HU SUN IRENE AND ANOTHER v. ZISHANG TRADING LTD AND OTHERS

HCA 1182/2021

[2023] HKCFI 1612

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1182 OF 2021

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R E A S O N S    F O R    D E C I S I O N

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1.  The Plaintiffs commenced this action on 9 August 2021 against 53 defendants claiming for the recovery of a total sum of USD41,847,250.18 said to have been defrauded or for damages in the same amount.

2.  The part of their claim relevant to this decision is their claim against the 19^th Defendant (“D19”) as a 2^nd layer recipient of part of the defrauded sum.

3.  It is claimed that after part of the defrauded sum in the total amount of HK$17,700,000 was transferred by the 1^st Plaintiff into the bank account of Zishang Trading Limited (“D1”) held with Standard Chartered Bank, D1 then on 16 September 2020 transferred from the same bank account a sum of HK$1,600,000 to an account in Bank of China held by D19 with the account number 615000XXXXX (“the D1 Transfer” and “D19’s BOC Account”).

4.  Pursuant to the Order given following a joint application by the Plaintiffs and D19 by a Consent Summons filed in August 2021, D19 paid into court the claimed sum of HK$1,600,000 to discharge the Mareva Injunction imposed against it.

5.  On 13 December 2021, the Statement of Claim was filed. On 27 January 2022, D19 filed its Defence.

6.  On 6 October 2022, the Plaintiffs took out a summons for summary judgment against D19. After a contested hearing, the Master on 6 February 2023 granted judgment against D19. By a Notice of Appeal filed on 14 February 2023, D19 appealed against the Master’s decision.

7.  It is trite that this appeal would be heard as if the application for summary judgment is heard by this court for the first time.

8.  At the conclusion of the hearing, I allowed the appeal, set aside the Master’s Order and the Judgment entered against D19 dated 6 February 2023, granted conditional leave to D19 to defend conditional upon the sum of HK$1,600,000 previously paid into court by D19 to remain in court, and ordered the costs of the O.14 summons before the Master be costs in the cause with certificate for counsel and the costs of this appeal, also with certificate for counsel, be to D19 to be summarily assessed.

9.  These are my reasons.

THE APPLICABLE LEGAL PRINCIPLES

10.  The legal principles applicable to an application for summary judgment under O.14 are well established, trite and not disputed. Mr Leung, counsel for the Plaintiffs, cited the following succinct summary by Ng J and entreated this court to (and this court did) bear them in mind :

“(1) The Order 14 machinery works on the basis that if the plaintiff’s application is properly constituted, it is prima facie entitled to judgment unless the defendant shows cause to the contrary.

(2) The mere assertion in an affidavit of a given situation by the defendant responding to an application for summary judgment does not, ipso facto, ground leave to defend.

(3) The burden is on the defendant to show a real or bona fide defence or some other reason for a trial. The defendant must satisfy the Court that his evidence is capable of being believed and that on the basis of such evidence, there is a fair or reasonable probability of the defendant having a real or bona fide defence.

(4) In deciding whether there is a fair or reasonable probability of the defendant having a real or bona fide defence, the Court does not isolate each factual issue and consider whether it is possible that the defendant’s story on that issue is credible. Rather, the Court must look at the whole situation.

(5) In assessing the credibility of the defendant’s factual case, while the Court will not embark upon a mini-trial on affidavit evidence, the Court is not obliged to suspend its critical faculties and assume that the defendant’s evidence is accurate.

(6) If having regard to inherent plausibility, inconsistency with contemporaneous documents and other compelling evidence, the defence is not credible, the Court must say so.

(7) If the defendant’s evidence is incredible in any material respect, it cannot be said that there is a fair or reasonable probability that the defendant has a real or bona fide defence.”

(Guanghua SS Holdings Limited v Lim Yew Cheng & Another HCA 1972/2020, unrep., 20 April 2022, paragraph 13)

THE DEFENCE CASE REAL AND BELIEVABLE ?

