Before: The Hon. Mr. Justice Waung
 
 

B E T W E E N

JUDGMENT
 
DATED: 24 December 1997

Mr. Justice Waung:

This is an application by some of the plaintiffs to re-amend the statement of claim against the third defendant, Wing Lung Bank (Wing Lung) which application is strongly resisted. The separate application to re-amend against the fifth defendant, Liu Chong Hing Bank (Liu Chong Hing) has been dealt with and is not the subject of this judgment.

The plaintiffs are a group of companies with first plaintiff, Kwai Hung Realty Co Ltd (Kwai Hung) as the parent company. The other five plaintiffs and the new proposed seventh plaintiff are all subsidiaries of Kwai Hung. The plaintiffs employed an accountant Kung Mo Ng, the first defendant (Kung) who forged a large number of the plaintiffs' cheques drawn on various accounts of the plaintiffs at various banks including Wing Lung and Liu Chong Hing. The respective bank accounts of the various plaintiffs were therefore debited. Many of these forged cheques have already been pleaded by the plaintiffs and are the subject of the existing amended statement of claim. What we are concerned with in this application, are three groups of cheques in relation to which the plaintiffs seek to re-amend against Wing Lung Bank.

The three groups of proposed new claims by one or other of the plaintiffs against Wing Lung are:

1. A cheque in the amount of $1,000,000 drawn on the account of Jewelpro Ltd, the fourth plaintiff (Jewelpro) at Wing Lung payable to Sure Huge Investments Ltd, the second plaintiff (Sure Huge). In respect of the wrongful debit by Wing Lung against the account of Jewelpro, Jewelpro is making a claim for that $1,000,000 sum against Wing Lung (paras 8(6), 20 and prayer (10) and (10A) of the draft re-amended statement of claim).

2. Five cheques in the total amount of $14,279,777.64 drawn on the account of Kwai Hung at Liu Chong Hing payable to Sure Huge. Wing Lung collected the money of these cheques from Liu Chong Hing and credited the money to the account of Sure Huge at Wing Lung. In respect of the money debited to the account of Kwai Hung by Liu Chong Hing, (on the basis that Kwai Hung cannot recover the wrongful debit money from Liu Chong Hing), Kwai Hung is making the claim against Wing Lung for money of Kwai Hung paid to Wing Lung by mistake of Liu Chong Hing and therefore should be repaid to Kwai Hung by Wing Lung (paras 14-15 and prayer (7) of the draft pleading).

3. One cheque in the amount of $1,500,000 drawn on the account of Yu Ngai, the proposed seventh plaintiff (Yu Ngai) at Hang Seng Bank (Hang Seng) payable to Sure Huge. Wing Lung collected the money of this cheque from Hang Seng and credited the money to the account of Sure Huge at Wing Lung. In respect of the sum wrongfully lost by Yu Ngai, (on the basis that Yu Ngai cannot recover the wrongful debit money from Hang Seng), Yu Ngai is making a claim against Wing Lung for that money paid to Wing Lung by mistake of Hang Seng and therefore should be repaid to Yu Ngai by Wing Lung (para 22A-22B and prayer (11B) of the draft pleading).

So far as the first group of claim by Jewelpro against Wing Lung is concerned, it is really a straightforward case of a customer suing its bank for wrongful debit because of the lack of mandate of the bank under the forged cheque. I do not see what difference it makes that the payee or the ultimate recipient of that $1,000,000 was Sure Huge which is an associated company or why some special restriction should be placed on my order of leave to re-amend. Wing Lung can plead whatever defence it wishes to plead in the same way as it can raise defences to the other five cheques claimed in para 8(6). This is not a restitution claim and there is no complicated legal obstacles to this claim. I will therefore grant leave to Jewelpro to re-amend the relevant paragraphs under that claim.

The second and third group of claims share the same characteristics of being payments made from one bank account in one bank to another bank account in a different bank and the debit in the first bank account was without mandate and therefore the payment of the money by the first bank to the second bank was on the basis of a mistake that the first bank was making the payment with authority of its customer whereas in fact the first bank did not have such mandate. The receipt by the second bank from the first bank was therefore unjust enrichment of the second bank and it is in those circumstances, that the claim is made against the second bank. The second bank, namely Wing Lung raised two objections to the restitution claim by the account holder of the first bank, namely Kwai Hung and Yu Ngai. The two objections are:

1. The money received by the second bank was not that of the account holder of the first bank because there was intermixing, or in other words common law tracing failed.

