WONG CHI LEUNG v. XHAO TRADING CO., LTD

DCCJ 5219/2023

[2024] HKDC 537

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5219 OF 2023

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DECISION

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A.   INTRODUCTION

1.  This is the Plaintiff’s application by summons dated 12 January 2024 (“the Plaintiff’s Summons”) for default judgment against the Defendant in default of filing a defence pursuant to Order 19 rule 7 of the Rules of the District Court (“RDC”), seeking, among others, declaratory relief.  The Plaintiff’s claim was commenced on 24 November 2023 and the Defendant has not up to the date hereof responded to these proceedings.

2.  The Plaintiff’s case is that he was a victim of an investment scam, which, regrettably, is not too uncommon these days.  On the instructions of the fraudsters, the Plaintiff was instructed to download an investment platform application and set up an investment account where he would receive stock tips for investment purposes.  The Plaintiff eventually transferred a total of HK$896,000 to various designated bank accounts as instructed by the fraudsters for the purpose of stock investment through the investment platform.  Of the HK$896,000 that was transferred, a sum of HK$234,000 (“the Sum”) was transferred to the bank account of the Defendant with the Hongkong Shanghai Banking Corporation (“the Defendant’s Account”) on 19 and 20 July 2023. In around August 2023, the investment platform showed substantial profits from his investment with a balance of HK$15,560,588.79.  The Plaintiff decided to withdraw his investment proceeds but was requested to transfer a further handling fee of HK$536,000 in order to effect the withdrawal, at which time the Plaintiff discovered that he was a victim of an investment scam.  The matter was reported to the Hong Kong police and the Plaintiff did not recover any of the sums transferred under the investment scam.

3.  The Plaintiff now claim against the Defendant for (1) monetary relief on the basis of unjust enrichment and (2) proprietary relief in the form of a declaration in respect of the Sum or the traceable proceeds in the Defendant’s Account.  It is necessary to analyze the causes of action of the Plaintiff in more detail below.

B.    SERVICE OF PROCEEDINGS ON THE DEFENDANT

4.  The Plaintiff commenced the present action on 24 November 2023 by issuing a Writ (with a general indorsement of claim).  On the same day, the Plaintiff filed the Statement of Claim.  Both the Writ and the Statement of Claim were served on the Defendant by leaving the same at the registered office of the Defendant addressed to the Defendant.

5.  No acknowledgment of service was filed by the Defendant by 7 December 2023, and no defence was served by the Defendant by the deadline of 5 January 2024.

6.  On 12 January 2024, the Plaintiff took out the Plaintiff’s Summons.  The Plaintiff’s Summons was served on the Defendant by ordinary post at its registered office.  In the circumstances, I am satisfied that there has been proper service of these proceedings on the Defendant, namely the Writ has been served in accordance with section 827 of the Companies Ordinance and the Statement of Claim and the Plaintiff’s Summons have been served pursuant to Order 65 rule 5 of RDC.  I am satisfied that it is proper to deal with the Plaintiff’s Summons in the Defendant’s absence.

C.   LEGAL PRINCIPLES

7.  As a matter of principle, default judgment will only be granted on a plaintiff’s claim provided that the pleaded facts give rise to the relief sought.  This is because the basis for default judgments is that the facts as pleaded in the statement of claim were true and impliedly admitted by the defendant.  The court’s task is therefore to look to the pleaded facts alone and no other evidence will be admitted:  see Wu Ka v Wu Kuo Cheng[2003] 3 HKLRD 658, at §6; Zhan An Wei v SDKJ Limited [2023] HKCFI 965, at §19; Hong Kong Civil Procedure 2024, at §19/2/1 and §19/7/11.

8.  On the principles of granting declaratory relief in a default judgment application:

(1)  Whilst it is not the normal practice of the Court to make a declaration without a trial, this is only a rule of practice which should not be followed when the plaintiff had a genuine need for the declaratory relief and justice would not be done if such relief were denied: see Law Yuk Fong v Man Chung Wai (unrep., HCA 2195/2015, 16 January 2017), at §§13-21, Hong Kong Civil Procedure 2024, §19/7/20;

(2)  For cases concerning proprietary claims, the courts have granted declaratory relief on default judgment in order to secure the plaintiff’s proprietary (as opposed to merely personal) claim, particularly given that the defendants may have other creditors: see, for example, 巨展皮具香港有限公司 v上海兄弟海運有限公司 [2018] HKCFI 53; IQ Solutions Inc v WKJ Limited[2024] HKCFI 559.

