XCHRX DONGGUAN CITY LONG LIAN TRADING CO. LTD. v. SO KIT AND OTHERS

HCA 13667 of 1999

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. I have before me, an application by the Plaintiff for the continuation of the Mareva Injunction and for certain discovery orders in aid of the Mareva Injunction and an application by the 2nd and 3rd Defendant to discharge the ex parte Mareva Injunction Order made by me as a Duty Judge on the 23rd of August 1999. The hearing of the discovery application is deferred.

2. In mid August 1999, by the fraud of the 1st Defendant a Bank Draft in the sum of RMB14.6 million was obtained fraudulently from the Plaintiff which was then converted by a Miss Wu another fraud accomplice with the help of a Mr. Li into HK$13 million, the majority of which sum was transferred from the account of Li at Nanyang Commercial Bank into two bank accounts, namely the bank account of the 2nd Defendant ("Leong") No. 07091610945056 at Po Sang Bank ("the Leong Account") in the sum of HK$1,792,453 and the bank account of the 3rd Defendant ("Prosperous") No. 03135600159221 at Sin Hua Bank ("the Prosperous Account") in the sum of HK$10,830,000. The Plaintiff discovered the fraud and with the assistance of the police and the relevant banks identified the Leong Account and the Prosperous Account into which the aforesaid sums of the Plaintiff's money had been paid. An urgent Mareva Injunction was obtained on the 23rd August and served on the parties. By the time the Ex Parte Order was served by the Plaintiff, the amount standing in the Leong Account was some HK$1.35 million and the amount standing in the Prosperous Account was some HK$0.117 million.

3. At the hearing of the two applications, much additional affidavit evidence had been filed by the 2nd Defendant, 3rd Defendant and the Plaintiff (1st Defendant did not appear), pursuant to my directions of time-table for the filing of affidavit evidence. The 2nd and 3rd Defendant each admitted the receipt of the sum of money in their respective bank account from the bank account of Li but each party gave an explanation of the reason for the receipt of the money. The 2nd Defendant's evidence is that he is a forex trader and has long term dealings with a man called Lo ("Lo") and that the money received on the 17th August was pursuant to his dealings with Lo. It will be seen later that the Affidavit evidence of the 2nd Defendant is not clear on many material respects. The evidence of the 3rd Defendant, Prosperous is however very clear, although lacking in credibility. The story of Prosperous is that a casual friend Tsang Wai ("Tsang") had used the Prosperous account (after being told by Mr. Mak of the 3rd Defendant the account no. of the Prosperous Account) to receive the $10.8 million and then Mak of Prosperous went with Tsang to Sin Hua Bank and gave instructions to Sin Hua Bank to transfer $6 million and $4.1 million to 2 different accounts nominated by Tsang and withdrew $500,000 cash which was given to Tsang. Since then Tsang had disappeared.

4. At the hearing before me, the 2nd and 3rd Defendant strongly argued that the Mareva Injunction Order should be discharged and should not be continued. I was addressed by the parties on the following Issues:-

1. Good Arguable case of the Plaintiff;

2. Risk of Dissipation by each of the Defendants;

3. Balance of convenience;

4. What order should be made.

GOOD ARGUABLE CASE

5. The case of the Plaintiff presented to me by Mr. Side at the hearing is that the Plaintiff has the following 3 Categories of Causes of Action:-

(A) Claim in the amount of $13 million for fraud and fraudulent breach of trust;

(B) Claim against the 2nd and 3rd Defendant each in the amount of money received ($1.8 million and $10.8 million respectively):-

(i) for money had and received and/or in restitution;

(ii) for constructive trustee of the money received;

(C) Claim against the 2nd and 3rd Defendant each in the the amount of money still standing in the respective accounts at the time of service of the Mareva Order ($1.35 million and $0.117 million respectively) by way of proprietory or tracing claim.

6. I will consider under each Category of cause of action whether on the evidence now before the Court, the Plaintiff has presented a good arguable case.

