BRITESTONE LTD v. COHOME (HK) INTERNATIONAL TRADE CO. LTD AND OTHERS

HCMP 2928/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2928 OF 2016

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D E C I S I O N

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1.  This is an application of Britsetone Limited (“the Company”) by summons dated 2 November 2016 (“the Summons”) for further continuation of the ex parte order made by B Chu J against all the defendants dated 1 November 2016 (“the Ex parte Order”) until further order or the final determination of this action.  This court made an order on 4 November 2016 to, among other matters, continue the Ex parte Order pending the resolution of the Summons.

2.  By the Ex parte Order, briefly stated, each of the defendants is injuncted from removing from Hong Kong, disposing of, dealing with or diminishing the value of any of his assets up to the value of US$3,466,481.00 (“the Sum”). The Company alleges that it has been deprived of the Sum as a result of a massive fraud committed by the defendants jointly.

3.  Despite leave obtained to file evidence in opposition to the Summons, only the 7^th defendant, Mr Lee, has filed his affirmation and took part in the substantive hearing of the Summons.

4.  The 6^th defendant, through his counsel Ms Claudia Lam, indicated to the court that he does not oppose the continuation of the Ex parte Order. He merely opposed an application of the Company to adduce an affirmation of its handling solicitor updating this court the progress of the criminal proceedings against the defendants but in vain.

5.  I should first outline the factual background leading to the grant of the Ex parte Order.

Background facts

6.  The Company is a local company dealing in electronic components worldwide. In the present proceedings, all seven defendants are allegedly involved in a fraudulent scheme (“the Scheme”) whereby the Company has been inflicted financial loss by way of the Sum.

7.  In or about February 2014, the Company was introduced to the Scheme by the 3^rd defendant, Mr Tam. Under the Scheme, the Company would make purchases from a specified vendor which turned out to be the 1^st defendant (“Cohome”). Then, the Company would sell the goods with a profit margin of around 3% to some buyers in the People’s Republic of China (“the Purported Buyers”) by delivering shipments to two designated warehouses.

8.  The Company agreed to the Scheme, which began its operation in February 2014. From December 2014 and until the end of the Scheme in March 2015, the Purported Buyers defaulted on payments in the amount of the Sum for the goods that the Company had shipped to them.

9.  The Company subsequently discovered the Scheme was a complex commercial fraud. The goods that the Company purchased from Cohome and sold to the Purported Buyers were being recycled through the two designated warehouses and being returned to Cohome, only to be resold to the Company without its knowledge. This meant that the goods the Company bought from Cohome were at all material times the same goods that the Company was selling to the Purported Buyers. The warehouses were found to be controlled respectively by Mr Tam’s family members and the 2^nd Defendant, Chen Zhimin. Mr Chen was introduced to Company by Mr Tam D3 as manager of Super Honor (HK) Electronic Technology Co Ltd, the 5^th defendant. In fact, Mr Chen was also the sole director of Cohome and the 4^th defendant, Beijing Rongxin Zhongke (HK) Electric Equipment Co Ltd (“the BRZEE Company”).

10.  Similarly, the payments the Company made to Cohome were funnelled back to the Company through different channels as if they were payments from the Purported Buyers. This was done in two ways. Firstly, Cohome would deposit the payment made by the Company to the account of the BRZEE Company. The BRZEE Company then transferred the money to the Company as if the payments were from the Purported Buyers. The second channel was through cashier orders made by different individuals to the Company. These individuals include Mr Tam, Mr Chan Chi Shing (the 6^th defendant) and Mr Lee.

11.  The Scheme came to light when staff working for the Company began to notice that the same goods were being recycled in this way after they put distinctive markings on several boxes containing the goods. The explanations given by Mr Tam failed to convince the Company. The Company ceased all business dealings with Cohome in April 2015.

