JOHN JOSEPH MC GEE v. NOLD (HK) LTD AND OTHERS

CACV 497/2022, [2024] HKCA 354

On appeal from [2022] HKCFI 3598

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 497 OF 2022

(ON APPEAL FROM HCA 1258 OF 2021)

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J U D G M E N T

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Hon Barma JA (giving the Judgment of the court):

1.  This is the 7^th, 8^th, 12^th and 13^th Defendants’ (together “the Appellant Defendants”)  renewed application, by a summons dated 6 March 2023 (“the Summons”), for a stay of execution of the summary judgment granted to the plaintiff by Recorder Rachel Lam SC (“the Judge”)  dated 2 December 2022 (“the Judgment”)  (see [2022] HKCFI 3598)[1] pending the determination of their appeal against the Judgment, pursuant to RHC Order 59 rule 13. By the Judgment, the Recorder ordered, inter alia, that:

(1)  the 7^th Defendant pay the Plaintiff the sum of HK$9,455,118.95 with interest and costs;

(2)  the 8^th Defendant pay the Plaintiff the sum of HK$8,090,583.21 with interest and costs;

(3)  the 12^th Defendant pay the Plaintiff the sum of HK$7,129,205.51 with interest and costs; and

(4)  the 13^th Defendant pay the Plaintiff the liquidated sum of HK$1,250,000.00 with interest and costs.

2.  Following the handing down of the Judgment, the Appellant Defendants lodged their Notice of Appeal on 28 December 2022, and the Respondent Plaintiff filed a Respondent’s Notice on 17 January 2023.  Thereafter, the Appellant Defendants applied for a stay of execution of the Judgment on 4 January 2023.

3.  By her decision dated 16 February 2023 (see [2023 HKCFI 409] (“the Stay Refusal Decision”), the Recorder refused the Appellant Defendants’ application for a stay of execution, following which the Appellant Defendants made the present application to this court.  Thereafter, on 14 March 2023, the Appellant Defendants filed an Amended Notice of Appeal.

4.  The Summons is supported by the 5^th Affirmation of Fang Si Qi Ivan filed on 17 March 2023, which refers to the 4^th Affirmation of Fang Si Qi Ivan filed on 5 January 2023 in HCA 1258/2021.  The Summons is opposed by the Plaintiff, who filed an affirmation in opposition on 20 April 2023. 

The Judgment

5.  The Plaintiff claims to be the victim of a romance scam in which a fraudster posed as a woman called “Ruth”, expressed romantic interest in him, and deceived him into making foreign exchange transactions.

6.  The Plaintiff says that as a result of the fraud, he transferred an aggregate sum of US$3,930,000 (“the Defrauded Sums”)  to the 1^st to 6^th Defendants (“the 1^st Layer Recipients”)  between April to July 2021, which were then further transferred to the 7^th to 15^th Defendants (“the 2^nd Layer Recipients”).

7.  On 20 August 2021, the Plaintiff obtained ex parte Mareva and proprietary injunctions against the 1^st Layer Recipients.  Following disclosure by the 1^st Layer Recipients’ bankers, the Plaintiff was able to trace the funds to the 2^nd Layer Recipients.  On 7 December 2021, the Plaintiff obtained ex parte Mareva and proprietary injunctions against the 2^nd Layer Recipients (“the Injunction Order”). Although the Appellant Defendants, who were among the 2^nd Layer Recipients opposed the continuation of the Injunction Order, at the return date of the inter partes summons, they consented to its continuation pending the resolution of the inter partes summons seeking the continuation of the Injunction Order.  At the return date hearing, directions were given for the filing of evidence, and the Appellant Defendants duly filed their evidence in opposition, and their Defence.

8.  On 2 June 2022, the Plaintiff applied for summary judgment.  This application was opposed by the Appellant Defendants on three broad grounds.

9.  First, the Appellant Defendants said that they all conducted legitimate businesses: 

(1)  All the Appellant Defendants claimed to trade in luxury timepieces.

(2)  The 7^th and 8^th Defendants’ business was said to generate hundreds of millions in revenue.  They would also take USDT (a form of cryptocurrency)  from their customers, and would also exchange cash and USDT with other businesses in the same trade.

(3)  The 7^th and 8^th Defendants explained that they had received transfers from the 1^st Layer Recipients because a PRC businessman named 程玉 (“Mr Cheng”) had requested them to exchange his cash for USDT.  This was why they received parts of the Defrauded Sums from the 1^st Layer Recipients, in exchange for which they transferred USDT to Mr Cheng.

