KONG FUNG RMB REMITTANCE EXCHANGE LTD v. CHAN KAM HOI t/a BAO HANG RMB MONEY EXCHANGE AND OTHERS

HCA276/2016
[2018] HKCFI 7

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 276 OF 2016

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(by Original Action)

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(by Counterclaim)

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D E C I S I O N

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1.  A Master gave leave to the plaintiff (“Kong Fung”) to amend the statement of claim and to produce what was called a “no consent letter” issued by the police. This is an appeal by the defendants by original action and the plaintiffs by counterclaim (collectively “the appellants”) against the Master’s decision.

Background

2.  Kong Fung and the defendants by original action carried on the business of money exchange and remittance.  It was a term of the agreement between them that monies transferred to Kong Fung’s bank account of the purpose of RMB remittance must not be proceeds of crime and that the defendants should not cause their customers to use Kong Fung’s bank account for the purpose of deposit without Kong Fung’s prior permission (“the Term”).

3.  Kong Fung asserted that should its bank account be frozen by the relevant authorities as a result of breach of the agreement, the defendants were obliged to provide funds equivalent to the frozen amount for use of Kong Fung until the funds were released by the relevant authorities. Should the funds in Kong Fung’s bank account be confiscated by the relevant authorities as a result of the breach of the Term, the defendants would indemnify Kong Fung for the loss.

4.  It was not in dispute that on 29 June 2015, without the consent of Kong Fung, someone transferred HK$1.9 million (“the Transfer”) into an HSBC account (“the Account”) in the name of New Rich Legend Limited (“New Rich”), which Kong Fung had authority to use.  That person was a customer of D2 by original action and P2 by counterclaim.  The Transfer allegedly involved a telephone scam which was investigated by the police.  HSBC froze the entire account containing HK$15 million.

5.  In purported satisfaction of its loss of use of money in the Account, Kong Fung seized a total of HK$12.87 million (HK$5 million + HK$7.87 million) on 30 June 2015 and 24 November 2015 respectively.  Such money had been transferred to Kong Fung by D1 and D2 for the purpose of money exchange and remittance, but was not put into the Account.

6.  One Ms Pan of Kong Fung was arrested for suspected money laundering on 23 November 2015.

7.  On 2 March 2016, Kong Fung issued the writ in the present action to seek indemnity from the defendants should the police confiscate the funds in the Account.

8.  The original plea was that the Transfer caused the Account to be frozen by the police (“the original plea”) on the ground that the HK$1.9 million were proceeds of crime and that Kong Fung was alleged to be engaged in money laundering.  The particulars that Kong Fung gave upon request was that it had no knowledge as to what authority the police relied on in freezing the Account and that HSBC claimed to have frozen the Account by order of the police.

9.  The appellants challenged the cause for Kong Fung’s loss.  They sought to strike-out the statement of claim and sought final judgment on the counterclaim for repayment of the sums beyond the HK$1.9 million. 

Decision of the Master

10.  The learned Master adjourned the summons upon the undertaking of Kong Fung to provide further and better particulars as to the facts that HSBC did suspend the Account by reason of the Transfer within 14 days, with liberty to restore.  She made an order nisi that 40% of the summons be borne by Kong Fung (“the costs order nisi”) and that there be no order as to the rest of the 60%.

11.  On 13 July 2017, the learned Master:

(a) Made absolute the costs order nisi (“the costs order”);

(b) Despite objections from the appellants, gave leave to amend the statement of claim by pleading that the Account “has been suspended by HSBC on its own authority and/or in consideration of a ‘no consent’ letter issued by the police under section 25A(2)(a) of the Organized and Serious Crimes Ordinance, Cap 455 (“OSCO”) to HSBC after the Transfer was made” (“the amendment order”); and

(c) Ordered Kong Fung to serve its amended statement of claim with a copy of the no consent letter at the same time on the appellants (“the production order”).

