E-TRADE SECURITIES LLC v. CEDALIAN CARE SERVICES CONSULTANTS LTD AND OTHERS

HCA 2312/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2312 OF 2016

________________________

________________________

________________________

REASONS FOR DECISION

________________________

1.  The plaintiff is a company incorporated in the state of Delaware in the United States of America, and carries on business as an online stockbroker. ‌The plaintiff was the victim of a fraudulent email scheme which caused the plaintiff to transfer sums of money to various accounts, including a payment to the 3^rd defendant in these proceedings, on 10 August 2015. It appears that a sum of HK$466,500 was paid on to the bank account held by the 4^th defendant shortly after being received by the 3^rd defendant. Default judgement has been entered by the court against the 1^st to 3^rd defendants.

2.  The 4^th defendant was not, initially, named as a party to these proceedings but was joined by order of the court on 26 September 2016.  On the same date a Mareva injunction was obtained over the bank account of the 4^th defendant.  The writ was served upon the 4^th defendant on 27 September 2016.  ‌However no notice of intention to defend proceedings was given by the 4^th defendant, and the plaintiff took out a summons for default judgement.  ‌At the last minute an acknowledgement of service was prepared and served by the 4^th defendant, and default judgement against it was thereby avoided.

3.  The plaintiff filed and served its statement of claim on 26 October 2016, however the 4^th defendant served no defence within time, and the plaintiff applied for judgement to be entered, with the Mareva injunction to be continued. That application was heard on 2 December 2016.  ‌The 4^th defendant attended that hearing through counsel, having, it appears, only engaged its legal team at the very last minute.  No evidence was filed on behalf of the 4^th defendant, and absent any explanation for the 4^th defendant’s inaction, the judge entered judgement in default.  In doing so he noted that it was nevertheless open to the 4^th defendant to seek to set aside that judgement if it was able to show sufficient merits in its substantive defence.

4.  The 4^th defendant took out a summons seeking to do so on 16 December 2016 and the parties filed evidence (or further evidence in the case of the plaintiff) relevant to that summons.  The matter was heard by me on 22 February 2017 following which I ordered that judgement be set aside.  I indicated at that hearing that a brief summary of my reasons for doing so would be set out, and I now do so.

5.  There is no dispute, on the facts, that the sum of money referred to by the plaintiff as having been paid to the account of the 4^th defendant, was in fact paid and received by the 4^th defendant. The principal issue for the court therefore was as to whether the affidavit evidence filed on behalf of the 4^th defendant demonstrated a defence to which the court ought to pay heed; one which carried a real prospect of success. In order to obtain an extension of time for service of its defence the 4^th defendant was required also to present an acceptable explanation for the delay hitherto.

6.  The explanation provided by the 4^th defendant as to why the money was paid to it carried some unusual features.  In essence it was said that the bank account of the 4^th defendant was being used, exclusively, by a “money service operator” trading in the name of Panda Money Exchange Co (“Panda”).  That business appears to operate along the lines of a remittance service for payments to and from China, as was explained in the 2^nd affirmation of Lee Lai Kwan. It is said that the money received by the 4^th defendant, was a payment to Panda, in respect of which it incurred, and discharged, a corresponding payment obligation.

7.  Counsel for the 4^th defendant therefore contended that the 4^th defendant was in the position of a bone fide purchaser, for value, without notice of the preceding illegality.  It was further contended that the 4^th defendant’s position was analogous to the position of a bank such that the 4^th defendant would be entitled to rely upon a defence of ministerial receipt, having received funds as agent for its customer, and having paid away such funds to the order of its customer.  Reliance was placed by the 4^th defendant on the decisions in Jones v Churcher [2009] EWHC 722, and Jeremy D Stone Consultants Ltd v National Westminster Bank plc [2013] EWHC 208.

8.  The plaintiff was critical of almost all aspects of the 4^th defendant’s purported defence, and of Panda’s business.  Since the matter will proceed to a trial I do not propose to rehearse the matters comprehensively canvassed on behalf of the plaintiff.  The plaintiff also criticised the delay on the part of the 4^th defendant and the explanation for the delay which had proffered.

9.  As to the apparent merits of the 4^th defendant’s defence, it appears to me, given the somewhat unorthodox circumstances, and the explanations which have been tendered, that this is a matter which ought to be considered by the court so as to adjudicate on the merits of this defence.  I accept that a defence with apparent merits and a reasonable prospect of success has been shown to be potentially available to the 4^th defendant.

10.  Evidence was placed before the court explaining the delay on the part of the 4^th defendant, this involving primarily the failure to take action beyond the service of the acknowledgement of service of the writ.  This was blamed on a misunderstanding of legal procedure by the sole shareholder of the 4^th defendant, one Zhang Guo Wei, who is based in China.  By itself that would be an inadequate explanation, however it is to be viewed more sympathetically given that the party more properly affected by the injunction and subsequently the judgement, Panda, was, it says, not properly informed of the legal claims until immediately before the hearing before Mr Justice Lam.  Having regard to the proper approach explained by Cheung JA in The Decurion [2012] 1 HKLRD 1063 I have considered the 4^th defendant’s delay in the context of the overall justice of the case; the requirement for parties to adhere to timetables set by the court; and in particular that a party should not be deprived of an adjudication on the merits due to a procedural default unless there is prejudice to the other party which cannot be compensated in costs.

11.  In the present case, the 4^th defendant made an offer, through counsel, to bring into court the sum of money claimed by the plaintiff.  It appeared to me that this would significantly ameliorate any prejudice otherwise faced by the plaintiff pending a determination of the merits of its claim and, in the circumstances, an appropriate order for costs would indeed largely compensate any residual prejudice.

12.  Accordingly, the 4^th defendant’s application to set aside the default judgement was allowed, conditional upon the payment in by the 4^th defendant of the sum of HK$466,500, plus interest in the sum of HK$10,000.

13.  I record that it was common ground between the parties that although the setting aside application strictly speaking addressed only paragraph 2 of the order of Lam J dated 2 December 2016, the setting aside, together with the payment in by the 4^th defendant carried with it the discharge of the Mareva injunction set out at paragraph 1 of that order.  Consequential directions as to the filing of a defence within 14 days were made, and by agreement of the parties an order for the costs of the summons to be in the cause was also made.