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HCA 2509/2014
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 2509 OF 2014
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| BETWEEN |
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LEONARD KOUTSOMIHALIS |
Plaintiffs |
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THEODORE KOUTSOMIHALIS |
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and |
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AKI ENTERPRISES |
1st Defendant |
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ACYUTA TECHNOLOGIES (HK) LTD |
2nd Defendant |
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| Before: Hon Chow J in Chambers |
| Date of Hearing: 10 & 15 June 2015 |
| Date of Decision: 16 June 2015 |
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D E C I S I O N
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INTRODUCTION
1. I have before me the following applications:-
(1) the plaintiffs’ summons dated 10 December 2014 seeking, as against the 2nd defendant, a continuation of the ex parte Mareva injunction order (“the Injunction Order”) originally granted by Bharwaney J on 9 December 2014 and continued by Ng J on 19 December 2014 until further order of the court; and
(2) the 2nd defendant’s summons dated 4 February 2015 seeking (inter alia) a discharge of the Injunction Order or alternatively an order that the plaintiffs pay the sum of HK$500,000 into court as security against any liability for costs on the ground that the plaintiffs are permanent resident in Australia and have no assets in Hong Kong other than their litigation interest in these proceedings.
2. The affidavit or affirmation evidence before me relating to the above applications consists of:
(1) for the plaintiffs –
(a) the 1st affidavit of Jeffrey Hadyn Lane dated 9 December 2014;
(b) the 1st affirmation of Wu Hon Ming dated 16 December 2014;
(c) the 2nd affidavit of Jeffrey Hadyn Lane dated 16 December 2014;
(d) the 1st affirmation of Cheng Siu Kwan dated 1 April 2015;
(e) the 2nd affirmation of Cheng Siu Kwan dated 1 April 2015;
(f) the 2nd affirmation of Wu Hon Ming dated 1 April 2015;
(g) the 1st affidavit of the 1st plaintiff dated 5 June 2015;
(2) for the 2nd defendant –
(a) the affirmation of Suwalal Sharma dated 7 January 2015;
(b) the affidavit of Kamran Syed dated 3 February 2015.
The plaintiffs’ claim
3. According to the plaintiffs, they are the victims of a major internet fraud and have been deceived of the total sum of US$1,196,464.45. Briefly stated, the plaintiffs say that they were persuaded by persons unknown to the plaintiffs, but believed at the time to be employees or representatives of a business entity known as Alpha Resource Partners, to take part in a fictitious share purchase scheme, whereby they were to purchase pre-IPO shares in Alibaba Group Holdings Limited (“Alibaba”), with the intention, or hope, of making a significant profit on the listing of Alibaba on the New York Stock Exchange in September 2014.
4. Between 2 April 2014 and 16 June 2014, the plaintiffs were induced to pay the total sum US$301,737.50, by five separate payments, into a bank account in the name of Greed Code Limited with HSBC in Hong Kong (“the Green Code Account”) as consideration for the purchase of some pre-IPO shares in Alibaba.
5. Between 14 July 2014 and 19 September 2014, the plaintiffs were induced to pay the total sum US$894,726.95, by ten separate payments, into a bank account in the name of Innovative Network Limited with HSBC in Hong Kong (“the Innovative Network Account”) as consideration for the purchase of some further pre-IPO shares in Alibaba.
6. However, the plaintiffs have never received any of the pre-IPO shares in Alibaba that they thought they had purchased.
7. It is the plaintiffs’ case that “Alpha Resource Partners” was a fictitious “boiler house” style entity which was used as a front to defraud potential investors and that they have been deceived into parting with the aforesaid total sum of US$1,196,464.45. The plaintiffs further say that the Green Code Account and the Innovative Network Account were used as vehicles for the fraud.
