TTI GLOBAL RESOURCES HONG KONG LTD v. HONGKONG MYPHONE TECHNOLOGY CO LTD AND OTHERS

HCA 1053/2019

[2021] HKCFI 306

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1053 OF 2019

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D E C I S I O N

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Introduction

1.  This is the hearing of the plaintiff’s (“Plaintiff’s) appeal against the order of Master Anthony Chan made on 17 July 2020 dismissing its application for summary judgment against the 2^nd and 4^th Defendants.  They are collectively referred to as “the Defendants” unless the context requires otherwise.  On14 August 2020, the Plaintiff filed a summons seeking leave to amend its statement of claim. There are therefore two applications before the court: an application for summary judgment and an application to amend the statement of claim.

2.  The Plaintiff is the victim of an email fraud under which an imposter procured it to transfer various sums to the respective accounts of the 1^st Defendant and 2^nd Defendant.  Tranches of these funds were then transferred to various second-layer recipients, including the 3^rd Defendant and 4^th Defendant. 

3.  The 1^st Defendant was the first-layer recipient.  The 2^nd Defendant was both a first-layer recipient and a second-layer recipient from the 1^st Defendant.  The 3^rd and 4^th Defendants are second-layer recipients from the 2^nd Defendant.  The 2^nd and 4^th Defendants are literarily one-dollar companies operated by Chou Hong Yu (“Chou”), who is their sole shareholder and director.  Chou’s mother is the sole shareholder and director of the 3^rd Defendant.

4.  The Plaintiff commenced this action against the 1^st to 4^th Defendants on 14 June 2019.  On 28 October 2019, summary judgment was obtained against the 1^st Defendant after a contested hearing.  On 30 December 2019, the 3^rd Defendant was by consent granted unconditional leave to defend this action.  On 17 July 2020, Master Anthony Chan dismissed the Plaintiff’s application for summary judgment against the 2^nd and 4^th Defendants.

Application to Amend the Statement of Claim

5.  The causes of action pleaded in the original statement of claim were fraud and unjust enrichment.  Shortly after filing its notice of appeal, the Plaintiff applied by summons to amend its statement of claim to pursue its claim in restitution based on unjust enrichment only.  Ms Mak, counsel for the Plaintiff, submitted that the amendment was to dispel any doubt that the Plaintiff still maintains any allegation of fraud against the Defendants.

6.  Mr Cheng, counsel for the 2^nd and 4^th Defendants, objected to the amendment. The thrust of his objection is that the master dismissed the Plaintiff’s application for summary judgment because of the fraud exception.  Hence, the focus in this appeal shall be on the Plaintiff’s original claim in the statement of claim since that was the foundation of the Plaintiff’s application for summary judgment which led to the order under appeal.  He submitted that the deletion of the fraud allegations against the 2^nd and 4^th Defendants in the amended statement of claim was a positive response to the master’s decision.  Such deletion renders the appeal unreasonable, especially as the Defendants had filed their defence on 28 September 2020 and a legal opinion on Mainland law on 2 November 2020.  He said that the deletion of the fraud allegations could not be new evidence or new cause of action or new development of law.  The appeal against the master’s decision could only be allowed if the appellate court found the fraud exception was not engaged based on the original statement of claim.  Mr Cheng further submitted that the Plaintiff should take out a new summons for summary judgment based on the amended statement of claim, the defence filed by the 2^nd and 4^th Defendants and the legal opinion on Mainland law filed by the Defendants.

7.  I am surprised by the position taken by Mr Cheng.  Order 20 rule 8 of the Rules of the High Court permits a party to amend its pleadings at any stage for the purpose of determining the real question in controversy between the parties to any proceedings.  As submitted by Ms Mak, amendment of pleadings before an appeal is common: see, for example, Tang Yuan Yi v Tokyo International Investment Limited[1].  It is consistent with the statutory wording and spirit of Order 14.  In Far East Bank and Trust Co v King Poo Koo[2], the court dismissed the argument that a plaintiff could not rely on an amendment to the statement of claim subsequent to the Registrar’s ruling.  In that case, Bewley J held:

“The parties are entitled to amend without leave before the close of pleadings. See O 20 r 3. The proceedings before the judge-in-chambers are an appeal by way of rehearing. Under the Rules of Court there is nothing to stop a party mending his fences between the two hearings, if he feels it is necessary. Order 14 r 1(2A)[3] states that the master will adjourn the summons to allow the plaintiff to amend the statement of claim. It does not say that the plaintiff may not amend after the Registrar’s decisions but before the appeal.”

The court took into account the new pleas which had been added to the statement of claim by amendment, even though the point made was one which the Registrar had refused to hear by reason of the defect in pleading.  Having considered the amendment, the court was satisfied that it had jurisdiction to rule on the plaintiff’s claim[4].  A fortiori, the amendment in this case which consists of deletions only should be allowed as nothing new was added.

8.  By its summons, the Plaintiff simply gave advance confirmation of its intention not to pursue its case on fraud at the appeal.  There was no new evidence involved.  There was no question of any need to adjourn the hearing to allow the 2^nd and 4^th Defendants to amend their defence or adduce new evidence.   Even if no amendment was made, the Plaintiff was entitled to inform the court at the hearing that it was not pursuing the case on fraud and allow that part of its case to be dismissed but to proceed on the remaining ground of unjust enrichment. 

9.  There is also no substance in Mr Cheng’s argument that the focus in the appeal should be solely on the master’s dismissing the Plaintiff’s claim on fraud.  The amendment was by way of deletion only.  Unjust enrichment had been pleaded in the original statement of claim.  By dismissing the Plaintiff’s application for summary judgment, the master must be taken to have also dismissed its claim based on unjust enrichment.  I cannot see why the Plaintiff should not be allowed to argue on this ground only at this appeal.

