YASAKART CORPORATION v. HAOGONG TECHNOLOGY CO LTD AND ANOTHER

DCCJ 5381/2021

[2023] HKDC 1514

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5381 OF 2021

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DECISION

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Introduction

1.  By a notice of appeal to judge in chambers filed on 10 March 2023, the 2^nd defendant appealed against the decision of Master Matthew Ho given on 2 March 2023:-

(a)  dismissing the 2^nd defendant’s summons for setting aside the final judgment dated 4 April 2022; and

(b)  making a garnishee order absolute.

2.  The 2^nd defendant filed another summons on 24 July 2023 (“the additional evidence summons”) for leave to adduce additional evidence for the purpose of the hearing of the appeal.

The additional evidence summons

3.  It is convenient to dispose of the additional evidence summons first.

4.  Order 58 rule 1(5) provides:-

“No further evidence (other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made) may be received on the hearing of an appeal under this rule except on special grounds.”

5.  To constitute “special grounds”, the conditions laid down in Ladd v Marshall [1954] 1 WLR 1489 need to be satisfied, namely,

(a)  that the evidence could not have been obtained with reasonable diligence for use at the hearing below;

(b)  the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; and

(c)  the evidence must be such as is presumably to be believed.

See Hong Kong Civil Procedure 2023 Vol 1 at 58/1/3.

6.  The additional evidence the 2^nd defendant sought to adduce are (a) the transaction record of 403369 USDT to the 1^st defendant’s designated account; (b) a bundle of delivery slip of gold bar; and (c) a bundle of transaction record with reference to transaction records of the 2^nd defendant’s account.

7.  According to the 3^rd affirmation of Chan Lai Chung filed on 24 July 2023, the 2^nd defendant sought to adduce those additional evidence because the learned Master ruled that there was no causal link between the receipt of US$404,992.30 with the subsequent change of position and that it is possible that the transaction was not completed and it was therefore suspicious. He further added that should the plaintiff had raised criticism on those transactions in the affirmation of opposition, the 2^nd defendant would have adduced evidence “to prove the reality of the transactions and the detriment suffered by D2 in the affirmation in reply”.

8.  Obviously, it is not the 2^nd defendant’s case that those additional evidence could not have been obtained with reasonable diligence for use at the hearing below but they are produced in order to rebut the criticisms of the plaintiff’s counsel at the hearing below.

9.  In a setting aside application, it is up to the defendant to demonstrate that the defence it raised has a real prospect of success. To this end, the defendant is incumbent to produce as much evidence as possible to show to the court that his defence has a realistic prospect of being accepted. For this reason, what evidence is to be produced is a matter of professional judgment of the legal representatives of the defendant and is not dependent on the way in which the plaintiff conducts his opposition.

10.  In my view, the 2^nd defendant is seeking to adduce the additional evidence in order to salvage the situation. I am not satisfied that there are special grounds on which to allow the application.

11.  Accordingly, the additional evidence summons is dismissed.

Legal principles on appeal against Master’s decision

12.  An appeal from the master to the judge in chambers is dealt with by way of an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time: see Hong Kong Civil Procedure 2023 Vol 1 at 58/1/2

Regularity of the judgment

13.  Judgment in default of notice of intention to defend was entered against the 1^st and 2^nd defendants on 4 April 2022.

14.  Mr Simon Wong, counsel for the 2^nd defendant, submitted that the plaintiff had not finally abandoned reliefs (2) – (7) because in the 2^nd affirmation of Lin Hui Ying filed on 16 January 2023, the abandonment of those reliefs was on the sole basis that the defendants did not contest the proceedings and for the purpose of expediting the obtaining of final judgment. Mr Lin further said that the plaintiff “will reserve its position as to relying upon the full set of causes of action against the 2^nd defendant”. The said judgment was therefore an irregular judgment. Mr Wong relied on the Court of Appeal decision in Russel Peter Brown v Edward Eugene Lehman, CACV 119/2012, 29/7/2016, unreported.

15.  With respect, Russel Peter Brown (supra) is not of assistance to Mr Wong’s argument. In that case, the Court of Appeal did not find the handling solicitor for the plaintiffs had abandoned the claim to an injunction. She was under a mistaken belief that the plaintiffs had already obtained a final injunction, which was in fact an interlocutory one. That being so, she could not be regarded as having abandoned the claim for an injunction as the learned judge below had accepted.

16.  Turning back to the present case, when the plaintiff applied for default judgment, the solicitors for the plaintiff did by a letter dated 25 February 2022 inform the Registrar of District Court, inter alia, that “we are instructed to confirm the Plaintiff’s abandonment of reliefs under the prayers (2) to (7) of the Indorsement of Claim of the Writ of Summons”.