(4)  The 12^th and 13^th Defendants contended that they had received parts of the Defrauded Sums because they sold expensive timepieces to the 7^th and 8^th Defendants.  They said that the 7^th and 8^th Defendants had directed Mr Cheng to directly deposit the price into their (the 12^th and 13^th Defendants’)  bank accounts as part of the USDT exchange transactions between the 7^th and 8^th Defendants and Mr Cheng.

10.  Second, the Appellant Defendants contended that Ruth’s interest in the Plaintiff and the foreign exchange transactions made by the Plaintiff could have been genuine, and that the Plaintiff should be cross-examined on such matters.  As such, summary judgment should not be given. 

11.  Third, it was suggested that expert evidence was required in two areas.  First, as to the use of USDT in the luxury watch trade; and second, in respect of “the level of auditors’ fees to revenue generated” since the Plaintiff had contended that the relatively modest sum of auditors’ fees charged to the Appellant Defendants for auditing services, compared to the very substantial revenue claimed to have been generated by the trading of luxury timepieces indicated that the Appellant Defendants did not have a genuine business. 

12.  By her Judgment, the Judge held that the Appellant Defendants had failed to raise any believable defences and had not raised any triable issues.

13.  As for the suggestion that the romance and the related foreign exchange transactions might have been genuine, the Judge did not consider that this gave rise to a credible defence.  The burden was on the Appellant Defendants to raise a believable deference or triable issue, and simply suggesting the romance or transactions might have been genuine was not enough.  The alleged scam was not regarded by the Judge as particularly complex, particularly bearing in mind that there had been many such cases recently. 

14.  In this context, the Judge did not see the need to cross-examine the Plaintiff, as his credibility would not seem relevant to the genuineness of the Appellant Defendants’ businesses.

15.  As for the proposed expert evidence, the Judge noted that no identified experts had been put forward, making it difficult to assess whether any such expert evidence would assist the court on the issues raised.  The Judge considered that it was unnecessary to look to expert evidence on the narrow issue of the level of auditor fees as contrasted with the level of revenue generated.

16.  In relation to the Appellant Defendants’ case that they had legitimate watch trading businesses and that cryptocurrency transactions were part of that business, the Judge, having considered the evidence, held that they had failed to establish a believable defence, for the following reasons:

(1)  The contemporaneous documents produced by the Appellant Defendants in support of the alleged legitimate business were sparse, and other items of evidence, which could and should have been adduced, were not produced to explain the very large revenues allegedly generated.

(2)  The accounts did not indicate any significant inventory, which one would expect to exist if the core business were really trading high value luxury time pieces.

(3)  There was no evidence from Mr Cheng in support of the alleged cryptocurrency transactions with the 7^th and 8^th Defendants.

(4)  The available evidence concerning Mr Cheng showed only that he was unable to deal freely with his money and needed the assistance of the 7^th and 8^th Defendants to engage in the intended cryptocurrency transactions.

(5)  There was little evidence in relation to the alleged legitimate businesses of the 12^th and 13^th Defendants and the lack of evidence from Mr Cheng was also a problem for them as they were the recipients of the funds dealt with by Mr Cheng.

(6)  Although the then counsel for the Appellant Defendants drew the Judge’s attention to specific documents such as (1)  a lease that specified the purpose of business to be selling watches; (2)  documents relating to the “due diligence” done on the 1^st Layer Recipients; (3)  audited accounts supportive of the watch trading business and (4)  documents showing that USDT transactions had taken place, the Judge considered that such documents did not fill the gaps in the evidence that she had identified.

The Stay Refusal Decision

17.  As noted above, after filing their Notice of Appeal, the Appellant Defendants applied unsuccessfully to the Recorder for a stay of execution of the summary judgment pending appeal. 

18.  Mr Sherry (appearing on behalf of the Appellant Defendants on the stay application below and in this court)  argued first, that the Appellant Defendants had good grounds of appeal, and second, that as the Plaintiff resided abroad, the appeal would be rendered nugatory if a stay was not granted.  He referred to Asparouh Ianev Dimitrov as administrator of the estate of Kaloian Ianev Dimitrov (Deceased)  v Dominic Tak Ming Lau [2021] HKCA 1196 for the proposition that where a foreign plaintiff obtained summary judgment, a stay ought generally to be ordered, regardless of the strength or otherwise of the merits of the appeal. 