8. Subsequent fund tracing exercises carried out by or on behalf of the plaintiffs establish that the total sum of US$894,726.95 paid by the plaintiffs to the Innovative Network Account was mixed with other funds in that account, and –
(1) between 17 July 2014 and 23 September 2014, the total sum of US$713,084.45 (by nine separate payments) was transferred from the Innovative Network Account to an account of the 1st defendant with HSBC; and
(2) between 21 July 2014 and 26 August 2014 (note that the date of “11.10.2012” mentioned in the particulars under paragraph 12 of the statement of claim appears to be mistaken), the total sum of US$407,127.17 (by five separate payments as particularised under paragraph 12 of the statement of claim) was transferred from the Innovative Network Account to an account of the 2nd defendant with HSBC (“D2’s Account”).
9. Pausing here, it may be noted that the evidence before me shows that there were in fact a total of seven payments from the Innovative Network Account to D2’s Account (in the total sum of US$560,763.92) and one further payment from the Innovative Network Account to an account of Mindtree Infotech (HK) Limited (“Mindtree”), an associated company of the 2nd defendant, with HSBC (in the sum of US$81,938.55), and that the total sum of these 8 payments comes to US$642,702.47.
10. In other words, out of the total sum of US$1,355,786.92 (US$713,084.45 + US$642,702.47) transferred from the Innovative Network Account to (a) the 1stdefendant and (b) the 2nd defendant and Mindtree, 47.40% of that total sum was received by the 2nd defendant (including the sum of US$81,938.55 received by Mindtree on behalf of the 2nd defendant).
11. It is the plaintiffs’ case that the 2nd defendant received the respective sums direct from Innovative Network Limited in circumstances where they had or should have had knowledge of the fraud and/or money laundering exercise being perpetuated upon the plaintiffs, and that the 2nd defendant cannot acquire a good title to the monies that it received from Innovative Network Limited and is not entitled to keep them, or to hold and treat them as its own.
12. In the prayer for relief, the plaintiffs claim against the 2nd defendant for, inter alia:-
(1) damages in the sum of US$407,127.17; and
(2) a declaration that they are entitled to and so assert their equitable proprietary interest in the sum of US$407,127.17 and that the 2nd defendant holds as constructive trustee for the plaintiffs the sum of US$407,127.17 and any sums of money or assets which it retains or has retained derived from the sum of US$407,127.17 or any part thereof.
The 2nd defendant’s defence
13. As can be seen from the 2nd defendant’s defence and the affirmation of Mr Sharma, the former owner or controller of the 2nd defendant, dated 7 January 2015, the 2nd defendant admits receipt of funds from Innovative Network Limited in the total sum of US$560,763.92. Additionally, the 2nd defendant admits that Mindtree received the sum of US$81,938.55 from Innovative Network Limited in respect of “mercantile services rendered and products sold by the 2nd Defendant to Innovative Network Ltd which at the former’s direction were remitted by the latter to the bank account of an associate company of the 2nd Defendant namely Mindtree Info Tech (HK) Ltd” (see paragraph 7 of the 2nd defendant’s defence).
14. It is the 2nd defendant’s case that the payments made by Innovative Network Limited were for “memory cards, adaptors, plastic display frames and packaging” purchased by Innovative Network Limited from the 2nd defendant (see paragraph 5 of the 2nd defendant’s defence).
15. In the affirmation of Mr Sharma, he describes how the transactions between the 2nd defendant and Innovative Network Limited came about in the following words:-
“ 4. In or around June or July 2014, I can remember being contacted by a Malawian male by the name of Mhango, Gabadinho Hellings who represented himself to be the Purchasing Manager of a company called Innovative Network Limited. Mr Mhango was interested in obtaining memory cards of varying capacities, adaptors, display frames and packaging on a wholesale basis and wanted me to find the right product at the right price. Memory cards are plug in devices which enhance the capacity of computers and their like, which are carried and displayed when not in use or for retail sale in a plastic mesh grid.
5. Eventually, I agreed a deal with Mr Mhango that Acyuta would source and purchase on behalf of Innovative Network Limited, charging a commission therefor of 3% on sale. I was able to source the products at the price from a company called Micro Max Trading. In turn, this information was relayed on to Mr Mhango and resulted in Innovative Network Limited placing a total of eight orders for the purchase of memory cards, adaptors and their packaging through Acyuta.”