11.  D19’s only pleaded defence is that it was a bona fide purchase for value without notice of the fraud.

12.  In its Defence, D19 averred that at all material times it carried on the business as a sole proprietorship trading in a variety of goods, including formula milk powder for babies/infants, that it did receive the D1 Transfer, and that the D1 Transfer was part and parcel of a genuine arms-length commercial transaction.

13.  D19 then in paragraphs 8 to 15 pleaded the details of the transaction :

a.  On 15 September 2020, one 林樹佳 (“Lam”) contacted a sales representative of D19 to place an order for the supply by D19 of 180 boxes each of “ILLUMA Stage 1 Infant Formula Milk Powder”, “ILLUMA Stage 2 Follow-On Formula Milk Powder” and “ILLUMA Stage 4 Growing-Up Formula Milk Powder”, and 540 boxes of “ILLUMA Stage 3 Growing-Up Formula Milk Powder” (“the Goods”) at the respective per box price of HK$1,860, HK$1,824, HK$1,590 and HK$1,590; totalling 1080 boxes of formula powder milk at the total price of HK$1,807,920.

b.  Lam said he would arrange D1 to make, on his behalf, a payment of HK$1,600,000, and upon receipt D19 could issue the invoice and Lam would arrange for the collection of the Goods by a transportation company named 威盛運輸有限公司 (“WS Transport”), and after the Goods have been collected Lam would settle the balance by making a cash payment. D19 agreed.

c.  The next day, D19 received a note of the same date stamped with a company chop of D1 and signed by Lam and entitled “代付款証明” in respect of the said payment by D1 on Lam’s behalf.

d.  Later that day, D19 received the D1 Transfer, but only the amount of HK$1,599,835, which was HK$1,600,000 net of the administrative fee charged by Standard Chartered Bank in the sum of HK$165. D19 disregarded the administrative fee and was prepared to accept that it has thereby received HK$1,600,000.

e.  The next day on 17 September 2020, D19 sent to Lam the invoice bearing the number TC202009-17, and later a large truck with two workers from WS Transport came and collected the Goods from the warehouse of D19 and one of the workers signed and stamped a note of Lam’s order to acknowledge the successful collection of the Goods. Written on the note against each type of formula milk powder were their respective expiry dates.

f.  D19 then received from Lam the balance in cash of HK$207,920 and a formal receipt was issued by D19 to Lam.

14.  In its Defence, D19 also specifically disputed the Plaintiffs’ averment in their Statement of Claim that “Upon receiving the Defrauded Sums ( … ), the 19^th Defendant within a few days withdrew and/or dissipated and/or transferred away the same to various other recipients” by pleading in paragraphs 16 to 18 of the Defence that (a) there were only 3 withdrawals (with full particulars given) from D19’s BOC Account within 2 weeks after the D1 Transfer totalling to HK$582,196 only, and (b) the balance in D19’s BOC Account actually increased from about HK$29 million immediately after the D1 Transfer to HK$42 million odd by the end of September 2020.

15.  As shown by the activity record of D19’s BOC Account mentioned in paragraph 21(c) below, the Plaintiffs’ such allegation against D19 seems to have been clearly refuted and shown to be baseless. Moreover, the 3 sets of invoices produced by D19 concerning the said 3 withdrawals show that two of the invoicing companies were indeed rather well known suppliers of food products, namely, Lam Soon Products Supply (Hong Kong) Company Limited and Hop Hing Oils & Fats (Hong Kong) Limited.

16.  D19 filed its main affirmation evidence from Kong Yat Chau (“KYC”), its sales representative and the younger brother of the sole proprietor of D19 Kong Ling Ling (“KLL”). KLL filed a short affirmation. KYC and KLL generally affirmed D19’s case as pleaded.

17.  KYC affirmed to a number of further details, notably that (a) Lam was a first-time customer but he has known Lam for some time, (b) Lam was also known by his nickname “老紀”, (c) on 15 September 2020, Lam placed the order through a telephone call with him, (d) Lam was based in Mainland and usually transacted in RMB and did not have sufficient HK dollar cash or a HK dollar bank account; and as KYC insisted payment to be made in HK dollar, Lam suggested that D1 could make payment of HK$1.6 million on Lam’s behalf and Lam would pay the balance in cash after delivery, to which KYC agreed, (e) with the provision of the“代付款証明”and the fact that the D1 Transfer was made through CHATs to D19’s BOC Account, the payment appeared to D19 as proper, and (f) the balance price of HK$207,920 was received the next day after delivery, namely 18 September 2020.