2. The money had been paid over by the second bank to its own customer, the payee of the cheque, namely Sure Huge and that therefore the second bank had changed itself and could not be liable in restitution to the plaintiffs owners of the money.

It is to be borne in mind that notwithstanding the strong objections of Wing Lung to the proposed re-amendments of the plaintiffs, this is an application for leave to re-amend the statement of claim and therefore although Mr Chang for Wing Lung asked me to treat the application as a strike out by the defendant, the approach I should adopt is still the same, namely that unless it can be clearly shown the claim is unarguable or that the alleged defence (not yet pleaded) is bound to succeed, I ought to grant leave to re-amend.

Tracing is neither a cause of action, not a remedy nor a right. It is said to be a method or technique by which a person follows his property or as Professor Birks would put it, identifies the location of the value of his property. Tracing enables the defendant to be identified as the recipient of the plaintiff's money and the measure of his liability to be determined by the amount of the plaintiff's money he is shown to have received (per Millett J in Agip (Africa) Ltd v. Jackson [1990] Ch 265 at 285C). There is common law tracing and tracing in equity. We are here only concerned with common law tracing. (At common law of course, restitution liability is strict but in equity it is not). There is tracing to pursue a personal claim or tracing for a proprietary claim. We are here only concerned with a personal claim. Tracing is not something commonly or properly understood by lawyers or judges (for that matter) and there is a great deal of confusion and disagreement on the nature of tracing. It has been said that the law relating to tracing stands in need of radical review (Birks on 'Persistent Problems in Misdirected Money' [1993] LMCLQ 229) and that the true limits of common law tracing remain unexplored (Goff & Jones on Restitution (3rd ed), p 67). There is fortunately appearing in recent years much new learning to help us clear up some of the confusions (see Smith, The Law of Tracing, Birks, Introduction to Law of Restitution, pp 358-375, 'Mixing and Tracing: Property and Restitution' (1992) 45 Current Legal Problems 69-98, Restitution, the Future pp 111-117, 'Overview: Tracing, Claiming and Defences' in Laundering and Tracing (1995) pp 289-322, and Burrows, The Law of Restitution, pp 57-76, Goff & Jones, Law of Restitution (4th ed), pp 77-93 and articles in Lloyd's Maritime and Commercial Law Quarterly and Restitution Law Review).

Having regard to:

(a) the nature of the application which is only to re-amend the statement of claim (reminding myself that this is not a trial);

(b) the complexity of and the mass of authorities and learning on tracing; and

(c) the narrow submissions made to me on this subject in this application, I propose to limit my judgment on what is essential for the determination of the tracing point raised by Mr Chang for Wing Lung.

The tracing defence of Wing Lung is that the restitution claim based on mistake by the plaintiffs is unsustainable because common law tracing must fail as the money of the plaintiffs received by Wing Lung was mixed with other funds in the clearing of the cheques in question. This is a somewhat surprising defence having regard to the fact that payments are now always made by cheques in the modern world and clearance of cheques is an everyday feature of such payments by cheques. There is no known instance of this point being decided against cheque payments. Whenever there is a mistaken payment made by cheque and the cheque fund is received firstly by the collecting bank and then by the customer of the collecting bank (the payee of the cheque), whether it is the paying bank or its customer which is suing for recovery of the money and whether the restitution claim is made against the collecting bank or the payee of the cheque (the ultimate recipient) the same tracing problem will arise (if Mr Chang is correct) that there had been intermixing through the clearing system. As said by Mr Ma for the plaintiffs, the proposition that once clearing takes place there can be no claim based on mistake would have made a tremendous impact on the law of mistake, if it is good. I mention this aspect at the very beginning not to demonstrate that the proposition advanced by Mr Chang is hopeless and against all common sense (which it is) but to remind myself not to be too easily swayed by the logic or elegance of the legal proposition put forward by Mr Chang and his learned junior. The point is after all a simple one, namely whether the money received by Wing Lung under each cheque of the plaintiff is the money from the plaintiff and of the plaintiff. Any layman would have no hesitation in saying yes. Only lawyers with the aid of case law, laden with legal history will seek to argue that the opposite is the case and further that there can be no doubt about it.