19.  The Judge, having referred to the principles governing applications for a stay of execution as summarized in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84, took the view that, as the arguments set out in the Notice of Appeal were essentially reiterations of the arguments made to and rejected by her in the summary judgment application, the appeal did not have merit.

20.  She also considered that the risk that an appeal would be rendered nugatory because a Plaintiff resided outside the jurisdiction was a matter that should be considered in the round, and in this case, she was of the view that the Plaintiff should not be deprived of the fruits of the judgment.  Although the Appellant Defendants contended that they should not be required to go to the United States (where the Plaintiff is resident)  to seek return of the judgment sum paid if they succeeded on the appeal, the Judge regarded this as being premised on the appeal being successful, contrary to her assessment of the merits.  It also assumed that the Plaintiff would not abide by his obligations if the appeal went against him, something there was no specific evidence to suggest.

21.  Having dismissed the application for a stay on the basis set out above, the Judge also declined to accede to the suggestion that the fact that the Plaintiff was foreign would generally call for the grant of a stay.

Legal Principles

22.  The principles governing the grant of a stay of execution pending appeal are well-settled and are been set out in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84. 

23.  An appeal does not operate as a stay of execution of the decision below.  Unless an appellant can justify a stay by demonstrating that good reasons for granting one exist, a stay will not be ordered.  Good reason can exist in a variety of forms and while it is not possible to set out an exhaustive definition of what would constitute good reasons, reference is commonly made to factors such as whether the absence (or existence)  of a stay would render an appeal nugatory (bringing into focus the relative prejudice that may be caused to the appellant and to the respondent by a stay of execution), and the merits of the appeal.

24.  The existence of a strong appeal will usually by itself constitute a good reason to grant a stay.

25.  For the purpose of a stay application, the court is only required to form a preliminary view on the merits.  It would be impractical, and indeed undesirable, for the court to delve deeply into the merits of the appeal.  The court should refrain from embarking upon detailed discussion and analysis of the grounds of appeal.

26.  In the end, the court carries out a balancing exercise and uses its common sense, bearing in mind that the starting point is that the successful party is not to be deprived of the fruits of his success without good reason for doing so.  

Discussion

27.  Essentially, Mr Sherry argued (as he had before the Judge)  that the Amended Notice of Appeal demonstrated there are strong grounds of appeal, and further that if a stay was not granted, the appeal would be rendered largely nugatory owing to the Plaintiff’s residence outside the jurisdiction and the concomitant difficulties and expense of having to try to recover the judgment sums from him abroad.

Merits of the appeal

28.  The Amended Notice of Appeal, which was not before the Recorder, sets out the following grounds of appeal:

(1)  Ground 1 -   The Judge was wrong to reject the defences that the Appellant Defendants received the payments as third parties for value without notice and changed their position on the basis that there was insufficient evidence to demonstrate that the Defendants were running a legitimate watch trading business, which also involved cryptocurrency transactions.

(2)  Ground 2 -  The Judge was wrong to find there were deficiencies in and problems with the audited accounts of the 7^th Defendant.

(3)  Ground 3 -   The Judge was wrong to find at [30(3)] of the Judgment that the Appellant Defendants’ contention that the trades or romance might have been genuine, without more, was insufficient to amount to a believable defence in the circumstances.

(4)  Ground 4 -   The Judge was wrong to find that the fact of fraud had been proven in relation to the Appellant Defendants.

(5)  Ground 5 -   In the premises, the Judge was plainly wrong to find that the Appellant Defendants had failed to raise any believable defences or assertions or which raised a triable issue; and thus was wrong to grant summary judgment in favour of the Plaintiff. 

29.  In accordance with established principle, we do not think it necessary or appropriate to embark upon a detailed discussion of the merits of the appeal. The application before us is not, and should not be, a dry run for the appeal.

30.  While the existence of a strong appeal would tend to lead the court to exercise its discretion in favour of granting a stay, the threshold is a high one.  The court has held that for there to be a “strong appeal” such as would justify the grant of a stay without more, the situation must be one which would lead the court to conclude that something has grievously gone wrong with the process of law in the court below, or that the appellant is “almost bound to succeed”.  Absent such a case, something more needs to be demonstrated.

31.  Having considered the parties’ submissions, and the materials before us, we would say only that while the appeal is arguable, it is not so strong as to justify the granting of a stay without more. 