12.  In or about September 2015, the Company commenced a High Court action under HCA 2146/2016 (“the Action”) against, among other persons, Cohome, Mr Tam and Mr Chen. Mr Lee was subsequently joined to the Action as the 9^th defendant.

13.  The Company joined Mr Lee due to a Norwich Pharmacal Order (“NPO”) that it obtained against HSBC, with which Cohome has its bank accounts. On 8 August 2016, pursuant to the NPO, HSBC disclosed the bank statements of Cohome showing that on four occasions, Mr Lee received payments from Cohome. On three of these occasions, Mr Lee shortly transferred exactly the same sums to the Company.

14.  Apart from civil proceedings, criminal proceedings are in progress arising from the Scheme. First, both Mr Tam and one Mr Cheung, an ex-employee of the Company, are prosecuted under KCCC 2553/2016 and KCCC 2865/2016.  On the other hand, Mr Chan and Mr Lee have been charged with the offence of dealing with property known or believed to represent proceeds of an indictable offence. There will be a hearing in September this year and committal proceedings are imminent.

15.  Absent any opposition raised by the defendants save Mr Lee, indeed the defendants except Mr Chan and Mr Lee through their legal representatives being absent, there is no reason why the Ex parte Order should not be continued against them. I should add that on the evidence, I am satisfied that a good arguable case of fraud is shown and that all the defendants knowingly or otherwise were involved in the Scheme.

This application

The case of the Company

16.  Given the foregoing conclusion, I need only consider the application of the Company as against Mr Lee. The Company relies on the following indisputable transactions taking place in the account of Mr Lee to found its case against Mr Lee.

17.  On 26 February 2014, Cohome transferred a sum of US$32,270.97 to Mr Lee (“the 1^st Transfer”). From the bank statement of Mr Lee, however, it is shown that a sum of HK$250,000 instead of the said sum of US$32,270.97 was deposited by Cohome.

18.  On 14 May 2014, Mr Lee received from Cohome a sum of US$80,352.00. On 16 May 2014, he made a cashier order drawn out to the Company in the like amount (“the 2^nd Transfer”).

19.  On 20 August 2014, Mr Lee received from Cohome a sum of US$70,000 and on the same day, he made a cashier order drawn out of the Company in the like amount (“the 3^rd Transfer”).

20.  On 21 August 2014, Mr Lee received from Cohome a sum of US$118,000 (“the 4^th Transfer”) and on the same day, he made two cashier orders drawn out of the Company. One was in the amount of US$70,000 while the other one was in the amount of US$480,000.

21.  It is noteworthy that all the amounts in the 1^st to 4^th Transfers (collectively “the Monies”) tallied with the respective amounts the Company was supposed to receive from the Purported Buyers. The Company contends that all these Transfers were made to facilitate the Scheme.

22.  Mr Lee does not argue otherwise save the 1^st Transfer. His defence, as will be elaborated below, is premised on his complete ignorance of the Scheme and his innocuous reason for dealing with the Monies.

23.  On the evidence relating to the 1^st to 4^th Transfers, the pleaded case of the Company is that Mr Lee received the Monies from Cohome in the knowledge that it was not entitled to receive the same from Cohome and/or the Company in the absence of valuable consideration and that the Monies were not Cohome’s funds. The Company further avers that the alleged knowledge should be acquired by Mr Lee as an honest and reasonable man due to his knowledge that (1) Cohome has no genuine ongoing business; (2) the manner of how the Monies were received by him and paid out within a very short space of time and (3) the Monies were either paid over as a means of money laundering.

24.  For the purpose of this application, Mr Hon (together with Mr Park), for the Company, relies on knowing receipt and dishonest assistance.

25.  Now I turn to the case of Mr Lee.

Mr Lee’s case

26.  Mr Lee’s case is simple and straightforward. He was involved in the 1^st to 4^th Transfers out of his friendship with Mr Tam, who became his friend in 2004. They used to play football regularly. Mr Lee knows that  Mr Tam is active in his business.

