HALLIBURTON BV MERKEZI HOLLANDA ANKARA MERKEZ TURKIYE SUBESI v. SHENG YI (HK) TRADE CO LTD AND OTHERS

HCA 1627/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1627 OF 2016

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J U D G M E N T

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1.  The plaintiff in these proceedings is the victim of what is said to have been an international fraud, as a result of which the plaintiff transferred a sum of US$4,977,000 to the bank account of the 1^st defendant in Hong Kong. That transfer took place on 15 June 2016. In the application before me the plaintiff seeks judgment in default of defence against certain of the defendants to its Action.

2.  Shortly after the initial transfer to the 1^st defendant there were further transfers this time from the account of the 1^st defendant to the accounts of the 2^nd, 3^rd and 4^th defendants. In money terms the largest recipient was the 3^rd defendant which received about US$2,165,000 from the 1^st defendant.  The 2^nd defendant received US$180,000 and the 4^th defendant US$200,000. The other relevant misappropriated funds were “caught” by an injunction obtained by the plaintiff over the assets of the 1^st defendant.

3.  Subsequently yet further transfers were made from the accounts of the 2^nd and 3^rd defendants to accounts held by the 5^th to 17^th defendants.  The recipients of the transfers from the 1^st defendant (i.e. the 2^nd, 3^rd and 4^th defendants) have been described in submissions as the “2^nd layer recipients” and the recipients of transfers from the 2^nd and 3^rd defendants as the “3^rd layer recipients”.  For convenience I will adopt that shorthand description.  It must be borne in mind however that the 5^th, 6^th and 7^th defendants received funds from the 2^nd defendant whereas the other 3^rd layer recipients received funds from the 3^rd defendant.

4.  Judgment has been entered (or proceedings settled or withdrawn) against all of the defendants except the 2^nd defendant and the 5^th 6^th and 7^th defendants.

5.  The 2^nd defendant has filed both a notice of intention to defend the proceedings, and a defence.  The 5^th 6^th and 7^th defendants have not filed any such notice of intention to defend proceedings, nor has a defence been filed on behalf of any of those defendants.  In those circumstances the plaintiff applied for judgment in default against the 5^th 6^th and 7^th defendants.

The statement of claim

6.  The plaintiff's claim describes the alleged fraudulent scheme giving rise to the transfer of funds to the 1^st defendant and sets out also the allegations regarding what it describes as the subsequent dissipation of those funds, from the account of the 1^st defendant to the 2^nd, 3^rd and 4^th defendants, and onwards to the 3^rd layer recipients.

7.  The plaintiff alleges that the facts and matters set out in the Statement of Claim give rise to the reasonable inference that the 1^st to 17^th defendants were perpetrators or participants in the fraudulent scheme against the plaintiff and/or were used as intermediaries for the dissipation of funds and/or received part of the traceable proceeds of the funds on behalf of the fraudster for the 1^st defendant.  It is alleged that the 1^st to 17^th defendants “knew or ought to have known” that the transfers of each layer wholly or partly consisted of the proceeds of fraud and that such transfers were made in breach of trust.

8.  In the alternative the plaintiff asserts an entitlement to trace into, and claim equitable title to, the proceeds of the funds in the accounts of the 1^st to 17^th defendants which, it is alleged, those defendants hold on trust for the plaintiff's.

9.  As noted above the 2^nd defendant defends the plaintiff’s claims and has served a defence accordingly.  The 2^nd defendant contends that its business is the trading and export of mobile phones and mobile phones accessories, but includes, as a subsidiary business, currency exchange and remittance services.  It is contended by the 2^nd defendant that the remittance made to it by the 1^st defendant on 16 June 2016 was part of a genuine currency exchange arrangement.

10.  It is also contended that the 5^th defendant and the 7^th defendant were regular customers of the 2^nd defendant in respect of its currency exchange remittance services.  The 2^nd defendant contends that it arranged the purchase of US currency from the 6^th defendant, to enable it to meet requests for such currency from the 5^th and 7^th defendants, on or about 15 June 2016.

11.  In summary therefore the 2^nd defendant denies any involvement in the alleged fraudulent scheme and contends, rather, that it received those funds without any notice of the alleged fraud.  The 2^nd defendant is, it says, an innocent purchaser for value in respect of the US$180,000 which it received from the 1^st defendant.