16. Mr Sharma also describes the modus operandi of the transactions between the 2nd defendant and Innovative Network Limited in paragraph 6 of his affirmation as follows:-
“With one exception which I will refer to later [ie the payment to Mindtree instead of to the 2nd defendant mentioned above], the accountancy procedure adopted to reflect the agreements reached were identical. Acyuta would invoice Innovative Network Limited, and on receipt in full of the cost of the order including the 3% commission, would purchase from Micro Max Trading who in turn would invoice and upon payment deliver to Acyuta. On each occasion, what comprised an order was collected in person by Mr Mhango, who upon our demand, established his bona fides by not only producing his passport copy but also presented a business card showing him to be the Purchasing Manager of Innovative Network Limited, Hong Kong. Moreover, each of Acyuta’s invoices were [sic] signed by Mr Mhango acknowledging receipt of the goods.”
17. In support of the 2nd defendant’s defence of bona fide purchase for value without notice, Mr Sharma has produced a bundle of documents, including Micro Max Trading’s invoices and shipping notes to the 2nd defendant and the 2nd defendant’s invoices to Innovative Network Limited. I shall come back to these documents later in this decision.
Discussion
18. As earlier mentioned, it is not in dispute by the 2nd defendant that it did receive funds from Innovative Network Limited, including in particular the five payments referred to in paragraph 12 of the statement of claim.
19. In Mr Robert Andrews (counsel for the 2nd defendant)’s skeleton argument and in his oral submissions to me yesterday, Mr Andrews referred me to some evidence to show that the plaintiffs failed to exercise all proper due care and diligence before parting with their monies to Green Code Limited and Innovative Network Limited. Mr Andrews does not, however, go so far as to challenge the plaintiffs’ basic case that they were the victims of a fraud and they had been defrauded to the extent of the total sum of US$1,196,464.45.
20. Mr Andrews argues that the plaintiffs’ want of care, or failure to exercise due diligence, is relevant because the court should weigh “the balance of merit against merit in the exercise of what is just and convenient for these particular circumstances” (see paragraph 1 of Mr Andrews’ skeleton argument). I am unable to accept this submission. While I recognise that the relief that the plaintiffs seek is equitable relief or involves discretionary considerations, I do not see that the plaintiffs’ want of care or failure to exercise due diligence in respect of their monies is directly relevant to the main considerations which the court ought to take into account when deciding whether to continue, or discharge, the Injunction Order. The main considerations for the court are:-
(1) whether the plaintiffs have shown a “good arguable case” on their substantive claims against the 2nd defendant;
(2) whether there are assets of the 2nd defendant within the jurisdiction;
(3) whether the balance of convenience is in favour of continuing the injunction;
(4) whether there is a real risk of dissipation of assets, or removal of assets from the jurisdiction, which would render the plaintiffs’ judgment, should the plaintiffs eventually obtain one from this court, of no effect.
See Hong Kong Civil Procedure 2015, paragraph 29/1/65.
21. Mr Andrews has not made any submission on the issues of “balance of convenience” and “risk of dissipation of assets”, and there is no complaint of any failure on the part of the plaintiffs to comply with the duty of “full and frank disclosure”. There can also be no dispute that the 2nd defendant does have substantial assets within the jurisdiction.
22. The main question that I have to consider is therefore whether the plaintiffs have shown a “good arguable case” on their substantive claims against the 2nd defendant. On the basis that the plaintiffs are the victims of a fraud, and that part of their funds can be traced into the hands of the 2nd defendant, the plaintiffs would prima facie have valid claims against the 2nd defendant for the return of the funds received by the 2nd defendant on the ground of money had and received, and may assert proprietary claims against the 2nd defendant to the extent that their funds can be traced and identified as representing recognisable assets of the 2nd defendant, unless the 2nd defendant can establish the defence of bona fide purchase for value without notice.
23. For the purpose of the present interlocutory applications the evidence of the parties is necessarily incomplete and has not been tested by cross examination. Thus, the court cannot make any definite finding on the validity of the plaintiffs’ claims or whether the 2nd defendant is a bona fide purchaser for value without notice. All that the court can do is to ask whether, on the basis of the materials currently before the court, the plaintiffs have demonstrated a “good arguable case” on their substantive claims against the 2nd defendant.
