R STAHL INC (A COMPANY INCORPORATED IN THE UNITED STATES OF AMERICA) v. AJ DEVELOPMENT LTD

HCA 1412/2019

[2020] HKCFI 816

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1412 OF 2019

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D E C I S I O N

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1.  The plaintiff in this case alleges that it has lost US$662,970 as the result of an identity fraud. A writ of summons was filed to recover this sum on 2 August 2019, coincident with applications for Mareva injunctive relief and disclosure orders. Those applications were granted by Wilson Chan J on 3 August 2019.

2.  This hearing concerns the plaintiff’s applications for summary judgment and/or judgment on admissions, these applications being made under Orders 14 and 27 of the Rules of the High Court, respectively.

3.  There was also a summons before the Court from the defendant dated 6 May 2020 seeking leave to file a supplementary (4^th) affirmation from its director Ms Zhong Airong (“Zhong”).  By agreement between the parties, the hearing proceeded on the basis that the Zhong 4^th affirmation would be heard on a de bene esse basis and that I would rule on the defendant’s summons in my decision.

Factual background

4.  The salient facts as summarised by Mr Ernest Ng, appearing for the plaintiff, are as follows:

a.  on 26 July 2019, an employee of the plaintiff, Ms Sherri Weishaar (“Weishaar”), received a call from a person introducing himself as Dr Matthias Hallman, the CEO of the plaintiff’s German parent company (“Hallman”).  It transpired that the person with whom Weishaar spoke was not Hallman at all but rather an unknown fraudster impersonating Hallman. In this decision I shall refer to this person as “the fraudster”;

b.  during this call the fraudster instructed Weishaar to correspond with another person, said to be Mr Robert Miller (“Miller”). This was said to be in relation to the negotiating of a confidential and delicate business acquisition:

c.  after some email correspondence and having satisfied herself that the request that she had received was legitimate (albeit that it turned out not to be so), Weishaar made a payment of US$662,970, which reached a Hong Kong account held in the name of the defendant with Standard Chartered Bank. The reference for this account was 574-1-146544-6 (“the SCB Account”);

d.  Weishaar discovered the alleged fraud on the same day, determining that both the fraudster and Miller (possibly one and the same person) had defrauded the plaintiff.  Very shortly thereafter, reports were made both to the banks concerned and to the police;

e.  upon further enquiry, it transpired that part of the above some had already been paid out from the SCB Account and there remained a total of US$452,935.97.

5.  Mr Kelvin Leung appeared for the defendant.  His response to this summary of the facts could be put in this way; he says that the defendant and Zhong knew nothing at all of the alleged fraud and that neither the defendant nor its officers had any part in it. Mr Leung’s submissions, supported by the defendant’s evidence go further.  The defendant’s case is that it had no hand whatever in the opening of the SCB Account in the first place and that any incomings or outgoings to or from that account were matters in which the defendant and its officers played no part – and wish to play no part prospectively. Although Mr Leung did not put it quite in these terms, I took the essence of the defendant’s submissions to be that the defendant, like the plaintiff, sees itself as a victim of the fraud described above.

6.  This is how the parties conveyed to me their impression of the relevant facts.

The plaintiff’s case

7.  Mr Ng’s submissions provided a helpful summary of the plaintiff’s pleaded case and of the relevant legal principles. As regards the plaintiff’s Order 14 application, Mr Ng referred to the helpful summary of DHCJ Wilson Chan (as he was then) in Li Chuen Kwai v Po Lam Construction Development Limited HCA 2376/2013 (unrep., 24^th September 2014), at §11-13.  I do not repeat these paragraphs here as these principles were not, as matters developed, really in issue between the parties.

