TOKIĆ, D.O.O. v. HONG KONG SHUI FAT TRADING LTD AND OTHERS

HCA 381/2020

[2022] HKCFI 217

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 381 of 2020

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BETWEEN

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D E C I S I O N

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A. A Familiar Fact Pattern

1.  This is another case of email fraud before the Court. The fact pattern is a familiar one.

2.  P’s case is that it is the victim of an email fraud. It was misled into depositing some US$2 million into a bank account in the name of D1. Upon discovery of the fraud, it obtained an injunction and disclosure orders, which revealed that the funds had been dispersed to accounts in the name of D2 to D10. P obtained a further injunction and disclosure orders against those recipients.

3.  P asserts a proprietary claim against D1 to D10 over the funds and the proceeds of the funds. It also claims against D1 to D10 for unjust enrichment and against D2 to D10 for dishonest assistance.

4.  D9 is the recipient of an aggregate sum of US$260,000 out of the original US$2 million. According to him, the receipt was as a result of his exchange remission from the Mainland to Hong Kong via underground banking.

5.  The basics of such “underground banking” are well-known in Hong Kong. A person has funds in the Mainland and wishes to remit it to Hong Kong. He pays RMB in the Mainland to and/or at the direction of someone there (“Mainland agent”) and receives the equivalent in HKD in Hong Kong from someone here (“Hong Kong agent”).^[1]

6.  D9 raises a defence of bona fides purchaser for value without notice and change of position in good faith.

B. The Present Applications

7.  Before the Court now are 2 related applications. P applies to continue the Mareva and proprietary injunction which it obtained ex parte against (amongst others) D9 before DHCJ Hall-Jones on 8 May 2020. D9 applies to discharge the injunction or alternatively for fortification.

8.  In many email fraud cases, the relevant recipient produces no or only scant evidence on how his receipt is said to be result of an alleged remission of funds from the Mainland to Hong Kong. In those cases, there would be a reasonable dispute about the facts of the recipient’s defence and issues to be tried. The injunction would be continued.

9.  In the present case, however, as I indicated at the hearing, D9 has produced a lot of evidence. P, of course, does not accept the evidence. But neither is it in a position to seriously challenge the evidence.

10.  Counsel for P makes a legal argument. He cited certain case authorities for a proposition that, because the alleged remission was illegal under Mainland law, D9 simply cannot avail himself of the defence of bona fides purchaser or change of position.

11.  I must confess that the legal argument appears to me too purist and may lead to unfair results in practice.

C. The Conundrum

12.  The conundrum arises from several matters which should be borne in mind.

13.  First, the kind of exchange remissions is well known and quite commonplace as between the Mainland and Hong Kong.

14.  Second, the kind of exchange remissions, whilst referred to as “underground banking”, is actually legal in Hong Kong and not necessarily illegal in the Mainland. Foreign exchange administration^[2] in the Mainland is complex and evolving. One cannot assume that simply paying there and receiving here is automatically against the law. Moreover, even if there is a breach of some provision, it is far from clear that the breach is serious.

15.  Third, the mechanics of this kind of exchange remissions are such that the recipient would not know how the Mainland agent causes or arranges for payment in Hong Kong, whether the Mainland agent pays the Hong Kong agent, and why the Hong Kong agent is involved.^[3] This adds another layer of uncertainty to assessing illegality and seriousness.

16.  Fourth, the facts of email fraud cases are such that the parties do not know each other and can say little about each other. If a recipient produces some evidence that his receipt is as a result of his having engaged in remissions from Mainland China to Hong Kong, it would be difficult for the victim to dispute.

17.  Fifth, the fact pattern of email fraud cases is also such that the relevant recipient would usually have received only a relatively small sum out of the original funds. The amount in dispute may not justify either side investing in expert evidence on Mainland law and regulation. Indeed, the parties may not even pursue the matter through to trial.

