REINHOLD THURNER v. EXCELLENT CENTURY HOLDINGS LTD

HCA 1422/2019

[2020] HKCFI 2550

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

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1.  There are 2 matters before this court:

(1) the defendant (“D”)’s appeal against the decision handed down by Master Dick Ho on 6 May 2020 (“D’s appeal”), by which the master dismissed D’s application for setting aside a final judgment obtained by the plaintiff (“P”) on 25 September 2019 in default of notice of intention to defend (“the Default Judgment”) and the Garnishee Order to Show Cause made on 18 October 2019;

(2) P’s application for an order making the Garnishee Order absolute (“P’s application”).

2.  I have directed that these 2 matters be determined by the court on the papers without an oral hearing.  Both P and D have provided me written submissions pursuant to the directions given.

SETTING ASIDE THE DEFAULT JUDGMENT

3.  It is trite that an appeal hearing under Order 58 is a de novo hearing.  The hearing before me is an actual rehearing as if the application came before me for the first time^[1]. Accordingly, I would approach D’s application for setting aside the Default Judgment afresh.

4.  P is a Swiss national.  P’s case is that he has been defrauded by a fraudulent scheme.  As a result of the fraud, on 24 November 2015, P was induced to transfer €1.05 million into an HSBC account (“Smart Jobs Account”) held by Smart Jobs Limited (“Smart Jobs”).  P claims that he is entitled to trace a sum of US$298,913.63 (“Sum A”) paid directly from the Smart Jobs Account to an account in HSBC held by D (“D’s Account”). P also claims that he is entitled to trace a sum of US$260,000 (“Sum B”) paid from the Smart Jobs Account to D’s Account via a bank account (“Wealth Mark Account”) held by Wealth Mark International Investment Limited (“Wealth Mark”).

5.  D contends that the Default Judgment ought to be set aside for the following reasons:

(1) the Default Judgment is an irregular judgment and D is entitled to have an order to set aside that judgment as of right;

(2) alternatively, if the Default Judgment is a regular judgment, the judgment should be set aside for D has a meritorious defence to P’s claim or due to some unique circumstances. 

Regular or irregular judgment?

6.  D is a company incorporated in the British Virgin Islands (“BVI”).  The registered address of D is in the BVI (“the BVI Address”).

7.  On 6 August 2019, P commenced these proceedings by issuing a writ of summons.  On the same date, P obtained a proprietary injunction (“the Injunction Order”), which restrained D from dealing with the sum of US$558,913.63 (ie the total of Sum A and Sum B) held in D’s Account.  P also obtained leave to issue a concurrent writ of summons and to serve it together with the Injunction Order and the inter partes summons for the continuation of the Injunction Order on D out of the jurisdiction at the BVI Address.

8.  On 6 August 2019, P’s solicitors sent the concurrent writ of summons and other court documents to the email account of Mr Zheng Zhi Long (“Zheng”), who was a director of D.

9.  On 9 August 2019, the concurrent writ of summons and other court documents were served at the BVI Address.  The concurrent writ of summons was personally served at the BVI Address, by being hand-delivered to a clerk employed by D’s registered agent, SBC Registration Limited (“D’s Registered Agent”).  P has produced evidence from BVI lawyers showing that under BVI law, foreign legal proceedings can be served on a BVI company by, inter alia, addressing the documents to the company and leaving the documents at the company’s registered office or the office of the company’s registered agent.

10.  Counsel for D contends that notwithstanding all the above, there has not been any valid service of the writ of summons. Counsel for D submits that:

(1) Zheng was and is the sole shareholder, the sole director and the contact person of D.  P should be aware of this by reason of the bank documents disclosed by HSBC as a result of the Injunction Order.

(2) On 29 May 2018, Zheng was convicted in the District Court for an offence related to €1.05 million and was imprisoned since then.  On 4 June 2018, Zheng was sentenced to serve an imprisonment term of 5 years and 3 months.  In other words, at the time of the service of the concurrent writ of summons, ie 9 August 2019, Zheng was serving his sentence in the prison.

