BR. C.A.T. INTERNATIONAL CO. LTD v. HONGKONG PROOF IMPORT AND EXPORT TRADING CO., LTD AND OTHERS

HCA 1023/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1023 OF 2014

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J U D G M E N T

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Introduction

1.  This is an action issued by the plaintiff, a victim of cyber fraud, to recover various sums from recipients to which the plaintiff had paid out as a result of the fraud.

2.  The action was originally commenced by the plaintiff (“P”) against 1^st and 2^nd defendants referred to as “First Layer Recipients” and later 3^rd to 12^th defendants were added and collectively referred to as “Second Layer Recipients”. P’s claim was based on (i) proprietary restitution; (ii) unjust enrichment; (iii) knowing or unconscionable receipt; (iv) conversion; and (v) conspiracy to injure by unlawful means.

3.  Default judgment were entered against D1 and D2, and 5 other defendants, namely D3, D5, D6, D9 and D11 on 10 May 2016 by Chung J[1]. P discontinued the action against D4, D10 and D12 on 8 February 2017.

4.  The present trial originally concerned D7 and D8, but on the 2^nd day of trial, D8 was able to reach a settlement with P and the action against D8 was stayed on various conditions.

5.  As a result, the trial proceeded against D7 only. P decided not to pursue its claim based on conversion or conspiracy to injure by unlawful means[2]. Subsequently, P also decided not to pursue the cause of action of knowing or unconscionable receipt against D7[3]. Thus, P’s claim against D7 proceeded on (i) proprietary restitution and (ii) unjust enrichment.

6.  Counsel Mr Ernset Ng appeared for P, and Mr Martin Wong and Mr Benjamin Lam appeared for D7. D8’s Counsel remained during the remaining part of the trial, save on the last day for closing submissions, on a watching brief for D8 who agreed to give evidence for D7.

7.  Separately, D7 and her husband Yau Si Yuen (“Yau”) have issued an action on 25 August 2016, namely HCA 2199/2016, against D8 and Allied Express Corporation Limited/滙至有限公司(“Allied”), a company controlled by D8 and/or his wife. D7 had tried to apply for that action to be consolidated with the present action and to be tried together. Both P and D8 had opposed, and this application was in the end not allowed.

Dramatis Personae

8.  P is and was at all material times a company incorporated under the laws of the Kingdom of Saudi Arabia and is said to be one of the major contracting and trading group of companies operating more than seven decades in the Middle East and Africa, particularly in Saudi Arabia. Mr Georges Joseph Hage is the Director and Chief Executive Officer of P’s parent company C.A.T International Limited and he attended the trial to give evidence on behalf of P.

9.  The First Layer Recipients, D1 and D2, are/were companies incorporated under laws of Hong Kong and controlled and operated respectively by D3 and D4 as director and/beneficial owner. D1 amd D2 each held an account at HSBC.

10.  D7 is a resident in Hong Kong. Her husband Yau is and was at all material times a trader and supplier of frozen seafood and sole proprietor of Hai Long International Trading Co which carried out its business at Ping Shan in Yuen Long (“Hai Long”)[4]. D7 herself is said to have been assisting Yau in Hai Long and she herself is and was at all material times the sole proprietor of another business called Peak Ford (HK) Trading Co (“Peak Ford”)[5].

11.  D8 is also a resident in Hong Kong. He and his wife started a money exchange business in about 2002 under the name of Universal Money Exchange Co/滙通人民幣(外幣)找換行 (“Universal”) which was later held through Allied, a company incorporated on 27 February 2012 under laws of Hong Kong.

12.  As from 12 March 2012, D8’s wife has been the sole registered shareholder and director of Allied and D8 is the company secretary. Allied holds a licence for operating money service and carries out its business at 4 branches[6] namely Sun Pole Money Exchange Co (中港人民幣(外幣)找換行) (“Sun Pole”) at Shop F2, 1^st floor, Kingswood Richly Plaza II, No 1 Tin Wu Road, Tin Shui Wai in New Territories (天水圍天湖路一号∙新北江商場), another one at Shop 147C, 1^st floor, Kingswood Richly Plaza I, Ting Shui Wai and two others in Yuen Long under name of Universal[7].

The Fraud

13.  In April 2014, P’s Area Accountant received various fraudulent emails and invoices from a fraudster who requested settlement of invoices, as a result of which, the following amounts, totaling USD4,045,676 were transferred by P:

(i) USD1,464,070 transferred to D1’s HSBC bank account on about 23 April 2014;

(ii) USD2,581,606 transferred to D2’s HSBC bank account on about 27 April 2014.

14.  From the bank statements of D1 and D2 subsequently obtained by P, it can be seen that:

(i) USD1,463,991.60 was credited into D1’s bank account on 24 April 2014;

(ii) USD2,581,606 was received by D2 on 29 April 2014, but shown on D2’s bank statement as HKD19,984,633.12.

15.  Further, it can be seen that upon receipt of the above sums, D1 and D2 transferred out almost immediately the entire sums, and for the purposes of the present action:

(i) On 25 April 2014, a sum of USD323,000 (or HKD2,500,407.60) was transferred from D1’s account to D7’s account no 507-708048-888 at HSBC (“D7’s HSBC Account”), and on 20 October 2014, the balance in D7’s HSBC Account was HKD2,972,404.38[8];

(ii) On 26 April 2014, a sum of USD129,100 was transferred from D1’s account to D8’s account and on 23 September 2014, the balance of D8’s account was HKD1,026,962.56[9].

