taken at face value.

H.  Proprietary Injunction

64.  Ms Lau does not dispute that if the sums received by the 2^nd defendant from the 1^st defendant were the proceeds of an apparent fraud, the plaintiff would be entitled to claim in equity the sums and/or their proceeds in the hands of the 2^nd defendant, subject to any defence of bona fide purchaser or recipient for value without notice.

65.  Ms Lau submitted (although I do not understand her to have strongly pressed the point), however, that the 2^nd defendant has by his evidence established a sufficiently strong defence bona fide recipient for value without notice that there is not even a serious issue to be tried in respect of the plaintiff’s claim. Ms Lau acknowledges that the hurdle for the 2^nd defendant is high: as mentioned above, the 2^nd defendant must be able to show that the plaintiff’s claim is liable to be struck out.  Despite Ms Lau’s valiant submission, it is obvious that there is at the very least a serious issue to be tried.

66.  On the question of balance of convenience, as mentioned above, the balance will generally lie in favour of preserving assets subject to a trust claim.  There are no strong countervailing factors against such preservation in this case. The balance therefore is firmly in favour of maintaining the proprietary injunction.

67.  In the circumstances, the proprietary injunction is to be continued until judgment or further order, and I so order.  For the avoidance of doubt, the injunction includes specifically:

(1) the sum of CAD 300,000 in D2’s Canadian Account and/or its proceeds. Ms Lau confirmed upon instructions during the hearing that the sum remains intact although it has been transferred to another account.

(2) the sum of HK$2,000,000 remitted by the 1^st defendant to the 3^rd defendant, which was converted to RMB and made available to the 2^nd defendant in the Mainland, and/or its proceeds.

(3) the sums of HK$2,580,000 and HK$2,000,000 converted to RMB and made available to the 2^nd defendant in the Mainland, and/or their proceeds.

68.  In his Defence, the 2^nd defendant contended that the plaintiff’s proprietary claim, if any, would extend only to CAD 290,000 out of the CAD 300,000 since the latter sum comprised a sum of CAD 10,000 originally in the Canadian dollar savings sub-account. Mr Lau, however, relies upon the principle that where there is a mixture of funds of an innocent contributor with those of the wrongdoer, a punitive presumption applies against the wrongdoer contributor with the effect that the court will aim to preserve the value contributed by the innocent contributor to the mixed fund at the expense of the value contributed by the wrongdoer. The result is that the innocent contributor can trace into whatever was purchased with the first withdrawals from the mixed bank account or the remaining monies, whichever is in his best interests. See eg Snell’s Equity 33^rd Edition, at §§30-056 to 057.

69.  Ms Lau does not dispute the principle above. However, she points out that from the bank statements of D2’s BEA Account, it is clear there was in fact a pre-existing balance of CAD 12,011 in the Canadian dollar savings sub-account prior to the transfer of CAD 290,000 into that sub-account on 21 November 2016. Hence, she argues, there can be no presumption that the CAD 10,000 out of the CAD 300,000 was traceable to the said Sum.

70.  In my view, although the savings account in the 2^nd defendant’s BEA Account comprised sub-accounts with different currencies, there is at least a serious issue to be tried that the sub-accounts together constituted one balance in the savings account. This is supported by the presentation of the bank statements, which appear to consolidate all the different currencies in the savings sub-accounts into one account balance. If this were correct, then the punitive presumption contended by Mr Lau may nonetheless be applicable, notwithstanding that part of the balance in the savings account was denominated in Canadian dollars prior to the receipt of the transfers from the 1^st defendant. It is at least arguable, therefore, that a presumption should operate such that the whole of the CAD 300,000 is traceable to the said Sum.

I.  Mareva Injunction

71.  There is no serious dispute between the parties, at least for present purposes, as to the legal principles underlying the plaintiff’s claims of knowing receipt, dishonest assistance, unjust enrichment and conspiracy. Rather, the focus of Ms Lau’s submissions was that, having regard to the 2^nd defendant’s defence and the evidence now before the court, the plaintiff is unable to establish on the facts a good arguable case for these claims.

