AESTHETICS ARCHITECTURE PTY LTD v. MAIN CROWN ENTERPRISES LTD

HCA 483/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 483 OF 2012

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JUDGMENT

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1.  This is an appeal from the order of Master de Souza dated17 January 2013 in which the defendant’s application to set aside the default judgment obtained herein on 26 April 2012 was dismissed by the Master. At the same time, the Master ordered that the garnishee order obtained by the plaintiff herein be made absolute.

2.  By an order of Master H Au-Yeung dated 28 January 2013 the defendant’s application for a stay of execution pending appeal was dismissed. As a result the money held in the defendant’s bank account which had been frozen pursuant to a Mareva injunction granted by Wright J on 23 March 2012 has since been paid out to the plaintiff in partial settlement of the judgment.

3.  The defendant is also seeking an order that the garnishee order be discharged notwithstanding the fact that the money held in the defendant’s bank account has already been paid out to the plaintiff.

Background

4.  These proceedings arose in respect of a fraud perpetrated against the plaintiff by an apparently fictitious investment company known as “Smith & Olsson” whereby, the plaintiff, an Australian company, was deceived into making payments purportedly to invest in securities in the United States.

5.  In carrying out the fraud against the plaintiff, the defendant was described by ‘representatives’ of Smith & Olsson as their Hong Kong transfer agent and the plaintiff was instructed to make two separate payments of US$299,612.22 and US$414,639.61 respectively to the defendant’s Hong Kong bank account held with the Hongkong & Shanghai Banking Corporation (“HSBC”) with account number 400-279287-838 (“the HSBC Account”). The total amount transferred by the plaintiff was US$714,251.53.

6.  In June 2011, Anthony Joseph Camilleri, (“Camilleri”) a director of the plaintiff, received a phone call on his mobile phone from a person introducing himself as David Turner and claiming to be an investment advisor representing a company called “Smith & Olsson”, which he claimed was an independent advisory firm providing advice and brokerage services for investments in US securities. Camilleri was asked if he wanted to become a client of Smith & Olsson and was referred to a website in respect of same. Between June 2011 and November 2011, Camilleri had ongoing telephone and email communication with no less than seven purported representatives of Smith & Olsson.

7.  Camilleri also communicated with a Jimmy Tan who purportedly represented the defendant which was described as Smith & Olsson’s Hong Kong transfer agent.

8.  On 8 November 2011, the plaintiff transferred US$299,612.22 into the HSBC Account as payment for the purported purchase by Smith & Olsson for the plaintiff 149,506 NASDAQ SREV shares. The plaintiff was provided with a receipt from Smith & Olsson by email dated 12 November 2011 for the payment.

9.  Prior to the transfer of this payment, the plaintiff was provided with a Stock Purchase Agreement and a Payment Instruction by email dated 8 October 2011 from Ms Cindy Lim, purportedly of Smith & Olsson.

10.  On 17 November 2011 the plaintiff transferred another sum of US$414,639.31 into the HSBC Account as payment for the purported purchase by Smith & Olsson for the plaintiff of 111,738 NASDAQ RVBD shares. Once again, the plaintiff was provided with a Stock Purchase Agreement and a Payment Instruction by email dated 10 November 2011 from Cindy Lim before the payment was made.

11.  Camilleri first became suspicious when towards the end of November 2011, he was unable to obtain any satisfactory response from Smith & Olsson in respect of certain queries raised by him.

12.  Then his suspicion further grew when in December 2011 he noticed certain inaccuracies in the documentation sent to him in relation to the purported share purchases but again could not obtain any satisfactory answer from Smith & Olsson.

13.  In early January, Camilleri went to the United States to the office address of Smith & Olsson in Chicago only to find that the office did not exist. He was further told by the building security officer there that the same address had been used for a separate fraud involving another bogus company which was being investigated by the FBI. Moreover, the representative from Smith & Olsson who Camilleri was supposed to meet did not appear. This then confirmed his suspicion that he had been defrauded.

14.  The Writ of Summons with Statement of Claim endorsed was issued on 23 March 2012 against the defendant, the plaintiff’s claim being one of money had and received. On the same day, the plaintiff obtained an ex parte Mareva injunction from Wright J against the defendant thereby freezing the money in the HSBC Account.