16.  P applied and obtained Mareva Injunction orders against various defendants including D7 and D8 on 4 November 2014. The Mareva Injunction orders against D7 and D8 were subsequently discharged by consent respectively on 21 and 20 November 2014, against the undertaking of each of them not to remove the respective sum transferred to their respective account.

17.  Mr Hage confirmed his evidence in his witness statement on how the fraud was committed against P in the first place and related matters. He was not cross examined and there was no dispute as to his evidence, which I accept.

18.  It was not disputed that the sum of USD323,000 transferred to D7’s HSBC Account came from and could be traced to the amount transferred to D1 by P.

D7’s case

19.  D7’s case was a simple one. According to her, on or around 24 April 2014, Yau called her from the Mainland and told her that an amount equivalent to RMB 2,500,000 would be paid into her bank account/s and her husband told her to use the money to settle certain bills. Then, the following sums were received by D7, totaling HKD3,094,059:

(i) On 25 April 2014 - HKD300,000 in D7’s HSBC Account;

(ii) On 25 April 2014 - USD323,000 in D7’s HSBC Account;

(iii) On 25 April 2014 - HKD222,721 in D7’s account with Bank of China (Hong Kong) Limited (“D7’s BOC Account”);

(iv) On 30 April 2014 - HKD70,931 in D7’s HSBC Account.

20.  D7’s case was further that as the bills were not immediately due, the sum of USD323,000 was left in her account, and D7 claimed that she had no knowledge of any of the unlawful acts alleged by P and denied that she and her husband were involved in any fraud.

21.  As for Yau, in gist, his case was that he was only involved in a money exchange with D8 through the “underground banking system”, as explained further below, of an amount of RMB 2,500,000 received from one of Hai Long’s Mainland customers, and that it was D8 who arranged for the USD323,000 to be transferred to D7’s HSBC Account, as part of the USD and HKD exchanged for the RMB 2,500,000. It was also Yau’s case that he had no knowledge of any of the unlawful acts alleged by P and he was not involved in any fraud.

The issues

22.  Thus, D7’s defence and/or Yau’s defence was that D7 and/or Yau was a bona fide purchaser for value without notice. The disputed issues are:

(i) Whether there was requisite knowledge, in that D7 and /or Yau had actual and/or constructive knowledge of the proprietary rights of P (including failure to enquire into the same);

(ii) Whether there was good consideration;

(iii) Should judgment be entered against D7, what relief should be granted, including whether compound interest should be awarded.

The legal principles

23.  As explained by DHCJ Marlene Ng in Tam Ying Man and Leung Ka Chun and others HCA 2166/2011, unrep judgment 31.08.16,

“The defence of bona fide purchaser for value without notice, which constitutes an exception to the nemo dat potest dare quod non habet principle, is available to defeat proprietary restitionary claims. Where the defence applies, the defendant is considered to have obtained good title to the property so the plaintiff’s property rights are extinguished and the proprietary claim is defeated absolutely. The burden of establishing such defence was on Ds[10].”

24.  DHCJ Marlene Ng had referred to the 5 types of knowledge identified by Gibson J in Baden v Société Générale pour Faouriser le Développement du Commerce et de l’Industrie en France SA (Note)[11], namely the defendant will be considered as having notice if he (1) has actual notice, (2) wilfully shuts his eyes to the obvious, (3) wilfully and recklessly fails to make such inquiries as would be made by an honest and reasonable man, (4) has knowledge of facts which would cause a reasonable person to appreciate that the transaction is improper, or (5) has knowledge of facts which would cause a reasonable person to make inquiries or seek advice which would reveal the probability of impropriety.

25.  DHCJ Ng further quoted the following passage of DHCJ Morris QC in Armstrong DLW Gmbh v Winnington Networks Ltd [2013] Ch 156, as follows:[12]

“123. In my judgment, the position, in a commercial context, can be summarised as follows: (1) Baden types (1) to (3) knowledge constitute “notice” so as to defeat the defence. In order to defeat the defence on this basis, it is not necessary to show that the defendant realised that the transaction was “obviously” or “probably” improper or fraudulent; the possibility of impropriety or the claimant’s interest is sufficient. (2) In other circumstances, mere negligence is not sufficient. Baden types (4) and (5) knowledge constitute “notice” such as to defeat this defence only if, on the facts actually known to this defendant, a reasonable person would either have appreciated that the transaction was probably fraudulent or improper, or would have made inquiries or sought advice which would have revealed the probability of impropriety.”

26.  DHCJ Ng then summarized what was held by the Privy Council in Credit Agricole Corporation and Investment Bank v Papadimitriou [2015] 1 WLR 4265, that it is important to distinguish between 3 different circumstances[13]:

(a) Where the defendant in fact appreciated that a proprietary right in the property probably existed so that he had actual notice of the right;

(b) Where a reasonable person with the attributes of the defendant should have appreciated, based on facts already available to him, that the right probably existed in which case he had constructive notice of the existence of the right; and

(c) where the defendant should have made inquiries or sought advice which would have revealed the probable existence of such a right in which case he also would have constructive notice of the right.