72.  Ms Lau submitted, correctly of course, that receipt and dealing with the funds from the 1^st defendant are by themselves insufficient to found liability for knowing receipt, dishonest assistance and conspiracy using unlawful means, and that the plaintiff must be able to show at least a good arguable case that the 2^nd defendant had the requisite knowledge and state of mind.

73.  She further submitted that that the plaintiff’s case on these claims is founded primarily upon inferences to be drawn from the transfers into and out of D2’s BEA Account and the timing of those transfers. There is no direct evidence showing that the 2^nd defendant had participated in or had knowledge of any fraudulent scheme.  She also reminded the court that:

(1) When weighing up and assessing the probabilities in relation to the evidence that is adduced, the court must bear in mind the seriousness of the misconduct alleged. The more serious the allegation, the less likely it is that the event occurred and the stronger the evidence required.  See eg Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at §§182-184.

(2) The court adopts a disciplined approach to the drawing of inferences and in particular inferences of fraud or serious misconduct should be drawn only where such inferences are compelling.  See eg Nina Kung v Wong Din Shin (supra) at §187.

74.  The principles above on assessing probabilities and the drawing of inferences in cases where serious misconduct is alleged (as in the present case) are of course well established.  However, these principles must be viewed in the context of deciding whether there is a good arguable case at the interlocutory stage. The court is not making any findings of fact, but merely taking a view as to whether, on the materials now before the court, a case has been shown that is “…barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success”.  That said, in taking such a view, the court will take into account all of the circumstances, including the inherent improbabilities of serious misconduct.

75.  I accept for present purposes that the 2^nd defendant has presented an arguable defence to the plaintiff’s claims.  However, for the reasons I have set out above, the 2^nd defendant’s evidence is far from conclusive, and indeed raises a number of questions that will have to be investigated at the trial. I am of the firm view that the plaintiff has maintained a good arguable case for its claims of knowing receipt, dishonest assistance and conspiracy using unlawful mean against the 2^nd defendant, including the inferences to be drawn as to the requisite knowledge and state of mind of the 2^nd defendant. It follows that the plaintiff has also demonstrated a good arguable case on its claim of unjust enrichment.

76.  Insofar as the risk of dissipation is concerned, Ms Lau accepted that this would stand and fall with the court’s determination of the question of whether the 2^nd defendant has a good arguable case that it is a bona fide purchaser in that he has simply been using funds in the ordinary course of business. I would put it this way: the same facts and circumstances that give rise to a good arguable case against the 2^nd defendant for knowing receipt, dishonest assistance, and conspiracy, including in particular the hasty withdrawal and transfer of funds from D2’s BEA Account out of the jurisdiction, must also give rise to a real risk of dissipation.

77.  I have also taken into consideration the balance of convenience, although in the context of a Mareva injunction, once a real risk of dissipation has been shown, the balance will normally weigh in favour of granting the injunction.  In the present case, as mentioned above, the 2^nd defendant’s assets that are subject to the Mareva injunction are in fact fairly limited.  Moreover, on the 2^nd defendant’s own evidence, he does not need to maintain much cash in Hong Kong. As to his complaint that the Mareva injunction would prevent him from selling his property in Tai Po, the plaintiff has indicated that it would not oppose any such sale, provided that the proceeds of sale are secured.

78.  I also note that it is open to the 2^nd defendant to apply for leave to repatriate some or all of the funds traceable to the said Sum that he had moved outside of the jurisdiction, including the CAD 300,000 in D2’s Canadian Account. Provided that those funds are then secured, the amount of the Mareva injunction can be correspondingly reduced to reflect those amounts.

79.  The 2^nd defendant further complains that the Mareva injunction has caused and will continue to cause him embarrassment, inconvenience and loss of business opportunities.  That may be unavoidable, and if it eventually transpires after the trial that the injunction should not have been granted, the 2^nd defendant may have recourse in the plaintiff’s cross-undertaking in damages.

80.  In the circumstances, I am of the view that the Mareva injunction should be continued until judgment or further order, and I so order.

81.  As to the costs, I consider that an appropriate order to be plaintiff’s costs in the cause (including any reserved costs), and I make an order nisi to that effect.

82.  Last but not least, I thank both counsel for their helpful written and oral submissions.

Annexure