MINIMAX GMBH & CO KG (SINGAPORE BRANCH) v. GOPOM PRODUCTS LTD AND ANOTHER

DCMP 1224/2019

[2019] HKDC 760

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 1224 OF 2019

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DECISION

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Introduction

1.  By originating summons dated 11 April 2019, the plaintiff commenced the present action.  It claims that it is the victim of an email fraud perpetrated by the 1^st defendant, a Hong Kong limited company, and that the money misappropriated from it now sits in the 1^st defendant’s account numbered 697-002277-838 maintained with HSBC, the 2^nd defendant (“the Account”).

2.  This is the first hearing of the originating summons.  Neither defendant is present in court this afternoon.  However, by letter dated 29 April 2019, the 2^nd defendant confirmed that it takes a neutral position in this dispute and will act according to the court order which the plaintiff may obtain.

Service of proceedings

3.  The plaintiff has filed an affirmation of service deposing to the following.

4.  On 15 April 2019, the originating summons was served on the 1^st defendant at its registered address, and on the 2^nd defendant at its head office in Central.  No acknowledgment of service was lodged by the defendants.  (The 2^nd defendant however wrote to the plaintiff in the meantime as mentioned.)  On 7 May 2019, the notice of appointment, which fixes today’s hearing, and an affirmation made by Ms Chan Seok Hui in support of the originating summons, were served on the 1^st defendant by ordinary post sent to its registered address.  On the following day, 8 May 2019, the two documents were served on the 2^nd defendant at its head office in Central.

5.  In light of the above chronology, I am satisfied that the notice requirement set out in Order 28, rule 3(1) of the Rules of the District Court has been complied with.  I have therefore proceeded with today’s hearing in the defendants’ absence.

The plaintiff’s case

6.  The plaintiff’s case is set out in Chan’s affirmation.  The evidence is unchallenged.

7.  The plaintiff is the Singapore branch of Minimax GmbH & Co KG, a German company which manufactures and trades in fire protection and security systems and technologies.  Chan is its Accounting Manager.  In her affirmation, she deposes to the standard procedure which the plaintiff follows when making outward remittance via its bank, Commerzbank AG in Singapore.  That would involve, as a first step, Chan filling out a remittance application form online, and printing out the filled out form for physical signature by the plaintiff’s authorised signatories.  Chan would then scan the signed form into a soft copy and email the copy to Commerzbank via her office email address.  Commerzbank would acknowledge receipt of the form by return email.  The remittance would then be processed.

8.  Based on the plaintiff’s investigation and enquiries with Commerzbank, it discovered that an unauthorized remittance had taken place on 28 April 2017 in which a sum equivalent to US$52,000 was paid out of the plaintiff’s account into the 1^st defendant’s Account.  The plaintiff did not know the 1^st defendant and had had no dealings with it.  At that time, the plaintiff was not aware that the remittance had taken place until Chan spotted some irregular transactions in the plaintiff’s accounting records on or about 4 May 2017.

9.  It appears that the plaintiff’s email system was hacked into by an unknown perpetrator who fabricated a remittance application form by using and doctoring a genuine form previously used in another transaction.  The perpetrator then emailed the forged form using Chan’s office email account.  That email was acknowledged by Commerzbank by a return email sent to the same office email address of Chan. Those emails were then deleted by the perpetrator so that Chan was kept in the dark about the remittance.

10.  Upon discovery, the plaintiff immediately made enquiries with Commerzbank and retrieved the emails which had been deleted from the plaintiff’s email system but had remained in the bank’s.

11.  On 5 May 2017, the plaintiff made a report to the police in Singapore.

12.  The plaintiff successfully obtained a Norwich Pharmacal order in Hong Kong in November 2018 with regard to the Account.  According to the bank statements disclosed by the 2^nd defendant pursuant to the order, the sum of US$52,000 had not been withdrawn since deposited and had remained in the Account as of November 2018.  No new funds were paid into the Account during that period.

13.  Based on the above factual case, the plaintiff says that it is a victim of a well-planned and sophisticated fraudulent scheme and that the sum of US$52,000 was stolen from it.  There has never been any legitimate reason for the 1^st defendant to receive the money from the plaintiff.  It seeks the following relief:-

(1) a declaration that the 1^st defendant is liable to account to the plaintiff for the sum of US$52,000 as constructive trustee;

(2) a declaration that the sum of US$52,000 remaining in the Account (together with any interest accrued thereon) are funds held on constructive trust by the 2^nd defendant for the plaintiff;

(3) the sum of US$52,000 (together with any interest accrued thereon) be forthwith released and returned by the 2^nd defendant to the plaintiff; and

(4) the 1^st defendant do pay the plaintiff’s costs of and incidental to these proceedings to be taxed if not agreed.