27.  With the above principles in mind, I turn to the facts of the present case.

The factual issues

Yau’s and D7’s business

28.  According to the business registration record, Peak Ford commenced its business on 10 May 2009 in trading, food wholesale and retail. It was Yau’s evidence at the trial that Peak Ford started off as a retail shop some 20 years ago, and he had been running it and it was only in 2009 that his wife D7 was registered as the proprietor, and that when he started the Japanese seafood business, he then set up Hai Long. The retail shop had since ceased, and the business of both Peak Ford and Hai Long is now importing seafood from Japanese suppliers for resale to purchasers in Mainland China.

29.  Although Peak Ford and Hai Long have different business addresses/offices, namely the former at Po Wai Building, Ta Yip Street in Yuen Long and Hai Long at Energy Industrial Centre, San Fui Street in Ping Shan, Yuen Long, it was Yau’s evidence during the trial that they could be regarded as having the same business nature.

30.  When asked which of Hai Long or Peak Ford he would use to import the seafood from Japan, Yau had said it did not matter, and that he was familiar with both businesses. He said he could place orders whether he was in Hong Kong or out of Hong Kong, and that all payments to the Japanese suppliers would be arranged by him, usually by telegraphic transfer, and sometimes also in cash delivered personally by him when he went to Japan, or when his suppliers came to Hong Kong.

31.  Yau had produced a bundle of invoices from Japanese suppliers, air way bills, import declaration forms and remittance records. Some of the invoices/air way bills addressed to Peak Ford were marked to the attention of Yau, and it seems clear that Yau was/is the one in charge of the seafood trading business and operations of both Peak Ford and Hai Long.

32.  Yau was asked about receipts issued by Japanese suppliers, but he had said there were never any receipts. It was not P’s case that those transactions Peak Ford or Hai Long had with the Japanese suppliers were sham transactions. In any event, I find there was no sufficient evidence to say those were sham transactions.

33.  Having considered the documentary evidence produced by Yau, I am prepared to accept, on a balance of probabilities, that Peak Ford and/or Hai Long were/are operating a business of purchasing seafood, in particular sea cucumber, from Japanese suppliers for onward sale.

34.  It was Yau’s case that the seafood ordered from the Japanese suppliers would be sold to Mainland customers/purchasers.

35.  During the trial, Yau had also produced two tax returns, one of Hai Long for the year of assessment 2014/2015, and one of his own personal tax return for the year of assessment 2015/2016. Both had Hai Long’s balance sheets and profit and loss accounts for the relevant year attached.

36.  The Hai Long balance sheets and profit and loss accounts for 2014/2015 were dated 20 May 2015 and indicated “sales” of some HK$58m and “purchases” of some HK$55m. Those for 2015/2016 were dated 8 July 2016 and indicated “sales” of some HK$18.7m and “purchases” of some HK$17.7 m. Hai Long also rented an office in Guangzhou.

37.  With the volume of business Hai Long was stated to be carrying on, there should be at least records, such as orders/invoices/receipts/payments/delivery of the goods, evidencing the onward sale by Hai Long/Peak Ford to the ultimate purchasers in Mainland, similar to those voluminous documents produced by Yau in relation to the purchases from the Japanese suppliers. Yau had said no custom declaration was required for the import of the sea cucumber to the Mainland. It was also Yau’s evidence during the trial that transactions with his Mainland customers were conducted on the telephone or face to face.

38.  However, there should at least be management or internal accounts/records kept by Hai Long/Peak Ford regarding their business/dealings with their Mainland customers, in order for Hai Long/Yau to prepare those balance sheets and profit and loss accounts for the Hong Kong Inland Revenue Department. Yau was however not asked or cross examined on this.

39.  Yau did not produce any documents to support his evidence as to his/Hai Long’s/Peak Ford’s business dealings with Mainland customers/purchasers. On the other hand, there was no sufficient evidence to contradict what Yau said. D7 confirmed the import of frozen seafood from Japan was mainly for resale to the Mainland and that Yau spent most of his time in the Mainland and a lot of time in Japan. Hai Long also rented an office in Guangzhou. Having considered their evidence, on a balance of probabilities, I am prepared to accept Yau’s and D7’s evidence that Hai Long/Peak Ford did sell the seafood from Japan to purchasers in Mainland.

Identity of 林仁仁/Lin Ren Ren

40.  According to Yau’s witness statement, on 24 April 2014, he was told by one of Hai Long’s staff in Guangzhou 林仁仁/Lin Ren Ren (“Lin”) that Hai Long had received a total sum of RMB 2,548,100 from one 孫全道 (“Sun”) who was Hai Long’s customer in Dalian, and that the sum was paid by way of 3 direct bank transfers into Lin’s bank account.

41.  Mr Ng had queried over Lin’s employee status. Yau admitted during cross examination that there was no identity card or employment contract or any payroll record produced as to Lin’s employment with Hai Long/ Peak Ford, but subsequently, Yau had produced the two tax returns and Hai Long’s balance sheets/profit and loss accounts for 2014/2015 and 2015/2016 referred to earlier.

42.  In Hai Long’s 2014/2015 and 2015/2016 balance sheets/profit and loss accounts, a list of “salaries” was attached and one of the items was in relation to “Salaries - China” with Lin’s name and her China ID card number stated thereunder, and also her salary of HKD97,562 for the relevant financial year, or about HKD8,130 per month, which would in 2014 be about RMB 6,500 @ 803[14].