A modern starting point on common law tracing is the case of Banque Belge Pour L'Etranger v. Hambrouck [1921] 1 KB 321. Pelabon was a customer of the Banque Belge. Hambrouck the defendant worked for Pelabon. Hambrouck by fraud obtained cheques drawn in favour of himself on the Pelabon account and he paid these cheques into his account with Farrow Bank. Farrow Bank collected the money from Banque Belge. The amount collected was £6,600. From his Farrow account, Hambrouck paid about £450 to his mistress Spanoghe by giving to her his cheque in that amount drawn on his account at Farrow Bank. Spanoghe paid that cheque into her account at London Joint City and Midland Bank. When the fraud was discovered, some £315 remained in that account of Spanoghe at London Joint City and Midland Bank. The Banque Belge made claim against Hambrouck, Spanoghe and London Joint City and Midland Bank which paid the sum of £315 into court. The mistress Spanoghe resisted the claim. It is to be noted that Belgian bank did not attempt to make Spanoghe repay the full amount she received namely £450 but limited the claim to only the £315 still left in her account from the original £450. The flow of the value of the property sought to be recovered (to paraphrase an expression of Professor Birks) was therefore as follows: Pelabon è Banque Belge è Farrow Bank è Hambrouck è London Joint City Bank è Spanoghe. Claim Banque Belge è Spanoghe.

At first instance, Salter J gave judgment against Spanoghe for £315. On appeal by Spanoghe, the only issue is whether Banque Belge could assert title to £315 and the defence of Spanoghe is that the money paid into court was not the money paid out by Banque Belge. That tracing defence was rejected by the Court of Appeal but two of the judges (Bankes LJ and Atkin LJ) held that there could be common law tracing. Scrutton LJ decided on equitable tracing. It is to be noted that despite the fact that the value of the property sought to be recovered had gone through no less than two banks after Banque Belge, with presumably the usual bank clearing, common law tracing was successful. Professor Burrows in his book on Restitution at p 62 analysed the Banque Belge case as money moving to chose in action of Hambrouck account at Farrow Bank then to the chose in action in the Spanoghe account at London Joint City and Midland Bank. That analysis as will be seen later is based on Lord Goff's judgment in Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548 at 572-574 that property in the form of chose in action can be part of the tracing chain. It is also to be noted that Lipkin Gorman approved Banque Belge (see p 566E).

Barclays Bank v. WJ Simms [1980] QB 677 is the classic modern starting point on claim based on mistake of fact. The customer of Barclays Bank drew a cheque in favour of the payee company which called in receiver. By mistake although the customer had stopped the cheque, Barclays Bank paid out on the cheque and the receiver of the company refused to repay the money. Robert Goff J (as he then was) held that the money could be recovered. The flow of the value of the property sought to be recovered was as follows: Housing Association è Barclays Bank è National Westminster Bank è Simms. Claim: Barclays Bank è Simms.

It is to be noted that the cheque which was supposed to be stopped but cleared and paid by Barclays Bank to National Westminster Bank presumably also went through the clearing system but the strong defence team did not raise any objection that tracing was not possible. It was simply assumed there that the same £24,000 which was the money of the Barclays Bank was received by National Westminster Bank after clearance and then paid to the company by National Westminster Bank. Clearance of the cheque was not an impediment to the common law claim based on mistake.

In Agip (Africa) Ltd v. Jackson [1990] Ch 265, Millett J held at first instance that the plaintiff Agip could not recover a common law claim for money had and received. The money was paid under an altered money order paid out by its bank Banque du Sud in Tunisia to Baker Oil's bank account with Lloyds Bank in London. Because it was US Dollars, the mechanics of payment was Banque du Sud paying Citibank in New York and Citibank in New York paying Lloyd's Bank in the amount of the order. Lloyds Bank credited Baker Oil's account and in pursuance of instructions from Baker Oil, Lloyds Bank transferred a sum just in excess of $500,000 to Jackson & Co. Jackson then further paid away the money as directed, so that only some $45,000 was left in the account. The flow of the value of the property sought to be recovered was as follows: Agip è Banque du Sud è Citibank, NY è Lloyds Bank è Baker Oil è Jackson & Co è Others. Claim: Agip => Jackson & Co.