D. Approach to the Problem

18.  With these matters in mind, I propose to approach the problem as follows.

(1) The starting question is: has the recipient produced sufficient evidence that his receipt was as a result of his own remissions of funds? If not, there is a reasonable argument about the very factual basis of his defence and a serious issue to be tried. In addition, the victim may urge for inferences that the recipient has been involved in the fraud and there is a risk of dissipation. The injunction likely should be continued.

(2) If the recipient has produced good evidence of his remission, the next question is: has the victim adduced evidence that the remission is illegal under Mainland law? Without evidential basis, the victim cannot be heard on its legal argument that the recipient is not entitled to any defence of bona fide purchaser and change of position.

(3) If there is a basis to hear the legal argument, is the argument sound? If it is not, the recipient would have established a good defence. The injunction should be discharged.

(4) Even if the victim’s argument is arguable, since the recipient has shown good evidence of his remission and therefore that he not part of the fraud, the question arises: is there still a real risk that the recipient would dissipate his assets? This goes to whether the Mareva injunction should be continued.

(5) A related question is: where does the balance of convenience lie? This goes to whether the proprietary injunction should be continued.

(6) Finally, if the injunction is continued, what of any application for fortification?

19.  I will address these questions in turn below.

E. Question 1: Recipient’s Evidence

20.  As I mentioned earlier, D9 has produced a lot of evidence of his alleged exchange remission from the Mainland to Hong Kong.

21.  D9 has named the Mainland agent. He has produced a series of text messages with the agent about the relevant remission, and produced documents showing payments in RMB to the agent. The amounts and the timing appear correct.

22.  D9 has also explained that the remission was for an intended investment in commodities contracts with his commodities dealer in Hong Kong. He has produced documents showing a history of such investments with that dealer. He has also pinpointed transfers from his bank account, after receipt of the funds, to his investment account with the dealer to make the intended investment.

23.  As I have mentioned above, P is not in a position to seriously challenge D9’s evidence. Counsel for P tried his best to raise doubts. But those are more conjectures than reasons to disbelieve the evidence.

24.  On the present evidence, P cannot sustain an arguable dispute or serious issues to be tried as to the facts of D9’s defence.

F. Question 2: Mainland Law

25.  The main dispute at the hearing was whether D9’s remission was illegal under Mainland law such that he cannot rely on his defence.

26.  Neither party produced any evidence on Mainland law. This may be understandable. As I noted earlier, where the amount in dispute is not substantial, it may not be worth the parties investing in expert evidence.

27.  Section 59 of the Evidence Ordinance (Cap. 8) and O38 r7(1) of the Rules of the High Court allow a party to cite the finding or decision by the CFI or CA on a matter of law of any country or territory outside of Hong Kong as evidence of the law of that country or territory with respect to that matter. See: Fan Yuxi v Linbiao Tang & Ors [2021] HKCFI 2652, per DHCJ Simon Leung at §§48-49. But there are difficulties in following such a course in the present case.

28.  O38 r7(1) requires notice to be given within 21 days after the date on which appointment for the first hearing is obtained. It is not clear whether P has given due notice. P’s application to continue the injunction was made on 11 May 2020 for hearing on 22 May 2020. D9’s application to discharge the injunction was made on 8 September 2020 for hearing on 11 September 2020.

29.  The first time P referred to Mainland law was in its Counsel’s skeleton submissions for the hearing on 11 September 2020. But Counsel only referred to Grupo Arbulu v City Apex [2018] HKCFI 1351, per DHCJ Keith Yeung (as he then was) at §§35-45. Whilst the learned judge there noted that the uncontradicted evidence before him showed illegality, he did not make a finding or decision on the point. He only found – since it was sufficient for him to find – legality to be a serious issue to be tried.

30.  Counsel for P in his skeleton submissions for the hearing on 29 September 2020 dropped all reference to Grupo Arbulu and cited DBS Bank v Pan Jing [2020] 4 HKC 395, where DHCJ Blair granted summary judgment to the bank victim of an identity fraud on the basis the recipient’s remission from the Mainland to Hong Kong via underground banking was illegal under Mainland law and hence, as a matter of law, the recipient had no defence of bona fide purchaser or change of position.