27.  Mr Lee says that prior to the four Transfers, he extended two loans to Mr Tam (“the Loans”). The first loan was made in January 2010 in the amount of HK$400,000 and was repaid within two months. The second loan was made in February 2012 in the amount of HK$500,000 (“the 2^nd Loan”) and was repaid by three instalments. For the last instalment allegedly made on 26 February 2014, Mr Lee avers that it was made by way of the 1^st Transfer. He only knew that it was made by Cohome and not by Mr Tam personally upon reading his bank statement.  Mr Lee asserts that it was his understanding that Cohome was a company controlled by Mr Tam but had no idea about its business activities.

28.  When I cast doubt on the basis of his alleged understanding, Ms Gwilt (together with Ms Vivian Lam), for Mr Lee, claims that Mr Tam told Mr Lee so in a social gathering. This assertion does not sit comfortably with the affirmation evidence and in any event, as pointed out by Mr Hon, it should not have been made from the bar table. 

29.  For the 2^nd Transfer, Mr Lee explains that a few days prior to the transfer, Mr Tam called him and told him that he was not in town but he needed to make payment of a sum by way a cashier order to another company. Mr Tam asked him to issue a cashier order for him after he paid into his account the relevant sum. Out of friendship, Mr Lee did so after confirming that he had received the sum of US$80,352 in his account.

30.  For the 3^rd Transfer, Mr Tam called Mr Lee on 20 August 2014. This time, he told Mr Lee that he had already deposited a sum of US$70,000 into his bank account and asked him to issue a cashier order in the same amount to the Company and deposit the same into its account.  He agreed without any concern and did what he had been requested on the very same day.

31.  On the following day, i.e., 21 August 2014, Mr Tam called again and told Mr Lee that he had already deposited a sum of US$118,000 into his account. Mr Tam asked him to issue two cashier orders to the Company. Mr Lee was not very happy as he was rather occupied on that day. Nevertheless, he acceded to his request but made it clear to Mr Tam that he was also busy with his own business and could not assist him in similar transactions anymore.

32.  After the 4^th Transfer, Mr Tam never makes such requests again.

33.  Mr Lee categorically denies knowledge of any suspicious activities of Mr Tam and he found nothing untoward about the 2^nd to 4^th Transfers whereas the 1^st Transfer was merely a repayment of the outstanding balance of the 2^nd Loan.

34.  Ms Gwilt, on this evidence, impresses upon this court that Mr Lee is innocent and in particular highlights the fact that the Company has never been deprived of any sum due to the 1^st Transfer and up to November 2014, the Company got full payments by the Purported Buyers.

35.  She further points out that in the 2^nd to 4^th Transfers, before Mr Lee issued the cashier orders, he had first received the sums from Mr Tam through Cohome. As such, Mr Lee had no reason to doubt that Mr Tam was merely in genuine need for his assistance to issue cashier orders and not because of any financial difficulties. He had no suspicion or misgiving at all.

36.  As a general observation, I should make it clear that I am not impressed by the evidence of Mr Lee at all. He is unable to produce any documentary evidence such as the texted messages exchanged between Mr Tam and him to support his allegations. The Loans do not sound convincing in the absence of documentary evidence showing the cash movements.

Analysis

Good arguable case?

Knowing receipt

37.  I shall assess the merits of the pleas of knowing receipt and dishonest assistance in turn in light of the evidence available. Since these are the only two causes of action advanced on behalf of the Company and for present purposes I do not venture to consider other possible pleas.                   

38.  The essential elements of a knowing receipt claim are authoritatively explained by Hoffmann LJ in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (cited with approval by Neuberger NPJ in Akai Holdings Limited (In Liq) v Kasikornbank PCL  [2011] 1 HKC 357 at §142) in the following terms:

“This is a claim to enforce a constructive trust on the basis of knowing receipt. For this purpose, the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty."