$13 Million Claim-Fraud

7. The evidence of the Plaintiff in support of the allegation of fraud against the 2nd and 3rd Defendant is that Miss Wu, the accomplice of the 1st Defendant who obtained fraudulently the bank draft from the Plaintiff knew the Leong Account and the Prosperous Account of the 2nd and 3rd Defendant and confirmed by telephone, presumably with each of the 2nd and 3rd Defendant recipient, the satisfactory receipt of the money in the Leong Account and in the Prosperous Account before Miss Wu handed over the Plaintiff's bank draft to Li. Mr. Side therefore puts the Plaintiff's case of fraud on the basis that the 2nd and 3rd Defendant was each part of the fraud and was liable in fraud to the Plaintiff. I accept of course that at the trial the defence of the 2nd and 3rd Defendant that they were innocent parties might be accepted and believed by the Court in which case then fraud would not be established at the trial. But what is the strength of the case of the Defendants as revealed by the Affidavit evidence put before the Court at the hearing.

8. The evidence on the part of the 3rd Defendant is to the effect that Mr. Mak ("Mak"), a director of the 3rd Defendant has a friend Tsang who approached Mak on the 10th of August 1999 and asked for the bank account number of the 3rd Defendant so that Tsang could have some remittance from China sent to that bank account of the 3rd Defendant. The reason given by Tsang for this is that the money Tsang was to receive had to go into a company account and therefore Prosperous was requested to receive the money on behalf of Tsang. Mak agreed and gave the Prosperous Account No. to Tsang. A week later, Tsang called and asked to meet Mak at the Sin Hua Bank where Mak found out that the very large sum of $10.8 m. had been transferred from some unknown account to the Prosperous Account. Mak was surprised that Tsang who was only a building work sub-contractor could have so much money. Tsang accompanied by two friends not previously known to Mak, asked to have the money so received in the Prosperous Account paid out in two sums of $6 million and $4.1 million to two nominated accounts alleged to be those of Tsang and the balance of some $800,000 paid out in cash to Tsang. Mak complied with the transfer requests. But due to the restriction by the bank on a cash ceiling of $500,000, only $500,000 cash was paid out to Tsang from the Prosperous Account with a balance of some $200,000 left in the said Prosperous Account. It will be seen that the essence of this defence of the 3rd Defendant is that a casual friend requires the bank account of the 3rd Defendant to receive some money as Tsang did not have a company bank account. Is that story credible. Further is the story of taking out of money from the Prosperous Account credible. For me the whole story of the 3rd Defendant is not credible and it seems to me that such a story is unlikely to be believed at the trial. In this day and age, it is inconceivable someone who is legitimately going to receive a large sum of money would not be able to receive the money in his bank account and has to resort to asking a friend to make use of the friend's company bank account. There is no commercial or even common sense purpose behind this transaction described by the 3rd Defendant's affirmation. The quality of the defence evidence of the 3rd Defendant is such (so poor) that I have no hesitation in coming to the view that taking such evidence into proper account, the Plaintiff has a strong case of fraud against the 3rd Defendant.

9. The evidence of the 2nd Defendant as an innocent volunteer or purchaser for value is fuller but its quality however leaves much to be desired. Leong said that he is and has been a forex trader for some 14 years. However he does not operate a foreign exchange trading company nor has he exhibited any reliable documents such as audited accounts and tax returns to show that he was truly a forex trader. Leong then said that his business involved him in buying RMB and other foreign currency such as US dollars in Macau and bringing them to Hong Kong. He sold the foreign currency thus brought to Hong Kong to a customer/friend. He would receive in his Hong Kong bank accounts money in respect of foreign currency a customer/friend wanted to buy and the money so deposited in the account of the 2nd Defendant would then be used to buy the foreign currency. He further went on to say in paragraph 9 of his Affirmation that "In essence, I earn the difference between the exchange rates one could get in Macau and the rates I could obtain from my banks in Hong Kong." It would seem therefore that the foreign exchange business is not a simple operation of a straight exchange of RMB bought in Macau and brought from Macau to Hong Kong and then given to customers in Hong Kong but a double operation of RMB purchased in Macau, brought to Hong Kong and then sold in Hong Kong to banks in Hong Kong at a better exchange rate which constitute his profits for that forex deal. If that is the case then the RMB from Macau would not go to a customer in Hong Kong but would go to a bank in Hong Kong. So far as the bank accounts in Hong Kong is concerned, under this double operation, it would follow that the Hong Kong account is used to pay the Macau seller of RMB and to receive the money from the banks in Hong Kong, to which he sells the RMB. But if such is the nature of the business (which is a perfectly understandable arbitrage business involving RMB) where does the putting into his bank accounts money from friends or customers come in. And this is the key part of the whole story, the mysterious deposit of funds in the Leong Account. This is the uncertain and unsatisfactory aspect of the 2nd Defendant's case. What is crucial however is that nowhere in the Leong Affirmation did he say what exactly the $1.8 million received in the Leong Account on the 17th August was for or what exactly were the nature of Lo transactions of the other highlighted sums appearing in the exhibited bank statement of 17th August 1999. If the receipt of $1.8 million that day was in respect of a foreign currency buy or sell transaction then what was it, how was it done and with which bank did Leong carry out the counterpart transaction and with what documentary support. If it is not for foreign currency transaction then what it is. It would seem from the Chinese Statement alleged to be made by Leong to the Police exhibited in his Second Affirmation that the story of the Leong involvment with Lo on 17th August is that the $1.8 million deposit was money received for Lo and that on that day Lo was paid some $4 million by way of 10 different bank accounts set out in the Statement. Leong did not say anywhere in his Affirmations that this version is true. Therefore on the crucial receipt of the fraud money, there is no clear evidence or explanation or what happened, let alone supported by reliable documentation.