31.  I have some doubts whether P can cite Pan Jing as evidence showing that D9’s remission in this case was illegal under Mainland law.

(1) Counsel for P cited Pan Jing only at his skeleton dated 25 September 2020. This was out of time for purposes of P’s application to continue the injunction. Whilst it may be within time for purposes of D9’s application to discharge, P does have to adduce evidence for purposes for its application too.

(2) When Counsel cited Pan Jing in his skeleton, he did so for its proposition(s) for law. It is somewhat equivocal whether he or P meant to give notice under O38 r7(1).

(3) Even if it was meant to be notice, it hardly served such a function in practice. The skeleton was filed after the close of evidence and just a few days before the hearing.

(4) Strictly speaking, Pan Jing did not find or decide what the Mainland law was. The learned judge agreed at §40 with the bank’s submission at §36 that “the state of the evidence and pleadings” was such that “it is effectively common ground that the defendant contravened arts 30 and 45 [of the PRC Foreign Exchange Measures for Individuals and the PRC Administrative Regulations on Foreign Exchange]”.

(5) As I noted earlier, foreign exchange administration in the Mainland is complex and evolving. It is dangerous to think, simply because the parties in one case were on common ground that the remission in that case at that time was illegal under Mainland law, the remission in another case at another time between other persons was also illegal, still less the parties in the other case should be on common ground that the remission was illegal.

32.  However, I bear in mind that D9 raised his defence only in an affirmation dated 7 September 2020. There was little time for P to collate or instruct for expert evidence on Mainland law. Further, D9 never sought leave to produce evidence to counter P’s assertion of illegality.

33.  Most importantly, D9’s own evidence acknowledges that his remission was an attempt to get around Mainland law. (In his own words, he engaged the Mainland agent to remit funds “Due to foreign exchange restricted in Mainland China”.)

34.  Indeed, for any recipient in an email fraud case to put forward a case of receipt as a result of exchange remission, he would likely have to explain why did not know transferor of the funds. This would necessitate his explaining why he remitted funds other than through regulated financial institutions, thus in turn require him to admit that he was attempting to get around some law or regulation.

35.  In the circumstances, I am prepared to find that there is a real possibility and thus an argument case and an issue to be tried to as whether D9’s exchange remission was illegal under Mainland law.

G. Question 3: the Legal Argument

36.  The next question is whether, even if the remission was illegal under Mainland law, this matters to D9’s defence.

37.  Counsel for P relies on Pan Jing to argue that, if the remission was illegal under Mainland law, then D9 cannot enjoy any defence of bona fide purchase or change of position under Hong Kong law.

38.  I do not think the true legal proposition as straightforward as Counsel cites Pan Jing to say. Whether and how illegality under the laws of another jurisdiction, a.k.a. “foreign illegality”, taints the matter in the eyes of our law is a difficult and developing subject.

G1. Bone Fide Purchaser

39.  In relation to the defence of bona fide purchase for good value without notice, DHCJ Blair in Pan Jing said at §56 that (a) “In principle, the courts will not enforce an exchange contract which is contrary to the exchange controls under the governing law”; and (b) “[the legal principle is] correctly stated in Virgo, The Principles of the Law of Restitution, 3rd Ed, 2015, at p659 … ‘The defendant cannot be considered to have provided value … if it was transferred pursuant to an illegal transaction.’”

40.  As for (a), the learned judge could not have meant it to mean that no value has been given. He only referred to courts not enforcing an exchange contract. Obviously, there is a difference between not enforcing a contract and not recognizing the value given. As the judge himself said at §47, even where illegality is clear, there is still an issue as to “the precise effect under [the foreign law] of the illegality on the arrangements …”

41.  As for (b), Virgo cites Lipkin Gorman v Karpnale [1991] 2 AC 548 and Clarke v Shee and Johnson (1774) 1 Cowp 197, 98 ER 1041 for its proposition. But a careful reading of the 2 cases would show that their logic and rulings are far narrower, if not altogether different.

