SU XIN AND ANOTHER v. QIAN XIAOCHUN

DCCJ 5882/2019

[2023] HKDC 316

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5882 OF 2019

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JUDGMENT

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Introduction

1.  This is the plaintiffs’ application by summons dated 23 November 2022 for default judgment under Order 13 rule 6 and Order 19 rule 7 of the Rules of the District Court, Cap.336H (“RDC”).

2.  The writ in this case was issued on 30 October 2019 endorsed with the Statement of Claim. On 13 October 2022, leave was obtained by the plaintiffs for substituted service of the writ to be effected by advertising a notice of the present proceedings once in Sing Tao Daily, a Chinese newspaper published in Hong Kong, and it was ordered that such service shall be deemed to be good and sufficient service of the writ on the defendant. This the plaintiffs did on 4 November 2022.

3.  The Defendant has not acknowledged service nor filed any Notice of Intention to Defend subsequent to the substituted service of the writ.

Principles governing applications for default judgment

4.  In an application for default judgment, generally the court would not receive or consider evidence in support of the plaintiffs’ claim, and must give its ruling according to the pleadings alone – see: Leung Pak Ki v The Estate of Pang Kau, HCA 624 of 2009, 1 March 2016, DHCJ Paul Lam SC; Hong Kong Civil Procedure 2023, Vol.1, para.19/7/11.

The plaintiffs’ pleaded case

5.  By their Statement of Claim, the plaintiffs’ claim can be summarised as follows:

(i)  The 1^st plaintiff is a biostatistician residing in the United States. She is the sole director and shareholder of the 2^nd plaintiff which is a nominee company used solely as a corporate vehicle holding her assets, including a bank account held with JPMorgan Chase Bank (“P2’s Account”);

(ii)  The plaintiffs are and were at all material times not acquainted with the defendant and had no dealings with her;

(iii)  On about 6 November 2018, the 1^st plaintiff received a telephone call from an unknown male claiming himself to be from the Chinese Consulate, who told the 1^st plaintiff that her passport had been stolen and she was not allowed to travel to China. The line was then transferred to another male who alleged himself to be from the Shunyi branch of the Beijing Police Department, and indicating to the 1^st plaintiff that she had been involved in an international money laundering case. She was asked to keep this confidential since the investigation involved Chinese national secrets;

(iv)  On the next day, another person telephoned the 1^st plaintiff claiming that a criminal had used her passport to open a bank account in China and had committed commercial deception involving over RMB2 million. The 1^st plaintiff was also named as a criminal involved in the deception, and she was given screenshots of what appeared to be orders for her arrest issued by law enforcement agents;

(v)  The 1^st plaintiff’s line was then transferred to another unknown person claiming himself to be a Chinese prosecutor who told her that in order to clear her name, she had to provide details of all of her bank accounts in the United States for investigation purposes. She was also instructed to wire money to a bank in Hong Kong for investigation in order to prove that her money was “clean”. Upon verification of the source of her money, it would be transferred back to her immediately. Several mobile text messages were then sent over to the 1^st plaintiff containing instructions for the transfers of two sums of US$90,000. Relying on the instructions, the 1^st plaintiff then caused the 2^nd plaintiff to make two transfers from P2’s Account to two bank accounts in Hong Kong, namely (i) US$90,000 to a bank account held with the Bank of China (Hong Kong) Limited (“BOC”) on 7 November 2018 ( “1^st Transfer”) , and (ii) US$90,000 to a bank account held with the BOC also on 7 November 2018 (“2^nd Transfer”);

(vi)  Subsequent to the said transfers, the 1^st plaintiff discovered that the mobile text messages she received earlier containing the details of the bank accounts had disappeared, and the telephone number through which she had received the first call had been disconnected. She then discovered the telephone scam, and proceeded to instruct JPMorgan Chase Bank to cancel the said transfers. In the event, the 1^st Transfer was successfully cancelled, but the sum of US$90,000 under the 2^nd Transfer had been successfully remitted;

(vii)  She then reported the matter to the police, who later confirmed that the sum transferred had been subsequently remitted and transferred to the defendant’s account held with the Hongkong and Shanghai Banking Corporation (“the defendant’s HSBC Account”).

The applicable law

  (i)  Tracing and recovery of the money transferred

6.  Mr Leung for the plaintiffs submitted, and I accept, that it is a well-established principle that when property is obtained by fraud, equity imposes a constructive trust on the recipient so that the money is recoverable and traceable in equity. Money paid under mistake of fact is prima facie recoverable provided there was no change of position on the part of the recipient in good faith – see 800 Columbia Project Company LLC v Chengfang Trade Ltd & Ano [2020] 5 HKC 88 at para.12; Tai Ching Ling v Cai Guo Chuan, HCA 1782 of 2018, 11 September 2019, Marlene Ng J at para.15; Prescient Corporation v Dunse Trading Ltd, DCCJ 678 of 2019, 20 May 2019, HH Judge Li; and Guaranty Bank and Trust Co v ZZZIK Inc Ltd, HCA 1139 of 2016, 18 July 2016, DHCJ Cooney SC at paras. 28-30.