10. But even assuming that the Police Statement version is sworn, is the sworn story believable. In my view it should suffer the same fate as the story of Prosperous about Tsang because the foundation of the story is the assertion that Lo did not have any bank account in Hong Kong. The story of Leong is that Lo caused to be deposited into Leong bank account, large sums of money (presumably coming from bank accounts not in Lo's name since he has no bank account) and has money transferred out of Leong account to accounts designated by Lo but again belonging to other people. The large number of alleged transactions with Lo depends on its legitimacy (since there are no details given in the Leong Affirmation) on the central allegation that Lo does not have a bank account in Hong Kong. As in the case of Tsang not having a bank account, one might well ask why would a person carrying out normal commercial business not have a bank account but resort to using a friend's bank account to receive or pay out money as seemed to be the case suggested in paragraph 11 of Leong first Affirmation and Leong Police Statement. I find the story of Leong about his dealing with Lo difficult to believe, specially the dealing on the 17th of August. In my view, the quality of the defence evidence of the 2nd Defendant is, in a different way, as poor as that of the 3rd Defendant and therefore taking such evidence of the 2nd Defendant into account, I have also little doubt that the Plaintiff has clearly shown more than a good arguable case of fraud against the 2nd Defendant.

11. It was argued by the Defendants that the Plaintiff had failed to present a good arguable case of fraud against the two Defendants because the evidence of the Plaintiff was insufficient to establish fraud and that the element of dishonest intention necessary for fraud was missing from the evidence. I accept of course that the burden of proof for fraud is high and that dishonest intention has to be proved. But if the defence evidence is rejected and/or disbelieved it is a case of the Defendants having no good reason to receive the large sums of Plaintiff money from Li account unless they are themselves involved in the fraud. The circumstances of the present fraud are unusual. The 2nd and 3rd Defendant have no connection with the Li bank account and has no business receiving any money from the Li bank account. The money which went into their two accounts were intended for these accounts and there had been no mistake about the receipt of the money in the two bank accounts. Without a good explanation of the receipt of the money in these two bank accounts, the strong inference is that the 2nd and 3rd Defendant have been dishonestly involved in the fraud against the Plaintiff. It must be remember that this is a fraud which requires a great deal of pre-planning and amongst the essential elements of such pre-planning is the prior arrangement for the reliable reception of the Plaintiff money. It is for me absurd to imagine that large sum of the fraud money can be sent to the bank account of a friend and hope that the friend will agree to transfer it out of his account. What if he does not agree or calls the police. This is a fraud which requires the participation of the 2nd and 3rd Defendant. It seems to me that in these circumstances and having regard to all the material now before the court, the Plaintiff has made out a good arguable case of fraud against the 2nd and 3rd Defendant.

