SCANDINAVIAN MEDICAL SOLUTIONS A/S v. RUNZHI TRADING CO LTD

DCCJ 3602/2023

[2024] HKDC 21

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3602 OF 2023

________________________

________________________

_________________

J U D G M E N T

_________________

A.  Introduction

1.  This is the Plaintiff’s application by summons dated 8 November 2023 (“Summons”) for judgment in default of defence against the Defendant.

2.  The Plaintiff is a company incorporated in Denmark carrying on the business of trading pre-owned healthcare and medical imaging equipment.  It commenced this action by a writ issued on 22 August 2023 (“Writ”) to recover a sum of €166,000 (“Sum”) transferred to the Defendant’s bank account with China Construction Bank with account number 000402277055 (“CCB Account”) on 30 May 2023.  The Plaintiff claimed that it was deceived into making the transfer by emails sent from a fraudster impersonating its goods and service supplier.  The Plaintiff sought both personal and proprietary remedies against the Defendant.

3.  The Plaintiff’s case is that:

(1)  The Sum was transferred to the CCB Account as a result of mistake and fraud.

(2)  There were no prior dealings between the Plaintiff and the Defendant and there was no commercial reason for the Defendant to receive the funds.

(3)  The Defendant had actual knowledge of the fraud at the time of receipt.

(4)  Further or alternatively, the Defendant acquired the knowledge of the fraud when it was served with the Writ on 22 August 2023.

4.  At the hearing, Mr. Tom Ng appeared on behalf of the Plaintiff and the Defendant did not appear.

B.  Service

5.  I am satisfied that the Plaintiff has duly served the Writ, the Statement of Claim, the Summons and the Notice of Intention to Enter Judgement on the Defendant by leaving them at the Defendant’s registered office.  The Defendant has not acknowledged service of the Writ.  Nor has it filed any Defence.

C.  Legal analysis

6.  The legal principles regarding an application for default judgment are trite:

(1)  On an application for default judgment under Order 19 rule 7, the court gives such judgment as the plaintiff appears entitled on the statement of claim.

(2)  It is not the normal practice of the court to make a declaration without a trial.  However, this is only a rule of practice which should not be followed when the plaintiff has a genuine need for the declaratory relief and justice would not be done if such relief were denied.

(3)  The court will scrutinise the application carefully and will not hastily grant the relief sought.  The court expects that maximum assistance will be provided.  The court should not be expected to deal with the matter on a “do-it-yourself basis” and rubber-stamp the uncontested application.

(4)  In cases which concerned alleged email frauds where a proprietary claim was asserted, the courts have granted declaratory relief in the default judgment context in order to secure the plaintiff’s proprietary as opposed to merely personal claim, particularly given that the defendant may have other creditors.

    See Hong Kong Civil Procedure 2023, at [19/7/11], [19/7/20].

7.  So far as the personal remedies sought by the Plaintiff are concerned, I am satisfied that its personal claims based on unjust enrichment and mistake being the unjust factor are established.  See: Goff and Jones: The Law of Unjust Enrichment, at §9-104; Guaranty Bank And Trust Co v Zzzik Inc Ltd [2016] HKCFI 1161, at §27; JG8 v Quwu Trading Ltd [2023] HKCFI 645, at §5.

8.  The proprietary remedies sought by the Plaintiff are less straightforward.  The Plaintiff sought (as set out in the draft order provided to this court by Mr. Ng):

(1)  A declaration that the Sum (transferred by the Plaintiff to the Defendant’s CCB Account on 30 May 2023) and its traceable proceeds were at all times and remain the property of the Plaintiff and are held by the Defendant on a constructive trust for the Plaintiff;

(2)  An order that the Defendant do deliver up or transfer the Sum and its traceable proceeds to the Plaintiff; and

(3)  All necessary accounts and inquiries against the Defendant for the purpose of tracing or following the Sum.

9.  I am satisfied that the Plaintiff has a genuine need for the declaratory relief and justice would not be done if such relief were denied.  However, as accepted by Mr. Ng, the Plaintiff only pleaded in the Statement of Claim that “By a letter from Deacons dated 29 June 2023, the Plaintiff informed CCB of the Fraud and requested CCB to freeze the CCB Account”.  There was no plea that the Defendant retained any sum in the CCB Account or if so, whether it was mixed with any other sums.