The case is of particular interest because the learned judge held that there common law tracing failed. What very much influenced that finding is that Lloyds Bank in London had credited Baker Oil account in advance of Lloyds Bank being paid in New York by the Banque du Sud's corresponding bank in New York, Citibank and the reason for this is that banking hours in London are a few hours earlier than New York banking hours. The learned judge also held that common law tracing was not possible because of paying instructions was not by physical paper but by a stream of electrons. But the claim in equity succeeded. The Court of Appeal ([1991] Ch 547) agreed with the learned judge and held also that common law tracing was not possible as the money got mixed in the New York clearing system. This decision was the subject of much academic criticism by specially Burrows (p 65 of Restitution) and by McKendrick in his article ('Tracing Misdirected Funds' [1991] LMCLQ 384). The case can of course be explained by its own facts and there are many special facts including for example the unique way of the fund being credited through the New York banking system and not by way of a cheque. However, in my view it is at least open to argument that the decision conflicts with Banque Belge and that arguably it was wrongly decided. If analysed on the basis of chose of action principle and the 'exchange product theory' tracing (see pp 53-56 of Mathews, 'Legal and Moral Limits of Common Law Tracing' in Laundering and Tracing), then common law tracing ought to be possible as in Banque Belge.

Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548 is the crucial authority for this application to re-amend because not only does it provide the guiding principle on common law tracing but also it sets out for the first time under English law the principle of change of position as a defence to a restitution claim. A partner of the plaintiff firm of solicitors, Lipkin Gorman was a gambler and he unlawfully drew cheques drawn on the firm's account at Lloyds Bank and with the cash drawn from the cheques, he used the money to gamble at the Playboy Club of the defendant. He took from the firm's bank account over £300,000 and paid back from time to time various sum totalling about £100,000. The claim was made by the plaintiff firm against the Playboy Club for some £200,000 said to be money which the defendant was unjustly enriched with the plaintiff's money. The flow of the value of the property sought to be recovered was as follows: Lipkin Gorman è Lloyd's Bank è Cass è Playboy Club. Claim: Lipkin Gorman è Playboy Club.

The claim was made in common law and therefore only involved common law tracing (572B) and it is a personal claim not a proprietary claim (572F). There is one unusual aspect of the case which however must be pointed out and that is the concession made by the defendant that mixing of money from the firm's account with Cass's own money does not affect the plaintiff's tracing or claim to the money handed over by Cass to the Playboy Club as money of the plaintiff received by the Playboy Club (see 572H). Although Mr Ma and Mr Chang did not really address me on the significance of Lipkin Gorman on tracing, it seems to me that the judgment of Lipkin Gorman in relation to common law tracing is notable for two principles. The first principle is the exchange product theory. Lord Goff said at p 573E that: It is well established that a legal owner is entitled to trace his property into its product provided that the latter is indeed identifiable as the product of his property.

The second principle is that chose in action is property and therefore is traceable. Lord Goff said at p 574A-B:

"... a debt constitutes a chose in action, which is a species of property, and since the debt was enforceable at common law, the chose in action was legal property belonging to the solicitors at common law. There is in my opinion no reason why the solicitors should not be able to trace their property at common law in that chose in action, or any part of it, into its product ..."

What is important to Lord Goff is that property can be traced at common law into its product provided it is an identifiable product of his property and this is true whether property or product is by way of chose in action or other property. In my judgment, if this is the correct interpretation of what Lord Goff said in Lipkin Gorman or even arguably the correct interpretation of the legal principle of tracing as laid down by Lipkin Gorman, then for the limited purpose of the application to re-amend, it is sufficient for me to hold against Wing Lung on this tracing point.

The final relevant authority on tracing is Bank Tejarat v. Hong Kong and Shanghai Banking Corp [1995] 1 Lloyd's Rep 239. The plaintiff bank paid under a letter of credit to Hong Kong Bank for a customer of Hong Kong Bank. The money was paid by a very complicated series of banking transactions as it involved German Marks. After the money was received by Hong Kong Bank, according to the instructions given, it was then dispersed by way of Credit Lyonnais to the use of the Lady in Paris. The flow of the value of the property sought to be recovered was as follows: Bank Tejarat è Bavarische Vereinsbank è Dresden Bank è HK Bank è Credit Lyonnais è Lady in Paris. Claim: Bank Tejarat è HK Bank.