(3) The fact that D was convicted and imprisoned is public information, given that the Reasons for Verdict and Reasons for Sentence of the District Court are available in the judiciary’s website and accessible to the public.  P was aware of the conviction and the imprisonment term, for P has referred to these in its skeleton argument dated 20 November 2019 filed for a hearing on 21 November 2019.

(4) After being detained, Zheng has never received any document or heard anything from D’s Registered Agent.  Further, Zheng also did not have access to his email account.

(5) D did not have any knowledge of these proceedings until he received a letter from HSBC (“the HSBC Letter”) through his cousin on or about 1 November 2019.  The HSBC Letter was sent to an address in Kwai Chung (“the Kwai Chung Address”), which was D’s correspondence address in Hong Kong.  That address was the office of Zheng’s cousin, who was running a trading business there.

(6) The Kwai Chung Address is clearly stated on the documents disclosed by HSBC, and P should be aware of the Kwai Chung Address.

(7) The Default Judgment is irregular since Zheng would not have any way to know these proceedings before the date of the Default Judgment.  By reason of this, D is entitled to have an order to set aside the Default Judgment as of right.  

(8) Further, P was aware of the Kwai Chung Address but deliberately not to serve the writ of summons at the Kwai Chung Address nor deliver any notice of these proceedings to the Kwai Chung Address.  P was also aware that Zheng was imprisoned, but P did not make any attempt to inform Zheng of these proceedings.  P deliberately served the concurrent writ of summons and other court documents whilst knowing full well that such documents would not reach Zheng’s attention given the fact that he was incarcerated and incommunicado.  In these circumstances, the Default Judgment must be set aside.

11.  With respect, I am unable to accept these submissions.

(1) Zheng is the director of D.  He himself is not D.  Zheng and D are two separate and distinct legal entities.  As a matter of law, valid service of court documents in these proceedings means valid service on D and not on anyone else.

(2) D is a BVI company.  Its registered address is the BVI Address.  It has a registered agent in BVI.  The concurrent writ of summons was served at the BVI Address by passing the same to D’s Registered Agent present in that place.  P has produced evidence on BVI law showing that this is a valid service under BVI law.  D has not produced any evidence showing the otherwise.  That being the case, there is no basis for D to contend that the concurrent writ of summons has not been validly served on D.

(3) P denied that it had any knowledge of the imprisonment of Zheng when the writ was served.  I am of the view that there is no sufficient evidence contradicting P’s assertion.  The fact that P referred to the conviction and the sentence of Zheng in P’s skeleton argument dated 20 November 2019 does not necessarily mean that P had already known the conviction and the sentence in August 2019.  Further, there is no or no sufficient reason to suggest that P must have discovered or should have discovered the conviction and the sentence in the judiciary’s website in August 2019.

(4) Further, whether P has any knowledge as to Zheng’s imprisonment in August 2019 is neither here nor there.  What P has to do is to serve the concurrent writ of summons on D in accordance with the law, not to serve the writ of summons on Zheng.

(5) Regarding the complaint that P has not sent the writ of summons to the Kwai Chung Address, D has not produced any evidence nor has advanced any argument to show that in order to constitute valid service on D, it would be necessary to serve the writ of summons on any address other than the BVI Address, which is D’s registered address.

(6) Zheng’s allegation that he is incommunicado while he is in the prison is contradicted by the fact that he did receive the HSBC Letter through his cousin on or about 1 November 2019.

(7) P says that the concurrent writ of summons was served on D by passing the same to D’s Registered Agent at the BVI Address on 9 August 2019.  This is not denied by Zheng.  D’s Registered Agent’s receipt of the concurrent writ of summons must be treated as D’s receipt of the writ.  I do not see any room for arguing otherwise.

(8) If D’s Registered Agent has not reported the matter to Zheng as alleged by Zheng, it is a matter between the agent and Zheng.  This would not affect the validity of the service of the concurrent writ of summons.

12.  I am not persuaded that there is any irregularity in the service of the concurrent writ of summons.  In my judgment, the Default Judgment is a regular judgment.

Any real prospect of success?