10.  As for Mr Cheng suggestion that the Plaintiff should take out a fresh summons for summary judgment based on the amended statement of claim, it is, with respect, absurd. It is contrary to the underlying objective of Order 1A.  Unjust enrichment was not a new plea.  The parties have to face the eventuality of a decision based on unjust enrichment.  Why should the hearing be delayed and additional costs unnecessarily incurred?  I allow the amendment.

The Plaintiff’s Factual Case

11.  The Plaintiff is a company incorporated in Hong Kong.  It sources socks from a supplier in the hosiery and textile industry in the Mainland named Zhejiang Hepolilo Socks Industry Co Ltd (“Hepolilo).  On 20 February 2019, the Plaintiff’s accounting manager, Matt Lyons received an email from an imposter purporting to be Shu Li Hua (“Shu”), who was known to Matt Lyons as the owner of Hepolilo.  The imposter informed him that Hepolilo’s bank account had exceeded its tax free limit for receiving payment and requested him to indicate when he intended to arrange for the next payment so that she could send him updated export bank details for payment.  Presumably, the imposter had successfully hacked into Hepolilo’s email account, Matt Lyons did not realize the email came from an imposter and informed the imposter that he was ready to arrange payment.  The imposter then informedhim the particulars of the 1^st Defendant’s bank account.  On 21 February 2019, Matt Lyons transferred USD256,429.32 to the 1^st Defendant’s bank account (the “Myphone Payment”).

12.  On 14 March 2019, under the same pretext the imposter informed Matt Lyons that future payments should be made to the account of the 2^nd Defendant.  On 21 March, 4 April and 11 April 2019, Matt Lyons transferred a total of USD1,602,313.32 into the 2^nd Defendant’s bank account (the “Multi Wise Payments”). 

13.  The Plaintiff never had any business dealing with the 1^st or 2^nd Defendants and had no reasons to remit the Myphone Payment and Multi Wise Payments to them.  Upon discovery of the fraud, the Plaintiff obtained an ex parte injunction order against the 1^st to 4^th Defendants on 14 June 2019 prohibiting them from disposing of their assets up to the value of USD1,858,742.64.  The order was continued on 21 June 2019.

14.  Police investigation revealed that at least USD4,370.75 of the Multi Wise Payments had been transferred to the 4^th Defendant’s bank account (“Multi Wise/D4 Payment”).  The Bankers’ Book Order obtained on 21 June 2019 revealed that USD181,629.32 of the Myphone Payments had been transferred to the 4^th Defendant’s bank account (“Myphone/D4 Payments”).

15.  The Defendants disputed the Plaintiff’s argument that it had never done business with the 1^st or 2^nd Defendants.  This argument is based on the following documents exhibited in Chou’s affirmation filed on behalf of the Defendants (collectively, “the four documents”):

(1)     the Plaintiff’s certificate of tax exemption;

(2)     the Plaintiff’s Nevada State business license;

(3)     a proforma invoice issued by the 1^st Defendant to the Plaintiff dated 27 February 2019; and

(4)     Create Payment slip of Well’s Fargo Bank.

16.  The document which was particularly relied on by the Defendants is Item (3) which was purportedly issued by the 1^st Defendant mentioning, but not evidencing, a prepayment of USD256,492.32 for goods to be sold to the Plaintiff.  That was the same amount as the Myphone Payment which was subsequently paid to the 1^st Defendant.  The Defendants argued that the burden was on the Plaintiff to contradict this document.  With respect, this cannot be right.  The document was produced by the 2^nd and 4^th Defendants and purportedly issued by the 1^st Defendant.  It is of course for the Defendants to prove its authenticity and how it was that they came to possession of the document.  Judgment was entered against the 1^st Defendant after a contested hearing.  The 1^st Defendant had practised a fraud on the Plaintiff.  The Defendants adduced no evidence as to the authenticity of that document and the circumstances the document had come to their possession.  In the circumstances, I can give no weight to such a document purportedly issued by a fraudster in relation to the fraud.  That document and the other documents do not damage the Plaintiff’s case that it had never done any business with the 1^st or 2^nd Defendants.  Those documents are actually evidence of fraud practised by the 1^st Defendant.  I am satisfied that the Plaintiff has proved its factual case as set out above.

The Plaintiff’s Restitution Claim based on Unjust Enrichment

17.  The Plaintiff claims restitution against the 2^nd Defendant for the Multi Wise Payments of USD1,602,313.32 and against the 4^th Defendant for the Multi Wise/D4 Payment of USD4,370.75 and the Myphone/D4 Payment of USD181,629.32.  Its claim is founded on unjust enrichment.  As set out by the Court of Final Appeal in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd[5],the test for unjust enrichment is as follows:

(1)     was the defendant enriched?

(2)     was the enrichment at the plaintiff’s expense?

(3)     was the enrichment unjust? and

(4)     are any of the defences applicable?

18.  Enrichment requires the obtaining of a benefit.  The benefits which may constitute enrichment include money, goods, etc.  Here, funds were transferred from the Plaintiff’s bank account to the 2^nd and 4^th Defendants’.  The law treats the transfer as equivalent to a direct transfer of value: see Chitty on Contracts[6]. It can hardly be argued that the payments received by the 2^nd and 4^th Defendants are not enrichments.

19.  In Lipkin Gorman (A Firm) v Karpnale Ltd[7], the House of Lords held that “at the expense” is generally established when the enrichment was obtained by direct transfer, but it is also proved if the benefit obtained by the defendant is an asset which is traceable to the plaintiff’s asset.  There is no dispute that the funds thus transferred belonged to the Plaintiff.  Thus, prima facie, the 2^nd and 4^th Defendants were enriched at the expense of the Plaintiff.