42.  In Lipkin Gorman, the defendant casino gave chips in return for a gambler’s money. The money turned out to be stolen money. The plaintiff sought its return. As Lord Templeman said at 564A and 567C-F, and Lord Goff said at 576F-577G, the giving of chips in return for money was not giving value. The chips represented the money. Value was to be given when the gambler used the chips to gamble. At that time, there was a contract to honour winning and losing. But that contract was void under the Gambling Act 1845. The casino could not be held to it, i.e., the casino could not be held to give value. It followed that the casino had not given any value.

43.  Once the issue is put in the right light by their Lordships, the answer becomes self-evident. Where a person “gives value” by agreeing to give value in a contract, if that contract is void, the person has not given value!

44.  In Clarke, an employee stole money from the employer and paid “to the defendants upon the chances of the coming up of tickets in the State Lottery of 1772, contrary to the Lottery Act of the said year 1772.” In short, the defendants were running an illegal gambling business. Hence Lord Mansfield said at 199-201, “Where money or notes are paid bona fide … they never shall be brought back by the true owner; but where they come mala fide into a person’s hands … the party has a right to recover … Here the plaintiff sues for his identified property, which has come to the hands of the defendant iniquitously and illegally, in breach of the Act of Parliament, therefore they have no right to retain it” (underlining added).

45.  “Iniquitously” means immorally. Thus, Clarke was decided on the basis that the defendants were not bona fide – they gave value in the course of an illegal and immoral dealing. The case does not stand for the one-line proposition in Virgo.

46.  As a matter of principle, where a person has acted bona fide (not immorally or illegally, as in Clarke) and has given real value (which is not contingent on enforceability of a contract, as in Lipkin Gorman), it cannot be correct to say the value he has given is to be disregarded simply because the transaction he engaged in is illegal in the sense that it breaches some law or regulation.

47.  It is trite that an illegal transaction in the above sense is not necessarily void or even voidable. If the law does not automatically void the transaction, I cannot imagine why or how it would automatically void the value given in the transaction.

48.  I find that D9 has raised an arguable defence. My inclination is further that if his remission was illegal under Mainland law only in the sense that it breached some administrative rules and could attract a fine (as in Pan Jing), the value he had given should be recognized. He should be entitled to rely on a defence of bona fide purchaser for value. Of course, it being early stage in the proceedings, and in the absence of proper evidence on Mainland law, my inclination must be preliminary.

G2. Change in Position

49.  Turning to the defence of change of position, DHCJ Blair in Pan Jing at §§63-69 followed Barros Mattos v General Securities [2005] 1 WLR 247, a case which extended the ex turpi causa principle in Tinsley v Milligan [1994] 1 AC 340, to the effect that “if a recipient’s actions in changing position is treated as illegal [under the foreign law], the court will more or less automatically refuse to contemplate a change position defence.”

50.  I note that Barros Mattos has been much criticized as overly rigid. See: Pan Jing at §69; Solyda S.R.L. v Wu Ge [2021] HKCFI 1825, per DHCJ Le Pichon at §§32-35. Further, Tinsley has been overruled in Patel v Mirza [2017] AC 467.

51.  Our CFA in Ryder Industries Limited v Chan Shui Woo (2015) 18 HKCFAR 546, per Lord Collins at §56 doubted Barros Mattos on its broader and sweeping proposition of law, and said at §57, “there is no basis in authority or principle for holding that every breach of foreign law [will result in unenforceability]”. The approach should be a flexible one having regard to the seriousness of the illegality.

52.  I respectfully agree with what DHCJ Le Pichon said in Solyda at §35: given the state of the authorities, it is hardly appropriate to decide in a summary manner whether a recipient like D9 can rely on a defence of change of position. The issue must remain arguable at this stage.

H. Question 4: Risk of Dissipation

53.  There being a number of arguable matters and serious issues to be tried, the Mareva part of the injunction would be continued if there is a risk that D9 would dissipate his assets.

54.  P relies on an inference of risk of dissipation from “the holistic evidence including [D9’s] receipt of the Funds resulting from the fraud.” There are some specific facts which are relevant to some other recipients, e.g., new incorporation. But they do not apply to D9.

