REINHOLD THURNER v. EXCELLENT CENTURY HOLDINGS LTD

HCA 1422/2019

[2020] HKCFI 743

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1422 OF 2019

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DECISION

1.  This is the Defendant’s application for setting aside a final judgment entered herein on 25 September 2019 in default of notice of intention to defend (“Default Judgment”) and the Garnishee Order to Show Cause made on 18 October 2019 (“Garnishee Order Nisi”). The hearing originally fixed for argument fell within the General Adjournment Period and was adjourned accordingly. By consent, the application is dealt with on paper in lieu of oral argument.

2.  The Plaintiff’s case is that he, a Swiss national, fell prey to a bogus investment scheme whereby he was induced into transferring Euro 1.05 million (“Euro 1.05m”) into the HSBC account of Smart Jobs Limited (“Smart Jobs account”), out of which a sum of US$558,913.63 (“Disputed Sum”) comprised in a larger sum of US$5 million (“US$5m”) was subsequently transferred to the HSBC account of the Defendant, a BVI company whose sole shareholder and director is a Mr. Zheng (“Zheng”). 

3.  The Plaintiff commenced this action to claim the Disputed Sum against the Defendant and concurrently obtained from DHCJ Maurellet SC a proprietary injunction and leave to issue a concurrent writ of summons for service on the Defendant at its registered address in the British Virgin Islands (“BVI address”).  There being no notice of intention to defend from the Defendant, the Plaintiff obtained the Default Judgment for the Disputed Sum and subsequently the Garnishee Order Nisi.  The Plaintiff’s application for making the Garnishee Order Nisi absolute has since been adjourned by DHCJ Simon Leung pending resolution of the present application.

4.  The Defendant says the Default Judgment is irregular; and even if otherwise, there are merits of defence and unique circumstances in the present case justifying the setting aside of the same.

5.  The parties have no dispute on the legal principles governing the setting aside of a default judgment which are trite.

Regularity of the Default Judgment

6.  It should be noted that in saying that the Default Judgment is irregular, the Defendant is not disputing the propriety of the service of process at the BVI address.  Rather, it asserts that service was not effective to bring these proceedings to the notice of the Defendant because Zheng, being the sole director, shareholder and contact person of the Defendant, in fact did not receive notice of the concurrent writ of summons as he was serving a prison term in Hong Kong after being convicted of money laundering in relation to the US$5m.

7.  The Defendant avers that the Plaintiff was aware of Zheng’s imprisonment but made no attempt to inform him of the present action and that the Plaintiff knew of the Defendant’s correspondence address in Kwai Chung (belonging to Zheng’s cousin) registered with HSBC (“Kwai Chung address”) but made no attempt to effect service of process at the Kwai Chung address.

8.  The Defendant’s complaint about the service of process herein betrays a total disregard of the principle that a company is a separate legal entity from its shareholders, which principle has since Salomon v Salomon & Co Ltd [1897] AC 22 been “so well-entrenched that it is rare to hear submissions to the contrary, and it is even rarer to see a departure from it in a court of law”.  Per Ng J in Re Primlaks (HK) Ltd [2016] 2 HKLRD 31 at §24. 

9.  Here, all that was required of the Plaintiff was to bring these proceedings to the notice of the Defendant company, not that of Zheng.  Since the Defendant does not dispute the propriety of service at the BVI address, there is simply no basis for saying that the service of process herein was not effective to bring the proceedings to the notice of the Defendant.

10.  That being so, the following matters can have no bearing on the regularity of the service of process herein, namely, the Plaintiff’s knowledge of Zheng’s incarceration at the time of commencement of action (which the Plaintiff denies anyway and Zheng could hardly rebut other than arguing that the Plaintiff’s solicitors could have found out his conviction from the Judiciary’s database absent any replies to their emails); the absence of any attempt to effect service at the Kwai Chung address (there being no mandatory requirement for service at such address anyway); or the absence of any attempt to inform Zheng of the present action (the Plaintiff says his solicitors did additionally send the relevant court papers to Zheng’s email address which Zheng has confirmed to be his but he said he had no access to the same while imprisoned). 

11.  Zheng only has himself to blame if he could not read those emails sent by the Plaintiff’s solicitors as aforesaid while serving a prison term when he could have so organized his personal affairs as to enable himself to be kept posted of any messages sent to his email address during his incarceration.

12.  Nor can the Defendant find fault with the Plaintiff if Zheng actually never received any documents from the Defendant’s registered agent in the BVI which was supposed to forward any documents concerning the Defendant to Zheng by emails and telephone calls through a service company engaged by the Defendant to provide offshore administration services. 

13.  I therefore find the Default Judgment to be regular so that the Defendant would carry the burden of demonstrating that it has a defence on the merits which has a real prospect of success.  See Young Bing Ching v Chow Yung Fung [2001] 2 HKLRD 394.