15.  The defendant, being a limited company registered in Hong Kong, the Writ with Statement of Claim as well as the Injunction Order was served on the defendant at its registered address in Hong Kong on23 March 2012.

16.  On 26 March 2012, an Inter Parte Summons was issued by the plaintiff for the hearing on the return date of the ex parte injunction granted by Wright J, and same was served on the defendant at its registered address on the same day.

17.  The return date for the ex parte injunction was set for13 April 2012.

18.  The defendant did not appear at the return date and the ex parte injunction was continued by To J until further order of the court.

19.  No appearance having been entered by the defendant and no defence having been filed, a judgment in default was granted to the plaintiff on 26 April 2012.

20.  On 27 June 2012, the plaintiff issued a Garnishee Order to Show Cause effectively applying to garnishee the moneys in those accounts of the defendant frozen by the Mareva Injunction to satisfy the default judgment.

21.  On 10 July 2012 the defendant applied by Summons to set aside the default judgment.

22.  On 17 January 2013 the defendant’s application to set aside the default judgment was heard and dismissed by Master de Souza. At the same hearing the Master also made the Garnishee Order absolute.

23.  On 25 January 2013, the defendant took out a summons for a stay of execution of the default judgment and the Garnishee Order Absolute. That was heard by Master H Au-Yeung on 28 January 2013 who dismissed the defendant’s application for stay of execution.

24.  On 5 March 2013, as a result of the Garnishee Order Absolute all the funds in the HSBC Account (totalling approximate HK$1.1 million) were paid over to the plaintiff’s solicitors.

25.  The defendant now appeals against the order of Master de Souza made on 17 January 2013 dismissing the defendant’s application to set aside the default judgment.

The default judgment

26.  There is no dispute that the default judgment is a regular judgment, the relevant documents having been served on the defendant at its registered address in Hong Kong.

27.  As such, the burden, which is not a light one, is upon the defendant to:

(a) Explain why judgment was allowed to go by default; and

(b) To show on affidavit evidence that there is a manifestly arguable defence on merits.

Defendant’s explanation for default

28.  Jacob Dov Senderowicz (“JDS”), as the lawful attorney and authorized representative of the defendant, swore an affidavit in which he gave the explanation for the defendant allowing judgment to go by default which is as follows.

29.  The defendant is a company incorporated in Hong Kong its business being project management services for property projects in various parts of Europe and India.

30.  The sole shareholder and corporate director of the defendant is a Canadian company, Brucal International Inc (“BII”).  In turn BII is owned solely by a Panamanian company Lexinter Management Inc, of which JDS is the sole owner.

31.  In short therefore, as was stated in the written submission of Mr Chan, counsel for the defendant, JDS is the beneficial owner of the defendant.

32.  JDS has the actual management and control over the business and operation of the defendant and runs the defendant’s business from Antwerp, Belgium where JDS resides.

33.  On 23 March 2012, certain legal documents were served on the defendant at its registered office in Hong Kong. JDS was informed by the corporate services agency of the service of those legal documents upon the defendant which were then copied to JDS including the Injunction Order dated 23 March 2012.

34.  JDS then consulted a Hong Kong solicitor, Messrs Kenneth Sit, Solicitors (“KSS”) in early April. After reading the case papers and being briefed about their effect, JDS engaged KSS to resist the plaintiff’s claim herein.

35.  JDS then discovered that due to oversight, annual returns for BII had not been filed for 2 years, which resulted in the registration of BII being suspended. The deregistration made it impossible for JDS to act on its behalf to retain KSS to act on behalf of the defendant.

36.  It was not until 27 April 2012 that JDS was informed that the Quebec Companies Registry had just reinstated the registration of BII. Immediately JDS arranged for resolutions to be passed and for the defendant to formally engage KSS to act on its behalf.

37.  When KSS attempted to file the Acknowledgment of Service on behalf of the defendant on 30 April 2012, they could not do so since judgment had already been granted by the court on 26 April 2012.

38.  Urgent steps were then taken at the advice of KSS to investigate and review the matter to prepare for the defendant’s application to set aside the default judgment.