43.  As pointed out earlier, the 2014/2015 balance sheets/profit and loss accounts were in fact prepared in May 2015, about a year after those transactions on 24 and 25 April 2014, and the 2015/2016 ones were prepared in July 2016. However, Yau had said that Lin’s name also appeared on the tax documents for other periods as an employee of Hai Long.

44.  The balance sheets/profit and loss accounts for Hai Long were not audited by professional auditors as Hai Long is not a limited company. Yau’s evidence was that the balance sheets/profit and loss account was prepared by his accounts department. Under cross examination, Yau admitted that the reference to Lin being an employee of Hai Long in the Mainland was only based on what he had told the department. During re-examination, Yau had explained that after Lin received money, she would then prepare a receipt, and further she would prepare a list of monthly salaries of all staff in Mainland including her own plus the rental of the Guangzhou office.

45.  There was no supporting documentary evidence produced by Yau as to Lin’s employee status, but on the other hand, there was no sufficient evidence to contradict Yau’s evidence that Lin was an employee of Hai Long at the material time. Although the tax returns were prepared after those transactions on 24 and 25 April 2014, there was no suggestion that they were prepared for the purpose of this litigation. If they were, one would have thought that Yau would have produced them much earlier rather than wait until after cross examination. Having considered the evidence, on a balance of probabilities, I am prepared to accept that Lin was indeed Hai Long’s employee at the material times.

46.  Yau had said Hai Long was using Lin’s bank account for transfer of funds at the Agricultural Bank as Hai Long did not have an account at that bank. Whether Lin was an employee of Hai Long or not, in my view she was clearly a nominee or an agent for Hai Long/Peak Ford/Yau in the receipt of RMB from various sources and the transfer out of such sums to various other accounts in Mainland, including those involved in the RMB to HKD currency exchange transactions. In fact, apart from those transactions on 24 and 25 April 2014, there were two further currency exchange transactions Yau had with D8, involving transfers of funds from Lin’s account to one of D8’s Designated Accounts (defined below) respectively on 30 May 2014 and on 11 June 2014, as seen from the Chat Messages referred to below, and on those two occasions, D8 had transferred the HKD into Yau’s account with Hang Seng Bank. Those transactions would be after the freezing of D7’s HSBC Account.

47.  The use of an account of an employee as a nominee account for the purpose of transferring funds in an “underground banking system” can be seen in Arrow ECS Norway AS v Xin Cheng Holdings (International) Company Limited and Others, HCA 239/2016, unrep, Decision 12 May 2016. In that case, the account in the Mainland from which funds were transferred was not held in the name of the subsidiary of the 18^th defendant, but an employee earning only a meagre salary, and the employee was said to be only a nominee holding the account used for the purpose of the remittances from the Mainland to Hong Kong, and the purpose was said to avoid legal implications for the subsidiary in the Mainland[15].

The 3 payments on 24 April 2014 by Sun

48.  According to Yau, the sum of RMB 2,548,100 was paid by way of 3 direct bank transfers from Sun’s bank account with the Agricultural Bank of China in Dalian to Lin’s bank account with Agricultural Bank in Shenzhen. Yau had produced 3 bank advices indicating that the sums of RMB1,000,000, RMB548,100 and RMB1,000,000 were transferred from Sun’s bank account at the Agricultural Bank in Dalian into Lin’s bank account at Agricultural Bank in Shenzhen respectively at 15:16:22, 15:17:58, 16:14:25 on 24 April 2014[16] (“24.04.14 Bank Advices”).

49.  RMB 2,548,100 was not a small sum. There was no invoice or receipt, or indeed any other documentary evidence at all showing that Sun was a customer who had purchased any seafood from Hai Long/Peak Ford/Yau, or that the payments were for the purchase of any seafood. In particular, on all the three 24.04.14 Bank Advices, the section for “purpose”/用途, was left blank. There was no supporting documentation on the history of Yau’s business dealings with Sun, whether before or after those 3 transactions. Also, there was no information on the identity or contact details of Sun, or the amount of seafood Sun had purchased.

50.  As mentioned earlier, Yau had explained that his dealings with his Mainland customers were by telephone or face to face and there would not usually be evidence in writing. Yau was not really cross examined on what he said although Mr Ng submitted that it was for Yau or D7 to produce supporting evidence.

51.  As with other Mainland customers, there was no supporting documentation in relation to Yau’s/Hai Long’s/Peak Ford’s business dealings with Sun. I do not find that there was sufficient evidence that the sums totaling RMB2,548,100 allegedly from Sun were in payment of any purchase of seafood by Sun from Hai Long/Peak Ford/Yau. On the other hand, there was no sufficient evidence that the 24.04.14 Bank Advices were not genuine bank advices from Agricultural Bank, and in fact they contained an extra note on the lower part of the advices giving a telephone number for customer service enquiry, when compared to the 25.05.14 Bank Advices referred to below.

52.  On a balance of probabilities, whatever the purpose of the transfers from Sun, I am prepared to accept that there was a total sum of RMB2,548,100 transferred to Lin’s account from Sun on 24 April 2014.