12.  The learned Master did not issue an unless order.  Nor did she require Kong Fung to provide further and better particulars (“the missing particulars”) as to:

(a) How the Account was allegedly suspended by HSBC, ie the justification for freezing over HK$1.9m (“the 1^st particular”);

(b) The identity of the person or persons involved (“the 2^nd particular”); and

(c) The document or the gist of the words used by the HSBC’s officer to suspend the Account (“the 3^rd particular”).

The appeal and cross appeal

13.  The appellants seek to set aside the costs order and the amendment order.

14.  Meanwhile, the statement of claim was amended in accordance with the leave granted.  However, Kong Fung has not complied with the production order.

15.  Kong Fung issued “a cross appeal” seeking to set aside the production order.  It was out of time.  However, Mr Chain, counsel for the appellants, took no issue on the propriety of this cross-appeal.

The cross appeal

16.  I will first deal with the cross-appeal.  Under Order 24, rule 10 of the Rules of the High Court, the Master had power to order a party to produce a document which was referred to in a pleading. 

17.  Mr Man, counsel for Kong Fung, submitted that rule 10 was subject to rule 13, which empowered the court to order discovery only if it was necessary for the fair disposal of the action. 

18.  With respect, the no consent letter featured prominently in Kong Fung’s case as forming the basis for freezing the Account.  Discovery was plainly necessary for the fair disposal of the action.  The cross appeal had no merits.

19.  In the course of submission, Mr Man informed the court, on instructions and without evidentiary basis, that Kong Fung needed more time to locate a director of New Rich in order to sign a letter to enable Kong Fung to obtain the no consent letter.  Mr Man could not even be certain as to the amount of time needed.

20.  This only illustrated further that Kong Fung should have applied for extension of time for compliance with the production order instead of making a cross-appeal.

The appeal against the amendment order

21.  It is trite law that when applying for amendments, full particulars ought to be given: Perak Pioneer Ltd v Carrian Holdings Ltd, CACV 59/1985, 13 June 1985, at §16. 

22.  In addition, only particulars of claim, as opposed to evidence, should be pleaded: Order 18, rule 12 of the Rules of the High Court.  Unless there is a genuine need to clarify the opposite party’s case to ensure fairness and to avoid wastage of costs, it is inappropriate to make requests for further and better particulars with a view to cross-examine or expose some weaknesses of the pleaded case of the other side.  See a recent statement of the principle in Million Decade Ltd v Tung Fai, also known as Dong Hui, HCA 1062/2013, 13 November 2015, at §22, Registrar Lung.

23.  The amended statement of claim added one ground for freezing the Account, ie by virtue of HSBC’s own authority. 

24.  Mr Man relied on Interush Ltd v Commissioner of Police [2015] 4 HKLRD 706 to submit that so long as there was a no consent letter, a bank could freeze an account with all the monies in it. 

25.  In Interush, Patrick Li J held that:

(a) The “no consent” regime under section 25A(2)(a) OSCO did not operate to freeze suspicious property.  It was not a means to bypass the procedures for a restraint order.  It only created a defence regarding further dealings with the property after disclosure to ensure they would not prejudice investigations.  Given that the law imposed duties to conduct due diligence and report suspicious property, financial institutions would refuse their customers’ instructions and suspend suspicious accounts even without a “no consent” letter (at §§50-55).

(b) A no consent letter was subject to monthly review and by the Formation Commander after 3 months (at §61).  It should not normally exceed 6 months (at §62).

(c) In case of any grievance of query whether the police had strictly observed guidelines, the owner of the property can always sue the financial institution or person holding the suspicious property and the court may look into the matter in detail (at §64).

(d) A person directly affected by the freezing of the account (such as a bank account holder) may also challenge the decision of the police concerning the “no consent regime” by way of judicial review.  The bank may no longer be interested in the matter.  Having done its duty by reporting its suspicion, the bank may simply sit on its hands and take care not to operate the account until the expiry of the moratorium (at §§67 & 69).