Showing an arguable defence on merits

39.  In the same affidavit sworn by JDS, those facts upon which the defence of the defendant rely may be summarised as follows.

40.  JDS engages in business of

(i) diamond dealing,

(ii) estate project management through a number of companies including the defendant, and

(iii) trading of various products on an ad hoc basis.

41.  The defendant’s business is primarily run by JDS from Belgium. The defendant maintains the HSBC Account in Hong Kong of which JDS was the only authorized signatory.

42.  JDS came to know an Israeli businessman, Michael Shaked (“Shaked”) who brokered trades in food products primarily from Europe to Israel. JDS has had a few transactions on food product with Shaked since 2005 which went smoothly and Shaked impressed JDS as trustworthy and reliable.

43.  In September 2011, Shaked contacted JDS and requested JDS to receive and disperse approximately US$700,000 on behalf of one L J Charbit (“Charbit”) who was going through a divorce with his wife.

44.  Shaked assured JDS that the arrangement was legitimate, parties involved were respectable, and the fund was proceeds of sale of certain property transactions in Australia and promised JDS a remuneration of 0.5% for assisting.

45.  JDS trusted Shaked and had no reason to suspect the legitimacy or legality of that proposed arrangement, he therefore accepted it. JDS then provided Shaked with the number of the HSBC Account.

46.  In November 2011, two sums of US dollars in the respective amounts of US$299,488.22 and US$414,631.59 (totally US$714,119.81) were transferred into the HSBC Account by the plaintiff.

47.  In accordance with the instructions given by Shaked through emails and telephone calls, the defendant, through JDS, remitted 9 sums in the total amount of US$710,154 to Charbit and to a Daniel Stone Realty & Development Corporation (“DSRDC”).

48.  US$3,965.81 (being 0.555% of the two sums paid into the HSBC Account by the plaintiff) was retained by the defendant.

49.  JDS alleged that he had no knowledge of any fraudulent scheme.

Argument advanced by the defendant

50.  It was submitted by counsel for the defendant that the defendant’s case is more than potentially credible for the following reasons:

(a) There is no evidence that the defendant or JDS had ever contacted the plaintiff or Camilleri;

(b) No evidence that the defendant or JDS had ever used the bogus address of 1/F, Causeway Bay Plaza 2, 463-483 Lockhart Road, Hong Kong which was used by those perpetrating the fraud when dealing with the plaintiff;

(c) No evidence that the defendant or JDS knew Cindy Lim or Jimmy Tan, who gave Camilleri instructions on remitting the two sums into the HSBC Account;

(d) No evidence that the defendant or JDS had been responsible for the email address jimmy.tan@maincrownenterprises.com or the website maincrownenterprises.com which is an internet domain registered in the Philippines and administered by one Paul Abbot;

(e) No evidence that the defendant or JDS had been responsible for the “Smith & Olsson” website or its bogus address in Chicago; and

(f) Other than handling the two sums paid into the HSBC Account, there is no other evidence which is capable of linking the defendant or JDS to the fraud alleged by the plaintiff.

51.  It was also submitted by counsel for the defendant that on the facts stated above, it can be shown that the defendant or JDS was not a knowing party to the alleged fraud for the following reasons:

(i) The bank statements of the defendant show that the defendant has active business dealings and is not a mere sham for fraud. Even after the 9 remittances were made to Charbit and DSRDC, the HSBC Account still had HK$1.1 million indicating that the defendant was not used merely as a vehicle for fraud;

(ii) The handling of the moneys from two sums paid into the HSBC Account was inconsistent with the defendant being a sham for fraud since it took the defendant almost 4 months (from 17 November 2011 to 12 March 2012) to make the 9 remittances out of the HSBC Account on the instructions of Shaked. More importantly, the last of the 9 remittances was made by another company controlled by JDS after JDS learnt that the HSBC Account had been frozen by the police. This is consistent with the defendant’s case that it was an innocent agent;

(iii) The plaintiff’s evidence that the defendant’s name was initially mistakenly stated to be “MC Enterprises” also shows that the defendant or JDS was not a party to the conspiracy to defraud since those who could have made that mistake must have been someone unfamiliar and unrelated to the defendant;

(iv) The personal particulars of JDS can easily be traced through the HSBC Account. This shows that JDS must have been an innocent agent since it can be contrasted with the fact that all those people who had been in contact with Camilleri and had perpetrated the fraud left no traces as to their real identities;

(v) The defendant’s pro-active approach in seeking to set aside the default judgment and to defend the claim, instead of absconding or laying low, also show that he was not a party to the fraud;

(vi) JDS has also disclosed the emails between him and Shaked which confirms that Shaked was not a random identity fabricated by JDS and shows JDS’s assistance in trying to track down Shaked.