Would the appeal be rendered nugatory without a stay

32.  Mr Sherry argued that, as the Plaintiff is not resident in Hong Kong and has not provided any security for any sums he may receive and be ordered to repay in the event that the appeal succeeds, there would be little or no reasonable prospect of the Appellant Defendants recovering their money paid to the Plaintiff pursuant to the judgment, if their appeal should ultimately be successful. 

33.  He argued that this detriment was particularly acute as the Plaintiff had now obtained Garnishee Orders absolute against the 7^th and 8^th Defendants on 31 March 2023 and the 12^th and 13^th Defendants on 30 March 2023 in the following sums (being the amount of the Judgment in so far as it concerned each of them respectively):

(a)  7^th Defendant in the sum of HK$9,455,118.95;

(b)  8^th Defendant in the sum of HK$8,090,583.21;

(c)  12^th Defendant in the sum of HK$7,129,205.51; and

(d)  13^th Defendant in the sum of HK$1,250,000.00

34.  Therefore, Mr Sherry argues, if money is paid out of jurisdiction to the Plaintiff in accordance with the above Garnishee Orders and the judgment is fully satisfied, there would be no incentive at all for him to continue his claim in Hong Kong.

35.  Mr Sherry also argued there would be serious financial consequences for the Appellant Defendants because they will have been deprived of substantial sums of money and would be left in the unenviable position of having to raise additional funds to commence litigation in the United States to recover the judgment sum. He also contended that there was an appreciable risk that the Plaintiff would be unable to repay in the event of a successful appeal. 

36.  In those circumstances, it was argued, the balance of convenience would lie in granting a stay as restoring the injunction order that was previously in place would suffice to protect the Plaintiff’s interests thus causing no real prejudice to the Plaintiff.

37.  With respect, we are not wholly persuaded by these arguments.

38.  The Plaintiff’s evidence is that the monies currently frozen in the Appellant Defendants’ bank accounts pursuant to the Garnishee Orders amount to roughly HK$3.8 million, which is significantly less than the total of the Judgments against the Appellant Defendants, which comes to HK$25,924,907.67.  It can hardly be said that the judgment has been “fully satisfied”.  Unless further sums are subject to the Garnishee Orders, the Plaintiff will be a considerable way away from achieving full recovery.  

39.  Although the Plaintiff has said in his evidence that he would carry on the proceedings should the Appellant Defendants’ appeal be successful, we place limited weight on this point.  Should substantial recoveries be effected pursuant to the Judgment, it cannot be ruled out that the Plaintiff might decline to participate further in the proceedings, leaving the Appellant Defendants to have to pursue him for the sums paid to him.  Against this, the Plaintiff has set out personal financial information indicating he has substantial assets in the United States, but this would not wholly eliminate the risk to the Appellant Defendants.  This would, we accept, involve potential detriment to the Appellant Defendants, although in the absence of evidence of the costs or difficulty of doing so, it is not possible fully to assess the seriousness to them of this risk. 

40.  Although Mr Sherry argues that the Appellant Defendants would be left with the “unattractive proposition” of raising money to fund litigation in the United States to recover sums paid to the Plaintiff, there is similarly also no evidence from the Appellant Defendants on the effects of their business of being required to raise such money.   

41.  Finally, an arguable lack of prejudice to the Plaintiff is not per se a reason to allow a stay of execution application, as the starting point must be that the successful party is not to be deprived of the fruits of his success. 

Balance of justice and exercise of the court’s discretion

42.  Bearing all the foregoing considerations in mind, we are of the view that while the appeal is not so strong as to justify the grant of a stay without more, we would accept that there is potential prejudice to the Appellant Defendants if a stay is refused.  Balancing the respective interests of the parties, we have concluded that the appropriate course to take would be to grant a stay of execution on condition that the Judgment sums are paid into court.  In this way, the Appellant Defendants would be protected against the risk of having to litigate abroad to recover sums wrongly paid to the Plaintiff, while the Plaintiff would retain some benefit from the Judgment he currently has in his favour.  There is no suggestion in the evidence that the Appellant Defendants would not have the wherewithal to fund the Judgment sums against each of them respectively.

Disposition and Costs

43.  We therefore make the order indicated in the previous paragraph.  So far as costs are concerned, as neither party has been wholly successful, we shall make an order nisi that the costs of this application, and of the application for a stay in the court below, shall be in the cause of the appeal.