8.  The primary issue in dispute between the parties concerning Order 14 was whether the so-called “fraud exception” in Order 14 rule 1(2)(b) applies. That provision is in the following terms:

“…this rule applies to every action begun by writ other than –

(b)   an action which includes a claim by the plaintiff based on an allegation of fraud…”

9.  Mr Ng contended that on the facts of this case, the fraud exception does not apply.  Mr Ng relies upon two decisions of this Court; the first being the decision of Lisa Wong J in Ferrari North America, Inc v Changhon International Energy Co Ltd and Others (HCA 852/2017) [2018] HKCFI 1603; the second being the decision of DHCJ MK Liu in DBS Bank (Hong Kong) Limited v Happy Grace International Development Limited (HCA 59/2017) [2019] HKCFI 2864. What makes these two decisions important, in Mr Ng’s submission, is that both cases concerned identity fraud, said to very similar indeed to the circumstances of the present case.

10.  Mr Ng placed particular reliance on §14 of the decision of the learned judge in the Ferrari case which stated as follows:

“In Universal Capital Bank v Hongkong Heya Co Ltd [2016] 2 HKLRD 757, in rejecting the defendant’s opposition on the basis that the plaintiff’s application was caught by the “fraud” exception, Deputy High Court Judge Burrell said at [18(1)]:

‘The underlying reason for the fraud exception is to prevent summary judgment in a case where serious allegations of dishonesty are made or implied against a party to the proceedings so that such a party may have an opportunity to answer the allegations, or put in a more familiar way, “have his day in court”.’

And then at [18(4)]:

‘Whilst it is true that the Hong Kong courts have adopted a fairly wide and liberal interpretation of “fraud” when considering the application of Order 14, rule 1(2)(b), it should not be applied automatically merely because there are allegations of fraud or dishonesty in the bigger picture. The question remains, does the underlying allegation of fraud (which does exist here) on which the claim is based (which it is not in this case) constitute an allegation of fraud against the defendant? … ’ (emphasis added).”

11.  As can be seen, the learned judge in Ferrari took note of the finding of Judge Burrell in Universal Capital Bank (supra) that for the fraud exception to apply, allegations of fraud need to be made against the defendant. In Ferrari, although a fraud perpetrated by unknown fraudsters was the underlying reason why the plaintiff had suffered loss and commenced proceedings, the plaintiff in the Ferrari case had stressed that it did not have the evidence and was not suggesting that the defendants were involved in the fraud.

12.  Mr Ng asserted that this rationale from Ferrari is directly applicable to the present case. The plaintiff in this case can succeed with its claims, both legally and factually, without contending that the defendant in this case had acted fraudulently or dishonestly.

13.  The second case relied upon by the plaintiff on the issue of whether the Order 14 fraud exception was triggered was the DBS Bank case (supra).  In §6 of that case, the learned judge stated as follows:

“P does not allege that D, or indeed any of the second-level recipients, were directly involved in the fraud practised on it. P is relying on unjust enrichment as a cause of action against D, which does not require any allegation of fraud. That being the case, the fraud exception in Order 14 which bars summary judgment is not triggered. In this Order 14 application, P is pursuing a personal claim for the value of the fund received by D, ie USD230,000, on the basis of unjust enrichment.”

14.  Mr Ng contends that these findings of the learned judge in DBS Bank apply equally on the facts of the present case. 

15.  In Mr Ng’s submission, the above-cited decisions provide the best guidance to this Court in determining whether the fraud exception was triggered in this case, such that summary judgment should (or should not) be granted. In his respectful submission, other cases, including Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94 are readily distinguishable on the facts.

16.  Turning to the plaintiff’s application under Order 27 rule 3 (judgment on admissions),Mr Ng relies upon the Court of Appeal decision in Re Chung Wong Kit (A Bankrupt) [1999] 1 HKLRD 410 for the general approach, as follows (from the decision of Rogers JA at page 412C-1):

“Before examining the material relied upon as constituting the relevant admissions, I would emphasise what I consider to be relevant points in relation to judgments on admissions. Under O.27 r.3 of the Rules of the High Court …, it is, of course, provided that:

Where admissions of fact or of part of a case are made by a party to a cause or matter either by his pleadings or otherwise, any other party to the cause or matter may apply to the Court for such judgment or order as upon those admissions he may be entitled to, without waiting for the determination of any other question between the parties, and the Court may give such judgment, or make such order, on the application as it thinks just.