D.   THE PLAINTIFF’S PLEADED CASE

9.  The Plaintiff’s pleaded case may be summarized as follows:

(1)  On or about 27 April 2023, the Plaintiff came across a Facebook post claiming to have tips on stock investment with an invitation to join a WhatsApp chat group (“the Chat Group”).  The managing person of the Chat Group was known to the Plaintiff by the name of Jennifer Lee (“JL”).  Upon joining the Chat Group, JL further invited the Plaintiff to join an institution known as “英仕曼環球商學院 G69” and the Plaintiff attended several online seminars on stock investment given by an instructor known as Lo Yan Shui;

(2)  On or about 19 June 2023, JL indicated to the Plaintiff that she had tips about specific stocks and asked if the Plaintiff was interested in investing.  Upon the Plaintiff’s indicating his interest, he was referred to a Mr. Chow for further details.  Mr. Chow then informed the Plaintiff that he would be required to set up an account through an online application (“the Investment Platform”);

(3)  Upon registration of an account with the Investment Platform, the Plaintiff was instructed to deposit funds into various designated bank accounts for the purpose of investment in stocks through the Investment Platform.  Between 20 June and 11 August 2023, a total of 17 transfers were made totaling to a sum of HK$896,000.  The transfers on 19 and 20 July 2023 (i.e. the Sum) were transferred to the Defendant;

(4)  In around August 2023, the Investment Platform showed substantial investment profits with an account balance of HK$15,560,588.79.  When the Plaintiff requested to withdraw his investment proceeds, he was asked to pay a further sum of HK$536,000 as handling charges.  It was then that the Plaintiff discovered that he was a victim of an investment fraud.  The matter was duly reported to the Police on 17 August 2023 and the Defendant’s Account had subsequently been frozen by the Police.

10.  On the facts as pleaded above, the Plaintiff first pleaded that he has a proprietary interest in the Sum and/or its traceable proceeds.  He further pleaded restitution of the Sum for money had and received and/or unjust enrichment.

E.    MONETARY RELIEF FOR UNJUST ENRICHMENT

11.  The claim for money had and received should now be considered as a species of unjust enrichment: see Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Limited (2004) 7 HKCFAR 79, at §66.  On the facts as pleaded by the Plaintiff in the Statement of Claim, I am satisfied that they give rise to a valid personal monetary claim against the Defendant in unjust enrichment.

12.  I am satisfied that there had been an enrichment to the Defendant which came at the expense of the Plaintiff.  The pleaded facts also demonstrated that, by reason of the pleaded investment fraud, the Plaintiff was under a mistaken belief that the payment was made to his investment account in the Investment Platform to enable genuine investments to be made.  Equally, there must also be a total failure of consideration for the transfer of the Sum.

13.  The Defendant has not filed a defence and I am satisfied that at present no defence to the Plaintiff’s unjust enrichment claim has been demonstrated.

14.  Accordingly, the Plaintiff is entitled to monetary relief on the basis of unjust enrichment.

F.    PROPRIETARY RELIEF

15.  There is no doubt that the court may, where the facts are appropriate, grant proprietary relief to victims of fraud.  Depending on the circumstances of the receipt by the defendant, there are potentially various bases for the court to impose a constructive trust.  First, a constructive trust may be imposed where the recipient defendant is implicated as the fraudster such that the defendant can be described as a “fraudulent recipient”.  Such a proposition was considered in Zief Incorporated v Tekchandani Ajai Mohan [2021] HKCFI 38, where Recorder Eugene Fung SC said, at §45:

“45. In Westdeutsche Bank v Islington LBC [1996] AC 669, in the context of describing a thief stealing a bag of coins or money, Lord Browne-Wilkinson at 716C-D said obiter that stolen moneys are traceable in equity, and that equity imposes a constructive trust on the fraudulent recipient where property is obtained by fraud. It appears that his Lordship considered that the thief’s unconscionable conduct in committing theft and his retention of the stolen property would be sufficient to give rise to a constructive trust. In this case, P transferred HK$3,120,000 directly to D4 by reason of its mistake; the sum was not taken by a thief who then paid the same to D4. D4 cannot be described, in Lord Browne-Wilkinson’s words, as a ‘thief’ or ‘fraudulent recipient’, and has not been described by P as such. I do not believe Lord Browne-Wilkinson’s dictum is applicable in the present case.”