55.  Counsel for P adds that D9’s commercial integrity should be called into question by his engagement in underground banking. I disagree. As I noted earlier, the kind of exchange remissions between the Mainland and Hong Kong is commonplace and entirely legal in Hong Kong. It is not necessarily illegal or serious in the Mainland. It would be against common sense and reality to impugn a person’s integrity merely because he engaged in such remissions.

56.  As Au-Yeung J said in Arrow ECS v Xin Cheng Holdings, HCA No. 239 of 2016, 12 May 2016 at §30, “Being a mere recipient of funds (like D18) remitted through an underground banking system is not sufficient in itself to find guilt. It has to be proved that the recipient knew or had reason to believe that the money had an illicit source.” See also: BR CAT International v Hong Kong Proof Import and Export Trading, HCA No. 1023 of 2014, 22 September 2017 per B Chu J at §§96-99.

57.  As I noted earlier, the issue of risk of dissipation should now be considered in the light of the answer to question 1 above, i.e., that at this stage the available evidence shows D9 to be not part of the fraud. I do not think it right to draw the inference which P seeks.

58.  I note that D9 has produced evidence of assets in Hong Kong, comprising money and investments with a bank and with his commodities dealer. Those assets are totally liquid and their presence within jurisdiction hardly means they would not be dissipated. Indeed, it is exactly because of their presence that P fears dissipation.

59.  The situation boils down to this: P can raise the possibility of dissipation. That possibility is always present, especially when a defendant resides out of jurisdiction. The applicable legal principles require P to point to some solid evidence of a real risk. It has not been able to do so.

60.  I order that the Mareva part of the injunction against D9 shall be discharged.

I. Question 5: Balance of Convenience

61.  Turning to the proprietary part of the injunction, the question is then where the balance of convenience lies between the parties.

62.  D9 raises an antecedent issue that, according to him, he has already transferred away and applied the relevant funds to investments with his commodities dealer. He therefore disputes that P can trace its funds to the “other” funds in his bank account.

63.  Tracing is not a matter which I would attempt within detailed evidence. As Counsel for P points out, whether one should apply the rule of “first in first out” (FIFO) or “last in first out” (LIFO) to funds going into a bank account is debatable. There are authorities suggesting that, at least in some circumstances, the true owner of the assets may choose whatever tracing rules more favourable to it. See: Virgo, The Principles of Equity & Trusts, 3^rd ed., pp562-563; Underhill and Hayton: Law Relating to Trusts and Trustees, 19^th ed., at 90.21-90.26 and 99.9.

64.  Further, as Counsel for P also points out, that the proprietary injunction bites at the relevant funds and its fruits or proceeds.

65.  On the question of where the balance of convenience lies, part of this inquiry is whether damages will be an adequate remedy. Obviously, damages will be adequate in the sense that an award of damages is an award of money and P’s claims are for money. See: DBS Bank v Tian Wen Quan, HCA No. 3228 of 2016, 12 October 2017, per A Chan J at §§14-15.

66.  Thus, the question of balance of convenience is at core about whether an award of damages will be satisfied or will go empty. This, of course, takes us back to the topic of risk/ possibility of dissipation.

67.  This may be why the two sides focused on arguing about risk of dissipation at the hearing and did not go into the question of balance of convenience. I think, however, there is a difference between how the risk/ possibility of dissipation is considered under the legal principles applicable to a Mareva injunction and those applicable to a proprietary injunction.

68.  For a Mareva injunction, the applicant has the burden to point to solid evidence of a real risk beyond the obvious possibility, whereas for a proprietary injunction, there is no need to prove risk of dissipation. The possibility can itself be taken into account. Indeed, the very purpose of a proprietary injunction is to prevent such a possibility. See: Zimmer Sweden AB v KPN Hong Kong, HCA No. 2264 of 2013, 2 May 2014, per DHCJ K Yee at §§72-77.