52.  Given the above circumstances, it is the submission of defence counsel that if the case of the defendant is believed, it constitutes a valid defence of ministerial receipt.

53.  In this regard, counsel relies on the following passage in Goff & Jones: the Law of Unjust Enrichment, 8^th ed at para 28-01 which reads:

“Suppose that an agent receives a benefit from a claimant for the value of which he must immediately account to his principal. Suppose, further the agent actually pays this value to the principal in good faith. If the claimant sues the agent in unjust enrichment, then the agent can now rely on the change of position defence, following recognition of this defence by the House of Lords in Lipkin Gorman (A firm) v Karpnale Ltd. Even prior to Lipkin Gorman, however, a defence was given to an agent who paid the value of such a benefit over to his principal, or applied it in accordance with his instructions, provided that he acted in good faith and without notice of the claim.”

54.  Relying on the law as stated above, it was submitted by counsel for the defendant that in the present case, JDS believed that the defendant was the agent of Shaked, who in turn was the agent of Charbit. JDS therefore followed the instructions from Shaked and paid the value of the two sums paid into the HSBC Account in good faith and in total ignorance as to any fraudulent scheme as alleged by the plaintiff.

Decision

55.  There is no dispute in the present case that it was a regular judgment entered by the plaintiff in default of any notice of intention to defend.

56.  As such the onus is on the defendant to explain away the default and to show there is a manifestly arguable defence on merits.

57.  That onus is not a light one since the defendant is, in such circumstances, asking the court for an indulgence to set aside an otherwise regular judgment.

58.  In the present case, the attempt by the defendant to explain away the default is set out sufficiently above in this judgment.

59.  I am unable to accept that explanation by the defendant for the following reasons.

60.  Firstly, although two affirmations had been sworn in this matter by Kenneth Hoi Wah Sit, the principal of KSS, to the effect that he was first consulted by the JDS in early April 2012 (as stated in paragraph 18 of the affidavit of JDS). The first affirmation of Kenneth Hoi Wah Sit only makes reference to paragraph 20 of the affidavit of JDS, at which time default judgment had already been entered by the plaintiff which was on 26 April 2012.

61.  The affirmations of Kenneth Hoi Wah Sit were also totally silent as to it being impossible for KSS to act for the defendant due to the fact that the registration of BII had been suspended by the Quebec Companies Registry.

62.  Moreover, not one piece of documentary evidence has been exhibited to show that BII had been suspended by the Quebec Companies Registry or of its reinstatement.

63.  One would have thought that had JDS actually consulted KSS in early April after being served with the Writ, and even if it was the case that BII, being the sole shareholder and corporate director of the defendant, did in fact have its registration suspended by the Quebec Companies Registry for overlooking to file annual returns, that would only have been a technical matter that can be put right with time. On that score, had JDS consulted KSS in early April, well before judgment was entered by the plaintiff, it would have been open to KSS, even if it could not properly act for the defendant, to have written to the solicitors for the plaintiff to the effect that it was acting for JDS, the beneficial owner of the defendant, and saying that due to the technical difficulties with BII having its registration suspended in Canada, they wished to request for an extension of time for the defendant to file its acknowledgement of service or the defence indicating at the same time that the defendant will defend the claim once that technical difficulty can be overcome.

64.  Nothing of that sort was done by KSS, a legally qualified firm of solicitors, unlike a layman such as JDS who may not know better.  As solicitors, KSS must know that to allow time to pass after receiving a Writ properly served on the defendant, and doing absolutely nothing, would be courting imminent disaster in the form of a default judgment which, in this case, came about on 26 April 2012.