16.  In the present case, the Plaintiff pleaded the mere receipt by the Defendant.  The Plaintiff did not plead that the Defendant was part of the fraud or that its receipt of the Sum was fraudulent.  As such, I do not think the pleaded facts could give rise to the kind of constructive trust against fraudulent recipients as described by Lord Browne-Wilkinson in Westdeutsche Bank v Islington LBC (supra).  In Hu Yangzhao v Yang Jian [2023] HKDC 1477 at §22, the constructive trust of this kind failed for the same reason.

17.  The second potential way for the court to impose a constructive trust is where in a claim for unjust enrichment, the conscience of the recipient is affected, such as where the defendant knew about the mistaken payment at the material time. This approach was referred to in Zief Incorporated v Tekchandani Ajai Mohan [2021] HKCFI 38 as the “conscience approach”:

“50. Further, I do not think that P has sufficiently demonstrated that there is a proper basis for court to impose a constructive trust on the facts of the case.

(1) In Westdeutsche (above), Lord Browne-Wilkinson at pp 714C-715C discussed the case of Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105. In Chase Manhattan, Goulding J held that where money was paid under a mistake, the receipt of such money without more constituted the recipient of the trustee because the payer “retains an equitable property in it and the conscience of [the recipient] is subjected to a fiduciary duty to respect his proprietary right”. Lord Browne-Wilkinson disagreed with the Goulding J’s reasoning and relevantly said at p 714E-F:

‘It will be apparent from what I have already said that I cannot agree with [Goulding J’s] reasoning. First, it is based on a concept of retaining an equitable property in money where, prior to the payment to the recipient bank, there was no existing equitable interest. Further, I cannot understand how the recipient’s ‘conscience’ can be affected at a time when he is not aware of any mistake….’

(2) Nonetheless, Lord Browne-Wilkinson said that Chase Manhattan might well have been rightly decided on the following basis (at p715B-C):

‘The defendant bank knew of the mistake made by the paying bank within two days of the receipt of the moneys: see at p.115A. The judge treated this fact as irrelevant (p. l14F) but in my judgment it may well provide a proper foundation for the decision. Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust…’

(3) It appears that a defendant recipient’s conscience should only be considered to be affected when he was actually aware of the plaintiff’s mistake. In Westdeutsche, Lord Browne-Wilkinson at p 705D-E stated that ‘[since] the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience’ [emphasis added]. See also pp 709C-D and 714F where Lord Browne-Wilkinson used the word ‘aware’ to describe the level of knowledge sufficient to affect the conscience of the ‘trustee’ or the recipient.

18.  At the same time, the learned Recorder recognized that the “conscience approach” has been doubted.  The learned Recorder did not and was not required to decide whether the Hong Kong courts should follow the “conscience approach” to impose a constructive trust as the relevant knowledge of the defendant was not pleaded at all.

19.  In the present case, the basis of seeking a constructive trust in the Plaintiff’s Summons was stated to be based on unjust enrichment.  However, the Plaintiff likewise has not pleaded the material facts to enable this court to impose a constructive trust on the basis of the “conscience approach”.  Even assuming (without deciding) that the “conscience approach” should be followed, the pleaded facts simply do not begin to show that a constructive trust could be imposed on this basis.

20.  The third way in which a constructive trust may arise is more uncontroversial and is based on the beneficial interest of property that could be traced into assets in the hands of a defendant.  In this context, the claim is not based on unjust enrichment, but is instead based on the equitable proprietary interest retained by a plaintiff in the defrauded assets.  In essence, a plaintiff is asserting that assets transferred to a defendant belong beneficially to him. In Foskett v McKeown [2001] 1 AC 102, Lord Browne-Wilkinson described it as “hard-nosed property rights”.  See Foskett v McKeown [2001] 1 AC 102, at 108F-109D per Lord Browne-Wilkinson, 129E-G per Lord Millett.