13.  It is trite that in order to set aside a regular judgment, the applicant has to show a real prospect of success, which means that an applicant should show his purported defence carries some degree of conviction[2].

14.  In assessing whether the applicant has shown a real prospect of success, it should be borne in mind that that the court is handling an interlocutory application and there should be no mini-trial on affidavit evidence.  As said by Harris J in Maryo Development Limited v Tsang Yau May & Ors[3]:

“13.   Godfrey JA speaks in terms of the defendant being required to show “a real prospect of success” and the court forming a provisional view of “the probable outcome of the action”. These formulations have their origin in the judgment of the English Court of Appeal in the “Saudi Eagle”. There is a danger that they can be read as requiring the court to undertake a mini-trial on the affirmations as to the likely outcome if the matter goes to trial.  This is not what is required and perhaps the correct approach can be more helpfully summarised as requiring the court to form a provisional view as to whether or not the defendant has a realistic prospect of successfully defending the action.  Determining this will involve assessing whether or not the defendant’s evidence on disputed factual matters has a realistic prospect of being accepted and, if it has, that the defendant has a realistic prospect of establishing a defence in law.  The assessment has to be carried out mindful of the interlocutory nature of the application and with a sense of proportionality.”

15.  P’s claim against D is based upon tracing.  Counsel for P draws my attention to the following principles concerning tracing:

(1) There must be a “clear link” between the claimant’s funds and the asset or money into which he seeks to trace. However, the wrongdoer cannot hide behind the mixing of funds to deny an innocent contributor’s claim. As said by Lord Neuberger MR in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd[4]:

“I do not doubt the general principle, reiterated by Lord Millett in Foskett v McKeown [2001] 1 AC 102, that if a proprietary claim is to be made good by tracing, there must be a clear link between the claimant’s funds and the asset or money into which he seeks to trace. However, I do not see why this should mean that a proprietary claim is lost simply because the defaulting fiduciary,while still holding much of the money, has acted particularly dishonestly or cunningly by creating a maelstrom. Where he has mixed the funds held on trust with his own funds, the onus should be on the fiduciary to establish that part, and what part, of the mixed fund is his property.”

(2) The interests of the innocent party are paramount.  In Foskett v McKeown, Lord Millett said[5]:

“The tracing rules are not the result of any presumption or principle peculiar to equity. They correspond to the common law rules for following into physical mixtures (though the consequences may not be identical). Common to both is the principle that the interests of the wrongdoer who was responsible for the mixing and those who derive title under him otherwise than for value are subordinated to those of innocent contributors. As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied.”

(3) The onus is on the wrongdoing trustee to show the very part of the mixed fund which is his own property. It follows that when money is withdrawn from the account and dissipated, then it is presumed to have been drawn from the wrongdoer’s share of the fund[6].

(4) The rule in Clayton’s Case (“the Clayton’s Rule”) is that it is presumed that the money first withdrawn from the account is drawn against the contribution of the party whose money was first deposited. Once that contribution has been exhausted, later withdrawals are treated as made against the contribution of the party whose money was next deposited[7].

16.  Counsel for D reminds me that the Clayton’s Rule can be displaced by taking a very small counterweight[8].

17.  As to the money movement concerning Sum A, the evidence shows the following:

(1) On 24 November 2015, P transferred €1,050,000 into the Smart Jobs Account.  After deducting bank charges, the exact amount received into the Smart Jobs Account was €1,049,992.10.

(2) On 26 November 2015, Smart Jobs converted the whole €1,049,492.10 (minus €500) into US$1,108,893.25 and transferred it to its USD account.

(3) Between 9 December 2015 and 18 January 2016, Smart Jobs dispersed all but US$298,913.63 of the US$1,108,893.25 originally transferred by P.

1. ORIGINAL BALANCE	28 November 2015	US$1,108,926.36
2. Less US$260,000[9]	9 December 2015	US$848,926.36
3. Less US$50,000	21 December 2015	US$798,926.36
4. Add US$2.06 interest	28 December 2015	US$798,928.42
5. Less US$250,000	16 January 2016	US$548,928.42
6. Less US$50,000	18 January 2016	US$498,928.42
7. Less US$14.79	18 January 2016	US$498,913.63
8. Less US$200,000	18 January 2016	US$298,913.63

(4) On 2 February 2016, Wealth Mark transferred US$5,000,000 (US$4,999,998.07 after bank charges) into the Smart Jobs Account. The balance in the Smart Jobs Account therefore became US$298,913.63 + US$4,999,998.07 = US$5,298,911.70.