The terms of the judgment sought

12.  No notice of intention to defend having been given, and no defence having been served, the plaintiff applied for judgment in default against the 5^th 6^th and 7^th defendants. Counsel for the plaintiff helpfully provided to the court a draft order setting out the terms in which such judgment was sought.  The formulation was slightly different in respect of the 5^th defendant as compared to the 6^th and 7^th defendants because of issues relating to the service of the Statement of Claim which are of no significance for present purposes.  Broadly what was sought against each defendant was an order for repayment of a specified sum to the plaintiff; an order directing the release or transfer of sums in specific bank accounts to the plaintiff; declarations that each defendant holds monies as a constructive trustee for and on behalf of the plaintiff, and that the plaintiff is the beneficial owner of such funds; an order for an account in respect of the relevant amounts; and interest.

13.  The basis for this was that, whether or not the 5^th 6^th and 7^th defendants were participants in the fraud, they would be constructive trustees of the relevant funds if their state of knowledge was such as to make it unconscionable to retain those funds.

14.  The plaintiff acknowledged that it was not the normal practice of the court to grant declaratory judgment without a trial, but submitted that this was a matter of practice, not of law, which would give way to the need to do justice between the parties in circumstances in which the declaration could properly be granted.  I was reminded that the judge giving judgment against the majority of other defendants on 24 November 2016 had made such declarations.

Appearance by D2

15.  Submissions were made on behalf of the plaintiff objecting to appearance by the counsel for the 2^nd defendant at the application for judgment against the 5^th, 6^th and 7^th defendants.  It was contended by the plaintiff that the 5^th 6^th and 7^th defendants were thereby circumventing the requirement for a company to appear by counsel unless authorised to appear by a director.  It was contended also that the 2^nd defendant had no locus to make submissions on behalf of the 5^th 6^th and 7^th defendants.

16.  In any event, there was no dispute however that the evidence which had been filed on behalf of the 2^nd defendant was relevant to the matters under consideration in respect of the 5^th, 6^th and 7^th defendants.

17.  In part this “locus” issue arose because of an agreement which it is said has been made between the 2^nd defendant and each of the 5^th 6^th and 7^th defendants as part of which the 2^nd defendant was said to have obtained the consent of the other defendants to oppose the application for judgment against them.

18.  It was the position of the 2^nd defendant that it had locus because it had a direct interest in the outcome of the default judgment summons.  This was because, it was contended, a declaration that the 5^th 6^th or 7^th defendants were constructive trustees in respect of part of the funds fraudulently taken from the plaintiff would entail or imply involvement by the 2^nd defendant in the alleged fraudulent scheme.  Moreover it was contended that the 2^nd defendant had locus simply as a party to the proceedings.

19.  I received written and oral submissions on behalf of the 2^nd defendant on the basis that these were made on its own behalf, and not as a representative or quasi‑representative of the 5^th 6^th or 7^th defendants.

The entitlement to judgment under order 19 rule 7

20.  The relevant rule entitles a plaintiff to apply for judgment where no defence has been served after the expiration of the period fixed for service of such a pleading.  When such an application is made the court “shall give such judgment as the plaintiff appears entitled to on his statement of claim”.  Where there are several defendants, and not all are in default, then such an application may be made by the plaintiff in circumstances in which the claim against the defaulting defendant or defendants is severable from claims against the other defendants.

21.  As is made clear at 19/7/13 of the Hong Kong Civil Procedure, the rule is discretionary rather than mandatory, and, moreover, the court may order the application to stand over until trial where there are matters affecting other parties waiting to be decided.

Determination

22.  In the exercise of my discretion, having considered the various matters referred to above, it appeared to me that the appropriate course was with no determination, or judgment entered, at this time on the plaintiff's application.  The defendants are to be taken to have admitted the claims made against them in the Statement of Claim, but it appeared to me nevertheless to be premature to enter a judgment which would involve a declaration imputing fraudulent conduct on the part of these defendants in circumstances in which, because of the defence pleaded by the 2^nd defendant, a trial is likely to be held in which the relevant factual circumstances are closely aligned with, and may overlap, those relevant to the claim against 5^th, 6^th and 7^th defendants.

23.  There remains the possibility that the trial judge, in due course, in the light of the evidence received, may come to the conclusion that making such declarations (or granting any of the other relief sought) would be inappropriate.  Therefore, notwithstanding the deemed admission on the part of the defendants, it appeared to me the better course was to leave the matter open for decision, in due course by the trial judge, whose discretion, notwithstanding the deemed admission by the defendants, will be exercised in the light of relevant evidence placed before him or her.

24.  The parties agreed that, in those circumstances, the costs of the summons as between the plaintiff and the 5^th 6^th and 7^th defendants should be to the plaintiff.  The costs of that summons as between the plaintiff and the 2^nd defendant are to be costs in the cause of the action.