PRIMEWAY INTERNATIONAL LTD AND ANOTHER v. YI HE (HK) TRADING CO., LTD

DCMP 730/2018

[2018] HKDC 575

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 730 OF 2018

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REASONS FOR DECISION

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Introduction

1.  By Originating Summons issued on 8 March 2018 (the “OS”), the plaintiffs sought:-

(1)  A declaration that the amount of US$51,652.44 (the “Funds”) held by the defendant in its account no. 369-278262-883 (“D’s Account”) maintained with Hang Seng Bank Limited (the “Bank”) are funds held on a constructive trust in favour of the 1^st plaintiff or alternatively the 2^nd plaintiff; and

(2)  An order that the Bank shall forthwith release and return the Funds to the 1^st plaintiff or alternatively the 2^nd plaintiff.

2.  The defendant did not appear at the hearing on 10 May 2018.  Upon hearing Mr Patrick Chiu, counsel for the plaintiffs, I gave judgment for the 1^st plaintiff in relation to the declaratory relief with costs, but I declined to make an order for the release of the Funds by the Bank.  These are the reasons for my decision.

The background facts

3.  This is yet another “email fraud” case.  The plaintiffs’ case is set out in the 2 affirmations by Mr Menghour Abderezak (“Menghour”), who is a director of both plaintiffs.

4.  In short, the plaintiffs were incorporated in Hong Kong and have been carrying on trading and shipping businesses, primarily from Mainland China to Algeria.  Since January 2017, the plaintiffs have been trading with an entity known as Intersport International Hong Kong (“Intersport”). Normally, the plaintiffs would place orders for goods with Intersport; Intersport would inform the plaintiffs of the identity of the supplier in question together with the payment details, and the plaintiffs would then make payment for their orders directly to the ultimate supplier in accordance with such information.

5.  The plaintiffs’ contact point with Intersport is one Ms Erica Gao (“Gao”).  The parties communicate mainly through email and Wechat.  Gao’s (proper) email address is erica.gao@intersport.com.hk.  On the other hand, Menghour uses his personal email raz25206162@yahoo.co.uk to communicate with Gao.

6.  In early July 2017, the 2^nd plaintiff placed several orders with Intersport.  Gao provided the 2^nd plaintiff with the names of the suppliers, one of which was Xiamen C&D Enterprise Co Ltd (“Xiamen C&D”). 

7.  On 5 July 2017, Gao requested the 2^nd plaintiff to make payment into the respective bank accounts of the suppliers.  The amount due from the 2^nd plaintiff to Xiamen C&D was US$51,652.44.

8.  Soon thereafter but still on 5 July 2017, Menghour received an email purporting to be sent by Gao but from email address erica.gao.intersport@rcom.ltd, as follows:-

“Re: URGENT REPLY NEEDED – 2^nd shipment from China to Algeria

Dear Rezak,

Please confirm by reply mail asap over my previous email so I send you the other branch bank account to make the payment

waiting for your reply.

Best regards,

Erica Gao”

9.  This email was sent as a reply to the earlier chain of emails between Menghour and Gao.  Menghour did not notice that it was in fact sent from an address other than Gao’s usual email address and thought he was still corresponding with Gao.  Upon a reply from Menghour, he received another email, purportedly from Gao through erica.gao.intersport@rcom.ltd, as follows:-

“Dear Rezak,

Find the attached right banking information for the payment of the 2^nd china shipment due to the problem we are having on the other bank. Please once done payment send me the T/T copy so we can proceed without further delays.

Thanks

Erica Gao”

10.  The attachment to this email directed payment of the Funds into D’s Account.

11.  Menghour further enquired for whom (ie which supplier) the payment was intended, and the response, again purportedly from Gao through erica.gao.intersport@rcom.ltd, was that it was a payment for Xiamen C&D.

12.  The Funds were accordingly transferred into D’s Account on 6 July 2017 intending to be a payment for Xiamen C&D. 

13.  It is convenient to add at this stage that while the order in question was placed by the 2^nd plaintiff (and Xiamen C&D accordingly issued an invoice to the 2^nd plaintiff), the Funds were in fact provided by the 1^st plaintiff.  In Menghour’s 1^st affirmation he said that this arrangement was “authorised” by the 2^nd plaintiff.  This is a point that affects entitlement as between the plaintiffs to which I will have to return.  This also explains why the reliefs sought in the OS have been framed in the alternative as between the 1^st and 2^nd plaintiffs.

14.  The plaintiffs subsequently discovered the fraud when Gao chased up on the payment for Xiamen C&D.  Gao in fact did not send the emails that originated from erica.gao.intersport@rcom.ltd.  Steps were taken, including by the paying bank, to claw back the Funds but they were unfruitful.  Menghour then made a report to the police.  Upon oral enquiries made on or around 8 January 2018, the police confirmed that D’s Account had been frozen and the Funds remained therein[1].

Service of the OS on the defendant

15.  According to the affirmations of service, the OS and the related documents were served on the defendant by leaving at its registered address as reported in its latest annual return.  I am satisfied that the plaintiffs’ efforts to effect service on the defendant complied with s 827 Companies Ordinance (Cap 622).

The relevant legal principles

16.  It is now well established that when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient so that the property is recoverable and traceable in equity: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 716C-D; Mesirow Financial Administrative Corporation v Best Link Industrial Co Ltd (unreported, HCMP 1846/2015, 25 January 2016); Michael Chen Kang Huang v Peter Lit Ma [2009] 6 HKC 191.

17.  The rule that the court will not make a declaration in default without a trial is a rule of practice and not of law.  The paramount duty of the court is to do justice depending on the circumstances of the case.  The practice will thus give way where there is a genuine need for declaratory relief: Mesirow at §35. 