7.  The pleaded facts of this case show that this is clearly one of fraud perpetrated against the plaintiffs. Since the sum transferred has been deposited into the defendant’s HSBC Account, equity imposes a constructive trust on her upon tracing to hold the same in favour of the plaintiffs[1]. It would be unconscionable for the defendant to retain the funds as the defendant has no dealings with the plaintiffs and there is no legitimate reason for her to receive and retain such funds. Even if the defendant is not a party to the fraud, her state of knowledge concerning the funds would make it unconscionable for her to retain the same. The plaintiffs have a tracing remedy against her in such circumstances – see Prescient Corporation at para. 20.

8.  Further, knowledge about the questionable state of the funds received does not have to be acquired at the time of receipt. In Guaranty Bank and Trust Co, DHCJ Cooney SC said at paras. 34-36:

“34. The defendant has knowledge of the fraud because of the injunction order, the statement of claim, the summons for judgment and affidavits, all of which have been served on it. Notwithstanding, the defendant has neither paid nor made any attempt to pay the funds to the plaintiff.

35. I consider it unconscionable for the defendant to retain the funds for the following reasons:

(1)  There were no dealings between the customer and the defendant; and

(2)  There was no legitimate reason for the defendant to receive the funds from the customer.

36. I find that the defendant holds the funds on trust for the plaintiff and the funds are recoverable and traceable in equity.”

9.  The same applies to the present case. Based on the above analysis, it is unconscionable for the defendant to retain the sum transferred to the defendant’s HSBC Account that represents the traceable sum that originated from the sum remitted under the 2^nd Transfer. That sum is thus recoverable in equity.

  (ii)  Declarative relief

10.  It is not the normal practice of the court to make a declaration without a trial. In a judgment reached without hearing evidence, a declaration can only be based upon unproved allegations. The court ought not to make declarations as facts without proof. However, this is only a rule of practice which should not be followed when the plaintiff had a genuine need for declaratory relief, and that justice would not be done if such relief was denied - see Leung Pak Ki v The Estate of Pang Kau at para. 6, and Tsui Ming Sin v Tsui Chi Ping and another, HCA 2550 of 2014, 2 February 2016, DHCJ Kenneth Kwok SC at paras. 13-15.

11.  On the other hand, the effect of the failure by a defendant to file a Notice of Intention to Defend is that the pleadings are deemed to be admitted by the defendant by reason of his default – see Hong Kong Civil Procedure 2023, Vol.1, para. 13/0/10.

12.  It is submitted by the plaintiffs that they should not be placed in a position where they have to pursue their proprietary claim in competition with other creditors and that a monetary judgment against the defendant for the return of the transferred sum, without more, would put the 2^nd plaintiff in the position of an unsecured creditor. On the other hand, it is submitted that a declaration by the court that the transferred sum is held on trust for the 2^nd plaintiff would earmark the fund as its property which would be out of reach of other unsecured creditors – see Barclay Butera Inc v Tianxbang Trade Co Ltd, HCA 1277 of 2018, 14 September 2018, DHCJ Keith Yeung SC (as he then was) at paras. 14-15; Guaranty Bank and Trust Co at para. 38, and Tai Ching Ling at para. 17. In fact, declaratory relief had been granted in the absence of the defendants in various cases involving fraud – see e.g. Prescient Corporation and Tai Ching Ling referred to above. I agree with the plaintiff’s submissions in this regard.

Conclusion

13.  Based on the above, I am satisfied that the plaintiffs are entitled to default judgment, and I make the following orders:

(1)  A declaration that the defendant holds the sum of US$90,000 remitted by the 2^nd plaintiff and deposited at the defendant’s bank account held under the defendant’s name at the Hongkong and Shanghai Banking Corporation numbered 121326714833 and any interest accrued and profits earned thereon (“the Sum”), on constructive trust for an on behalf of the 2^nd plaintiff;

(2)  The defendant do pay or transfer to the 2^nd plaintiff the Sum (or its Hong Kong Dollar equivalent at the time of payment) together with interest thereon at the rate of prime plus 1% per annum from 30 October 2019 to the date hereof, and thereafter at judgment rate until payment;

(3)  The defendant, whether acting by himself, his servants and/or agents or otherwise, be restrained from disposing of or dealing with the Sum until the Sum is paid over or transferred to the 2^nd defendant;

(4)  The costs of and occasioned by this action, including the costs of this application be summarily assessed at HK$80,000 to be paid forthwith by the defendant to the plaintiffs.

14.  Lastly, I thank Mr Leung for his assistance.