(5) Following receipt of this US$5,000,000 from Wealth Mark, Smart Jobs remitted US$5,000,000 to D’s Account.

18.  Counsel for P argues that applying the Clayton’s Rule, US$298,913.63 of the US$5,000,000 that was paid by Smart Jobs into D’s Account can be traced directly to the €1,050,000 originally paid by P into the Smart Jobs Account.  Counsel for P submits that after receiving the US$5,000,000 from Smart Jobs, a number of withdrawals took place from D’s Account between February and March 2016.  Thereafter, there were relatively minor transactions. On 25 May 2019, the balance of D’s Account was US$578,513.68.  Applying the principle in Re Hallett’s Estate, the sum of US$578,513.68 held in D’s Account (or however much now remains) formed part of the US$5,000,000 that was paid from the Smart Jobs Account to D’s Account.  The sum of US$5,000,000 paid by Smart Jobs into D’s Account should include Sum A, and P is entitled to ask D to return this sum to P.

19.  Counsel for D submits that the US$5 million in D’s Account is originated from Wealth Mark and has nothing to do with Sum A.  it is clear that Wealth Mark provided the US$5 million via Smart Jobs to D.  The US$5 million in D’s Account as at 2 February 2016 should not include Sum A.  P may not derive much assistance from the Clayton’s Rule, as that rule can be displaced by taking a very small counterweight.

20.  With respect, I am of the view that the argument put forward by D does not have a real prospect of success.  First, D has not put forward any convincing reason why the application of the Clayton’s Rule in these circumstances would lead to an unjust outcome and hence the rule should be displaced.  Second, as said in Foskett v McKeown, 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. There is no reason why the principle in Foskett v McKeown should not apply here.

21.  As to the money movement concerning Sum B, the evidence shows the following:

(1) On 24 November 2015, Smart Jobs received €1,050,000 from P and converted it to US$1,108,893.25.  On 9 December 2015, Smart Jobs remitted US$260,000 to the Wealth Mark Account.  Prior to receiving this remittance, the USD balance of the Wealth Mark Account was nil, and so this deposit brought the balance to US$260,000.

(2) On 18 January 2016, Wealth Mark made three separate withdrawals, each of US$63,000, converted those amounts into three separate amounts each of HK$490,392 (total HK$1,471,176) and deposited them into its HKD account.  Upon receipt of these three HKD deposits, the HKD balance of the Wealth Mark Account was HK$1,472,176.

(3) Also on 18 January 2016, Wealth Mark:

(a) Converted Euro funds held in its EUR account into HK$21,190,000 and deposited this HD$21,190,000 into its HKD account; and

(b) Incurred bank charges of HK$260 and withdrew HK$20,000.

(4) The closing balance of the HKD Wealth Mark Account on 18 January 2016 was therefore HK$22,641,916.  This was also the balance of the account on 30 January 2016. (This includes HK$1,471,176 transferred from the USD Account highlighted below.)

OPENING BALANCE	31 December 2015	HK$1,000
Add HK$490,392 (from USD account)	18 January 2016	HK$491,392
Add HK$490,392 (from USD account)	18 January 2016	HK$981,784
Add HK$490,392 (from USD account)	18 January 2016	HK$1,472,176
Add HK$21,190,000 (from EUR account)	18 January 2016	HK$22,662,176
Less HK$260 (bank charges)	18 January 2016	HK$22,661,916
Less HK$20,000 (withdrawal)	18 January 2016	HK$22,641,916

(5) On 1 February 2016, Wealth Mark withdrew HK$21,477,030 from its HKD current account, converted it into US$2,757,000 and deposited it into its USD account, which brought the balance of its USD account to US$5,000,000.10 (including the remainder of P’s sum).