Merits of the Plaintiff’s claim

14.  It is submitted on the Defendant’s behalf that even if the Default Judgment is a regular one, the Court should exercise its discretion to set aside the same having regard to the merits of the defence and the unique circumstances of the present cases, in particular, the reason why the default occurred.  In this connection, however, apart from a bare denial of any knowledge of the fraud perpetrated on the Plaintiff and putting the Plaintiff to strict proof of his proprietary claim, the Defendant has not put up any positive case as regards any entitlement on its part to retain the Dispute Sum.  In particular, Zheng has revealed nothing in his affidavit evidence in support of the present application about the background to the Defendant’s receipt of the US$5m, he having exercised his right to silence and called no evidence in the criminal proceedings leading to his conviction.  The Defendant’s focus is therefore almost entirely on the merits of the Plaintiff’s claim rather than its own defence. 

15.  As said, the Plaintiff’s case is that the Disputed Sum originated from the Euro 1.05m he transferred to the Smart Jobs account.  The Disputed Sum in fact comprised two sums of US$298,913.63 (“Sum A”) and US$260,000 (“Sum B”) respectively.

16.  Evidence obtained by the Plaintiff from the banks concerned reveals that, in terms of sequence, immediately after the Euro 1.05m was deposited into the Smart Jobs account (and converted into US dollars), Sum B was transferred out of the Smart Jobs account to the Hang Seng Bank account of Wealth Mark International Investment Limited (“Wealth Mark account”), followed by several US dollar transfers to other parties leaving Sum A as balance until a sum of US$5 million from the Wealth Mark account topped it up to US$5,298,913.63 as at 2 February 2016, out of which the US$5m was transferred to the Defendant’s HSBC account. 

17.  There can be no dispute that the Plaintiff is entitled to claim against the fraudulent recipient of his funds as well as other persons to whom traceable parts of such funds are transferred.  See Mesirow Financial Administrative Corporation v Best Link Industrial Co Ltd (HCMP 1846/2015), unrep., 25 January 2016, at §33.

18.  And in order to succeed in tracing his funds, the Plaintiff must establish a clear link between his funds and the asset or money into which he seeks to trace. His proprietary claim would not be lost simply because the wrongdoer has mixed such funds with his own funds, with the onus on the latter to establish that part, and what part, of the mixed fund is his property.  See Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] Ch 453 at §138.

19.  In this connection, the interests of the wrongdoer responsible for the mixing and those who derive title under him otherwise than for value are subordinated to those of innocent contributors who, as against the wrongdoer and his successors, are entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture, if any, until their own contribution has been satisfied.  See Foskett v McKeown [2001] 1 AC 102 at 132C. 

20.  The Plaintiff submits that the Defendant is a wrongdoer with respect to its dealings with the US$5m by reason of Zheng’s conviction of money laundering so that its interests should be subordinated to the Plaintiff’s interests in applying the tracing principles.  While arguably the act giving rise to Zheng’s criminal conviction might not relate, or directly relate, to the fraud perpetrated on the Plaintiff, I agree with such classification for the present purpose which the Defendant has not specifically refuted other than denying knowledge of the fraud perpetrated on the Plaintiff.  In any event, the Defendant has not even claimed to have derived title to the US$5m for value. 

21.  With regard to Sum A, the Plaintiff’s case is a simple application of the rule in the Clayton’s Case that the money first withdrawn from the account is drawn against the contribution of the party whose money was first deposited.   When the US$5m was transferred out of the Smart Jobs account, it therefore comprised Sum A so that Sum A can be traced directly to the Euro 1.05m from the Plaintiff.  I see no reason to disagree.

22.  As regards Sum B, the Plaintiff is able to show by reference to bank statements how that sum can be traced amidst internal switches between different currencies in the Wealth Mark account before the US dollar balance thereof came to US$5 million, followed by the transfer of that amount to the Smart Jobs account whereby Sum B went back to the Smart Jobs account.  Indeed, Zheng conceded in his affidavit filed in support of the present application that Sum B originated from the Euro 1.05m (“Concession”). 

23.  Between February and March 2016, after the receipt of US$5m from the Smart Jobs account, various withdrawals took place in the Defendant’s account leaving a balance of US$578,513.68.  Relying on Re Hallett’s Estate (1879) 13 Ch D 696 at 726-729 cited in Snell’s Equity (2015, 33^rd ed) at §30-057, the Plaintiff submits that those withdrawals should be presumed to have been drawn from the wrongdoer’s share of the mixed fund so that the said balance should be deemed to form part of the US$5m to which the Plaintiff is entitled to trace.  Again, I see no reason to disagree.

24.  The Concession is not repeated (nor withdrawn) in Counsel’s submissions on the Defendant’s behalf.  Instead, it is submitted that the whole of the US$5m in the Defendant’s account had in fact originated from Wealth Mark (via Smart Jobs) and is separate and distinct from the Euro 1.05m from the Plaintiff.  There being no direct evidence from Zheng, however, Counsel has to seek support for such proposition from the evidence of the director of Wealth Mark (as well as Smart Jobs) given in the criminal proceedings as gleaned from the reasons for verdict in respect of Zheng’s conviction to the effect that he intended to transfer a sum of US$5 million directly from the Wealth Mark account (with Hang Seng Bank) to the Defendant’s HSBC account and that the Smart Jobs account (with HSBC) was only used to facilitate such transfer.