It is also well-known and not disputed in this case that where admissions of facts are relied upon, such admissions may be express or implied, but they must be clear and unambiguous. In the notes to The Supreme Court Practice, Vol.1, para.27/3/1, ‘Admissions of fact’, in considering the identical rule the example is given:

So, the widow of a deceased person who died as a result of an assault which occurred during a criminal affray is not entitled to judgment under this rule on the admission of the defendant that he had pleaded guilty to the manslaughter of the deceased, since the defendant may be able to defeat the claim or mitigate the damages or reduce them by alleging contributory negligence (Murphy v Culhane [1977] QB 94).

It must also be remembered that judgment on admissions is different even from a summary judgment application. There, the court may, in the appropriate circumstances, draw inferences from primary facts. In the case of judgment on admissions, the court must consider the actual admissions, albeit in some cases those made by implication.”

17.  The underlining within the above text is that of Mr Ng.

18.  Having “set the stage” with these principles, Mr Ng submits that the admissions relied upon by the plaintiff are that:

a.  the defendant had not yet started trading; and

b.  the monies now remaining in the SCB Account do not belong to defendant.  This admission was drawn from Zhong’s 1st affirmation. 

19.  Mr Ng submitted that the Court should view these admissions as showing that it cannot be disputed that the stolen funds were paid into the SCB Account.  It is said that the defendant does not dispute this.  Thus, in applying the principles set out in Re Chung Wong Kit, it can,by necessary implication arising from the admissions, be inferred that the defendant has admitted that the sum remaining in the SCB Account belongs to the plaintiff – and that it should be returned. 

20.  This, then, is the basis for the requested relief for judgment on admissions.

21.  At this juncture, I asked Mr Ng if the relief sought by the plaintiff would be different depending on which of the two applications (Order 14 or Order 27) might be granted. This question arose in the context of Hong Kong Civil Procedure (2020), §27/3/9.   Mr Ng’s response was that the relief sought would be the same, in either case.

The defendant’s case

22.  As foreshadowed, the defendant approaches the facts from an entirely different perspective. The defendant confirms that the defendant company was incorporated in November 2018. Thereafter, in late 2018, Zhong engaged a local accounting firm to help set up a bank account. Fees were paid to the accounting firm in Order for this task to be carried out and completed. However, after several weeks had rolled by, the defendant had a change of heart and decided not to open the proposed account. It is the defendant’s evidence that the fees paid to the accounting firm were therefore refunded and on the defendant’s case this is where the account opening efforts came to an end.

23.  In this situation, the defendant maintains that it only learnt of the existence of an SCB account in the defendant’s name - and of the transfers into and from that account - when it was served with the Mareva injunction in August 2019.

24.  Given the defendant’s stance as described above, Mr Leung was at pains to refer to the SCB Account as being “an account held in the name of the defendant”, rather than “the defendant’s account”.  As noted above, I shall refer to the account simply as “the SCB Account”. 

25.  In what is perhaps of marginal relevance only in these proceedings, the defendant alleges that SCB (or its employees) was active (or complicit) in the fraud that resulted in the opening of the SCB Account. While Mr Leung’s written submissions on this point are detailed and were supplemented in oral submissions, I indicated that such submissions were peripheral to the applications before me. I remain of this view and whilst I listened to Mr Leung’s submissions on the question of alleged fraud by SCB and/or its employees, I make no findings on those matters. These matters are not relevant to the matters at hand and plainly, it would not be appropriate to explore such allegations when SCB is not a party to these proceedings.

26.  Returning to the facts at hand, Mr Leung was clear in his assertion that the defendant had no role in opening the SCB Account in its name; that it had no knowledge of how funds arrived in that account, nor where dispersed funds ended up. As regards the funds remaining in the SCB Account, the defendant is clear in its assertion that those funds are not the defendant’s and it wishes to have no part in how those funds are (or are not) dispersed.

