Hong Kong Court finds company unconnected with fraud unjustly enriched after receipt of tainted funds

Idemitsu Chemicals (Hong Kong) Co, Limited -v- Yanqing Limited and Others [2024] HKCFI 1075

Idemitsu HK, a subsidiary of the listed Japanese petroleum group, Idemitsu Kosan, has succeeded in an indirect unjust enrichment claim before the Hong Kong High Court to recover its loss suffered as a result of a fraud by an unconnected company.

The case highlights that where subject assets of a fraud become untraceable (at common law or in equity) as a result of dissipation by subsequent recipients, victims of the fraud could in principle advance an indirect unjust enrichment claim against the subject recipient to recoup their losses.

The background facts 

The managing director of Idemitsu HK, Mr. Takagi, was deceived by fraudsters impersonating his senior, the president of Idemitsu Kosan, Mr. Kito. The fraudsters telephoned Mr. Takagi and closely mimicked Mr. Kito’s voice demanding payment from Idemitsu HK in respect of an alleged merger and acquisition being transacted by Idemitsu Kosan. Mr. Takagi was deceived by the fraudsters into remitting funds of US$13.7 million in tranches to Zhigang Trading Co., Limited (Zhigang/2nd Defendant) (the First Transfer). 

After the First Layer Transfer, Zhigang further remitted the majority of the US$13.7 million to various entities, including a sum of US$300,000 (the Sum) to Brilliant One Shipping Company Limited (Brilliant One/the 10th Defendant) (the Second Transfer).

Idemitsu HK advanced unjust enrichment claims against Zhigang and Brilliant One and the High Court decided in favour of Idemitsu HK.

The High Court decision

The First Transfer (Zhigang)

In respect of the sums of US$13.7 million, the Court was satisfied that the elements of unjust enrichment were established. In particular, (1) Zhigang was enriched; (2) the enrichment was at Idemitsu HK’s expense; and (3) the enrichment was unjust. 

It followed that Idemitsu HK’s claim in unjust enrichment against Zhigang succeeded. However, that did not assist Idemitsu HK to recover the Sum which was transferred to Brilliant One. This led the Court to consider the position of the subsequent transfer (the Second Transfer).

The Second Transfer (Brilliant One)

The Court considered three issues.

Issue 1: Whether a victim of fraud could rely on common law unjust enrichment to make good its losses when the underlying interest subsisting in the tainted fund was equitable in nature

The answer is yes. 

In this case, the Sum had lost its identity at common law upon mixing with Zhigang’s monies in the First Transfer or Brilliant One’s monies in the Second Transfer. The legal effect was that, after the mixing, Idemitsu HK’s interest in the Sum would be equitable in nature (as opposed to legal).

However, the Court considered that the above would not have a bearing on the conclusion that Idemitsu HK would be entitled to advance a common law unjust enrichment claim as such a claim could be advanced regardless of whether the underlying interest was legal or equitable.

Issue 2: Whether unjust enrichment was available to the victim (Idemitsu HK) when the tainted fund was transferred to a party unconnected to the fraud (Brilliant One)

The answer is yes. 

In this case, Idemitsu HK had directly transferred the US$13.7 million to Zhigang and thereby enriched it. Zhigang in turn transferred part of the US$13.7 million (i.e. the Sum) to Brilliant One and thereby enriched it. Consequently, Idemitsu HK indirectly enriched Brilliant One and there was nothing to prevent Idemitsu HK from bringing an indirect unjust enrichment against Brillant One. 

Issue 3: Whether dissipation of the Sum by the unconnected party (Brilliant One) was a valid defence of change of position

To rely on this defence, the defendant must have changed its position after receiving the relevant enrichment and would be worse off (and therefore prejudiced) if it is required to make restitution. Spending money that would not have been spent but for the enrichment is one way in which the defendant may be worse off for these purposes.

In order for a defence of change of position to succeed, Brilliant One needed to show that: 

1.  there was causation between the receipt of the Sum and Brilliant One’s change of position; 

2. Brilliant One changed its position in good faith; and 

3. it would be inequitable for Brilliant One to make restitution to Idemitsu HK. 

In respect of (1), the Court did not accept that Brilliant One had changed their position at all after the receipt of the Sum. 

Brilliant One argued that the Sum they (as a seller) received was part payment of the purchase price (US$900,000) from King Chuen (as a buyer) for a sale and purchase of a ship. The Court disagreed and considered that Brilliant One’s position remained unchanged in that they were still awaiting the payment of the price by King Chuen before and after the Second Transfer. 

Brilliant One’s alternative argument of change of position was that they spent the Sum as received to cover their usual operational expenses. Again, the Court did not accept that the spending amounted to change of Brilliant One’s position as the relevant operational expenses would have been incurred in their ordinary course of business in any event.

In respect of elements (2) and (3), the Court found that that Brilliant One did not act in good faith due to their failure to carry out proper “know your client” inquiries into the identity of the payor and the purpose of the Sum. Had the inquiries been carried out in good faith, Brilliant One would have found that the Sum was unrelated to the sale and purchase of the ship. Under the circumstances, the Court held that it would not be inequitable for Brilliant One to make restitution to Idemitsu HK.

Comment

It is settled that the remedy of tracing (at common law or in equity) against subject assets of a fraud is not available as a result of dissipation by subsequent innocent recipients. 

However, this case shows that it is possible for victims of fraud to make an indirect unjust enrichment claim against subsequent innocent recipients to recover their losses (by way of damages).