The relationship between D7, Yau and D8

53.  Yau had said in his witness statement that his customers in Mainland would pay Hai Long/Peak Ford in RMB and usually he would arrange for the sale proceeds to be transferred to D7’s or Hai Long’s bank account in Hong Kong in HKD through a Hong Kong money exchange company.

54.  It was not disputed that such currency exchange and transfer would be conducted through what is commonly called an “underground banking system” or “underground banking arrangement”. The arrangement has been set out by Au-Yeung J in Arrow ECS Norway AS[17].

55.  As I understand it, the “underground banking system” has been developed due to the Mainland’s restriction and control on outward remittance of RMB. The arrangement involves the transfer of RMB in the Mainland to HKD or USD in Hong Kong, namely a customer would pay the amount in RMB in the Mainland into designated or nominee account/s of the money exchange company’s agent in the Mainland, and the customer would then receive from the money exchange company in Hong Kong the equivalent in HKD/USD in Hong Kong at an agreed exchange rate.

56.  According to Yau, prior to these proceedings and the transactions which are subject matter of these proceedings, Hai Long/Peak Ford had regularly engaged D8 in currency exchange.

57.  D8 had also said in his witness statement that he and Yau had been having currency exchange transactions for several years prior to the present litigation. However, D8 appeared to have said in his witness statement that he did not know that D7 was Yau’s wife until he saw the documents disclosed by D7 in the present proceeding, and that it was after checking his records that he recalled that Yau had instructed him to deposit sums into the account of a “Wong Siu Heung”, namely D7[18].

58.  D7/Yau had produced the “What’s App” Chat messages between Yau and D8 from 21 March 2014 to 25 November 2014 (“Chat Messages”)[19]. There was no challenge that the Chat Messages were contemporaneous records.

59.  As seen from the Chat Messages, on 10 July 2014, D8 had called Yau and asked Yau’s wife to send him by what’s app the letter from the bank to D7 regarding the freezing of D7’s bank account, as D8 said he would need to find some one to “tackle this” (我要揾人搞). Later that day, Yau then asked D8 whether there was any progress (有无点眉目?) and what was the situation (什麼情况?), D8 had replied saying that he needed to find a lawyer.[20]

60.  D8 was cross examined during the trial as to why he would want a copy of the bank’s letter to D7, and D8 had said this was because D7 learnt from the bank that it was in relation to the transfer of the sum of US$323,000, and also his own account was frozen on the same day as D7’s bank account.

61.  Then, there was a gap of some 3 months before further communications by What’s App. On 20 November 2014, Yau sent D8 a message at 21:55:21 informing D8 that his wife/D7 had to go to court the following morning and that she had asked Yau to ask D8 whether she should tell her lawyer that the amount of RMB2,500,000 was paid to D8 in cash in Hong Kong, or by internet transfer in Mainland, and Yau was asking D8 to reply as soon as possible as D7 would not be able to change her version after what she had told her lawyers[21].

62.  The above message was sent by Yau to D8 the night before 21 November 2014, which was the return date of P’s application for Mareva Injunction against D7. Subsequently, after the discharge of the Mareva Injunction against D7, on 25 November 2014, Yau sent D8 a message saying that his wife would be telephoning D8. When asked about this during the trial, D8 said he could not recall whether D7 did telephone him in the end or not.

63.  Anyway, it appears from the above Chat Messages that D8 knew full well at least by July 2014 that Wong Siu Heung was Yau’s wife and that the sum of US$323,000 was paid into Yau’s wife’s account. It seems also clear that D7 and/or Yau were consulting D8 as to what to say to their lawyers as to how the amount of RMB2,500,000 was paid to D8.

64.  Although the above Chat Messages would indicate that there was collaboration on the part of D7/Yau and D8 as suggested by Mr Ng, it also indicated that the amount of RMB 2,500,000 was indeed paid to D8.

65.  In any event, notwithstanding the above Chat Messages, I do not find sufficient evidence that the relationship between Yau and/or D7 on one part and D8 on the other was anything other than that of a regular customer and a money exchange company in relation to currency exchange by way of the “underground banking system”.

The transactions on 25 April 2014

66.  It was Yau’s evidence that on 25 April 2014, after the deposit of a total of RMB 2,548,100 was transferred by Sun into Lin’s account on 24 April 2014, Yau had contacted a number of currency exchange dealers who were able to handle currency exchange and money transfer between Hong Kong and Mainland, including D8, and Yau decided to engage D8/Universal because D8 offered the best rate.

67.  It was Yau’s evidence that after deciding to engage the service of D8/Universal on 25 April 2014, he instructed Lin to transfer RMB2,500,000 to D8’s designated accounts in Shenzhen. This was done by 3 sums, 2 of which were transferred to a bank account held by a 林竟 at Agricultural Bank in Shenzhen and the other transferred to a bank account held by a周海英 at Agricultural Bank in Fujian, respectively RMB1,000,000 at 11:23:25, RMB 500,000 at 11:30:09, and RMB1,000,000 at 11:33:41 on 25 April 2014 and Yau produced 3 bank advices from Agricultural Bank as evidence[22] (“25.04.14 Bank Advices”) .

68.  Yau’s evidence in his witness statement was that he did not instruct D8 to convert any part of the RMB into USD and in fact he told D8 to convert into HKD, and that when he asked D8 to provide him with the transfer receipts, D8 then told him that he made a mistake, and that as D8 apologised and was willing to bear the exchange rate difference and additional currency conversion charges, Yau said he accepted the USD.