27.  During the hearing, when I asked Mr Leung if the defendant accepts now that the funds which arrived in the SCB Account emanated from the plaintiff, Mr Leung’s position was simply that such questions are not within the knowledge of the defendant.

28.  Mr Leung then addressed the legal principles pertaining to Order 14 and Order 27. 

29.  As to the fraud exception in Order 14, Mr Leung accepts that the facts in Pacific Electric are very different from the present case. Whilst the present case involves a very small series of transactions (and commendably brief bundles and submissions), Pacific Electric by contrast was an Order 14 hearing that lasted for 12 days with over 10,000 pages of documents. Despite this dramatic difference in “scale” however, Mr Leung submits that the principles from Pacific Electric nonetheless apply equally to this case. Mr Leung referred me in particular to paragraph 19 of the decision of Rogers V-P in that case:

“The wording of Order 14 r. 1(2)(b) makes quite clear that what is excluded is an action where there is a claim which is based on an allegation of fraud. Two matters are clear from that. The first is that there may be one or more claims in the action and the rule envisages that one of the claims may not be based on an allegation of fraud but another may be. In those circumstances it is clear that an application for summary judgment under Order 14 will not lie. Secondly, the rule is not confined to excluding actions in which one of the claims is a claim for damages for fraud, what is excluded is any action where there is a claim in respect of which the underlying allegations on which the claim is based constitute an allegation of fraud. It is clear that if rule 1(2)(b) applies there is no jurisdiction for the court to entertain an application for summary judgment.”

30.  From this position, Mr Leung asserts that where a pleading on its face sets out claims based on an allegation of fraud, Order 14 is inapplicable. This is said to be a matter of jurisdiction.

31.  Mr Leung also responded to Mr Ng’s submissions regarding the Ferrari and DBS Bank cases (supra). As to Ferrari, Mr Leung’s submission was that the words fraud “against the defendant” do not appear in Order 14 rule 1(2)(b) and that to construe the rule as if those words do appear is wrong. Further, in Mr Leung’s submission, the Ferrari case is inconsistent with the Court of Appeal decision in Pacific Electric. Mr Leung urged this Court to dismiss the reasoning in DBS Bank for similar reasons, noting further that the defendant in that case did not appear at the Order 14 hearing and that the legal principles put forward by the plaintiff in that case were not vigorously tested or challenged.

32.  Turning to the plaintiff’s application under Order 27 rule 3, Mr Leung referred to the decision of Mr Justice Waung in the case of Louis Dreyfus Trading Ltd v Bonarich International (Group) Ltd [1997] 3 HKC 597.  This case was relied upon for the proposition that it is unlikely that a judgment on admissions would be granted where summary judgment would not.  (See also Hong Kong Civil Procedure (2020), §27/3/6).

Order 14 – discussion

33.  The correct starting point for the discussion of whether the fraud exception set out in Order 14 rule 1(2(b) applies is surely the decision of the Court of Appeal in Pacific Electric (supra). Where an action includes a claim by the plaintiff based on an allegation of fraud, I accept, as a matter of jurisdiction, that Order 14 does not apply. In the words of Rogers VP cited above, “what is excluded is any action where there is a claim in respect of which the underlying allegations on which the claim is based constitute an allegation of fraud.”

34.  Notwithstanding the submissions of Mr Ng, I believe that Order 14 rule 1(2)(b) is problematic for the plaintiff, for at least two reasons. Firstly, the Statement of Claim in this case is replete with references to fraud. Reading the applicable rule on its face - and keeping in mind the clear reminder of Rogers VP of what is excluded from Order 14, it seems apparent to me that in the present case, there are underlying allegations on which the plaintiff’s claim is based which relate to fraud. Even if one accepts Mr Ng’s submission that the plaintiff’s legal claims can be pursued without having to allege or prove fraud specifically by the defendant, that distinction is not one that can be said to arise from the express wording of Order 14 rule 1(2(b).  Nor does such a distinction arise from the reasoning of the Court of Appeal in Pacific Electric.