17.  It was the basis upon which a final judgment was entered on 4 April 2022, which is reflected from the preamble of the judgment in the following terms:-

“the Plaintiff having abandoned the claim for account, tracing enquiry, declaration, orders, equitable compensation, damages and interest as sought in prayers (2)-(7) of the Indorsement of Claim”

18.  In my view, the plaintiff had expressly and effectively abandoned the reliefs under prayer (2) to (7) which fell outside Order 13 rules 1 to 4 of the Rules of the District Court. What Mr Lin said in his 2^nd affirmation in January 2023 only catered for the contingency of the 2^nd defendant’s setting aside application. In any event, I do not think what is said by Mr Lin in January 2023 has any effect on the position of the plaintiff expressed to the Court one year earlier.

19.  I see no merits in Mr Wong’s argument.

Legal principles on setting aside a regular judgment

20.  There is no dispute on the legal principles on setting aside a regular judgment, which is succinctly summarized by Kwan VP in Harbour Hero Enterprises Ltd v Chau Nung Tai [2019] 3 HKLRD 174:-

“10. The relevant principles regarding the setting aside of a regular default judgment are not in dispute. As stated by the Judge, the defendant would have to show “a real prospect of success”, which means that she should show that her defence carries some degree of conviction (Premier Fashion Wears Ltd v Li Hing Chung [1994] 1 HKLR 377, 383). In assessing whether she has shown a real prospect of success, it should be borne in mind that there should be no mini-trial on affidavit evidence. The court is to form a provisional view as to whether she has a realistic prospect of successfully defending the action and this will involve assessing whether her evidence on disputed factual matters has a realistic prospect of being accepted. The assessment has to be carried out mindful of the interlocutory nature of the application and with a sense of proportionality (Maryo Development Ltd v Tsang Yau May (CACV 101/2015, [2016] HKEC 74, 11 January 2016), [13]).”

The plaintiff’s case

21.  It is the plaintiff’s case that the plaintiff is the victim of a fraud perpetrated by unknown fraudsters. On 18 August 2021, the plaintiff was deceived into making a payment of US$300,000 to the 1^st defendant’s account with Standard Chartered Bank numbered 41500532913.

22.  The plaintiff discovered the fraud between 20 and 22 August 2021 whereupon a report was made to the Hong Kong police on 24 September 2021 through a firm of solicitors. In October 2021, the plaintiff was informed by the police that part of the money was transferred from the 1^st defendant’s account to the 2^nd defendant’s account with Chong Hing Bank numbered 2608-00-411-147.

The 2^nd defendant’s defence

23.  As no statement of claim is filed, the 2^nd defendant put forward its defence case by the affirmations of Chan Lai Chung as follows:-

(a)  the 2^nd defendant was established in 2019 by Mr Wong Lap Hang, who then transferred his business to Mr Chan Lai Chung in December 2020. The 2^nd defendant was running the business of trading precious metals, mainly gold. From early 2021, the 2^nd defendant was involved in the trading of cryptocurrency, mainly USDT.

(b)  The turnover in the year of 2020-2021 was HK$195,540,000 with a profit of HK$567,000.

(c)  In relation to the USDT business, the company issuing USDT guarantees its coin to be exchanged with USD at the ratio of about 1:1 with security at a bank account. The 2^nd defendant would purchase USDT from open market or directly from USDT issuing company through its agent for selling to anyone who wants to purchase USDT.

(d)  In each transaction, the 2^nd defendant would earn the difference at about 0.4%.

(e)  The 1^st defendant was introduced to the 2^nd defendant by a dealer by the name of Mr Pang Ting Keung. It is the practice of Mr Pang to produce the business registration certificate of his client for the record of the 2^nd defendant and this transaction is no exception.

(f)  Through Mr Pang, the 1^st defendant had had a total of 2 transactions with the 2^nd defendant, ie

(i)  on 6 August 2021 purchasing 39,800 USDT at the sum of US$39,992.28; and

(ii)  on 19 August 2021 purchasing 403,384 USDT at the sum of US$404,992.30 (excluding the deduction of administration charge of USDT).

(g)  The 403,384 USDT was transferred to the account designated by Mr Pang on behalf of the 1^st defendant, ie 0Xc0cc52951e56e6550837c669AF5Ca10376fdb39f.

(h)  Apart from receiving the 1^st defendant’s fund for the USDT transactions, the 2^nd defendant had no relationship with the 1^st defendant or its director or shareholder.

(i)  Out of the US$404,992.30 deposited by the 1^st defendant, US$400,025 was withdrawn from the 2^nd defendant’s account on 20 August 2021 for investing in gold. There were 10 subsequent transactions afterwards which were not related to the incident. No later than 15 September 2021, all money from the 1^st defendant were spent. The money claimed by the plaintiff was dissipated. Therefore, the fund remaining in the 2^nd defendant’s account no longer belongs to the plaintiff due to change of position. It would be inequitable or unconscionable to allow the plaintiff’s claim of restitution because the 2^nd defendant was doing lawful and genuine business. The 2^nd defendant was a bona fide purchaser for value without notice. The 2^nd defendant has no knowledge of the 1^st defendant’s fraudulent involvement nor has acted dishonestly.