69.  However, D8 did not agree with what was said by Yau. It was D8’s evidence that he said he received Yau’s telephone call on 25 April 2014 asking him to convert RMB2.5m into HKD, and on the same day, he received instructions from another customer of his, a Mr Chan, asking him to convert USD323,000 into RMB. D8 said he then asked Yau whether he wanted the USD323,000 and that if Yau wanted it, he would arrange for the sum of USD323,000 to be directly transferred to Yau and D8 would then pay the balance of the RMB2,500,000 in HKD to Yau. According to D8, Yau had agreed to accept the US$ 323,000. D8 further confirmed his version during the trial.

70.  There were no Chat Messages from 3 April 2014 to 10:56:20 on 25 April 2014. From the Chat Messages on 25 April 2014, one can see:

(i) The 1^st message on 25 April 2014 was at 10:56:20 when Yau sent to D8 the details of D7’s HSBC Account;

(ii) The 2^nd message was when Yau gave D8 the details of D7’s BOC Account;

(iii) Then, D8 gave Yau details of the bank account of 林竟 and of 周海英 respectively at the Agricultural Bank Shenzhen and Agricultural Bank Fuzhou, with the remark that 1 million was to be credited into 周海英’s account, and these accounts were said to be designated nominee accounts of D8 (“Designated Accounts”);

(iv) Yau then sent a message “俞老板，您做好后將兩个户口各入多少錢告訴我，謝謝”.

(v) This was followed by Yau sending D8 copies of the 25.04.14 Advices of the amounts transferred from Lin’s bank account into the Designated Accounts at about noon that day;

(vi) At about 16:44:20 on 25 April 2014, Yau asked D8 to send him the information about D8’s deposits. At about 16:53:04 to 16:56:08, D8 sent to Yau 2 attachments both indicating the amount of USD323,000 having been deposited in D7’s HSBC Account[23];

(vii) At 19:31:12, Yau asked D8: “俞老板，你又入了多少港幣?” or, how much Hong Kong dollars D8 had deposited;

(viii) At 19:35:53, D8 had responded by asking Yau whether he had checked the amount of USD and that D8 would do the calculation the following day;

(ix) Yau responded at 19:35:53: “有單應该不會錯，明早上查!”, namely as there was an advice, there should be no mistake and that he would check the following morning.

71.  It can be seen from (vi) above that by about 5 pm on 25 April 2014, Yau would have received the bank transaction advice in relation to the deposit of USD323,000. Thereafter, there were no further Chat Messages until about 19:31:12, when Yau asked D8 how much HKD D8 had deposited.

72.  During the trial, Yau had said he had telephoned D8 to complain about the USD when he received the bank transaction advice. It was Yau who had asked for details of the deposits made by D8, and apart from sending the bank transaction advice of USD323,000, there was no further information sent by D8. Although one could not see any complaint by Yau in relation to the USD323,000 from the Chat Messages, I note that there was a 2½ hour gap in the Chat Messages after D8 sent Yau the bank transaction advice of USD 323,000 and before Yau asked D8 about the further amount of HKD deposited by D8. That they had direct telephone communications during that gap was not impossible.

73.  It seems unlikely that D8, an experienced money exchange businessman, would have made a mistake between HKD or USD or that he would have arranged for not a small sum of USD to be deposited in his one of his regular customer’s account without the latter’s consent.

74.  Having said this, that Yau had all along wanted HKD could be seen from the fact that the USD323,000 was in fact converted into HKD. Further, from the banking documents provided by HSBC obtained by P, it could further be seen that D7’s HSBC Account was only converted from a “SmartVantage” account to a “Premier account” on 30 April 2014[24], and Yau had told D8 that he had asked D7 to arrange for this conversion of the account, to see whether there would be a better exchange rate for the USD[25].

75.  In my view, had it been Yau’s intention all along to accept the USD and then convert that into HKD, he would have asked D7 to convert her account to a Premier Account earlier.

76.  Notwithstanding D8 gave evidence on behalf of Yau, I find that Chat Messages and the conversion of D7’s HSBC Account into a Premier account 5 days later supported Yau’s version that he did not intend to have USD at the time, and only found out when he received from D8 the bank transaction advice for the USD323,000 and he then tried to obtain a better rate for changing it into HKD.

The two receipts

77.  There were two receipts prepared by D8 in connection with the transactions on 25 April 2014:

(i) One was issued in the name of “Princess Money Exchange Co” dated 25 April, indicating that RMB2,500,000 was received from D7, and at the exchange rate 0.8125, total HKD3,067,484 (illegible) was transferred into D7’s HSBC Account, with name of remitter being D7, with her HKID card, address and mobile telephone number (“Princess Receipt”)[26];

(ii) One was produced by D8 in his witness statement, which was issued in the name of “Sun Pole Money Exchange Co” dated 25 April 2014, indicating that RMB2,009,060 was received from D7, and at the exchange rate 6.22, a total of USD 323,000 was transferred into D7’s HSBC Account, with name of remitter being D7, with her HKID card, address and mobile telephone number (“Sun Pole Receipt”)[27].

78.  D8 was asked about the Princess Receipt during cross examination, and he had said it was written out by him about 10 days after the transfer to D7’s HSBC Account, and not on 25 April 2014. D8 explained that Universal had a money exchange business called Princess Money Exchange Co at Shop G27, Ground Floor at Allied Plaza in Mong Kok previously but that business had closed down.