20.  The 2^nd and 4^th Defendants have no dispute about the Plaintiff’s case (except as to whether the Plaintiff had prior business dealings with the 1^st Defendant, which I have found in favour of the Plaintiff) and their receipt of the payments made by the Plaintiff.  Obviously, the payments made by the Plaintiff to the 1^st and 2^nd Defendants were made by mistake, believing that they represented its customer, Hepililo.  It is of course unjust for a person to keep a payment made to him by mistake.  Payment by mistake is a well-established factor that can ground restitution: Guaranty Bank and Trust Co v Zzzik Inc Ltd[8].  Prima facie, the 2^nd and 4^th Defendants were unjustly enriched at the Plaintiff’s expense.  The same applies to the Multi Wise Payments made by the Plaintiff to the 2^nd Defendant, the Multi Wise/D4 Payment made by the 2^nd Defendant to the 4^th Defendant out of the Multi Wise Payment it received from the Plaintiff and the Myphone/D4 Payment made to the 4^th Defendant by the 1^st Defendant out of the Myphone Payment it received from the Plaintiff.   Thus, the burden is shifted to the 2^nd and 4^th Defendants to show that their receipt of the benefit is not unjust. 

The 2^nd and 4^th Defendants’ Defences

21.  The 2^nd and 4^th Defendants do not dispute the Plaintiff’s case or that they were in receipt of the Myphone Payment and Multi Wise Payments belonging to the Plaintiff.  Their defences are that:

(1)     they were bona fide purchasers for value without notice;

(2)     they suffered a change of position as a result of receipt of the Myphone/D4 Payment and Multi Wise Payments; and

(3)     the Plaintiff may not seek restitution against them by relying on their own illegality in transferring the funds to the 1^st Defendant or the 2^nd Defendant. 

The Defendants’ Case of Bona Fide Purchaser for Value without Notice

22.  To raise this defence, the defendant has to prove: (i) there was a purchase for value; (ii) of the legal estate in property; (iii) in good faith; (iv) without notice; and (v) at the time of transfer of the legal estate: Lewin on Trust[9]. The 2^nd and 4^th Defendants’ case as gleaned from their Defence and affirmation may be summarised as follows.

23.  Chou is the sole director and shareholder of the 2^nd and 4^th Defendants, which were respectively incorporated on 1 December 2016 and 10 October 2017.  As the company’s annual returns show, the 2^nd and 4^th Defendants are literarily one-dollar companies. 

24.  The Defendants carry on business as traders and importers of seafood with annual turnover of USD12,270,000 and USD11,700,000 respectively.  The seafood consignments were sourced and purchased from overseas, such as India, Ecuador and Japan and shipped to their importer in Vietnam.  The consignments were distributed to the Defendants’ customers in Guangdong, presumably by the Vietnamese wholesalers at the Defendants’ direction.  The Defendants’ customers paid the Defendants by Chinese Yuan (“CNY”), while the Defendants’ Vietnamese wholesalers only accepted US dollars (“USD”).  Hence, the Defendants have great demands for USD.  Initially, Chou bought USD from the 3^rd Defendant using CNY received from the Defendants’ customers.

25.  In early 2017, the scale of the 2^nd Defendant’s business far exceeded the 3^rd Defendant’s.  The situation became more prominent since the 4^th Defendant started operation in October 2017.  The 3^rd Defendant had difficulties meeting the 2^nd and 4^th Defendants’ demands for USD.

26.  At about the same time in early 2017, Chen Lin Xu (“LX Chen”) and his younger brother Chen Tai Jin (“TJ Chen”) (collectively, the “Chens”) offered Chou foreign currency exchange services.  Chens’ services involved mainly matching companies in Qiaotou town of Dongguan which receive CNY in the Mainland but requiring settlements in foreign currencies in Hong Kong with companies in Hong Kong which require CNY for settlement in the Mainland and receiving payments in foreign currencies in Hong Kong.  Through these currency matching arrangements, the 2^nd and 4^th Defendants could buy USD from USD receiving companies in Hong Kong and pay by settling those companies’ liabilities in CNY in the Mainland.  With the USD so bought, the 2^nd and 4^th Defendants could pay their Vietnamese wholesalers.

27.  Chou first used Chens’ services on behalf of the 2^nd Defendant in early 2017.  Under this currency matching arrangements, LX Chen would give Chou the name and background of the USD receiving company.  Chou and his staff in the 2^nd and 4^th Defendants would check the background of the USD receiving company mainly on its years of incorporation, its members, directors and mode of business by making inquiries with the Chens and from the 2^nd Defendant’s own sources.  If Chou agreed to make a transaction, LX Chen would notify him once the remittance or transfer from the USD receiving company was made and provide him with a list of payment instructions through mobile messages containing the CNY receiving companies’ particulars.  Then, Chou would instruct the Defendants’ customers in the Mainland to make payments according to the list. 

28.  In early March 2019, Chou was introduced to the 1^st Defendant as such an USD receiving company.  He inquired from TJ Chen about the nature of the 1^st Defendant’s business and its source of USD.  Then TJ Chen showed him the four documents mentioned in paragraph 15 above.  On the strength of the four documents, Chou was satisfied that the 1^st Defendant was a supplier of the Plaintiff and had received remittance in USD from the Plaintiff.  Chou also checked the background of the Plaintiff on the internet and found that it was a scalable American company in socks and accessories business with suppliers in China.  He found the names of the Plaintiff’s management personnel, including Matt Lyons’.  He found the amount received by the 1^st Defendant, USD256,429.32, matched the amount needed to be exchanged to CNY as informed by TJ Chen.  He believed there was genuine transaction between the Plaintiff as buyer and the 1^st Defendant as supplier of goods.  Then he accepted the USD remittance from the 1^st Defendant and settled the 1^st Defendant’s liabilities to its suppliers in the Mainland according to the list provided by TJ Chen.

