Introduction

In the case of Exclusive Networks Deutschland GMBH v Wakoon Trading (H.K.) Ltd and Another [2022] HKCFI 2966, the 2^nd Defendant puts forward the defence of being a bona fide purchaser for value without notice to resist the Plaintiff’s claim for money had and received. This case explores the position of a recipient who acted bona fide in receiving proceeds of fraud.

Facts

The Plaintiff, Exclusive Networks Deutschland GMBH (“END”), is the subject of an email fraud, which resulted in US$438,364.54, a sum which should have been paid to END’s business partner, being transferred on 19 March 2018 to the 1^st Defendant’s (“Wakoon”) bank account with CTBC Bank. On the following day, US$436,810 (the “disputed sum”) was transferred from Wakoon’s bank account with CTBC Bank to the 2^nd Defendant’s (“Galaxy”) bank account with CTBC Bank.

Galaxy carries on business selling computer hardware including video graphics cards and solid state drives. One of Galaxy’s customers is a Chinese company called Shenzhen Jiashi Weiye Technology Co., Ltd (“JWT”). Historically, some payments made by JWT to Galaxy were made by remittance agents including Wakoon. Wakoon had acted as remittance agents for JWT on 168 times prior to the disputed sum and paid over US$45 million on JWT’s behalf. These payments had been trouble free.

Wakoon has not defended the proceedings against it. As for the dispute between END and Galaxy, END asserts the following causes of action entitling it to recovery of the disputed sum, namely, money had and received, knowing receipt, dishonest assistance and as a constructive trustee.

Legal principles

Money had and received is a receipt-based cause of action under the common law. In Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, Ribeiro PJJ explained a useful framework for determining such claims is to ask four questions:

 

1.       Was the defendant enriched?

 

2.       Was the enrichment at the Plaintiff’s expense?

 

3.       Was the enrichment unjust?

 

4.       Are any of the defences applicable?

 

Galaxy does not dispute these principles and that the first of the two questions identified by Ribeiro PJJ should be answered in END’s favour. Galaxy, however, asserts that it was a bona fide purchaser for value without notice (“bona fide purchaser”) which is a complete defence to END’s claim for money had and received.

Citing Papadimitriou v Credit Agricole Corp and Investment Bank [2015] 1 WLR 4265, the court ruled that the inquiry as to whether or not a recipient has acted bona fide is the same in practice as the inquiry as to whether or not the recipient had the relevant knowledge if a Plaintiff seeks to establish liability for knowing receipt or assistance or for a recipient to be accountable as a constructive trustee. It follows that if a Defendant such as Galaxy establishes that it was a bona fide purchaser, the alternative claims necessarily will fail. The court held that there is no reason to consider the alternative claims in the present case.

Bona fide purchaser defence

In order for Galaxy to succeed in establishing that it was a bona fide purchaser, it must demonstrate that it received the disputed sum as consideration for something of value that it had provided to JWT.

In response to Galaxy’s defence, END’s case at trial can be summarized as follows:

1.       There was something inherently suspicious or questionable about JWT paying through remittance agents and that given that Galaxy put in place no anti-money laundering or know your client procedures, Galaxy was not a bona fide recipient; and

 

2.       The ledgers and account documentation did not demonstrate with sufficient clarity that the disputed sum was paid in consideration for goods that had been delivered.

Ruling

Payments through remittance agents

The Court found that Galaxy was acting bona fide in accepting payment of the disputed sum from Wakoon’s bank account for the following reasons:

1.       Galaxy is a supplier of goods to purchasers many of whom are based in the Mainland;

 

2.       In the present case, JWT had previously used Wakoon to make payments without any issues arising on 168 occasions prior to the disputed sum being paid;

 

3.       There was nothing inherently suspicious about payment being made by a Mainland purchaser through remitting agents which is quite common;

 

4.       Galaxy does not operate the kind of financial services business that is obviously open to abuse by persons seeking to launder money or simply transfer the proceeds of a crime or fund, for example, terrorist activities;

 

5.       The business model of Galaxy i.e. selling computer products and receiving payments in arrears, is not by its nature open to misuse; and

 

6.       There does not seem to be any particular reason why Galaxy should have to put in place the kind of procedures required of banks to determine the source of deposits.

Galaxy’s accounting

The Court further ruled that Galaxy has shown that it gave value for the disputed sum based on the followings:

1.       It is clear that Galaxy and JWT operated a running account and that at least in some instances particular payments were attributed by Galaxy to particular invoices;

 

2.       Galaxy’s debtor account ledger for JWT (the “JWT Ledger”) shows the running account going into debit on 18 March 2018;

 

3.       The JWT Ledger shows that US$1,064,700.70 (consisting of the disputed sum) was credited to the ledger on 20 March 2018;

 

4.       Any payment made when the running account was in debit necessarily must be attributable to goods supplied; and

 

5.       Galaxy only has to establish on the balance of probabilities that the disputed sum was paid as consideration for goods that it had delivered. It does not have to demonstrate that on 20 March 2018 its account records were perfectly accurate.

 

The court is satisfied on the balance of probabilities that Galaxy has demonstrated that it was a bona fide purchaser for value without notice.

Takeaway

This case is a food for thought for practitioners in choosing the right claims to pursue at trial. If the court finds that a recipient acted bona fide, it naturally follows that the alternative claims of knowing receipt or assistance or liability as a constructive trustee will fail due to a lack of the requisite knowledge. Such alternative claims should therefore not be pursued further at closing. This case is also an example of a successful defence against a claim based on money had and received, which is a receipt-based cause of action. Companies should however exercise judgment as to the adequacy of procedures it put in place to filter out funds from suspicious sources in order to avoid the risk of inadvertently receiving proceeds of fraud.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2023