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Eugene Kwok recently represented the 8th Defendant in Lesnina H. D.O.O. v Wave Shipping Trade Co Ltd [2022] HKCFI 1070. The 8th Defendant was allegedly a second-tier recipient of the Plaintiff’s funds which had been wrongly paid out as a result of an email fraud.  The 8th Defendant asserted that it had no knowledge of the alleged fraud, and that it had received the funds as payment from a customer for products sold to it by the 8th Defendant.
As is common in cases of email fraud, the Plaintiff’s claim was based on constructive trust (knowing receipt) and restitution.The Plaintiff applied for summary judgment, but this was refused by Deputy High Court Judge Dawes SC. The judge noted that it was necessary for the Plaintiff to show, for a claim in knowing receipt, “unconscionable knowledge” on the part of the 8th Defendant. Given the absence of evidence that the 8th Defendant had any knowledge of the alleged fraud, whether the 8th Defendant had such “unconscionable knowledge” was a triable issue (paragraph 38 of the judgment). Although not directly mentioned by the judge, lack of “unconscionable knowledge” may also potentially affect the Plaintiff’s claim in restitution (with respect to the “unjust” component of unjust enrichment).
The 8th Defendant also asserted the defence of being a bona fide purchaser for value without notice. However, the funds which the 8th Defendant had received from its customer were allegedly paid via the “underground banking” system – basically, a black market foreign exchange transaction used to circumvent the capital control laws of the People’s Republic of China. The Plaintiff relied on previous court decisions, notably Barros Mattos Junior v General Securities & Finance Ltd [2005] 1 WLR 247 and DBS Bank (Hong Kong) Ltd v Pan Jing [2020] 4 HKC 395, to argue that the illegality behind this payment precluded the bona fide purchaser defence because: (1) the 8th Defendant could not be considered to have provided value for an illegal contract; and (2) the illegality negatived any good faith on the part of the 8th Defendant.
The Plaintiff had a respectable argument in this regard on the face of Barros and Pan Jing. However, the judge accepted that the absolute approach taken in those cases
– that all kinds of illegality (save perhaps for de minimus ones) would preclude reliance on the bona fide purchaser (and also change of position) defences – was an “overly blunt application” of the illegality principle. Instead, “a preferable approach would be one that measures the gravity of the defendant’s criminal conduct against the impact of allowing the defence” (paragraph 57). Consequently, the alleged illegality concerning the remittance of funds via the PRC underground banking system raised triable legal issues.
In addition, the 8th Defendant had not participated in any underground banking activity itself (being merely the recipient of funds paid over by the customer who, presumably, was the one who did engage in any alleged underground banking activity). The judge considered this to be a triable issue as well, specifically, whether a mere recipient of alleged illegally paid funds would be prevented from relying on the bona fide purchase defence (paragraph 61).
As a result of the triable issues raised, the case was not suitable for summary judgment and would have to proceed to trial in the usual way.
This is not the only case to have dialled down the approach taken in Barros and Pan Jing. For example, in Solyda S.R.L. v Wu Ge [2021] HKCFI 1825, Deputy High Court Judge Le Pichon stated that, “It has been said that the issue to what extent illegal conduct precludes a defendant from relying on the defence is a ‘developing point of law’” (paragraph 32). In Tokic, D.O.O. v Hong Kong Shui Fat Trading Ltd [2022] HKCFI 217, Deputy High Court Judge Laurence Li SC noted that an illegal transaction was not necessarily void or even voidable, and that, “If the law does not automatically void the transaction, I cannot imagine why or how it would automatically void the value given in the transaction” (paragraph 47). In other words, good value could still be given for an illegal transaction if the illegality did not render the transaction void under law.