21.  This is the way in which the Plaintiff in this case has pleaded his case in the Statement of Claim, where he asserted that by reason of the fraud he has a proprietary interest in the money held by the Defendant.  In order for such a constructive trust to be imposed by the court, it is necessary for the Plaintiff to identify the assets held by the Defendant and identify by the tracing process that those assets represent the original trust property.  In Milestone Electric, Inc v Meihoukang Trading Co Limited [2020] HKCFI 2542, the court clearly explained that:

“14. Constructive trusts provide proprietary relief. To obtain proprietary relief in relation to the US$850,000 transferred to the defendant or assets derived from it, the plaintiff must establish that the assets claimed can be identified by the tracing process as representing the original trust property. In Federal Republic of Brazil v Durant International Corpn [2016] AC 297, Lord Toulson at §17 said:

‘The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. If it has ceased to exist, it cannot metamorphose into a later property interest. Ex nihilo nihil fit: nothing comes from nothing.’

15. For reasons given below, I am not satisfied that the plaintiff can now seek proprietary relief in relation to the US$850,000:

(1) It is well-established that a plaintiff who seeks a proprietary remedy must usually prove that the property to which he lays claim is still in the ownership of the defendant (Boscawen v Bajwa [1996] 1 WLR 328 at 334H (Millett LJ);

(2) Given that over US$600,000 of the US$850,000 had already been withdrawn from D’s Account as at July 2020, it is no longer possible for the plaintiff to assert its rights in the US$850,000. The statement in P’s Statement of Claim that D retains the benefit of the US$850,000 therefore appears to be incorrect;

(3) Whether or not the plaintiff can assert its rights in the remaining credit balance in D’s Account is not something that the Court is currently in a position to determine.  The question depends on a number of considerations including (but not limited to) whether or not there has been any mixing of money in D’s Account, and whether the intermediate balance has fallen to or below zero, since the deposits of the three sums of money transferred form the plaintiff in May 2020, none of which has been pleaded by P in its Statement of Claim.”

22.  The learned judge in Milestone Electric, Inc v Meihoukang Trading Co Limited (supra) was clearly not satisfied that the pleadings contained sufficient facts to enable a constructive trust to arise.  That is not to say that the court would not impose such a trust where the pleaded – and thus impliedly admitted – facts are appropriate to do so.  See, for example, Zhan An Wei v SDKJ Limited [2023] HKCFI 965, at §§20-21.

23.  In the present case, I am not satisfied that the facts as pleaded in the Statement of Claim give rise to a constructive trust of the assets currently held by the Defendant:

(1)  The Statement of Claim did not identify any outstanding balance in the Defendant’s Account.  On the pleaded facts, it is uncertain whether any assets are still in the hands of the Defendant; and

(2)  The Statement of Claim also failed to plead facts and matters to allege that any retained assets represents and/or are traceable to the Sum.

24.  In accordance with the principle as stated in Milestone Electric, Inc v Meihoukang Trading Co Limited (supra), I am not satisfied that the pleaded facts are sufficient to give rise to a constructive trust over the unidentified balance in the Defendant’s Account.

25.  For these reasons, I decline to grant a declaration that money held in the Defendant’s Account is subject to a constructive trust in favor of the Plaintiff.

G.   DISPOSITION

26.  At the conclusion of the Plaintiff’s submissions, Ms. Chan for the Plaintiff indicated that, if the court refuses to grant a proprietary remedy, the Plaintiff would not insist on proving their entitlement for a proprietary remedy at trial.

27.  For the above reasons, I make the following order:

(1)  Judgment be entered against the Defendant for the sum of HK$234,000, together with interest at 1% above HSBC best lending rate from the date of the Writ to the date of judgment and thereafter at judgment rate until full payment;

(2)  Costs of this action (including this application with certificate for counsel) be paid by the Defendant to the Plaintiff to be taxed if not agreed.