The case has two aspects, one is payment over or change of position and the other is common law tracing. Because of the intermixing through the German banking system involving two German banks, Tucker J held that there could be no common law tracing. The case can be explained on its particular facts but it is merely seeking to apply the Agip judgment and therefore it adds nothing to our inquiry as to what is the true limit of common law tracing.

It is now time to analyse our present case which is really the most simple everyday kind of mistaken payment by cheque. The flow of value in this case, take the second group claim, was: Kwai Hung è Liu Chong Hing è Wing Lung è Sure Huge. Claim: Kwai Hung è Wing Lung.

Professor Birks in his authoritative book and articles has shown clearly that the purpose of tracing is to identify where value resides and that tracing involves the identification of movement of the same value from one location to another location or from one property to another property. Can there be any doubt that for example that the first cheque payment pleaded in para 14(1) in the sum of $2,143,440 being the money from cheque No 356725, received by Wing Lung from Liu Chong Hing on or about 12 May 1993 was the product of Kwai Hung's property under its said cheque in that amount. No layman could possibly doubt that there is identification of both values and matching of these values so that what was received by Wing Lung was the property of Kwai Hung paid by way of Liu Chong Hing Bank from the Kwai Hung account. The ultimate question on this common law tracing is whether by the inter-bank clearing that this certainty of identification is lost. I know there is a traditional view that tracing stopped when there is mixing of funds (see Ellinger & Lomnicka, Modern Banking Law (2nd ed) pp 214-216) but it is perhaps worthy to take note that the very case as basis for that traditional view mentioned by Ellinger of Sinclair v. Brougham [1914] AC 398 is already departed from and is seriously in peril of being overruled by the House of Lords (see Westdeutsche Landesbank v. Islington London BC [1996] AC 669, 710). It is in my view at least highly arguable (and by no means easy) that clearance of cheques in Hong Kong does not destroy the identification of value necessary for common law tracing and this is specially when we have no concrete specific and detailed evidence on the clearance of these six cheques.

A study of the considerable literature on the subject shows that the present law on tracing is both in disarray and uncertain and that the time has moved so much, specially in the light of Lipkin Gorman that there should be an overall review of tracing and whether there is any justification for the different rules governing common law tracing and equitable tracing (see Millett LJ in Jones v. Jones [1997] Ch 159, 169H-170B). Modern society is now so organised that the old rules, based on banknotes and coins as a special case on tracing and mixing, call for a new governing principle.

Whatever might be said about common law tracing, it is neither easy nor certain and therein lies the central difficulty for Wing Lung. I am not persuaded that the case of the plaintiffs on common law tracing must fail or that the law is so certain as contended by Mr Chang. The matter is more than arguable and in the circumstances, I do not accept the certainty of plaintiffs' failure on the tracing point. I therefore reject Wing Lung's first reason for opposing leave to re-amend.

Paid over/change of position

The second reason advanced by Wing Lung that the re-amendment should not be made is that the claim based on mistake must fail because Wing Lung has an unarguable defence based on:

1. the special position of the bank as agent of its customer, Sure Huge in collecting the money from the first bank and as such agent in paying over to its principal. It is contended that therefore Wing Lung cannot be liable in restitution for the receipt of the money;

2. the general defence of change of position as Wing Lung has changed its position by paying out the money to its customer, the payee of the cheque, Sure Huge.

For ease of reference I will hereinafter call the first point the bank agent defence and the second point the position change defence.

The foundation of the bank agent defence is to be found firstly in Continental Caoutchouc v. Kleinwort Sons (1904) 9 Com Case 240 and subsequently in Gowers v. Lloyds and National Provincial Bank [1938] 1 All ER 766. In Continental Caoutchouc, a firm of rubber merchants was regularly financed by two banks, the defendant Kleinwort, and Brandt bank. The plaintiff, purchaser from the rubber firm of a particular consignment of goods, at the direction of the rubber firm seller, made payment of the purchase price directly to the seller's banker. But instead of paying Brandt, the plaintiff buyer erroneously paid the price of that consignment to the defendant Kleinwort who received the money in good faith and credited the rubber merchant seller. It was Brandt which had the right to that money as it had financed the transaction and held the documents relating to the goods. The Court of Appeal held that the amount was recoverable by the purchaser payers. The Master of the Rolls distinguished between the situation where the bank received the money as a mere agent from where he received the money as principal. The money in question was received by the defendant Kleinwort with the belief that the money was due to it in its own right whereas in fact it was received under mistake as the proceeds related to a transaction financed by the other bank, Brandt. The money was accordingly recoverable. It could be seen therefore that it was the true nature of the money received which is relevant as to whether the defendant bank is liable to pay back. In particular, the recipient's understanding of the transaction and the capacity in which he purports to act and deal with the money will have a significant bearing as to whether he received the money as agent or not.