35.  Secondly, it is my view that the plaintiff’s affidavit evidence reinforces this position. During the hearing, I raised with Mr Ng some passages from the 1st affidavit of Mr Criswell, for the plaintiff, most particularly, paragraph 22 of that affidavit. Mr Ng asserted that those paragraphs did not “cross the line” of mounting fraud allegations specifically against the defendant. Respectfully, I do not share that view. Paragraph 22 of the Criswell affidavit refutes the defendant’s assertion that Zhong did not open the SCB Account. As between Criswell and Zhong there is, either directly or by implication, a live issue as to whether Zhong is an honest witness. It seems to me that issues of this type, in the context of an identity fraud case, are very much issues that, applying Order 14 rule 1(2(b), do not fall to be determined by way of summary judgment.

36.  What then is to be made of the Ferrari and DBS Bank decisions, as relied upon by the plaintiff?

37.  It is perhaps unnecessary for me to address these decisions since I have determined that the plaintiff’s affidavit evidence raises (either directly or by implication) allegations of fraud by the defendant. On this analysis, the plaintiff’s case would fail even if I were to apply these two decisions.

38.  I would add however, that I have reservations regarding these two decisions.  The Ferrari case is based upon the assertion of the learned judge in the Universal Capital Bank case that the underlying reason for the fraud exception in Order 14 is to prevent summary judgment in a case where serious allegations of dishonesty are made or implied against a party to the proceedings so that such a party may have the opportunity to answer the allegations”. With respect to the learned judge in that case, I do not believe that this observation as to the underlying reason for the fraud exception in Order 14 rule 1 (2)(b) sits comfortably with the wording of the rule itself. Nor do I believe that reading the word “fraud” in the rule as if it were to read “fraud against the defendant” sits comfortably with Pacific Electric.

39.  In my assessment, the decision of the Court of Appeal in Pacific Electric is firmly and correctly anchored in the express wording of Order 14 rule 1 (2)(b).

40.  To conclude on the plaintiff’s Order 14 application, I have determined that this application fails as a matter of jurisdiction, since the plaintiff’s claim in this case is a claim based on an allegation of fraud.

Order 27 rule 3 – discussion

41.  The starting point for this part of the enquiry is the wording of Order 27 rule 3 itself.  Namely, where admissions of fact are made by a party either by his pleadings or otherwise, another party may apply to the Court for such judgment or Order as he may be entitled to, without waiting for the determination of any other questions between the parties. Where this rule applies the Court may give such judgment or make such Order on the application as it thinks just.

42.  To this, one gleans the following additional principles from the decision of Rogers JA Re Cheung Wong Kit (supra):

1.  where admissions of facts are relied upon, such admissions may be express or implied, but they must be clear and unambiguous;

2.  judgment on admissions is different from summary judgment. In the latter, the Court may, in the appropriate circumstances, draw inferences from primary facts. However, in the case of judgment on admissions, the Court must consider the actual admissions, albeit in some cases those made by implication.

43.  The first admission relied upon by the plaintiff is that the defendant was not trading at all. Mr Ng asks, how can a company that is not trading accumulate such a large sum of money, paid in a lump sum? The second admission relied upon is from the 1st affirmation of Zhong.  It is in these terms: “I have no knowledge who transferred the funds into the alleged account. The alleged funds in the alleged account do not belong to the company.”

44.  Looking at the evidence in this case in its entirety, I am satisfied that there is a clear and unambiguous statement from the defendant that the money in the SCB Account is not the defendant’s money. This arises from the 1^st affirmation of Zhong.  Further, the plaintiff’s affidavit evidence and the contemporaneous documents, including police reports, show equally clearly that the stolen sums that arrived in the SCB Account on 29 July 2019 were from the plaintiff’s account (held with the Bank of America).

