The court’s approach to assessing evidence for defences in email fraud cases

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Authored by: Genevieve Lam

Email scams are very common nowadays. During the first quarter of 2023, the Hong Kong police intercepted nearly HK$160 million stolen from overseas victims of technology-based crime and deception cases deposited into local bank accounts. Tracing and recovering becomes challenging in multiple layered scam cases.

In a recent large-scale fraud case, Toyota Boshoku Europe NV v Kingsville (HK) Enterprises Limited & Others [2023] HKCFI 1393, the High Court scrutinized evidence to determine whether the proprietary and Mareva injunctions should be continued.

Facts

The Plaintiff was a victim of a large-scale fraud, in which approximately HK$500 million was paid to various companies as a result of unknown individual(s) impersonating the CEO and President of the Plaintiff’s parent company, and causing the Plaintiff’s general manager of finance to believe that the funds were required for a secret and urgent acquisition.

The Plaintiff had already obtained interlocutory proprietary and Mareva injunctions against 48 defendants, which comprised of 1^st, 2^nd and 3^rd layer recipients in another action.

Subsequently, the Plaintiff in this action traced the proprietary funds against the next layer recipients of its funds and sought to continue the proprietary and a “top up” Mareva injunction against the 8^th defendant (Defendant) which received traceable proprietary funds of around US$274,000 in August 2019. The Defendant opposed the continuation of the injunction.

The court examined each of the defences put forward by the Defendant:-

• it is a bona fide recipient of the funds through a transaction conducted in its wholesale wine business; and/or

• it has so changed its position by making part payment for wine purchased from its supplier that it would be inequitable in all the circumstances to require it to make restitution.

Bona fide purchaser without notice

As to the proper approach to assess whether the purchaser is a bona fide purchaser without notice, the court held that the transactions cannot be looked at in isolation, but rather in the more structured context of the running of a legitimate business generally, whether the particular line of business in question is legitimate (in the present case, trading in wine) and the specific transactions involved.

The court examined four matters relied on by the Defendant in support of its legitimate operation of a wholesale trading business:-

1. the bank accounts for the Defendant’s business and relevant bank statements,

2. the container yard lease;

3. employees’ MPF records; and

4. 2 years of accounts in 2018 and 2019.

However, based on the evidence, it appeared that the Defendant was carrying on a wholesale trading business in frozen meat. The court held that it did not follow that it would automatically legitimise its trading in wine.

Further, the court raised a number of red flags as to the legitimacy of wholesale trading of wine, such as:-

1. There was no explanation as to why the Defendant suddenly branched out into the wine trade, when the Defendant’s sole director did not provide any evidence of  knowledge and experience in that field;

2. The Defendant did not maintain a log or chronological record of incoming orders for wine for accounting purposes;

3. The Defendant did not appear to maintain records of its customers, be they repeat or one-off customers;

4. The invoices in question specified the name of the purchaser, but without any address or contact number;

5. While the invoices contained important information (such as the name of the beneficiary and details of the bank account into which payment should be made), the court observed that the terms of payment were nowhere specified.

In conclusion, the court held that the Defendant was not carrying on a bona fide business of wholesale trading in wine.

Change of position in good faith

The Defendant’s alternative defence was that it had altered its position in good faith since receipt of the funds in that the funds had been applied in partial payment for the wines the Defendant ordered in July 2019.

However, the court held that the Defendant only made a payment in the ordinary course of business, which did not come within the defence of a change of position, as it failed to show that as a result of receiving the funds, it engaged in some extraordinary expenditure, bearing in mind that the Defendant’s liability for the July order had already arisen before it received the funds in August 2019.

The court ultimately ordered that the injunction be continued.

Comment

This judgment reaffirms the court’s approach to scrutinising evidence in multiple layered fraud cases and willingness to grant and continue proprietary and Mareva injunctions to assist victims of cyber fraud to trace assets.