18.  There are numerous instances when the Court of First Instance and the District Court have declared, in the absence of the defendant, the existence of a constructive trust over funds procured or obtained by deceptive emails: see for example Mesirow at §36 and the cases cited therein.

19.  It is clear that the court has power at the first hearing of an originating summons to dispose of the action summarily and in chambers where there are no triable issues.  The burden under this procedure is on the plaintiff to justify its entitlement to summary judgment: International Automotive Components Group s.r.o. v Xuke Trading Limited (unreported, HCMP 546/2017, 19 April 2017) at §3; Order 28 rule 4(1) Rules of the District Court (“RDC”, Cap 336H).

Analysis

20.  The burden is therefore on the plaintiffs to show that they are (or to be exact, either one of them is) entitled to summary judgment on the reliefs sought in the OS.

21.  The plaintiffs’ account of events leading to the remittance of the Funds to D’s Account was uncontested due to the non-appearance of the defendant, and I have already held that the defendant was properly served with the OS and notified of the hearing. 

22.  In any event, the contemporaneous documents all support the plaintiffs’ case.  There is no suggestion, let alone evidence, that the defendant was entitled to receive the Funds or any part thereof.

23.  Accordingly, I see no reason not to accept the plaintiffs’ case on the evidence.

24.  I am also satisfied that the plaintiffs have shown a genuine need for declaratory relief.  Such declaration of constructive trust is necessary to affirm the plaintiffs’ (or one of their) proprietary interest in the Funds: Mesirow at §38.

Who is the proper beneficiary?

25.  As aforesaid, this issue arises because the relevant order was placed by the 2^nd plaintiff but the Funds came from the 1^st plaintiff.  There is a need to resolve who, as between the 1^st and 2^nd plaintiffs, is the proper beneficiary under the constructive trust.

26.  It is plain that at the time when the 1^st plaintiff transferred the Funds to D’s Account, it did so as the 2^nd plaintiff’s agent; that explains why Menghour confirmed that the 1^st plaintiff’s payment of the Funds was “authorised” by the 2^nd plaintiff.

27.  In my judgment, the proper beneficiary under the constructive trust ought to be the 1^st plaintiff being the entity from which the Funds originated.

28.  First, insofar as locus is concerned, Mr Chiu submitted, and I accept, that both the agent and the principal may sue: Bowstead and Reynolds on Agency (21^st edition) §§9-099 to 9-100.

29.  Second, as a matter of commercial reality, since the 1^st plaintiff was the entity against which the Funds were debited, it should also be the entity that would ultimately be “reimbursed”.  To this extent, even if I should declare the 2^nd plaintiff (as principal) to be the beneficiary under the constructive trust, in all likelihood the 2^nd plaintiff would, and in fact it should as a matter of agency law, “forward” the Funds to the 1^st plaintiff upon recovery of the same.

Payment out by the Bank

30.  The next question is how, in law, the Bank may be procured to release the Funds to the 1^st plaintiff. I am not persuaded that I should make an order requiring the Bank to release the Funds as sought.

31.  As explained in International Automotive, there are basically 3 ways to require the Bank to transfer the Funds to the 1^st plaintiff, namely (i) a vesting order; (ii) notice to non-parties; and (iii) a garnishee order.

32.  The first 2 ways are irrelevant, because the Bank was not joined as a party to this action, and there is no evidence that the Bank was previously notified of these proceedings or the hearing.  There is also no indication from the Bank that it would adopt a neutral position and/or that it would abide by the order of this court.

33.  As to third way, it is sufficient to point out that there is no live application for a garnishee order before me and there are designated procedures for such an application under Order 49 RDC.

34.  Procedural difficulties aside, there is a more fundamental objection.  There is no evidence before me as to what transactions had taken place within D’s Account.  There might be deposits and withdrawals both before and after the Funds were deposited by the 1^st plaintiff; and it is plausible that those funds were subject to other trusts or rights of third parties (eg they represented monies obtained by similar frauds).  If it should happen that part of the “mixed” funds were then withdrawn or dissipated, the usual tracing rules would dictate the beneficial title to the remaining monies.  The Bank itself may also be entitled to a set-off against the Funds (eg the defendant maintains a separate account with the Bank that is in overdraft). 

35.  If I were to make an order as sought by the plaintiffs to compel the Bank to transfer the Funds back to the 1^st plaintiff, it would in effect give priority to the 1^st plaintiff over the credit balance within D’s Account (or part thereof up to an amount equivalent to the Funds), possibly to the detriment of third parties who might have an equal or even better title to the same.  It would in my judgment be wrong in principle to do so without giving them an opportunity to be heard; at the very least the Bank ought to be heard because it will have knowledge as to transactions that had taken place within D’s Account (if any).

36.  Mr Chiu referred me to Mesirow at §§1-2, Northeast Metal Traders, Inc v Huiguan Electronic Industry Co Limited (unreported, DCMP 1837/2017, 19 September 2017) at §2 and Dialog Services Saudi Arabia Company Limited v Youtai International Trading Co Limited (unreported, DCMP 1215/2017, 14 July 2017) at §§1-2.  In these cases, in addition to declarations of constructive trusts, the court seemed to have made orders directing the recipient bank to repay the victim.  Nevertheless, it would appear that the propriety of such an order was not raised as a live issue in any of those cases.  On the other hand, International Automotive is a decision directly relevant to the point.  Furthermore, Mesirow was decided before International Automotive, and although the other 2 cases came after International Automotive, it was not cited in the decisions.  I would therefore prefer to follow International Automotive on this point.

Conclusion

37.  For these reasons, I granted the declaratory relief in favour of the 1^st plaintiff with costs (which I summarily assessed with certificate for counsel), but declined to make an order requiring the Bank to release and return the Funds to the 1^st plaintiff.