25.  Counsel for the Defendant goes on to submit that such “clear intention” suffices to displace the rule in Clayton’s Case, relying on Wilson Chan J’s observation in Council of the Law Society of Hong Kong v Cheng Chun Chung [2018] 4 HKLRD 728 at §§31-32 that the “first-in-first-out” rule in the Clayton’s Case is often regarded as unfair and has been much criticized and that it takes only a very small counterweight to displace the rule.  He, however, stops short of explaining why such intention should displace the rule in the Clayton’s Case here, and more pertinently, why the application of this rule is unfair to the Defendant.  

26.  For one thing, the learned judge’s observation in Cheng Chun Chung was made in the context of fairness as between rightful claimants where there is deficiency in funds for distribution.  Here, as between the Plaintiff and the Defendant, I can see no unfairness in applying the rule in the Clayton’s Case to trace the Plaintiff’s money into the Defendant’s account. 

27.  For another, absent direct evidence from the Defendant on the purpose of the transfer of funds from Wealth Mark to Smart Jobs/the Defendant or indeed any of the related transactions, I see no basis for displacing the rule in the Clayton’s Case in respect of Sum A.  As to Sum B, given the Concession and since it is in any event demonstrably traceable to the Plaintiff’s money, the “clear intention”, even if established, simply would not stand in the way of the Plaintiff’s tracing exercise under his proprietary claim.

28.  More importantly, being a wrongdoer or at least a recipient of the US$5m otherwise than for value, the Defendant should not be allowed to dictate which tracing rule to apply.  Applying the principles laid down in Sinclair Investments and Foskett and according precedence to the Plaintiff’s claim, Counsel for the Plaintiff submits, and I accept, that the Plaintiff is entitled to specify the relevant tracing principles, and in particular, rely on the rule in Clayton’s Case in the manner that it has done.

29.  I am satisfied that the Plaintiff has shown a clear link between the Euro 1.05m and the US$5m so that he is entitled to a judgment for the Disputed Sum to which the Defendant has failed to show a defence with any real prospect of success.  As a matter of course, the Plaintiff is entitled to a garnishee order for enforcement thereof.

The claim of Dragon Lotus Capital Limited (“Dragon Lotus”)

30.  The Defendant further relies on the fact that there is a “competing claim” by Dragon Lotus (against both the Defendant and Zheng personally) for a sum of US$5 million in another High Court action in which Dragon Lotus has also obtained a Mareva injunction.  On the face, it submits, Dragon Lotus and the Plaintiff are competing for the same subject matter so that the Defendant should be allowed to “defend the present action and resolve its issues against Dragon Lotus and the Plaintiff concurrently.  In any event, given the existence of the Injunction, P will not be able to take any further steps unless it obtains an order for variation or discharge of the Injunction”.

31.  The Defendant does not explain and I am unable to see why the existence of another claim against the Defendant, even if a competing one as the Defendant would have it, would per se afford a defence to the present claim.  In the same vein, Zheng has hardly revealed anything material about the “competing claim” or any defence thereto.

32.  In any event, as rightly pointed out by Counsel for the Plaintiff, a Mareva injunction does not operate as a charge or make Dragon Lotus a secured creditor: United Asia Finance Ltd v Yiu Tsz Ngar [2015] 2 HKLRD 189 at §§11-13.  And if necessary, the Court has the power under Order 49, rule 6, Rules of the High Court to deal with any potential competing claims to a fund by third party creditors such as Dragon Lotus in the context of the Plaintiff’s garnishee order application.  How the competing claims are to be resolved is of no concern to the Defendant who is putting up no positive claim to the US$5m or any part thereof.  

33.  The Plaintiff also questions the genuineness of the claim of Dragon Lotus because of the involvement of a figure featured also in the fraud perpetrated against him.  For the present purpose, however, it matters not whether Dragon Lotus’ claim is genuine or otherwise.

34.  Neither do I see any unique circumstances in the present case, whether by reason of Zheng’s incarceration or otherwise, justifying the setting aside of the Default Judgment and/or the Garnishee Order nisi.  

Conclusion

35.  As it turns out, all the Defendant has attempted is to mount what is at best a lame attack on the Plaintiff’s case and to ride on the convenience of there being a separate civil claim against the Defendant also for a sum of US$5 million.

36.  The Defendant’s summons is therefore dismissed with an order nisi that the Defendant do pay the Plaintiff’s costs, to be summarily assessed if not agreed.  Absent any application for variation of the costs order nisi and for the purpose of summary assessment, the Plaintiff shall lodge and serve his statement of costs between 14 and 28 days from the date hereof.  The Defendant shall lodge and serve its list of objections within 14 days thereafter.  Summary assessment shall then be conducted on paper.