$1.8 Million & $10.8 Million Claim-
Money Had and Received, Restitution & Constructive Trustee

12. A good deal of time and energy at the hearing was directed towards arguments that there was no good case in respect of this Category of causes of action. With due respect to arguments advanced on behalf of both Defendants, it seems to me the solution to this question is reasonably simple. On the cause of action of money had and received and restitution, there can be no question that the money of the Plaintiff had been received by each of the two Defendants and in order to escape liability a good defence will have to be established at the trial. A possible defence of change of position without negligence however does not alter the quality of the cause of action. There is no doubt that on the undisputed material presented to the court (Plaintiff deprived of its money and the Defendants gained by the receipt of the Plaintiff's money) that the Plaintiff has a good arguable case on this cause of action. The quality of the defence evidence presented to the court cannot and does not render the case of the Plaintiff on this cause of action less than a good arguable case. In these circumstances, it seems to me that the debate on constructive trustee will not not help the Defendants as under this Category of causes of action, I would have in any event found in favour of the Plaintiff. However as the matter of constructive trustee had been argued, I will briefly also state my conclusion on the constructive trustee cause of action.

13. In this developing and difficult area of the law (see for example discussions of the various basis of liability for "knowing assistance" in Royal Brunei Airlines v Tan [1995] 2 A.C. 379, 387-392; Chapter 4, Parts II and III of Oakley on Constructive Trusts, 3rd edition and specially pages 238-9), although much might be uncertain, it is not in dispute that to establish liability against the Defendants as constructive trustee each Defendant must be shown to have constructive notice that the money received from breach of trust or was put on inquiry as to the money received. Having regard to the large sum involved, the lack of any honest commercial purpose for the transactions, and that the money was coming from an account or source not known personally to the recipient and/or was going out to account or sources personally not known to the recipient, it is certainly more than arguable that the recipient was put on inquiry or if he failed to do so, such failure would be both reckless and willful in the sense described by Peter Gibson in the Baden case (see Agip v Jackson [1992] 4 AER 451 for an application of the Baden tests.) Mr. Chow suggests that the cultural context of a Chinese society in Hong Kong should impose a different standard of behaviour in respect of constructive notice. Even assuming that there might be something in this point (for which I am doubtful) the Plaintiff still has a good arguable case on constructive trust. Therefore on the material before the court, not withstanding the evidence of the Defendants (which I have not overlooked and which I found to be of poor quality), I am of the judgment that the Plaintiff has shown a good arguable case of constructive trust against the 2nd and 3rd Defendant.

Claim in the Amount standing in the Accounts-Proprietory Claim

14. The Defendants did not seriously argue against this cause of action at the hearing and it will not be necessary for me to consider the adequacy of this cause of action except to say that there is plainly a good arguable case of proprietory claim by the Plaintiff against each of the Defendants.

DISSIPATION OF ASSETS

15. The Defendants strongly argued that there was no proper or insuffient evidence of the risk of dissipation of assets so as to warrant the court granting the Mareja Injunction Order. It is accepted that the test is whether there is a real risk that a judgment in favour of the Plaintiff would remain unsatisfied. Is there evidence of risk. I have no doubt there is a serious risk of dissipation. First the nature of the fraud speaks for itself and that suggests strongly the risk of dissipation. Secondly the events have proved that there was immediate dissipation (in respect of the Leong Account $4 milllion and in respect of the Prosperous Account $10.6 million), with the Defendants calling such dissipation, reasonable transaction or explanation. Thirdly, it is to be noted that the amount is very large some $13 million and that by its sheer size creates a risk of dissipation. Fourthly, it is to be noted that in the case of the 2nd Defendant the nature of his business is somewhat uncertain and unorthdox, specially having regard to what he described as his business of allowing friends to pay money into his accounts and take money out of his accounts (he has many bank accounts) and that large sums of money belonging to others are supposed to be amongst the funds in his accounts. Fifthly, there are many items in the exhibited bank account statements of the 2nd and 3rd Defendant which have not been explained and examples of these are the 17th August IC021893 payment of $71,582.00 and IC021892 payment of $104,800 from the Sin Hua Bank Statement of 3rd Defendant. Sixthly, it is to be noted that the 2nd Defendant is only partly in Hong Kong and is partly Macau based. Finally, it seems to me that the nature of the defence put forward, instead of putting the Plaintiff at ease does suggest that the Plaintiff is justified in feeling a risk of assets of the Defendants being dissipated prior to judgment. In the circumstances, I hold that the Plaintiff has made out a sufficient case of risk of dissipation for the granting of the Mareva Injunction Order.