Change of Position and bona fide purchaser

24.  To raise the defence of change of position, the defendant has to prove:-

(a)  there was a causative link between the receipt of the benefit and his change of position, so that, but for the receipt of the benefit, the defendant’s position would not have changed, either because the defendant no longer has the benefit received or because he has changed his position in some other way in reliance on the receipt of the benefit; and

(b)  the defendant’s position must have changed in circumstances which make it inequitable for him to make restitution to the plaintiff.

  See TTI Global Resources HK Ltd v Hong Kong Myphone Technology Co Ltd [2021] HKCFI 306.

25.  To raise the defence of bona fide purchaser for value without notice, the defendant has to prove:-

(a)  there was a purchase for value;

(b)  of the estate in property;

(c)  in good faith;

(d)  without notice; and

(e)  at the time of transfer of the legal estate.

  See also TTI Global Resources (supra).

Discussion

26.  The first thing I note is that whenever there is a client who wants to purchase USDT through the 2^nd defendant, the 2^nd defendant would need to purchase the same either from the open market or directly from the USDT issuing company. The profits that can be derived from each transaction are the price difference of about 0.4%.

27.  Hence, before the 2^nd defendant is able to deliver USDT to its client, he must first spend an approximately the same amount of money to purchase the same from either the USDT issuing company or the open market.

28.  Here, the 2^nd defendant is saying that the money received from the 1^st defendant was used to purchase gold for investment purpose on the following day. It has not been shown that the 2^nd defendant had expended any money to purchase the USDT pursuant to the request of Mr Pang.

29.  The buying and selling of cryptocurrency is not ordinary business. The mechanism of the business transaction is not readily understood by people in the street. It is therefore up to the 2^nd defendant to demonstrate how the business was done including but not limited to the receiving of the order from Mr Pang; the then available sources of USDT; the then market rate of USDT quoted by the different sources; how the purchase of the USDT was performed; how the purchased USDT was credited into the designated account of the 1^st defendant and the nature of such an account.

30.  It is fair to say that there is a total lack of information on how the 2^nd defendant ran the business of cryptocurrency trading. In respect of the transaction in question, the 2^nd defendant only by CLC-03 exhibited in the affirmation of Chan Lai Chung filed on 9 November 2022 produced the screenshot of a WhatsApp group that transpired on 19 August 2021 (“the WhatsApp page”) without any explanation of the various messages contained therein and a page of untitled document (“the untitled page”) also without any explanation.

31.  It is worth noting that in the untitled document, it purportedly showed that an application was submitted at 11:36:07 hours on 19 August 2021 for 403,384 USDT. However, according to the statement of accounts of the 2^nd defendant’s account numbered 260-800-0411147 with Chong Hing Bank (produced as exhibit LD-10 by the 2^nd affirmation of Li Ding filed on 2 June 2022) US$404,992.30 was credited into the account at 15:26:00 on the same day. The act of the 2^nd defendant purchasing USDT for the 1^st defendant before the receipt of fund does not sit well with logic and is against business sense.

32.  It is the 2^nd defendant’s case that the money received from the 1^st defendant was used to buy gold for investment purpose. Whilst I am puzzled as to the source of fund whereby the 2^nd defendant was able to purchase and sell the USDT to the 1^st defendant, it is obvious, in my view, that the purchase of gold had nothing to do with the USDT transaction with the 1^st defendant. It was an act in the ordinary course of business of the 2^nd defendant.

33.  Lord Goff of Chieveley in the House of Lords case of Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 580F has the following to say on the defence of change of position:-

“… the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things.”

34.  Accordingly, even on the 2^nd defendant’s own case, the defence of change of position is not made out.

35.  The 2^nd defendant sought to show that 403,384 USDT was transferred to the 1^st defendant’s designated account by the WhatsApp page and the untitled page, thus provided valuable consideration for the money received.

36.  I bear in mind that it is not my function to make any findings of fact at this stage. I am however required to form a provisional view on the prospect of success of the 2^nd defendant’s intended defence of bona fide purchaser for value without notice. For the reasons I have stated above, I have great reservation that any reasonable tribunal of fact would accept that the USDT was purchased and passed to the 1^st defendant. Therefore, I am of the view that there is no real prospect of success of the defence.

Conclusion and order

37.  For the foregoing reasons, I have come to the same conclusion as the learned Master did, that the setting aside application be dismissed and the garnishee order be made absolute.

38.  The 2^nd defendant’s appeal is therefore dismissed.

Costs

39.  I make a costs order nisi that the 2^nd defendant shall pay the plaintiff the costs of this appeal with certificate for counsel, to be taxed if not agreed, such costs to be assessed summarily.

40.  In the absence of any application for variation by summons within 14 days from the date of this decision, the costs order nisi shall become absolute.

41.  Within 14 days from the date of the costs order absolute, the plaintiff shall lodge and serve a statement of costs, followed by the 2^nd defendant’s list of objections within 7 days thereafter.