29.  On 5, 8 and 12 March 2019, the 4^th Defendant received three USD payments from the 1^st Defendant under the currency matching arrangements.  These payments totalled USD181,629.32, making up the Myphone/D4 Payments.  Then the 4^th Defendant instructed its customers in the Mainland to settle payments on behalf of the 1^st Defendant according to the list provided by TJ Chen.

30.  After receiving these first three payments, TJ Chen suggested the 4^th Defendant to receive USD directly from the Plaintiff on behalf of the 1^st Defendant so as to shorten the overall turnaround time of each transaction.  Chou enquired TJ Chen how the 1^st Defendant kept its profit if the Plaintiff made payment directly to the 4^th Defendant.  TJ Chen told him that the Plaintiff used to make advanced payments to the 1^st Defendant and the 1^st Defendant could lock in its profit in the subsequent payments.  Chou accepted the matching arrangements with the Plaintiff.  Eventually, the 2^nd Defendant received three payments in the total amount of USD1,602,313.32 directly from the Plaintiff on behalf of the 1^st Defendant.  In every payment to the 2^nd Defendant, TJ Chen provided the 2^nd Defendant with a list of the 1^st Defendant’s suppliers for the 2^nd Defendant to settle on behalf of the 1^st Defendant.  In respect of the first payment received by the 2^nd Defendant on behalf of the 1^st Defendant, the 2^nd and 4^th Defendants’ customers were unable to meet the 1^st Defendant’s CNY requirements.  Thus TJ Chen pressed Chou to remit the balance of funds to another company named Initation Enterprises Co Limited (“Initation”) on 27 March 2019, which he did.

An Overall View of the 2^nd and 4^th Defendants’ Evidence

31.  The legal principles applicable to an Order 14 application are well settled.  In summary, these are as follows[10]:

(1)     The defendant bears the burden to satisfy the court that he has a real or bona fide defence (ie that there are triable issues), or that there ought for some reason to be a trial of the plaintiff’s claim.  Leave to defend ought to be given unless there is clearly no defence in law and no possibility of a real defence on the question of fact.

(2)     While the mere assertion in an affidavit does not in itself provide leave to defend, the court will not embark on a trial on affidavit.

(3)     The test is not whether the defendant’s assertions are to be believed, rather it is whether those assertions are believable, ie capable of being believed.  If they are, the defendant must be given leave to defend.

(4)     Whether the defendant’s assertions are believable is a question that should be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.

I shall test the 2^nd and 4^th Defendants’ evidence against these principles.

32.  In short, the 2^nd and 4^th Defendants’ case is that they each carried on a very substantial seafood business with turnover of USD12 million a year.  They have strong demands for USD to pay their Vietnamese wholesalers.  Chou bought USD under the USD/CNY matching arrangements with the Chens.  Before receiving the USD from the 1^st Defendant, he satisfied himself from documents provided by the Chens that the 1^st Defendant was one of the Plaintiff’s suppliers and had the right to receive USD from the Plaintiff.

33.  The 2^nd and 4^th Defendants’ evidence is basically Chou’s verbal assertions of the Chens’ currency matching arrangements, the four documents TJ Chen gave him before receiving the Myphone/D4 Payments,the screen shots of messages from the Chens showing to whom he should pay CNY in respect of the 4^th Defendant’s receipt of the Myphone/D4 Payments, and screen shots of his communication with TJ Chen in relation to the Multi Wise Payments and particulars of the bank account of Initation.

34.  The most important building blocks of the Defendants’ defence of bona fide purchaser for value are: (i) the Chens’ currency matching arrangements; and (ii) their payments to discharge the 1^st Defendant’s liabilities in the Mainland.  All the evidence adduced by the Defendants are hearsay evidence from the Chens about the currency matching arrangements and hearsay evidence from Chou about the Defendants’ customers settling liabilities of the 1^st Defendant in the Mainland.

35.  The Defendants’ evidence of the currency matching arrangements was made up solely of Chou’s oral assertions of his meeting with the Chens, TJ Chen giving him the four documents and the TJ Chen’s oral instructions as evidenced in the screen shots. According to the Plaintiff’s Mainland law expert, such currency matching arrangements are illegal.  It is understood that for such illegal arrangements documentary evidence may be difficult to obtain.  The transactions amounted to USD1.8 million or HK$14 million.  The total absence of documentary evidence for transactions of this size is incredible.  Remittance to and from the Mainland is often carried out by “underground remittance companies” involving some elements of illegality.  Yet, to the court’s knowledge, some documentary evidence of receipt and payment such as invoice or even contract of remittance are available.  All that Chou could offer were his own words in his affirmation. He did not even arrange for the Chens to give an affirmation of their business and their currency matching arrangements.  No explanation was given for his failure to file an affirmation from the Chens.  No particulars were given about the location of Chens’ business and their whereabouts.  Chou had engaged the currency matching arrangements of the Chens for two years.  He should know their whereabouts and be able to ask them to provide an affirmation.  The absence of documentary evidence and the failure to call the Chens cast serious doubts on the credibility of the alleged matching arrangements.