69.  In the context of an application for proprietary injunction, the question of balance of convenience is ultimately concerned with preserving the property “so as to prevent a determination one way or the other proving abortive”. See: Seridom v Heng Wen Trade & Ors [2019] HKCFI 85, per Marlene Ng J at §66, quoting Samtani v Samtani [2012] 4 HKLRD 872 per DHCJ Queenie Au-Yeung (as she then was) at §77.

70.  Further, irremediable damage need not be shown and the court will readily find that the balance of convenience favours preservation of the property, including funds, pending trial. See: Seridom at §66, quoting Pacific Rainbow International v Shenzhen Wolverine Tech, HCA No. 3023 of 2016, 2 May 2017, per DHCJ Douglas Lam SC at §37.

71.  Specifically, whilst damages will be an adequate remedy for claims of money, the balance of convenience may still lie in favour of grant of a proprietary injunction over funds and proceeds if there are questions about the defendant’s ability or readiness to meet an award. See: Fan Yuxi at §60.

72.  D9 resides in the Mainland. His business in the Mainland. He has ~US$219,000 and HK$206,000 in a bank account in Hong Kong and ~US$186,000 in assets in his account with his commodities dealer. Cash is fluid and easy to dispose of. Assets with a commodities dealer is likely volatile and, in any event, not difficult to dispose of.

73.  D9 says that because of the injunction in place now freezing his accounts, he has been “unable to make any investment decisions and the disruption of [his] investment in Hong Kong is continuing”. This may have an impact on fortification, which I will turn to further below. But it does not assist D9’s case much on balance of convenience.

74.  An injunction over liquid assets would, of course, affect one’s freedom to invest. This is a truism. What is important is whether this effect on freedom may cause any prejudice. That would depend on D9’s overall resources, means, and wishes to make investments and what investments. D9 has not touched on any of those matters. There is no basis for him to claim, or for the Court to find, any serious prejudice to him if an injunction ultimately turns out to have been wrongly granted.

75.  On the other hand, P will suffer obvious and serious prejudice if its application for an injunction turns out to be wrongly denied. Both its proprietary and money claims can become empty.

76.  Thus, on balance, I conclude that I shall order the continuation of the proprietary injunction.

J. Question 6: Fortification

77.  D9 seeks fortification.

78.  Counsel for P makes the general point that the burden is on a defendant seeking fortification to show a likelihood of significant loss, the need for fortification, and the appropriate quantum. See: Seridom at §133.

79.  Here, D9 has shown a likelihood of significant loss. He has produced evidence that he keeps assets in Hong Kong to make investments and that he has a practice of making such investments. Disruption to this is likely to lead to losses. (I note the conceivable point that investment can also lead to losses thus inability to invest could theoretically help a person avoid losses. I do not think the requirement to show a likelihood of loss is meant to require this kind of inquiry about relative percentage chances.)

80.  D9 has also shown a need for fortification. It has pointed to the fact that P is a Croatian company with no known assets in Hong Kong other than its claims against the defendants. P has not disputed this.

81.  However, D9 has not even attempted to assisted the Court on what is the appropriate quantum. He does not refer to any past investment return or any interest rate. Instead, he says, “As the Order was obtained ex parte and I only have very little time to file the present affirmation, I will also ask for directions for further affirmation evidence if necessary.”

82.  Without expressing any view on whether D9’s reason for not having adduce the necessary evidence is valid, suffice to say that, without the evidence, I am presently unable to grant fortification.

83.  I have considered D9’s suggestion of further directions. It is better to have closure on the present applications. The parties can consider how best to proceed.

K. Conclusion and Costs

84.  To recap, I discharge the Mareva part of the injunction dated 8 May 2020 but continue the proprietary part therein.

85.  As for costs, each of P and D9 has been successful in part. I think the fairest order, which I make as an Order nisi, is for the costs of the applications to be in the cause. I also give a certificate for counsel.

86.  I thank counsel and solicitors on both sides for their assistance. As my discussion above reflects, the Court sees a number of practical as well as legal issues in email fraud cases. I hope an attempt at arranging the different considerations in a logical order may be helpful. The experience, legal research, and able argument of the legal teams in this case are much appreciated.