(6) The next day, on 2 February 2016, Wealth Mark transferred US$5,000,000 to the Smart Jobs Account. This included the sum of US$260,000 (Sum B) that had been transferred from the Smart Jobs Account to the Wealth Mark Account on 9 December 2015.

(7) On the same day (2 February 2016), Smart Jobs transferred US$5,000,000 to D’s Account.

(8) It is P’s case that the sum of US$5,000,000 paid by Smart Jobs into D’s Account included Sum B (P’s sum of US$260,000). These funds were transferred from Smart Jobs to Wealth Mark and back again, and then onto D’s Account.

22.  D’s position is that taking P’s case as its highest, only Sum B is originated from P.

23.  There is no evidence nor any argument showing that D has a real prospect of success in defending P’s claim to Sum B.

24.  In my judgment, D has not shown any meritorious defence to P’s claim in relation to both Sum A and Sum B.

Other circumstances

25.  Counsel for D mentions that another set of proceedings, ie HCA 508/2018, in which Dragon Lotus Capital Limited (“Dragon Lotus”), claims against D and Zheng for a sum of US$5 million.  On the face of the documents, Dragon Lotus and P are competing for the same subject matter.  On 23 March 2018, the court granted an injunction in HCA 508/2018 (“the Dragon Lotus Injunction”) covering assets up to US$5 million, including all monies deposited in D’s Account.

26.  Counsel for D submits that as a result of the competing claims by Dragon Lotus and P, D should be allowed to defend these proceedings to resolve the matters relating to Dragon Lotus and P concurrently.  In any event, given the existence of the Dragon Lotus Injunction, P will not be able to obtain money from the Garnishee Bank unless it obtains an order for variation or discharge of the Dragon Lotus Injunction.

27.  In my judgment, D cannot rely upon the existence of HCA 508/2018 as a ground to set aside the Default Judgment.  I have ruled that the Default Judgment is a regular judgment and D has not shown any real prospect of success in defending P’s claim in these proceedings.  That being the case, there is no reason to set aside the Default Judgment.  If there are any competing claims by Dragon Lotus and P regarding the same subject matter, the issue would have to be resolved by Dragon Lotus and P at a later time.  Existence of competing claims would not afford D any defence to P’s claim.

28.  Counsel for D submits that in the unique circumstances of this case, ie the default occurred due to the fact that Zheng was imprisoned at the material time, warrants the setting aside of the Default Judgment.  In my view, this is repetition of the submissions arguing that the Default Judgment is irregular.  Those submissions have already been rejected by this court.

29.  Counsel for D also argues that Zheng has taken active steps to apply for setting aside the Default Judgment after having notice of these proceedings on or about 1 November 2019.  Further, setting aside the Default Judgment would cause no prejudice to P, for P may not obtain any sum from D until and unless the outcome of HCA 508/2018 is known.  I do not accept these submissions:

(1) As said in the above, it is not true that Zheng is incommunicado while he is in the prison.  It is doubtful whether Zheng only had notice of these proceedings on or about 1 November 2019 but not at any earlier time.  Even if Zheng only came to realize the present proceedings on or about 1 November 2019, that would be due to the communication problem between D’s Registered Agent and Zheng.  That problem should not be a matter affecting P’s interests in these proceedings.

(2) As said in the above, while the Default Judgment is regular and D has no real prospect of success in defending P’s claim, there is no reason to set aside the Default Judgment.  Any competing claims by Dragon Lotus and P would be a matter between Dragon Lotus and P, and should be resolved by them at a later time.  D cannot take any benefit from the competing claims.

No setting aside

30.  By reason of the aforesaid, there is no merit in D’s application for an order setting aside the Default Judgment.  D’s appeal must be dismissed.

GARNISHEE ORDER ABSOLUTE

31.  Since I have dismissed D’s appeal, the Default Judgment stands.  As a result, D cannot have any ground to oppose P’s application.

32.  The Garnishee Bank does not have any objection to P’s application. However, the Garnishee Bank informs the court the following:

(1) D’s Account is subject to an injunction order made in HCA 508/2018 and served on the bank on 13 March 2018.  The bank has not received notice of the injunction order having been discharged or withdrawn.