36.  Apart from the lack of supporting or credible evidence, the 2^nd and 4^th Defendants’ case is inherently incredible.  The basic building block of their case is that they have a total business turnover of about USD24 million and therefore demand a lot of USD.  But they are literarily one-dollar companies.  Chou has much to explain how the Defendants could operate to such a scale.  The 2^nd Defendant was incorporated on 1 December 2016.  In a year, it has boosted its turnover to USD12 million.  The case of the 4^th Defendant was even more incredible.  This one-dollar company was incorporated on 10 October 2017 and immediately started off with an annual turnover of USD12 million. 

37.  The Defendants adduced no evidence about their business and demand for USD.  What evidence to present is a matter for the parties.  Such evidence does not go to the heart of the Defendants’ case.  However, the Defendants as companies conducting genuine business with huge demand for USD is the basic building block of their defence.  Given the weakness of their evidence, it would greatly boost the credibility of their case if the Defendants could adduce evidence of their business and turnover by adducing tax returns; business records showing purchases and sales; bank accounts evidencing their turnover, payments in and payments out, and very importantly, the payment out of USD to their Vietnamese wholesalers.  Chou took so much pain to verify the legitimacy of the 1^st Defendant’s business and funds and how the Chens could secure their profits from the matching arrangements, but did nothing to prove the business of the 2^nd and 4^th Defendants.  While absence of such evidence is not fatal, its presence would greatly enhance the credibility of the defence.  The above observation should not be taken as this court drawing adverse inference for the Defendants’ failure to adduce such evidence.

38.  My overall view of the Defendants’ evidence is that it is very flimsy and unbelievable.  It is basically made up of hearsay evidence from the Chens and the Defendants’ customers under circumstances which render such hearsay extremely unreliable. No explanation was given as to why these witnesses were not called to give affirmations.  Chou failed to condescend on particulars as regards the payments by the Defendants’ customers in discharging the 1^st Defendant’s liability.  Hereunder, I shall specifically analyse the evidence relating to (i) the Myphone/D4 Payments, (ii) the Multi Wise Payments and (iii) the Multi Wise/D4 Payment.

The Myphone/D4 Payments

39.  The 4^th Defendant is the second layer recipient from the 1^st Defendant.  Receipt of the funds by the 4^th Defendant is not disputed.  The issue is whether the 4^th Defendant was a bona fide purchaser for value.   There is no evidence of the Defendants’ payments to discharge the liabilities of the 1^st Defendant under the currency matching arrangements.  Chou said that TJ Chen gave him three lists of CNY receiving companies to pay in respect of the three Myphone/D4 Payments.  There was in fact no such list adduced by Chou.  All that Chou produced were just some screen shots showing the name of the account holder, the bank and the amount to pay.  The screen shots showed three amounts to pay which totalled CNY 835,891.  The other three screen shots referred to payment of an unspecified balance.  It might well be that each payment plus an unspecified balance related to one of the Myphone/D4 Payments, but there was no such evidence.  The 4^th Defendant has failed to condescend to particulars in respect of its case.   Peculiarly, it is the 4^th Defendant’s case that the Chens provided Chou a list of the 1^st Defendant’s suppliers to pay after the Chens confirmed receipt of the payments from the 1^st Defendant.  However, one of the instructions in the screen shots actually pre-dated the last tranche of the Myphone/D4 Payments on 12 March 2019.  This evidence is inconsistent with the Defendants’ case.  This casts doubt on the credibility of the Defendants’ case. 

40.  There was no evidence that the Defendants’ customers made payments into those accounts as specified in the screen shots.  No acknowledgment to pay was produced by the Defendants’ customers.  No bank pay-in slips evidencing the payments were produced.  There was no evidence that the payments, if indeed made, were to discharge the liabilities of the 1^st Defendant under the currency matching arrangements and what those liabilities were. 

41.  There was also no evidence to connect the instructions in the screen shots to the 4^th Defendant’s receipt of the Myphone/D4 Payments, let alone to show that they constituted consideration in exchange for the remittance of the Myphone/D4 Payments to the 4^th Defendant’s bank account. 

42.  I understand that some of the documents or evidence I suggested above may be in the possession, custody or control of third parties.   If the Chens’ matching arrangements are genuine and the Chens are not fictitious characters, some, at least, of the evidence could be available.  On his own evidence, Chou exercised such a degree of care as to obtain a copy of the four documents and to make detailed company search of the Plaintiff, yet he did not do the same in respect of the other side of the transaction.  He did not make a company search of the 1^st Defendant and verify if the people whom he had to pay under the matching arrangements were entitled to receive payments from the 1^st Defendant.  The Defendants’ case is so lacking in particulars and the evidence in support is so flimsy (for reasons as explained in this and the preceding subsections) that I find the 4^th Defendant’s case in respect of this payment is not capable of belief.

The Multi Wise Payments

43.  The evidence relating to the 2^nd Defendant’s payment for the Multi Wise Payment is particularly wanting.  That payment amounted to USD1,602,313.32, equivalent to about HK$12.5 million.  Chou said that TJ Chen gave him a list of the 1^st Defendant’s suppliers to pay.  That list was not produced.  Instead, he said as the Defendants’ customers could not catch up with the payment, TJ Chen asked him to pay Initation and he produced some screen shots of his communication with TJ Chen and the particulars of Initation’s bank account.  The screen shots were uninformative.  They bore no reference to the matching arrangements or the 2^nd Defendant’s payments.  The amount in this transaction was huge.  For the same reasons as stated in the preceding paragraph, the absence of evidence casts very serious doubt about the credibility of Chou’s evidence.  There are no particulars how much the Defendants’ customers had paid to the unknown CNY receiving companies and how much they had paid Initation.  For the same reasons as given in the above subsection, the Defendants’ case in respect of this payment is not believable.