79.  D8 said on a Saturday about 10 days after the transactions on 25 April 2014, Yau had requested a receipt from him in relation to the RMB2,500,000. D8 said he then took a receipt book at his office and made one out the Princess Receipt at Yau’s request.

80.  At the trial, D8 however said that both the exchange rate of 0.8125 and also the total sum of HKD3,067,484 was not correct, but the rest of the information was correct.

81.  D8 further said that when Yau asked for a receipt, he had asked Yau what to write down on the receipt, and Yau told him to put down RMB2,500,000 and when D8 said he had forgotten the exchange rate, he was told by Yau simply to put down 0.8125 as the exchange rate. Thus, this was what was written down by D8 on the Princess Receipt.

82.  As for the Sun Pole Receipt, D8 said this was prepared by his staff on his instructions. In his witness statement, D8 had said the Sun Pole Receipt was prepared at Yau’s request. At the trial, D8 said the Sun Pole Receipt was prepared when Yau told him that HSBC had requested for a receipt when D7’s HSBC Account was frozen.

83.  D8 had also said in his witness statement that there was a record kept by the company in relation to the transactions on 25 and 30 April 2014, and he had produced a copy of this record (“Handwritten Record”)[28]. The name of “Li Hung Ha” appeared on the top of the Handwritten Record and she was Yau’s employee in Hong Kong. When asked why her name was there, D8 had explained that most of the times, he either put down Yau’s name or Li Hung Ha’s name on his record, and D8 had also said the handwriting on the Handwritten Record was that of D8’s employee, save those words highlighted by him during the trial.

84.  In the Handwritten Record, it would appear some of those words admittedly written by D8 were added on 30 April 2014 and he had initially assumed an exchange rate of 7.765 for his conversion of the sum USD323,000, and that the final balance of HK$70,931 was ascertained and transferred to D7’s HSBC Account on 30 April 2014. The final balance and the amounts credited would accord with Chat Message to Yau on 30 April 2014 at 15:24:48 (“Final Calculations”).

85.  According to D8’s evidence at the trial, the Princess Receipt was prepared about 10 days after the transactions on 25 April 2014, which would be around 5 May 2014. Yau admitted he was the one who asked D8 for the receipt and that the exchange rate of 0.8125 was what he had told D8 to put down on the receipt. Yau had explained during cross examination that he asked D8 to prepare the Princess Receipt for the purpose of showing it to his customer, Sun. He then further explained during re-examination that he had agreed with his customer the exchange rate to protect himself against the volatile exchange rate of Japanese Yen.

86.  As for the Sun Pole Receipt, according to D7, he had asked D8 to give him a receipt to show to HSBC the reason for the transfer of USD323,000 when D7’s HSBC Account was frozen by HSBC. The Sun Pole Receipt was thus prepared when D7’s HSBC Account was frozen.

87.  The exchange rate and the amount in HKD on the Princess Receipt was clearly incorrect. The Sun Pole Receipt however only referred to the RMB equivalent USD323,000 and did not set out the receipt of the full sum of RMB2,500,000.

88.  Mr Ng said the explanations of Yau in relation to the two receipts were dubious and that the court should take an adverse view of Yau’s credibility.

89.  I accept the Princess Receipt was dubious and the Sun Pole Receipt was incomplete. In my view, both should be ignored.

Yau’s position

90.  By the time of the trial, P was no longer pursuing its originally pleaded case, that D7 and Yau were part of an international money laundering syndicate.

91.  As I have found earlier, there was no sufficient evidence that the 24.04.14 Bank Advices were not genuine. There was also no sufficient evidence that the 25.04.14 Bank Advices were not genuine. These bank advices and Chat Messages were contemporaneous records. The Chat Messages indicated that there was indeed a total sum of RMB2,500,000 transferred from Lin’s account to D8’s Designated Accounts in Mainland, and the receipt of RMB2,500,000 was also supported by the Handwritten Record produced by D8. More importantly, the Chat Messages indicated that it was only after Yau had sent to D8 the 25.04.14 Bank Advices indicating the transfer of RMB2,500,000 into the Designated Accounts of D8 that D8 then sent Yau the bank transaction advice of the USD323,000, which meant it was only on receipt of the RMB2,500,000 from Yau that D8 transferred the USD323,000.

92.  Having considered the evidence, on a balance of probabilities, I find that the transactions between Yau and D8 on 25 April 2014 were genuine currency exchange transactions albeit under the “underground banking system”, which I understand would be illegal under law of Mainland China.

93.  I have accepted earlier Yau’s evidence that it was not his intention to convert the RMB into USD and that he only found out after D8 sent him the bank transaction advice and he then asked D7 to convert her account into a Premier Account to obtain a better rate to change the USD back to HKD. Yau was told by D8 the USD323,000 came from D8’s client Mr Chan. The evidence, indeed the Chat Messages indicated that Yau had had regular currency exchange transactions in the past with D8, and as D8 had said, there had been not be any problems in the past. There was no evidence to contradict what D8 had said nor was he cross examined on this.