18.  The Plaintiffs filed the affirmation of the 1^st Plaintiff, in it, so far as related to D19, a number of adverse comments were made against the transaction and D19 based on what a “reasonable” and “honest” businessman ought to or would have done and based on “commercial and common sense”, such as - that D19 ought to have verified the identity of the buyer, the source of fund, that D19 ought to have entered into a formal contract for a sale of this amount, that the payment arrangement was not normal such as should raise queries and so on.

19.  Mr Leung, counsel for the Plaintiffs, in his written submissions made many points against the probative value of D19’s documents, submitting that there were “inconsistencies” in and (what I would characterize as) weaknesses in D19’s defence case. However, and without ignoring these points, it seems to me that the logical and much better starting point, for the purpose of analysis in assessing whether the factual case of the defence of a bona fide purchaser for value is believable in the summary judgment context, is to examine the alleged transaction connected with the subject money to see whether it is believable that it actually took place.

20.  This I propose to do after considering whether D19 was a sizable trading company, as D19 said, which the Plaintiffs do not accept.

21.  D19 produced :

a.  Its Business Registration record showing that the business commenced in December 2011. This record of itself is not particularly telling.

b.  The tax return of KLL for the year 20/21 with a set of financial statements of D19 attached thereto said to have been submitted to the Inland Revenue. It was reported that the sales of D19 in that year amounted to HK$175 million odd, but with a gross profit of only about HK$3 million and a net profit of HK$604,048.

c.  A print-out of the activity record of D19’s BOC Account covering the period between 1 and 30 September 2020 consisting of 14 pages.  The record substantiates what were pleaded in paragraphs 16 to 18 of the Defence. The record shows that in that month there were a total of 68 credit transactions and 7 debit transactions. Various details of the transactions were shown including the transaction type and particulars (by cash, transfer, cheque or CHATs) and the name and bank account number of the counter party. Many of the names of the counter parties suggested that they were trading companies or businesses.

d.  3 sets of invoices related to the 3 withdrawals pleaded in paragraph 17 of the Defence.

22.  As canvassed at the hearing, it appeared somewhat out of ordinary that despite having such a sizable business (in terms of turnover) D19 is a sole proprietorship and not a company limited and that D19’s reported profit for the year 20/21 was so very low. Somewhat out of ordinary these features may be, yet they seem to me not sufficient to negate the broad picture shown by these documents, which I find believable, that D19 was a sizable company carrying on trading.

23.  Mr Chan, counsel for D19, at the hearing went through the transactional documents :“代付款証明”[1], the screen shot of the internet banking screen showing details of the D1 Transfer[2], the 車輛申報資料 of WS Transport[3] which contained very detail information including a photo and the mobile telephone numbers of the driver, registration numbers (HK and Mainland) of the truck, detail address of WS Transport and such, the note of Lam’s order signed and stamped by a worker of WS Transport[4], the invoice TC202009-17 dated 17 September 2020 issued to“老紀”[5] and the receipt number 0709305 dated 18 September 2020 issued to“老紀” acknowledging receipt of HK$207,920[6]. He pointed out and submitted that the detail information contained in these documents are consistent with one another and all corroborated D19’s version of the sale of the Goods regarding the details as to how, what, when and by whom. These were not seriously disputed by Mr Leung. In any case, I accept what was pointed out and said by Mr Chan.

24.  Moreover, more telling is a series of 25 Whatsapp messages exchanged between KYC and KLL from 15 September 2020 10:59pm to 16 September 2020 8:20pm[7]. These messages were essentially continuous communications between them concerning the sale of the Goods consisting of, among others, a query by KYC on 15 September 2020 as to the address of the warehouse and a further request early on 16 September 2020 for the bank account number for the purpose of a transfer in, then provision of the requested information by KLL, then a screen capture sent by KYC to KLL at 4:23pm on 16 September showing the D1 Transfer, followed by discussions about when delivery would take place, and ended with KYC sending to KLL an excel file said by D19 to be the said 車輛申報資料.