The Multi Wise/D4 Payment

44.  The 4^th Defendant is entirely silent as regards the Multi Wise/D4 Payment which was traced to the Multi Wise Payment received by the 2^nd Defendant as first layer recipient who then transferred it to the 4^th Defendant.   The Plaintiff’s evidence is unchallenged.  The payment by the 2^nd Defendant and receipt by the 4^th Defendant are unexplained.  In the circumstances, the Plaintiff is entitled to summary judgment, provided that it may not enforce the judgment in respect of this payment against both the 2^nd and 4^th Defendants.

Conclusion – Bona Fide Purchaser for Value

45.  For reasons as analysed above, when the defence of bona fide purchaser for value is tested against the incontrovertible background, I do not find Chou’s case credible.  I would even go that far as to say on the evidence as it now stands it is not even capable of belief.  There is no need to consider the other elements of the defence. 

Illegality of the Currency Matching Arrangements under Mainland Law

46.  Quite apart from the evidential issues, a defendant cannot in law be considered to have provided value for the property if it was transferred pursuant to an illegal transaction.  Ms Mak submitted that the currency matching arrangements are illegal under both Mainland law and Hong Kong law.

47.  The Plaintiff adduced a legal opinion from Beijing Y. R. Law Firm (“YR Law Firm”) on 19 December 2019 which opines that the foreign currency matching arrangements engaged by the Chens, the 2^nd and 4^th Defendants constitute a private purchase and sale of foreign currencies and the amount involved is deemed to be “relatively large”.  As such the transactions contravene Article 45 of the Regulations of the People’s Republic of China on Foreign Exchange Administration (the “Foreign Exchange Regulations”).  The 2^nd and 4^th Defendants are liable to have the illegal income confiscated and be penalised by a fine of up to 100% of the illegal income, or be subject to criminal liabilities.  Article 45 provides as follows:

「第四十五條

私自買賣外匯、變相買賣外匯、倒買倒賣外匯或者非法介紹買賣外匯數額較大的，由外匯管理機關給予警告，沒收違法所得，處違法金額30%以下的罰款；情節嚴重的，處違法金額30%以上等值以下的罰款；構成犯罪的，依法追究刑事責任。」

Translation:

“Article 45

Whoever buys or sells foreign exchange without permission, buys or sells foreign exchange in a disguised form, buys and sells foreign exchange, or illegally introduces a large amount of foreign exchange, the foreign exchange administration authority shall give a warning, confiscate the illegal income, and impose a fine of less than 30% of the illegal amount; if the circumstances are serious, a penalty shall be imposed.  A fine of more than 30% of the illegal amount and less than the equivalent value; if a crime is constituted, criminal responsibility shall be investigated according to law.”

48.  “Foreign exchange” is defined by Article 3 as follows:

「第三條     

本條例所稱外匯，是指下列以外幣表示的可以用作國際清償的支付手段和資產：

(一)     外幣現鈔，包括紙幣、鑄幣；

(二)     外幣支付憑證或者支付工具，包括票據、銀行存款憑證、銀行卡等；

(三)     外幣有價證券，包括債券、股票等；

(四)     特別提款權；

(五)     其他外匯資產。」

Translation:

“Article 3

The term “foreign exchange” mentioned in these regulations foreign exchange refers to the following instruments of payment and assets expressed in foreign currencies that can be used for international liquidation:

(1) foreign currency in cash, including bank notes and coins;

(2) foreign currency payment instruments, including bills, bank deposit certificates, bank cards, etc.;

(3) negotiable securities in foreign currencies, including government bonds, stocks, etc.;

(4) special drawing rights;

(5)     other foreign exchange assets.”

Basically, “foreign exchange” means foreign currencies whether in the form of notes, coins or instruments of payment.

49.  According to YR Law Firm, under this article, illegal purchase of foreign exchange mainly includes situations such as buying and selling foreign exchange in a disguised form. The disguised purchase of foreign exchange refers to transaction not in the form of a direct exchange between CNY and foreign currency, but the act of repaying CNY in foreign exchange or repaying foreign exchange in CNY, and realizing currency value conversion by swapping foreign exchange and CNY.  Cross-border currency exchange is a typical form of foreign exchange trading in disguised form.  Through underground banks, illegal parties collude with overseas personnel, enterprises, and institutions or use overseas bank accounts to assist others to effect cross-border remittances and transfer of funds.  This type of underground bank is also known as “double-knock-type” underground bank, which means that funds are circulated in a one-way manner within and outside the country without physical flow.  The balance between the two places is usually achieved by way of reconciliation.  Nowadays, the major operation of most underground banks is to arrange cross-border payments.  Such activities cause huge capital outflows, which is extremely harmful to society.  YR Law Firm opined that the currency matching arrangements among the Chens, the 2^nd and 4^th Defendants was a typical form of disguised cross-border currency exchange which is unlawful under Mainland law.

50.  No expert evidence on Mainland law was adduced by the Defendants before the master.  It was not until 2 November 2020 that the Defendants filed, without leave, an affirmation from Poon Chi Ho exhibiting a legal opinion from Sincere Partners & Attorney of Shenzhen (“Sincere Partners”).  This new evidence does not meet the Ladd v Marshall[11] requirements.  There was also no explanation for the delay.  However, to avoid delay which may cause more prejudice to the Plaintiff, Ms Mak did not insist on excluding the evidence and accepted the prejudice by forgoing the opportunity to respond to the Mainland law opinion filed by the 2^nd and 4^th Defendants. 