39.  The following passages in Snell’s Equity (23^rd Edn., 2015) at §§30-071 & 30-072 are also instructive:

“Where the defendant receives the property beneficially he may be liable to give restitution of its value in an action for knowing receipt. The basis of the defendant’s liability is that he received property in which the claimant had a subsisting equitable interest, so the claim could not arise if he received it as a bona fide purchaser for value. The claimant may need to prove by the formal rules of following or tracing that the money received by the defendant was specifically applicable to him. It would not be enough for him to prove in a more general way that the sum received by the defendant was the same as the sum misapplied from the trust.”

“The defendant must be at fault when he receives the trust property. This justifies his continuing liability to restore is value to the claimant even after he may no longer have the original property to restore by a proprietary claim. Fault means that the defendant must know enough of the facts surrounding the misapplication of trust property to make it unconscionable for him to retain the benefit of his receipt. The degree of knowledge which might make the defendant’s conduct unconscionable varies with the context. This allows the court to set a standard that is appropriate to exigencies of the transaction in question.” (my emphasis)

40.  Mr Hon acknowledges that he has difficulties in establishing the subsisting equitable interest in the Monies of the Company when Mr Lee received the Monies. The four Transfers were made by Cohome and there is no evidence that the Monies were actually received by Cohome from the Company. This is not the pleaded case of the Company to start with.

41.  Further, I have some doubt as to the availability of this cause of action to the Company by reason of the undisputed evidence that Mr Lee himself did not retain any part of the Monies or any monetary benefit deriving from the Monies. Again, there is no such allegation at all.

42.  Therefore, I am unable to conclude that the Company has a good arguable case of knowing receipt as the matter now stands.

43.  I should add that at the hearing, I point out to Mr Hon my view on the pleading of the Company in regard to the plea of the necessary knowledge of Mr Lee. I refer him to the decision of  A Chan J in Shun Hing Holdings Company Limited and Ors. v Li Kwok Po David a.k.a. David Li Kwok Po & Choi Fan Keung VIC, Executors of the Estate of Mong Man Wai William, Deceased and Ors., unreported, HCA 2417/2014, 30.9.2016 for the pleading requirement relating to the plea of knowledge. Subsequent to the hearing, it came to my attention that the Court of Appeal affirmed the decision of A Chan J (unreported, CACV 211/2016 and CACV 212/2016, 21.8.2017) and Lam VP giving the Reasons for Judgment of the Court of Appeal further explained the pleading requirement.

44.  Whilst the pleading of the Company in the Action does not have any bearing on my assessment of the knowing receipt claim, I am of the view that that the Company should review its pleading in light of the foregoing authorities.

Dishonest assistance

45.  Dishonest assistance in a breach of trust attracts accessory liability. It depends on the defendant’s wrongful participation in a primary breach committed by the trustee.: see Snell’s Equity, supra, at §30-077.

46.  In the present case, there is no dispute that the four Transfers facilitated the Scheme, which practiced a fraud on the Company and that Mr Lee was somehow involved in the four Transfers. Though on the face of it, the Company was not deprived of the amount in the 1^st Transfer, the 1^st Transfer was instrumental to the overall perpetration of the fraud. The early series of transactions conned the Company into thinking that it was transacting genuine sales with the Purported Buyers and therefore it allowed itself to continue to take part in such bogus sales.

47.  The debate is actually centered on the state of mind of Mr Lee when he received the Monies and issued the cashier orders as per the instructions of Mr Tam. It is pertinent to refer to those authorities shedding light on the requisite element of dishonesty.

48.  I first refer to Snell’s Equity, supra, at §30-079. It says,

“When the test of dishonesty is applied, the defendant is not free to be judged according to his own standards. He is judged according the standards of an ordinary honest person (sic), who would have the same knowledge of the circumstances as he does, and sharing some of his personal characteristics, such as his age and experience. His conduct need not be dishonest by the standards of all people, since not all people may appreciate the kinds of specialised wrongdoing involved in certain kinds of commercial transaction.”