In Gowers, a retired army officer's widow fraudulently continued to receive his pension by representing that he was still alive. The relevant payments were obtained by means of certificates, presented through the defendant bank which included an attestation by an alleged medical practitioner to the effect that the army officer was well. The sums involved were remitted directly to the bank which paid them out to the widow. The Court of Appeal upheld the judge and said that the money was not recoverable from the bank because the defendant bank had paid over the money to its principal. It is to be noted that money was paid over by the bank was not in dispute. What is puzzling to me with the Gowers decision is the view of Greene MR that it did not matter that the bank received the money as purporting agent of Mr Gibson (who had already died) and paid away the money to someone who was not its purported principal. I have serious doubt as to the correctness of the reasoning of the Master of Rolls.

In ANZ Banking Group Ltd v. Westpac Banking Corp (1988) 164 CLR 662, the plaintiff bank ANZ telegraphically transferred a sum of money to the defendant Westpac for the credit of one of its customers. In fact by the mistake of ANZ, it had sent $100,000 too much. The customer's account was overdrawn and Westpac applied the overpayment amount in reduction of the overdraft. Then ANZ discovered the mistake and notified Westpac and sought repayment of the overpaid amount. The High Court of Australia held that where an agent has received money, paid by mistake, on behalf of a principal, the agent has a good defence to a claim by the payer if he has paid it over to the principal or done something equivalent thereto. The following important passage in the judgment at pp 673-674 however must be quoted:

"The prima facie liability to make restitution is imposed by the law on the person who has been unjustly enriched. In the ordinary case of a payment of money, that person will be the payee. However, when the person to whom the payment is directly made receives it as an intermediary (e.g. as agent for a designated principal), there may be uncertainty about the identity of the actual recipient of the benefit at the moment of payment. If the circumstances are such that the intermediary is to be seen as being himself the initial recipient of the benefit, his prima facie liability will ordinarily be displaced when he has handed the money received on to the person for whom he received it. In such a case he has, in the event, not retained 'the benefit of the windfall' but been 'a mere conduit-pipe' (see per Collins MR, Continental Caoutchouc v. Kleinwort at 248) and 'the only remedy is to go against the principal' per Greene MR, Gowers v. Lloyds and National Provincial Bank at 773). A more difficult case arises where the intermediary has not made a physical payment of money to, or on behalf of, the person for whom the payment was received but has made a credit entry in his books in favour of that person. In such case, the question will arise whether the benefit of the payment made under fundamental mistake has been wholly or partly retained by the intermediary or effectively passed on to the third person: Continental Caoutchouc. In answering that question, the courts will pay regard to the substance rather than to the form of what has occurred."

Thus the cases indicate that a mere book entry which has not been communicated to the third party or which can be reversed without affecting the substance of transactions or relationships will ordinarily not suffice: see e.g. Buller v. Harrison (1777) 2 Cowper 565, Cox v. Prentice (1815) 3 M&S 348, Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 AC 84. It must appear that the third party has effectively received the benefit of the payment with the consequence that the prima facie liability to make restitution has become his. It will subsequently be necessary to return to this aspect of the matter and consider whether agent must also establish that he would sustain some overall detriment by reason of the mistaken payment if he were required to repay the amount to the payer and look to his principal for indemnity.

The dispute on the bank agent defence is whether the benefit of the payment had been wholly or partly retained by the intermediary or effectively passed on to the third party. This is a question of fact which requires much more than the mere assertions made in affirmations filed by the defendant Wing Lung. Mr Chang admits that there were effective overdrafts in the two operative accounts when the mistaken payments were received by Wing Lung and in these circumstances, it seems to me that even assuming that there is this bank agent defence and that Wing Lung was acting as agent of Sure Huge, there are still the substantial questions of:

(a) whether in relation to each such ministerial payment, each payment was effectively passed on to Sure Huge and Sure Huge had the effective benefit of it; and (b) whether the credit entries in the books of Wing Lung could be reversed without affecting the substance of the transactions or relationship.