10.  Mr. Ng relied upon Kuo Benjamin Yung Hsiang v Xu Meiyi [2022] 5 HKLRD 111, [2022] HKCFI 2007.  In that case, the plaintiff claimed that he was deceived into transferring two sums of money to the defendant’s bank account.  The plaintiff applied for judgment in default of defence against the defendant under Order 19 rule 7 seeking a declaration that the defendant held the sums or their traceable proceeds on constructive trust for the plaintiff.  Deputy High Court Judge Jonathan Chang SC granted the declaration relief:

“6. The plaintiff seeks a declaration that the defendant held the Sums or their traceable proceeds on trust for the plaintiff. Whilst it is not the normal practice of the Court to make a declaration without a trial, I am satisfied that the present case is one where justice requires the Court to grant the declaration sought by the plaintiff to enable him to pursue proprietary in addition to personal remedies against the defendant: see Hong Kong Civil Procedure 2022, Vol.1, para 19/7/20 at p.565; Wismettac Asian Foods Inc v United Top Properties Ltd [2020] 3 HKLRD 732 at [15]. There will also be the usual consequential orders for payment of the Sums to the plaintiff, and for an account to be taken and an inquiry to be made on the whereabouts of the Sums and their traceable proceeds.”

11.  Mr. Ng stressed that the court granted the declaration relief even though it was not clear in that case whether the subject sums were still retained in the defendant’s bank account or whether it was mixed with other sums:

“15. … The Sums may be mixed with pre-existing monies in the Account or may have already been transferred out of the Account. The funds sitting in the Accounts may also be subject to proprietary claims of other victims defrauded in a similar manner.

16.  In a default judgment application (where only the pleadings will be considered), the Court is unable to decide whether any part of the monies remaining in the Account represent the Sums or their traceable proceeds.”

12.  Mr. Ng further relied upon JG8 v Quwu Trading Ltd [2023] HKCFI 645 where Deputy High Court Judge Jonathan Chang SC again granted proprietary remedies against the 1^st defendant even though the relevant sum was almost completely dissipated out of its bank account within 2 business days from receipt:

“5. The plaintiff seeks both personal and proprietary remedies against the 1^st defendant. I am satisfied that the personal claims based on unjust enrichment (the unjust factor being mistake) and unlawful means conspiracy are sound in law and established on the pleaded facts against the 1^st defendant. The proprietary claim based on constructive trust over the Sum is also established on the pleaded facts. In circumstances where the 1^st defendant (1) received the Sum pursuant to a fraud, (2) had no business with the plaintiff justifying its receipt of the Sum, and (3) almost completely dissipated the Sum out of the Account within 2 business days from receipt, the compelling inference is that the 1^st defendant is part of the fraud committed on the plaintiff and hence a fraudulent recipient, and for such reason holds the Sum (and any of its traceable proceeds) on constructive trust for the plaintiff. Justice requires the Court to grant a declaration to such effect even without a trial to enable the plaintiff to pursue proprietary remedy against the 1^st defendant and other recipients of any part of the traceable proceeds of the Sum.”

13.  Very fairly, Mr. Ng referred me to JSP International SRO v Alacrity Ltd [2022 HKCFI 977 where the plaintiff sought, inter alia, “a declaration that the Summonsed Defendant holds each of the sums transferred to its bank account by the Plaintiff (in the case of the First Tier Defendants) … “together with the traceable proceeds and/or fruits thereof (including interest accrued thereon, if any) on trust for the Plaintiff””.

14.  In the case, Cheng J refused to grant proprietary remedies against the First Tier Defendants on the following two grounds:

(1)  There was no sufficient plea that they were fraudulent recipients (see §§27-30 of the judgment).

(2)  There was no sufficiently pleaded case that the First Tier Defendant had retained p roperty in which the plaintiff could identify its proprietary interest, such as to justify the grant of a declaration of constructive trust over such property in the hands of the First Tier Defendants (see §§31-33 of the judgment).

15.  These apparently conflicting authorities raise the issue of whether the court should grant proprietary remedies in an application for default judgment and, if so, under what circumstances.  From my reading of the cases, these authorities may be reconciled as follows:

(1)  In JSP, as noted by her Ladyship, the declaration sought by the plaintiff was not limited to the remaining balances in the First Tier Defendants’ accounts, but went further in seeking a declaration of constructive trust over the sums originally paid into those accounts, even though most of those amounts had since left the accounts (see footnote 3 of the judgment).  That was why her Ladyship in refusing the declaration said, at §41, that:

“It is necessary for the defendants to have retained identifiable property over which a declaration of constructive trust can take effect.”