65.  Moreover, JDS, of his own admission in paragraph 4 of his affidavit also holds a Power of Attorney which is produced as “Exhibit JDS-1” given to him by the corporate services agent in Canada, formerly engaged to be the director and secretary of BII, and which is dated11 February 2004 which, according to JDS, remains valid thereby giving JDS the actual management and control over the business and operation of the defendant.

66.  Armed with such a Power of Attorney, it should have been even less of a problem for JDS to have instructed KSS to act for the defendant when JDS consulted KSS in early April even if it was a fact that BII has had its registration suspended.

67.  Had any such notification as suggested above been given to the plaintiff’s solicitors, chances are that default judgment would not have been entered by them on 26 April 2012 which was only one day before JDS was informed that the Quebec Companies Registry had reinstated the registration of BII.

68.  Even if the plaintiff had gone ahead to enter default judgment ignoring any such notification by KSS, the written record of such notification would have provided an almost foolproof springboard to explain away the default.

69.  As matters stand now, there is only the unconfirmed word of JDS in an attempt to explain away this default.

70.  JDS further states in his affidavit that KSS attempted to file the defendant’s Acknowledgment of Service herein on 30 April 2012 but could not do so because judgment had already been granted on 26 April 2012.

71.  Yet it took until 10 July 2012, almost two and a half months, for the defendant to take out its summons seeking to set aside the default judgment.

72.  Turning now to deal with the merits as to the defence.

73.  The defence relied on by the defendant is one of ministerial receipt. The law in relation to that defence has been referred to the court by counsel for the defendant and is succinctly stated in the passage from Goff & Jones cited above.

74.  The relevant words from that passage cited are “that he acted in good faith and without notice of the claim”.

75.  Coming back to the facts of the present case, JDS on behalf of the defendant paid out 9 remittances allegedly on the instructions of Shaked in respect of the moneys paid by the plaintiff into the HSBC Account.

76.  The last of these 9 remittances was made on 12 March 2012 in the sum of US$15,600.00 which was remitted to Charbit.

77.  JDS stated in his affidavit that in respect of this last remittance of US$15,600.00, in the second week of March 2012, Shaked gave him instructions to remit that last sum to Charbit, but when JDS tried to make that remittance out of the HSBC Account he was unable to do so. Upon his enquiry, a manager at HSBC told him that the account had been frozen by the Hong Kong Police.

78.  JDS then contacted the Commercial Crime Bureau (“CCB”) and spoke to an officer, one Charles Ng who told him that the HSBC Account could not operate because illegal money had been paid into it but refused to explain any further.

79.  JDS then arranged for the remittance of the US$15,600.00 to be remitted to Charbit through a related company, Crown Group Services Pte Ltd on 12 March 2012 which is a company based in Singapore and is one of the companies within the group managed by JDS.

80.  On those facts, when JDS made that last remittance to Charbit, he must have known, having been told by an officer of the CCB, that illegal money had been paid into the HSBC Account. Notwithstanding what he had been told, JDS still made that remittance of the US$15,600.00 to Charbit as instructed by Shaked.

81.  How then can that last remittance be said to be made in good faith by JDS without notice of the claim. What was told to JDS by the officer from CCB must have put JDS on notice of some illegality with the money that had been paid into the HSBC Account even though details had not been made known to JDS at the time.

82.  No explanation has been given by JDS as to why he made that last remittance despite what had been told to him by the CCB.

83.  Clearly, that last payment must be tainted with such knowledge of illegality on the part of JDS. How then is it possible for JDS / the defendant to say that they acted in good faith since the moneys paid into the HSBC Account, albeit in two sums, were paid in as one single transaction as a result of the fraud practiced upon the plaintiff.

84.  For the reasons given above, I am not prepared to accept the explanation given by the defendant for the default nor do I accept that the defendant has shown a manifestly arguable case on the merits.

85.  In the circumstances, I am of the view that the Master was correct to have dismissed the application by the defendant to set aside this default judgment.

86.  Accordingly, this appeal is dismissed and all the orders given by the Master below are to stand in their entirety.

87.  There will also be a cost order nisi that the defendant is to pay the plaintiff the costs of and arising from this appeal to be taxed if not agreed and to be paid forthwith.