24. In this regard, the 2nd defendant’s general case that it runs a bona fide business and its evidence regarding the alleged sale of goods to Innovative Network Limited have been heavily criticised by Mr Lane (for the plaintiffs). The following criticisms of the 2nd defendant’s case and evidence seem to me to have force.
25. First, Mr Sharma says in paragraph 3 of his affirmation that the 2nd defendant has moved its premises to “RM1442, 15/Floor, Radio City, 505 Hennessy Road, Causeway Bay, Hong Kong”, and that it was and still is actively involved in business. However, Mr Wu Hon Ming of Tanner De Witt, the plaintiffs’ solicitors, attended the aforesaid premises on 23 February 2015, but could not find any name plate of the 2nd defendant and, on inquiry with a female staff who opened the door, was told that the 2nd defendant did not “currently rent this address or any address at this location”.
26. Second, in the same paragraph of his affirmation, Mr Sharma states that “apart from their business premises and [his] own commercial expertise in this field, Acyuta obtain their business by advertising widely on the Internet, where they have their own website”. The 2nd defendant has not, however, adduced any evidence of its website. On the other hand, Mr Cheng Siu Kwan, a solicitor of Tanner De Witt, has tried to look for the 2nd defendant’s website on the internet. All that he could find was a website with the address of “http://acyutatechnolgies.com” which conformed to the 2nd defendant’s description of its alleged business. The contents of that website appear to have been plagiarised directly from another website belonging to a company called “Trimas IT Infrastructure & Services Limited”, an IT firm based in India. I accept that the website found by Mr Cheng may not actually be the 2nd defendant’s website. However, the 2nd defendant has received the 1st affirmation of Mr Cheng since 1 April 2015, but has not filed any evidence regarding its alleged website or to demonstrate that it has advertised its business widely on the internet as alleged.
27. Third, the alleged Purchasing Manager of Innovative Network Limited, Mr Mhango, is apparently a leading football player who plays for a football team called “Bloemfontein Celtic” in South Africa. The evidence indicates that “Bloemfontein Celtic” had a busy fixture during the period from July to September 2014. However, on Mr Sharma’s evidence, Mr Mhango was supposed to be in Hong Kong on various occasions during that period physically taking delivery of goods sold by the 2nd defendant to Innovative Network Limited.
28. Fourth, the shipping notes and invoices from Micro Max Trading to the 2nd defendant suggest that payments were made by cash. In this regard, it is of note that, according to the 2nd defendant, it has only one bank account in Hong Kong, namely, account no 658-094347-838 at HSBC. However, an examination of the 2nd defendant’s bank statements of that account does not show that cash was withdrawn on or about the relevant dates which matched the amounts shown on Micro Max Trading’s invoices and shipping notes.
29. Mr Andrews argues that the 2nd defendant appears to be carrying on a bona fide business, in view of the fact that it maintains a multi-currency accounts with HSBC in which Hong Kong and US dollars together with Japanese Yen are deployed, that apparently “salary” is paid from that account, and that the contents of the incorporation document of the 2nd defendant suggests that “the motivational force to create an Acyuta presence in Hong Kong came from Acyuta of Jaipur, India … for the purposes of commerce alone”. While these matters may tend to show that the 2nd defendant does carry on a trading business in Hong Kong, they do not answer the critical question of whether the 2nd defendant should be regarded as being a bona fide purchaser for value without notice in respect of the particular funds that it received from the Innovative Network Account.
30. The 2nd defendant may at the trial be able to produce evidence to explain or neutralise the above points. However, for the purpose of the present application, the question is whether the plaintiffs have shown a “good arguable case” that the 2nd defendant is not a bona fide purchaser for value without notice in so far as the funds which it received from the Innovative Network Account are concerned. On the totality of the evidence before me, I consider that the plaintiffs have crossed the threshold.
31. Taking into account the matters mentioned in paragraphs 20 and 21 above, I am prepared to continue the Injunction Order against the 2nd defendant pending trial or further order of the court.