(2)  In contrast, the plaintiff in Kuo Benjamin Yung Hsiang sought a declaration that the defendant held the sums “or their traceable proceeds” on constructive trust for the plaintiff.  The declaration sought, therefore, was not meant to cover any non-identified sum.  As indicated in the case, whether the plaintiff could eventually obtain any proprietary remedy over any specific asset of the defendant would depend on the result of the tracing exercise.  

(3)  Similarly, in JG8, the court held that “Justice requires the Court to grant a declaration to such effect even without a trial to enable the plaintiff to pursue proprietary remedy against the 1^st defendant and other recipients of any part of the traceable proceeds of the Sum.”  Again, it appears from the case that whether the plaintiff could eventually obtain any proprietary remedy over any specific asset of the defendant would depend on the tracing exercise.  The declaration of trust granted was not meant to cover any non-identified sum.

16.  In these circumstances, Mr. Ng suggested that the declaration sought by the Plaintiff be changed by adding the italic part as follows:

“A declaration that the Sum (transferred by the Plaintiff to the Defendant’s CCB Account on 30 May 2023) and its traceable proceeds (if any, and if they are held by the Defendant) were at all times and remain the property of the Plaintiff and are held by the Defendant on a constructive trust for the Plaintiff.”

17.  Mr. Ng submitted that by adding the italic part, the present case can be distinguished from JSP’s second ground and the declaration sought by the Plaintiff will have a similar effect as that ordered in Kuo Benjamin Yung Hsiang and JG8, namely the Plaintiff does not seek a declaration of constructive trust over any non-identified property and whether the Plaintiff could eventually obtain any proprietary remedy over any specific asset of the Defendant would depend on the result of the Plaintiff’s tracing exercise. I accept Mr. Ng’s submission.

18.  Further, assuming that the Defendant has retained any of the Sum or its traceable proceeds, it must have obtained the knowledge of the fraud by reason of the receipt of the Writ at the latest.  As held in Minebea Cambodia Co., Ltd v Zhao Jin Fang [2022] HKCFI 3325, where the court granted proprietary default judgment on an email fraud claim, holding that (at §33):

“(a) Even if the recipient was not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the money, the defrauded claimant has a tracing remedy: Guaranty Bank at §32.

(b)  Knowledge does not have to be acquired at the time of receipt, it can be acquired subsequently while the money is in the recipient's hands: Guaranty Bank at §33.”

19.  Deputy High Court Judge Cooney SC also held in Guarantee Bank And Trust Co v Zzzik Inc Ltd [2016] HKCFI 1161, at §§33-36, that:

“33. Knowledge does not have to be acquired at the time of receipt, it can be acquired subsequently while the money is in the recipient’s hands: Lewin on Trusts 19^th ed, para 42-083.

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.”

20.  Therefore, so far as JSP’s first ground is concerned, it is also distinguishable as the plaintiff’s argument in that case was that the “Claim in constructive trust and unjust enrichment are predicated upon the fact of receipt”, which argument was rejected by the court (at §§39-41).  Unlike the present case, it did not rely on the knowledge of the fraud based on the service of the writ.

D.  Conclusion

21.  For the reasons above, I order that judgment be entered for the Plaintiff against the Defendant for the following relief[1]:

(1)  The sum of €166,000.00 (or its Hong Kong Dollar equivalent at the time of payment) (“Sum”);

(2)  A declaration that the Sum (transferred by the Plaintiff to the Defendant’s bank account with China Construction Bank with account number 000402277055 on 30 May 2023) and its traceable proceeds (if any, and if they are held by the Defendant) were at all times and remain the property of the Plaintiff and are held by the Defendant on a constructive trust for the Plaintiff;

(3)  An order that the Defendant do deliver up or transfer the Sum and its traceable proceeds (if any, and if they are held by the Defendant) to the Plaintiff;

(4)  All necessary accounts and inquiries against the Defendant for the purpose of tracing or following the Sum;

(5)  Interest on the Sum from 30 May 2023 to the date of judgment at 1% above prime rate and thereafter pursuant to section 50 of the District Court Ordinance (Cap. 336) at judgment rate until payment in full; and

(6)  Costs of this Action be to the Plaintiff, summarily assessed at HK$68,000.

22.  Lastly, it remains for me to thank Mr. Ng for his helpful submissions.