25.  I particularly note that there were several messages exchanged between KYC and KLL between 18:11pm and 18:15pm on 16 September in which KLL asked KYC who should bear the bank fee of HK$165, and KYC suggested not to be bothered as the buyer would be taking delivery themselves, and to which KLL then indicated her agreement. It seems to me that such a discussion on the incidence of the bank fee followed by a mention concerning the mode of delivery is much more consistent with the existence of the alleged sale than with the situation of a 2^nd layer recipient receiving a defrauded sum from the 1^st layer recipient.

26.  Mr Leung submitted that D19’s defence case was inconsistent in that the buyer was pleaded in the Defence as 林樹佳 only, while the affirmation evidence said he was also known as“老紀”. In view of the fact that the said Whatsapp messages clearly connected 老紀 to the D1 Transfer and the “代付款証明” on its face also stated that the full name of 老紀 was 林樹佳, I do not accept that there is such an inconsistency in the nature as submitted. I am prepared to accept what Mr Chan said that it was more a matter of mere omission in pleading the Defence.

27.  Mr Leung placed emphasis on the unusual feature that the payment by Lam of HK$1,600,000 was made even before an invoice was issue to him, unusual in that (a) it was KYC’s own evidence that usually an invoice was issued first, then followed by payment, and (b) that a first-time customer would take the risk of parting with such substantial amount by making payment to D19 before receiving any documentation. Mr Chan did not dispute it was somewhat unusual and pointed out that KYC or KLL did not even try to explain this aspect as it was a matter for Lam, and further said that so far as D19 was concerned, the transaction just happened in the manner as deposed.

28.  Mr Leung also submitted that while the sale was clearly rather fast-paced or hasty, there was no further details provided by D19 as to how the “代付款証明” was given to D19, how the invoice and the receipt by D19 were sent to Lam, and how Lam paid the balance of HK$207,920 “by cash”, save that it was said that these documents or cash were “sent to” or “received” by the relevant party. Mr Leung further submitted that there was a conspicuous lacuna of evidence or information so far as Lam was concerned, such as nothing further was said by KYC save barely that he knew Lam and Lam had no HK dollar cash or bank account, while no name of Lam’s company or business, no address or telephone number or other means of contact of Lam was set out in any of the transactional documents or in D19’s affirmations. I accept there was such a conspicuous lacuna.

29.  There were also a number of other forensic points made by Mr Leung.

30.  Having examined and considered D19’s evidence as alluded to above together with the submissions and points made on behalf of the Plaintiffs, I was of the clear view that these other relatively minor forensic points, or the somewhat unusual feature of D19 having a low net profit in the tax year 20/21, or the matters mentioned in paragraphs 26 to 28 above, taken individually or together, were insufficient to render D19’s defence case unbelievable.

31.  These matters raised by the Plaintiffs might reflect on the veracity of D19’s case as to whether the transaction was bona fide and without notice. However and quite clearly, the issues of bona fide and notice are generally, unless there is compelling or indisputable evidence one way or the other, not issues that can be summarily determined without trial. At the hearing Mr Leung was not able to point to the existence of any such compelling or indisputable evidence. As these issues would be left to be litigated, I think it unnecessary and indeed undesirable to further go into these other forensic points raised.

IMPOSING A CONDITION

32.  From the outset, Mr Chan has helpfully indicated in his written submissions that D19 was seeking leave to defend, whether unconditional or even conditional. There was thus no serious resistance against the imposition of a condition.

33.  Considering the matter in the round, including the number of unusual features and the conspicuous lacuna mentioned above, I took the view that it was appropriate to impose the condition set out in paragraph 8 above.

CONCLUSION

34.  For the reasons expressed above and having heard counsel on costs, I made the Orders set out in paragraph 8.

35.  I thank both counsel for their assistance.