(2) D’s Account is also subject to a restraint order made in HCCP 41/2018 and served on the bank on 26 January 2018.  The bank has not received notice of the restraint order having been discharged or withdrawn.

33.  In respect of the restraint order mentioned by the Garnishee Bank, counsel for P acknowledges that even if a garnishee order absolute is made, the garnishee order absolute may well be subject to the restraint order.  It would be necessary to take steps to investigate the current status of the restraint order before funds can be paid out from D’s Account to P.

34.  In respect of the injunction order mentioned by the Garnishee Bank, counsel for P submits that a garnishee order absolute can be made notwithstanding that injunction order:

(1) The Garnishee Order to Show Cause has been served on Dragon Lotus. Further, the directions made by this court on 15 and 21 September 2020 (“the Directions”) have also been served on Dragon Lotus.  Dragon Lotus is well aware of the fact that P’s application would be determined by this court on the papers.

(2) The Dragon Lotus Injunction is not a proprietary injunction and would not confer any proprietary interest in the funds in D’s Account on Dragon Lotus.

(3) Dragon Lotus has not expressed any objection to P’s application.

35.  As to the service of the Garnishee Order to Show Cause and the Directions, as shown in the evidence adduced by P, the service was done by delivering the documents to the law firm representing Dragon Lotus in HCA 508/2018.  The process server has also attempted to leave the documents at the registered office of Dragon Lotus, ie a unit on 22/F of a commercial building on the Hong Kong Island.  He was unable to reach the 22/F as the elevator could not reach the 22/F.  He enquired with the building management and was told that the company previous located on the 22/F had moved.

36.  Based upon the evidence now before the court, I cannot be sure that there has been valid service of the Garnishee Order to Show Cause and the Directions on Dragon Lotus.  The law firm representing Dragon Lotus in HCA 508/2018 may not have the authority to accept service of documents in these proceedings on behalf of Dragon Lotus.  Further, the Garnishee Order to Show Cause and the Directions have not been left at the registered office of Dragon Lotus.

37.  The injunction order mentioned by the Garnishee Bank is an injunction served on the bank on 13 March 2018.  That injunction cannot be the Dragon Lotus Injunction, for the Dragon Lotus Injunction was made on 23 March 2018.  I have read the Dragon Lotus Injunction.  The Dragon Lotus Injunction itself is not an order continuing an injunction made at an earlier time.  So, it is unclear what is the nature and what are the terms of the injunction order served on the Garnishee Bank on 13 March 2018.

38.  In my view, the matters relating to the restraint order, the injunction served on the Garnishee Bank on 13 March 2018, and the Dragon Lotus Injunction have to be sorted out before determining P’s application.

39.  I direct that there be a hearing of P’s application before me on 14 December 2020 at 9:30 am, with 30 minutes reserved.  P should serve all the papers relating to P’s application (including a copy of this decision) on Dragon Lotus as soon as practicable.  P intends to have a garnishee order absolute enabling it to obtain the funds in D’s Account to satisfy the judgment debt owed by D to P in these proceedings.  In order to achieve this aim, P should conduct the necessary investigations and take out appropriate application(s) reasonably before the hearing on 14 December 2020.  Depending upon the development of the matter, I may determine P’s application or give further directions in that hearing.

DISPOSITION

40.  I dismiss D’s appeal.  P’s application is adjourned and will be heard on 14 December 2020 at 9:30 am, with 30 minutes reserved. 

41.  There be a costs order nisi that costs of D’s appeal be paid by D to P forthwith, and costs of P’s application be reserved.  I am of the view that most of the time in this paper disposal exercise is spent on D’s appeal. I would apportion the time spent on D’s appeal and P’s application as 95% and 5%.  Costs of D’s appeal be summarily assessed by this court.  There be leave to P to file and serve a bill of costs for summary assessment within 7 days after the costs order nisi becoming absolute, and leave to D to file and serve a written reply to the said bill within 7 days thereafter.

42.  Lastly, I thank counsel for the assistance rendered to the court.