BALANCE OF CONVENIENCE

16. On the question of exercise of the discretion of the court whether to grant or to refuse the granting of the injunction, it is necessary to first distinguish between the Proprietory claim on the one hand limited to the amount now in the respective Accounts and the personal claim for fraud and for money had and received/restitution and constructive trust. In respect of the Proprietory claim what is sought is an ordinary injunction against disposal of any money in the Account on the basis that the money in the Account belong to the Plaintiff (see page 784f of Polly Peck Internatinal v Nadir (No 2) [1992] 4 AER 769 for an example of this proprietory claim injunction). The exercise of discretion in that respect is all one way and there is no serious argument against the granting of that injunction.

17. The opposition to the granting of injunction is in respect of the Mareva Injunction relating to the personal claims and under that heading, it is said by the Defendants that the granting of such injunction would cause grave hardship on the Defendants. The first question on this contest of balance of convenience is whether the Plaintiff will suffer irreparable damage if the Mareva Injunction is refused. The answer must be yes having regard to the serious risk of dissipation of assets. In my view the Plaintiff does require the protection of the Mareva Injunction. The next question is whether the Defendants will suffer irreparable damage if the Mareva Injunction Order is granted. The Defendants say that they will not be able to conduct their business because the banks have frozen their bank accounts. The purpose of Mareva Injunction is not to stop a defendant from carrying on with his legitimate business but to prevent the defendant from disposing of assets below the ceiling figure in the Order. If the 2nd Defendant has assets of more than $13 million then of course he could dispose of assets above the $13 million but if the 2nd Defendant does not have assets of $13 million then he could not without the consent of the Plaintiff or the Order of the Court dispose of any assets. The exceptions are of course the standard ones of spending for living expenses, for legal costs and disposal in the ordinary course of business. The Mareva Order which had been granted was not meant to and did not prevent the Defendants from paying money into their bank accounts or from paying money out of the bank account for legitimate expenses done in the course of business for example such as paying the rent of the office or paying salary of staff. If the banks of the Defendants have misapprehended the true nature of the Mareva Order which had been made it is the duty of the solicitors of the Defendants to correct such misapprehension. Mareva orders are now regularly made without in any way totally stopping the business of defendants subject to such orders.

18. To establish that irreparable or serious damage will be caused to the Defendants if they are subject to the Mareva Injunction, it is necessary for the Defendants to state clearly on affidavit what is the exact nature of the damage which will be caused. In the case of the defendants which operate a proper business, evidence should be adduced as to what is the nature of the business, how much revenue and profit is earned every month from the business giving its breakdown and what part of the business would be hurt by the Order and what is the sort of monthly loss which will be suffered as result of the Order, giving details of the breakdowns of such losses. In this case, unfortunately, nothing had been put before the Court by either of the 2nd or 3rd Defendant as to what is the loss alleged on the granting of the Order. I am therefore unable to say that serious or irreparable loss will be suffered by the Defendants. The balance of convenience is therefore strongly in favour of my continuing the Mareva Injunction Order subject however to the proviso that the Plaintiff should further reinforce its undertaking in damages by paying into court or by other form of security a further sum of $1.0 million thereby making the total fortification of undertaking $2.0 million.

WHAT ORDER TO BE MADE

19. For reasons stated above, I am of the judgment that there should be:-

(1) An injunction against the 2nd Defendant from disposing of the $1,352,762.17 presently standing in the Leong Account;

(2) An injunction against the 3rd Defendant from disposing of the $117,524.51 presently standing in the Prosperous Account;

(3) A Mareva Injunction against the 2nd Defendant in the upper limit of $13 million less $1,352,762.17 or $11,647,237.83;

(4) A Mareva Injunction against the 3rd Defendant in the upper limit of $13 million less $117,524.51 or $12,882,475.49 (with the agreed exception of $100,000 for legal costs);

20. I will hear the parties as to the precise form of the Order I should make including the matter of costs.

21. As for the hearing of the second part of the Plaintiff's Summons for discovery orders, I will give directions for the proper hearing of such application after the parties have a chance to make submissions of the best way to proceed.