45.  It remains for me to consider the ramifications of the Louis Dreyfus case (supra) and the proposition therein that it is unlikely that a judgment on admissions would be granted where (as we have here) summary judgment under Order 14 is not granted.  Whilst I have had regard to the decision of the learned it judge in that case, I am satisfied that the present case is one where it is appropriate for this Court to grant Order 27 rule 3 relief notwithstanding that Order 14 relief has not also been granted. While this may be unusual, I believe that the present case is one where this course is appropriate.  In my view, there are significant differences between the facts in this case and those in Louis Dreyfus. In the latter, the Court was dealing with a series of sugar contracts where a number of disputes had arisen and where there were arbitration clauses in the underlying contracts between the parties. Given the nature and range of disputes between the parties in Louis Dreyfus (and faced with a stay application) it can readily be seen that the facts in that case dictated against both summary judgment and judgment on admissions. I believe that the present case is quite different. Both parties in the matter before me admit and accept that the sum remaining in the SCB Account is not the defendant’s money. The evidence is equally clear that the money remaining in the SCB Account came from the plaintiff.

46.  Accordingly, while I have concluded that Order 14 relief is not appropriate in this case due to the operation of the fraud exception in Order 14 rule 1(2)(b), I am equally satisfied that Order 27 rule 3 relief is appropriate.

47.  This being so, it would seem apparent (and uncontroversial) that the sum remaining in the SCB Account, in the sum of US$452,935.97 (together with any interest that has accrued thereon), are sums due to the plaintiff and for which it should have judgment. I do not believe however that a judgment on admissions in the plaintiff’s favour should extend to the whole of the losses pleaded by the plaintiff (ie to the sum of US$662,970).  The difference between these two sums is a remaining dispute between the parties and the plaintiff’s entitlement to that sum is not an Order 27 rule 3 matter.

48.  In summary, my finding is that the plaintiff is entitled to judgment on admissions pursuant to Order 27 rule 3 in the sum of US$452,935.97, together with any interest that has accrued on that sum.

49.  I would add only this. Much of the defendant’s advocacy in the present case was centred upon its position, as described herein, that the defendant played no hand in opening the SCB Account, nor in the transmission of funds to or from that account. It does not fall for this Court to make determinations in respect of such matters.  Thus, whether in these proceedings, or elsewhere, the defendant will be free to pursue any arguments that it wishes to make that it is “innocent” of any wrongdoing in relation to the matters at hand. Those arguments can still be made by the defendant notwithstanding my direction herein that the sums remaining in the SCB Account can - and should - be returned to the plaintiff.

Defendant’s application to file additional evidence

50.  Finally, it remains for me to decide upon the defendant’s summons dated 6 May 2020 to file the supplementary (4th) affirmation of Zhong.

51.  Having reviewed this affirmation, it is apparent that it is directed overwhelmingly (if not entirely) at a nascent and as yet unpleaded dispute between the defendant and Standard Chartered Bank, the latter of which is not a party to these proceedings. I do not believe that the Zhong 4^th affirmation added anything to the present discussion and I therefore decline leave to file the said affirmation.

Decision

52.  For the reasons set out in paragraphs 33 to 40 herein, the requested Order 14 relief is declined.

53.  For the reasons set out in paragraphs 41 to 49 herein, this Court enters judgment on admissions in the plaintiff’s favour, on the following terms:

1.  the defendant shall pay, and cause to be paid, the sum of US$452,935.97 from the SCB Account, to the plaintiff, together with any interest that has accrued thereon;

2.  the said some shall carry interest after judgment as provided for by section 49(1)(b) of the High Court Ordinance (Cap 4).

54.  As the plaintiff has succeeded with its application based on Order 27, I also make an order nisi that the defendant shall pay the plaintiff’s costs of the plaintiff’s summons dated 6 December 2019, such costs to be taxed not agreed. 

55.  There shall be no order as to the defendant’s summons dated 6 May 2020.