51.  The Defendants specifically relied on paragraph 4 of section 3 of the opinion.  Sincere Partners opined that although the 2^nd and 4^th Defendants’ repayment to the 1^st Defendant took place in the Mainland, it falls within the “domestic” category as stipulated in the Foreign Exchange Regulations.  Their argument is that it is debatable whether the repayments by the 2^nd and 4^th Defendants fall within the meaning of “foreign exchange” as defined in article 3 of the Foreign Exchange Regulations. They said:

「（四）第二被告、第四被告向第一被告還款的行為雖發生在大陸，即屬于《中華人民共和國外滙管理條例》所規定的 “境內” 範疇。但根據《中華人民共和國外滙管理條例》第三條的規定，第二被告、第四被告向第一被告還款的資金是否屬于《中華人民共和國外滙管理條例》所規定的 “外匯” 範疇，存在爭議。有可能不能認定為該條例所規定的 “外匯”。這種情況下，則不受《中華人民共和國外滙管理條例》的約束。反之，簡單認定被告二及被告四的行為屬于《中華人民共和國外滙管理條例》所規定的 “外匯” 違法行為，可能過于武斷。」

Translation

“Although the 2^nd and 4^th Defendants’ act of repaying the 1^st Defendant took place within the Mainland, and fall within the “domestic” scope as defined in the Regulations of the People's Republic of China on Foreign Exchange Administration; however, in accordance with Article 3 of the Regulations of the People's Republic of China on Foreign Exchange Administration, it is debatable whether the repayments by the 2^nd and 4^th Defendants fall within the meaning of “foreign exchange” as defined in the Regulations of the People’s Republic of China on Foreign Exchange Administration. It may not be recognized as “foreign exchange” under the Regulations. In that case, it is not caught by the Regulations of the People's Republic of China on Foreign Exchange Administration. On the other hand, to simply conclude that the acts of 2^nd and 4^th Defendants are violations of “foreign exchange” control under the Regulations of the People’s Republic of China on Foreign Exchange Administration may be too arbitrary.”

In essence, Sincere Partners submitted that the opinion of YR Law Firm was arbitrary.  Their argument is founded on their construction of Article 3 of the Foreign Exchange Regulations.

52.  Though I am not an expert in Mainland law, it is obvious that Sincere Partners were avoiding the issue by just looking at part of the transaction in isolation.  They just focussed on the repayments by the customers of the 2^nd and 4^th Defendants to the 1^st Defendant’s creditors in isolation of the prior part of the transaction which caused those repayments.  Those repayments were in local currency, ie CNY, within the Mainland and not by foreign exchange.   Such repayments were of course domestic and not caught by Article 45.  However, the 2^nd and 4^th Defendants’ repayments to the 1^st Defendant’s creditors were made on behalf of the 1^st Defendant and should not be looked at in isolation without regard to the 1^st Defendant’s payment in USD to the 2^nd and 4^th Defendants in Hong Kong as result of which the 2^nd and 4^th Defendants cause their customers to pay the creditors of the 1^st Defendant in the Mainland.  The payments and repayments should be viewed as parts of the same transaction.  The effect of the transaction viewed as a whole is that the 1^st Defendant was the vendor of USD in Hong Kong while the 2^nd and 4^th Defendants were purchasers paying CNY in the Mainland and collecting the USD in Hong Kong.  The CNY paid in the Mainland was converted into USD in Hong Kong.  The transaction is clearly a sale and purchase of foreign exchange and export of the foreign exchange out of the Mainland.  It was contrary to Article 45.  It was a “double-knock-type” underground cross-border sale of CNY and purchase of USD as described by YR Law Firm.  The funds were circulated in a one-way manner within and outside the Mainland without physical flow.  The balance between the two places was achieved by way of reconciliation through the Chens’ currency matching arrangements.  Viewed nationwide, the transaction upset the Mainland’s balance of payment with Hong Kong.  As stated in Article 1, the purpose of the Foreign Exchange Regulations is precisely to control this type of transaction so as to strengthen foreign exchange control, enhance international balance of payments and enhance international economic development.   I accept the opinion of YR Law Firm that the transaction is unlawful and reject the opinion of Sincere Partners.

Illegality of the Currency Matching Arrangements under Hong Kong Law

53.  Ms Mak also submitted that the underground foreign exchange transaction is illegal under section 29 in Part 5 Division 2 of Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap 615).  Under that section, it is an offence to operate a money service without a licence.  Money service is defined in Part 1 of Schedule 1 as including money changing and remittance services.   Remittance service is defined as a service of one or more of the following that is operated in Hong Kong as a business: (a) sending, or arranging for the sending of, money to a place outside Hong Kong; (b) receiving, or arranging for the receipt of, money from a place outside Hong Kong; (c) arranging for the receipt of money in a place outside Hong Kong.  There is no dispute that neither the 2^nd Defendant nor the 4^th Defendant is licensed to carry out such services.  Ms Mak therefore argued that their act of causing their customers to pay the 1^st Defendant’s creditors in the Mainland is caught within section 29.  She quoted Arrow ECS Norway AS v M Yang Trading Ltd & Ors[12] in support of her argument.  I think Arrow ECS Norway is distinguishable from the present case.  The relevant defendants in that case operated a money service business as a business.  They were unlicensed money service operators, whereas the 2^nd and 4^th Defendants only arranged the money service for themselves.  The Chens are certainly operating the money service business as a business and are caught by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.  For the Defendants, it is at least arguable that they are not.

Change of position

54.  The 2^nd and 4^th Defendants also raised the defence of change of position.  They argued that acting on the four documents provided by TJ Chen, Chou honestly believed that the 1^st Defendant was the owner of the funds transferred under the Myphone/D4 Payments and the Multi Wise Payments. The 2^nd and 4^th Defendants suffered a change of position by causing their customers to pay the 1^st Defendant’s creditors.