94.  There was no sufficient evidence that D7 and/or Yau had willfully turned a blind eye to how or what sort of money was remitted into D7’s HSBC Account. There was no evidence that D7 and/or Yau had ever met or had any dealings with Mr Chan, and there was also no evidence that D7 and/or Yau had ever had any dealings or connections with D1 or D3.

95.  Although the USD323,000 was received in D7’s HSBC Account on 25 April 2014, it was left in the account and was only converted into HKD2,500,407.60 on 30 April 2014, and by 20 May 2014 or the time when the account was frozen, there was still an amount of HKD2,934,290.53 in D7’s HSBC Account. There were no immediate withdrawal or outward transfers of monies by D7 and/or Yau.

96.  As Au-Yeung J had said in Arrow ECS Norway AS, being a mere recipient of funds remitted through an underground banking system is not sufficient in itself to find guilt and it has to be proved that the recipient knew or had reason to believe that the money had an illicit source[29].

97.  Although the transactions through the “underground banking system” may be considered illegal under the Mainland law, in the present case, there was no reason for Yau to believe that the USD323,000 transfer arranged by D8 to be deposited into D7’s HSBC Account designated by him, would come from a fraudster, or any illicit or improper source, nor was there any evidence to indicate that there was anything obvious or untoward in D8 transferring the amount to him. There was no sufficient evidence to show that a reasonable person in Yau’s position would have appreciated that the transfer arranged by D8 with whom he had had money exchange transactions in the past was probably fraudulent or improper, or a person in Yau’s position would have made inquiries or sought advice which would have revealed the probability of impropriety.

98.  In fact, as seen in the Chat Messages, when asked by D8 to check the USD amount, Yau had said there should be no problem as there was the bank transaction record.

99.  Having considered all the evidence, Yau did not have actual notice of P’s proprietary right to sum of USD323,000 or the fraud nor am I satisfied that he had constructive notice thereof or that he should have made enquiries or sought advice which would have revealed the same. In my view, D8 did receive the RMB2,500,000 and there was good consideration from Yau to D8 for the sum USD323,000. There was no unjust enrichment, as Yau had paid RMB2,500,000 to D8 in currency exchange for sums of which the USD323,000 was part of.

100.  Having considered and weighing up all the evidence, I am satisfied on that Yau has discharged the burden on him and that on a balance of probabilities he was a bona fide purchaser for value without notice for the sum of USD323,000.

D7’s position

101.  Mr Ng had raised a legal issue and argued that even if Yau was a bona fide purchaser without notice, D7 could not rely on that defence, in that the consideration for the USD323,000 must move from D7 herself. In this respect, Mr Ng referred this court to Re Diplock [1947] Ch 716.

102.  Mr Wong did not dispute the general legal principles set out in Re Diplock, but referred to what was summarized by Millet J, as he then was, in Macmillan Inc v Bishopsgate Investment Trust (No 3) [1995] 1WLR 978, as follows:

“The rule that the purchaser must acquire the legal estate and must do so before receiving notice of the prior interest is subject to two qualifications.

(1) The better right to the legal estate

It is not necessary that the purchaser should obtain the legal estate and have the same vested in himself. It is sufficient if he has the legal estate transferred to a trustee or nominee for him. Provided that neither he nor his nominee has notice of the prior equitable interest, he will take free from it, for he has the better right to the legal estate[30]…”

103.  There was really no dispute that D7 had received the sum of USD323,000 as a trustee or nominee for Yau. D7’s evidence was that Yau telephoned her from the Mainland on or around 24 April 2015 to tell her that an amount equivalent to RMB 2,500,000 would be paid into D7’s HSBC Account, and that Yau instructed her to use the money to settle certain bills. D7 said she was not in Hong Kong at that time and she was told the bills were not immediately due. She then let the monies sit in her account, and said she had no knowledge of any of the unlawful acts alleged by P.

104.  There was no sufficient evidence to contradict what was said by D7 and I accept that she did not have the requisite knowledge and was only a nominee for Yau.

Conclusion

105.  As I have found, Yau was a bona fide purchaser for value without notice of the USD323,000. The sum of USD323,000 was vested into D7’s account by Yau, and I find that D7 did not have the requisite knowledge/notice.

106.  In the above circumstances, in my view, Yau’s right to the USD323,000 is better than P’s.

107.  Further, as submitted by Mr Wong, in restitution in general, Lord Wright said in Brook’s Wharf and Bull Wharf Ltd -v- Goodman Bros [1937] 1 KB 534 :-

“The obligation [to repay] is imposed by the court simply under the circumstances of the case and on what the court decides is just and reasonable having regard to the relationship of the parties. It is a debt or obligation constituted by the act of the law, apart from any consent or intention of the parties or privity of contract[31].”

108.  I am of the view that it is not just and reasonable for P to take away from D7 (nominee of Yau) a sum of money to which Yau has a better claim over P, when it was Yau who directed that sum of money to D7 to be held on trust for himself in the very first place.

109.  Having regard to all of the above, I have come to the conclusion that P’s claims against D7 must fail, and it is not necessary for me to consider the issue on compound interest. In any event, I accept Mr Wong’s submission that having regard to the fact that the USD323,000 was frozen in D7’s HSBC Account and there had not been any use of it for any gains, I am of the view that the facts of this case do not justify an award of compound interest.

Order

110.  I dismiss P’s claims against D7 and order P to pay D7’s costs of this action. This is an order nisi which shall be made absolute after 21 days.