It seems to me that the existence of these factual questions under the bank agent defence issue is sufficient reason for giving leave to the plaintiffs to re-amend the statement of claim.

But in fact the bank agent defence suffers from another more vulnerable weakness and that is whether it can be shown so clearly at this interlocutory stage that Wing Lung was receiving the money payment as agent for Sure Huge. In this context it must be borne in mind that the payments on these cheques were part of the overall fraud of Kung, the accountant for Sure Huge. Sure Huge as a company did not authorise any person and certainly not Wing Lung to collect any payment on these cheques for Sure Huge or to receive such payment. Notwithstanding Gowers, in my judgment the purported agency of Wing Lung for Sure Huge in relation to the transactions in question is very much in doubt and it follows that this is another reason why the bank agent defence is not bound to succeed.

The position change defence is of course first given full recognition under English law in Lipkin Gorman. Whether such a defence now subsumes the bank agent defence is very much debatable. Burrows in his book seems to take the view that it does not, whereas Birks and others seem to take the opposite view. The matter is at least debatable and this would provide another reason for leave to re-amend.

But assuming that position change defence is separate from bank agent defence, can such a defence be so clearly shown at an interlocutory stage as to shut out the restitution claim. I have no doubt that it cannot be so clearly shown in this case. On this defence in Lipkin Gorman, Lord Goff said at p 580C-F:

"... in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution, and it is commonly accepted that the defence should not be open to wrongdoer ... At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full."

In the light of the above statement of principle, I do not see how on an interlocutory basis without knowing all the circumstances, the court could hold that this defence now succeeds. Mr Ma referred to matters such as:

(a) the necessity for Wing Lung to show it changed its position bona fide;

(b) that Wing Lung acted properly and was not a wrongdoer;

(c) that Wing Lung did not act negligently;

(d) that there was the necessary reliance by Wing Lung on each of the six cheque payments for each of the change of positions;

(e) that Wing Lung would have to reveal its internal systems and exactly what it did in relation to each of the six cheques and in relation to the subsequent payment out on the forged Sure Huge cheques from the Sure Huge account at Wing Lung.

I agree that these are matters which would have to be investigated at the trial before a court could be convinced that a successful defence of change of position had been made out.

There is finally one additional reason why in my view, the objection of Wing Lung to the proposed re-amendment is doomed to be rejected and this is the somewhat uncertain state of the law on this new defence. As pointed out in a learned article (Fung, Eugene on 'Defences to Tracing and Related Claims', International Tracing of Assets (1997 ed), Vol 1):

(1) Lord Goff and Lord Bridge in Lipkin Gorman and Waller J in Standard Bank London Ltd v. Bank of Tokyo [1995] 2 Lloyd's Rep 169 formulated the principle of who can rely on this defence in somewhat different terms.

(2) The precise fault or innocence of the plaintiff and of the defendant would have considerable impact on the final outcome of the restitution claim.

This article only reinforces the fact that we are at the early development stage of this defence, the full scope of which is yet to be worked out by the courts and that the full facts of each case at the trial will finally determine to what extent the defence could be relied upon in respect of each mistaken payment alleged to be the subject of a change of position. In this context, if the ANZ test is correct, namely the defendant agent will not be discharged if 'the agent is a knowing party to the wrongdoing which led to the payment or was in some other way responsible for it' (see para 435 and notes thereon of Mason & Carter on Restitution Law in Australia), then the question of responsibility of Wing Lung for the mistaken payment to Wing Lung will need to be examined. Such examination may include matters such as Wing Lung permitting payment on the forged Sure Huge Wing Lung cheques which enabled in turn the Kwai Hung Liu Chong Hing cheques frauds to continue resulting in the subject mistaken payments to Wing Lung.

Notwithstanding all the evidence in the affirmations by Wing Lung and the strong attractive arguments put to me by Mr Chang, I am firmly of the view that this is not a case which can be decided on an interlocutory strike out application. The plaintiffs have a clearly arguable case and in my judgment, the application to re-amend ought to be granted. I will hear the parties on the appropriate order which should be made including the matter of costs of the hearing before me and before the master.