55.  To raise this defence, the defendant has to prove: (1) there was a causative link between the receipt of the benefit and his change of position, so that, but for the receipt of the benefit, the defendant’s position would not have changed, either because the defendant no longer has the benefit received or because he has changed his position in some other way in reliance on the receipt of the benefit; and (2) the defendant’s position must have changed in circumstances which make it inequitable for him to make restitution to the plaintiff:  see Chitty on Contract[13]. But this defence is not available to someone who has changed his position in bad faith or to a wrongdoer: see Lipkin Gorman[14] or if the change was unlawful:  see Barros Mattos Junior v General Securities and Finance Co Ltd & Another[15].

56.  In my view, this defence is not available to the Defendants for want of evidence.  As I have already found when considering the defence of bona fide purchaser for value above, there is neither evidence of the 2^nd and 4^th Defendants’ payments out to the 1^st Defendant’s creditors nor of any causal link between such payments out and their receipt of the Myphone/D4 Payments and Multi Wise Payments.

57.  Furthermore, the Defendants also may not rely on this defence because their change of position was brought about by unlawful sale and remittance of foreign exchange contrary to Article 45 of the People’s Republic Regulations on Foreign Exchange Administration.  Besides, under the principle in Tinsley v Milligan[16], a party to an illegal arrangement cannot enforce a claim against his counter-party if he has to rely on his own illegal conduct as an element of his claim.

58.  Still further, the illegality of the arrangements indicates that the Defendants have failed to act in a commercially acceptable way that it would be inequitable or unconscionable to allow them to deny restitution to the Plaintiff.

The Plaintiff’s Illegality

59.  The Defendants raised the Plaintiff’s illegality as a defence to its claim for unjust enrichment.  They argued that the Plaintiff’s acts in responding to the imposter’s emails by transferring funds in USD to third parties’ bank accounts outside the Mainland with the aim of assisting Hepolilo to receive payment despite of their tax limit problem might constitute a tax avoidance or/and evasion acts.  Relying on the opinion of Mainland law expert YR Law Firm, Mr Cheng argued that the Plaintiff’s deliberate transfer of USD payment to third party payees in Hong Kong and outside the Mainland with the belief that the funds would be transferred back to Hepolilo after their tax problem was resolved may constitute a crime under the Foreign Exchange Regulations.  He said that under the present evidence it is difficult to decide.  Further evidence, discovery and Mainland law opinion would be required to assist the court to determine the illegality of the Plaintiff’s acts.  He therefore submitted that this is a triable issue which could not be resolved in a summary judgment on affidavits and affirmation evidence only. 

60.  With respect, Mr Cheng’s submission was incomprehensible.  He sought to rely on the opinion of YR Law Firm but did not specifically identify which aspect of that opinion and which provisions of the Foreign Exchange Regulations he was relying on to support his case of the Plaintiff’s illegality.  He said that the Plaintiff parked payments due to Hepolilo in a third party account pending resolution of Hepolilo’s tax problem constituted an offence under the Foreign Exchange Regulations.  But he did not identify the provisions contravened and why such temporary parking of funds is an offence.  He seemingly suggested that such arrangement was no different from the Chens’ currency matching arrangements.  The arrangements which the Plaintiff was led to believe were quite different in that they did not involve selling of foreign currency and remittance out from the Mainland.  Mr Cheng did not even know what the Defendants’ defence and case are going to be.  He suggested not only filing of evidence, but also discovery and filing of Mainland law expert opinion.  Mr Cheng was not even sure if the Defendants’ case is going to be tax avoidance or tax evasion.  The former is legitimate; the latter is not.  He did not appear to have formulated a defence, let alone one which is arguable and supported by evidence.  He just asked for time to investigate.  This is not the way to resist an Order 14 application.

61.  In Tinsley v Milligan quoted by Mr Cheng, the House of Lords held that the defendant was entitled to recover if she was not forced to plead or rely on an illegality.  Under this approach, a person should not be granted a remedy only if he has to rely directly on unlawful conduct to succeed.  Conversely, if he can assert his claim without relying on the illegal conduct, he is entitled to succeed.  Whatever the Defendants’ suggested defence is going to be, the Plaintiff did not have to rely on the alleged illegality to sustain its claim.  The Plaintiff’s case is that it paid over money to the 1^st Defendant by mistake and is entitled to restitution.   The Defendants’ suggested defence of the Plaintiff’s illegality has no prospect of success.

Conclusion

62.  There is no dispute that the 2^nd Defendant received the Multi Wise Payments direct from the Plaintiff as first layer recipient; and that the 4^th Defendant received the Myphone/D4 Payments from the 1^st Defendant as second layer recipient and the D4 Payments from the 2^nd Defendant as second layer recipient.  These funds belong to the Plaintiff.  There is also no dispute that the Plaintiff has no business dealings with the 1^st, 2^nd and 4^th Defendants.  On the evidence adduced by the 2^nd and 4^th Defendants, I am not satisfied that they have raised the defence of bona fide purchaser for value without notice or change or position, which is arguable and capable of belief.  Accordingly, this appeal is allowed and the master’s order is set aside.

63.  I therefore enter summary judgment against the 2^nd Defendant in respect of the Multi Wise Payments; and against the 4^th Defendant in respect of the Myphone/D4 Payments and the Multi Wise/D4 Payment.  The 4^th Defendant’s liability for the Multi Wise/D4 Payment and the 2^nd Defendant’s liability for the Multi Wise Payments to the extent of the amount received under the Multi Wise/D4 Payment of US$4,370.75 are joint and several.  I also make a costs order nisi that the 2^nd and 4^th Defendants shall pay the Plaintiff’s costs of the appeal and costs before the master jointly and severally.