Fraud—tracing—illegality—bona fide purchaser for value without notice—change of position

P’s employees committed a sophisticated fraud on P through making misrepresentations to P as to the prices submitted and charged by the manufacturers for the supply of products to P, as well as in respect of the expenses recorded in monthly expense reports. In fact, the prices were inflated (the difference was pocketed by the employees) or the payments had not been made to manufacturers but to shell companies controlled by the said employees. Judgment was entered against the employees by the New Zealand High Court. In breach of Hong Kong freezing/Mareva injunction orders granted in support of New Zealand proceedings, one of the employees (CJ) made a series of fund transfers from her bank account with DBS Bank Ltd in Singapore. These transactions included one transfer of HKD 12,476,607 to D1. P brought claims in unjust enrichment, knowing receipt and dishonest assistance against D1. D1 denied that the monies received into her account were traceable to the misappropriated monies belonging to P. She further contended that she had received the funds as a bona fide purchaser for value without notice. D1’s version was that she had entered into a currency exchange arrangement with CJ pursuant to which she had transferred RMB 10 million into a joint bank account with CJ and CJ had then transferred HKD 12.5 million into her account. D1 also claimed that she had changed her position in good faith. P argued the currency exchange performed was illegal under PRC law which operated to defeat D1’s defences to P’s claim in unjust enrichment.

Decision: P’s claims (including the claim in unjust enrichment) were allowed. (1) Based on the evidence, the HKD received into D1’s account represented the proceeds of fraud perpetrated by the employees and which were derived from the monies misappropriated from P. The employees thus held the monies as constructive trustees for P. Even if P’s monies had been mixed with other funds, P was entitled to trace the money in the manner which is most advantageous and the rules in Clayton’s Case (1816) 1 Mer 572 and Re Hallett’s Estate (1880) 13 Ch D 696 (CA) are applicable. (2) Having considered the