26.  With respect to Mr Man, Interush did not support his proposition in paragraph 24 above. 

27.  In the context of this case, even if the Term would have entitled Kong Fung to seek indemnity from the appellants, causation between the Transfer and freezing of funds 8 times over had to be shown.  By way of example, if there had been deposits into the Account by other money launderers, the appellants should not be liable for the same. That was quite different from Interush where the funds in the whole account were suspected to be involved in a serious crime. 

28.  Insofar as the bank’s own authority was concerned, all that was pleaded was that an officer from HSBC/Kwun Tong Branch told Ms Pan that the suspension was “due to an incident of ongoing criminal investigation into the Account by the police and revert Ms Pan to contact with the Police.”  There was no plea eg of HSBC’s reliance on an express or implied term of contract with New Rich to freeze the Account: Interush, at §§49-50, 52.  Neither Kong Fung nor New Rich had ever challenged the propriety of HSBC’s conduct.

29.  In my view, the request for particulars was neither to cross-examine Kong Fung, nor to expose the weakness in its case.  It went to the core of its case, ie to ascertain the legal justification for HSBC’s freezing of more than HK$1.9 million. 

30.  Insofar as the limb of police authority was concerned, for 2½ years since the Account was first frozen, Kong Fung has never produced the no consent letter.  The no consent letter was not just the mode in which Kong Fung’s case was to be proved but to show if Kong Fung had a case at all.  If it never existed, the claim was bogus.  If it existed, the court would need to know why so much funds were frozen.

31.  In my view, this was a plain case where the authority for freezing and hence causation for Kong Fung’s loss were not shown on its pleaded case.  There should be an unless order for Kong Fung to give further and better particulars and to produce the no consent letter within 14 days, failing which the claim should be struck out.

Terms of the missing particulars

32.  I agree with Mr Chain that Kong Fung should give the 1^st and 3^rd particulars.  As to the 2^nd particular, freezing of an account was an act of HSBC.  The identity of the officer involved was unnecessary except where the decision to freeze was made orally and this would be covered by the 3^rd particular anyway.

Quantum of judgment to be entered

33.  In the event judgment is to be entered, Kong Fung should release all sums seized to the appellants except for HK$1.9 million. In the letter from the appellants’ solicitors after the hearing, it was suggested that the sum of HK$1.9 million be split between the counterclaiming P1 and P2.  For the purpose of this decision, I fail to see why not, provided it is without prejudice to Kong Fung’s contention that P1 and P2 should be jointly or severally liable for the HK$1.9 million at trial.

Appeal against the costs order

34.  It was not appropriate to award only 40% costs to the appellants when the proposed amendments to the statement of claim were made on the eve of the hearing before the Master and the Master did make a production order.

Conclusion

35.  I allow the appeal and set aside the Master’s order.  I order instead that:

(1) Unless by 4 pm on 16 January 2018, Kong Fung:

(a) do serve a copy of the no consent letter on the appellants; and

(b) provide the missing 1^st and 3^rd particulars, ie

(i) How the Account was allegedly suspended by HSBC; and

(ii) The document or the gist of the words used by HSBC (if oral) to suspend the Account;

paragraphs 10, 15 and 16 of the amended statement of claim be struck out;

(2) In consequence of the striking out, judgment be entered for the 1^st plaintiff by counterclaim in the sum of HK$4,411,371.28 and RMB317,190 and for the 2^nd plaintiff by counterclaim in the sum of HK$4,466,700 and RMB1,500,000;

(3) On a nisi basis, interests pursuant to paragraph (2) at the rate of 1% above prime from 3 May 2016 until judgment and thereafter at judgment rate until payment;

(4) The cross appeal be dismissed;

(5) Costs of the cross appeal, on a nisi basis, be to the appellants;

(6) Should Kong Fung be able to comply with the conditions in paragraph (1), I make an order nisi that costs of the appeal and below be costs of the appellants in the cause; and

(7) Should Kong Fung be unable to comply with the conditions in paragraph (1), I make an order nisi that costs of the appeal and below be to the appellants and be summarily assessed on the papers on 13 February 2018.

36.  I thank counsel for their assistance.