32. There is one matter relating to the upper limit of the Mareva injunction which I ought to deal with. The evidence before me shows that the total sum of US$894,726.95 belonging to the plaintiffs went to the Innovative Network Account, and that the total sum of US$1,355,786.92 was paid from the Innovative Network Account to the 1st defendant (US$713,084.45) and the 2nd defendant (US$642,702.47). It seems clear that not every single cent received by the 1st defendant or 2nd defendant could be traced back to the plaintiffs’ funds. The precise tracing exercise is a matter to be further considered at the trial. At this stage, I consider it fair and reasonable to adopt a simple approach and treat 47.40% (see paragraph 10 above) of the total sum of US$894,726.95 paid by the plaintiffs to Innovative Network Limited, ie US$424,100.57, as having been received by the 2nd defendant. In view of the fact that the monetary limit of the Mareva injunction granted by Bharwaney J is US$407,125.17 only and there has not been any application by the plaintiff to vary the monetary limit of the Injunction Order, I am content to simply continue the Injunction Order in its current form.
33. In passing, I should mention that there are two other points raised by Mr Lane on which I do not feel able to attach much weight:-
(1) Mr Lane has drawn my attention to the fact that each set of invoice and shipping note from Micro Max Trading to the 2nd defendant and invoice from the 2nd defendant to Innovative Network Limited bore the same date. Thus, on the basis of Mr Sharma’s description of the modus operandi of the transactions between the 2nd defendant and Innovative Network Limited, in each of the eight transactions in question, the 2nd defendant was able to collect payment from Innovative Network Limited, make payment to and take delivery of the relevant goods from Micro Max Trading, and finally make delivery of the same goods to Innovative Network Limited all within the same day. Mr Lane submits that it is unlikely that everything could be done in a single day in each and every one of the eight transactions in question. For my part, while I think the possibility of this happening in real life may not be high, I cannot totally exclude that possibility.
(2) Mr Lane has also pointed out that, in each of the eight relevant transactions, the amount of commission apparently charged by the 2nd defendant is not exactly 3% of the invoiced amount shown on Micro Max Trading’s invoice to the 2nd defendant or that shown on the 2nd defendant’s invoice to Innovative Network Limited. Mr Lane argues that these discrepancies show that the documents produced by the 2nd defendant were possibly fabricated by a process described by him as “reverse engineering”. It seems to me, however, that the 2nd defendant can equally argue that if the documents were fabricated to justify the receipt of funds by the 2nd defendant from Innovative Network Limited, it is unlikely that they would show the discrepancies referred to by Mr Lane.
THE 2ND DEFENDANT’S APPLICATION FOR SECURITY FOR COSTS
34. The 2nd defendant asks for security for costs in the amount of HK$500,000. I am not prepared to make any order for security for costs at this stage in the absence of evidence regarding the likely costs which may be incurred by the 2nd defendant in this action.
35. The 2nd defendant is at liberty to make a fresh application for security for costs with proper evidence in support of the application. I should make it clear, though, that nothing herein is intended to pre-empt the plaintiffs from arguing that on the facts and circumstances of the present case, no security for costs should be ordered in any event.
36. I note in passing that Mr Andrews has mentioned the question of fortification of the plaintiffs’ undertaking in damages. However, this is not what the 2nd defendant is seeking in its summons dated 4 February 2015. In my view, if the 2nd defendant wishes to pursue an application for fortification of the plaintiffs’ undertaking in damages, the 2nd defendant should make a proper application and support the application with relevant evidence.
DISPOSITION
37. I make an order in terms of paragraph 1 of the plaintiffs’ summons dated 10 December 2014, and dismiss the 2nd defendant’s summons dated 4 February 2015. I shall hear the parties on the question of costs.
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(Anderson Chow) |
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Judge of the Court of First Instance |
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High Court |
Mr Jeffrey Haydn Lane, of Messrs Tanner De Witt, for the plaintiffs
Mr Robert Andrew, instructed by Messrs Yeong & Co., for the 2nd defendant
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