49.  Mr Hon refers this court to the headnote in the report of Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 A.C. 378. I find particular assistance in the following speech of Lord Nicholls giving the judgement of the Privy Council at p.391B-C,

“Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.”

50.  For completeness, Mr Hon refers this court to a passage of Law Relating to Trusts and Trustees by Underhill and Hayton (15^th Edn.) cited by a district judge in her judgment handed down in 2003. This court is unable to find the same passage in the current edition of the work, namely, the 19^th edition with a slightly different title and hence I do not intend to rely on the same here.

51.  With these authorities in mind, I turn to the evidence to find out whether there is a good arguable case of dishonesty on the part of Mr Lee.

52.  On his evidence, Mr Lee was in his mid-forties in 2014. He earned a bachelor degree in commerce from the University of Toronto in 1997. He has worked as an accountant in numerous accountancy firms in Hong Kong since his graduation. In 2009, he set up a private company to prepare accounts for other companies. He also takes up freelance auditing work for his friend.

53.  Despite his vigilant effort to convince this court that Mr Tam was his good friend and he only assisted him in the 2^nd to 4^th Transfers as a gesture of goodwill, to say the least, I am persuaded the Company could show a good arguable case of his dishonesty for the following reasons.

54.  First and foremost, Mr Lee is an experienced accountant by profession. Coupled with his social and business experience, he should be very sensitive to this kind of prompt transactions in monies in bank accounts and money laundering must be at the forefront of his mind.

55.  The Monies were substantial and it is not easily acceptable that one would deal with them in such a causal manner even for a close friend. Mr Lee relies on the Loans to dilute the suspicion arising from the size of the Monies and to reinforce his perceived trustworthiness of Mr Tam. As observed above, I even have doubt about the existence of the Loans at all.

56.  It is alarming that Mr Lee did not even make the slightest enquires with Mr Tam as to the bona fide of those transactions. Mr Tam curiously enough required the help of Mr Lee to issue cashier orders in the course of his business whilst he could take the trouble and indeed risk to deposit those sizable sums into the account of Mr Lee even without giving him any prior notice.

57.  Moreover, the 3^rd and 4^th Transfers took place within 2 days only and Mr Lee had to help Mr Tam to dealing with such large sums of money. I am not convinced that all these circumstances would not cause a professional accountant any concern and Mr Lee would unquestioningly have followed the instructions of a close friend to deal with the Monies.

58.  I should add that his allegation that he made his complaint after the 4^th Transfer sounds really contrived. Instead of raising reasonable queries about the bona fide of the transactions, he was just concerned about his busy schedule. This is not convincing.

59.  Therefore, I can conclude that the Company has shown a good arguable case of dishonest assistance against Mr Lee.

Other considerations

60.  As pointed out above, the debate before me is all about the merits of the claims of the Company as against Mr Lee. Nonetheless, this court should also consider the other requirements of Mareva/proprietary injunctions.

61.  Firstly, given the foregoing conclusion on the dishonesty issue, I am satisfied that there is a real risk of dissipation of the assets of Mr Lee. On the evidence, he is the registered owner of a landed property in Mei Foo Sun Chuen, Kowloon.

62.  It is not in dispute that the Company was seriously victimized and has suffered financial loss by way of the Sum. I have heard nothing about any hardship caused to Mr Lee by the injunctive part of the Ex parte Order save that in his affirmation Mr Lee made a bare assertion that it has seriously disrupted his business and livelihood. On the evidence, I am convinced that the balance of convenience is in favour of the continuation of the Ex parte Order.

Conclusion and order

63.  By reason of the foregoing analysis, I should exercise my discretion and allow the application of the Company by the Summons.

64.  On the issue of costs, I make an order nisi that the Company’s costs of and occasioned by the Summons except such costs previously dealt with be the plaintiff’s costs in the cause of the Originating Summons.

65.  It remains for me to thank counsel for their succinct submissions.