Discussion

14.  This is the first hearing of the originating summons.  It is well-established that under Order 28, rule 4, the court can decide whether the matter can be dealt with summarily and an order can be made which would dispose of the entire proceedings: Bank of China (Hong Kong) Ltd v Keen Lloyd Resources Ltd CACV 1787/2001, 26 February 2002 at para 19; International Bank of Asia Ltd v Kewpaisal Warranuch HCMP 1421/1998, 4 March 1999 at para 12; Hong Kong Civil Procedure 2019 at 28/4/2.

15.  In a summary disposal, the burden is on the plaintiff to justify its entitlement to judgment.  Once this is demonstrated prima facie on the evidence, the burden falls on the defendant to show that he has a defence to the claim.  In this regard, if the defendant files no evidence or his evidence discloses no triable issue, the court may enter final judgment under Order 28, rule 4(1): Bank of China (Hong Kong) Ltd v Twin Profit Ltd [2010] 2 HKLRD 1065, at paras 5 to 8.

16.  The evidence contained in Chan’s affirmation discloses a plain and strong prima facie case of fraud.  Chan gives a detailed account of the plaintiff’s usual practice on outward remittance, her discovery of the unauthorised payment and the steps she and her colleagues took to piece together what had happened which resulted in the payment to the 1^st defendant.  Her allegations are substantiated by contemporaneous documentary evidence, including the emails exchanged between the plaintiff and Commerzbank.  Chan confirms that there has been no reason why the plaintiff would remit the sum to the 1^st defendant, which is an unknown entity to the plaintiff.

17.  The evidence is not challenged as the 1^st defendant has not participated in these proceedings and the 2^nd defendant takes a neutral stance in this dispute.  There is no reason not to accept the facts as deposed to as true.

18.  Here, I am satisfied that these facts give rise to a valid claim of proprietary constructive trust against the 1^st defendant in respect of the sum of US$52,000 now sitting in the Account.  When property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient and the property is recoverable and traceable in equity.  See, eg, Michael Chen Kang Huang v Peter Lit Ma HCA 218/2005, 7 September 2009, citing at para 56 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 667, at 716.  See also the application of the principle in recent email fraud cases: Mesirow Financial Administrative Corporation v Best Link Industrial Co Ltd HCMP 1846/2015, 25 January 2016 at paras 33 to 34; 巨展皮具香港有限公司 v 上海兄弟運有限公司 [2018] HKCFI 53 at para 27; and Sultana Distribution Services Inc v Hong Kong Fuheng Technology Co Ltd [2018] HKCFI 1480 at para 10.

19.  The affirmation evidence only shows that the sum of US$52,000 still sat in the Account as of November 2018.  At the hearing this afternoon, counsel informed the court that the police in Hong Kong orally confirmed to the plaintiff’s solicitors in April this year that the money was still in the Account.

20.  I am therefore prepared to grant the relief set out in para 13(1) above, without any interest.  (The relief in (2) is not appropriate because as a matter of law, it is the 1^st defendant, not the 2^nd defendant, who stands as constructive trustee.)  The interest is in any event minimal.  It has accrued not only on the sum of US$52,000 but also on a balance of about US$100 which was already in the Account when the fraud took place.  Hence an issue of apportionment arises.  But counsel confirmed just now that the plaintiff will not pursue the interest.

Legal basis for the 2^nd defendant to return the money directly to the plaintiff

21.  The remaining question is whether I should also grant the relief sought in para 13(3), which effect is to compel the 2^nd defendant to forthwith return the sum to the plaintiff.  The court can only make such an order if it is supported by a proper legal basis.

22.  In this regard, I follow the decisions made in a recent spate of email or online fraud cases in Hong Kong including, eg, Guaranty Bank and Trust Company v Zzzik Inc Ltd HCA 1139/2016, 18 July 2016; Halliburton BV v Sheng Yi (HK) Trade Co., Ltd HCA 1627/2016, 24 January 2017; AXHT Company Ltd v Soe Kin Fai HCMP 1223/2017, 11 September 2017; PT Adhyawarna Bumi Pelangi v YB (HK) Trading Co., Ltd [2018] HKCFI 1863; The Henri Stern Watch Agency Inc v HK Huasheng Technology Develop Co, Ltd [2018] HKCFI 1972; and, Prescient Corporation v Dunse Trading Ltd [2019] HKDC 735.  In those cases, vesting orders were made under section 52 of the Trustee Ordinance and consequent upon the vesting, the banks were ordered to return the moneys directly to the victims.

23.  Section 52 of the Trustee Ordinance empowers the court to make a vesting order concerning stock and thing in action.  Of relevance to this action are the following provisions:-

“52. Vesting orders as to stock and thing in action

(1) In any of the following cases, namely–

…

(e) where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise and it appears to the court to be expedient,

the court may make an order vesting the right to transfer or call for a transfer of stock, or to receive the dividends or income thereof, or to sue for or recover the thing in action, in any such person as the court may appoint:

   Provided that– [not relevant]

…

(2) In all cases where a vesting order can be made under this section, the court may, if it is more convenient, appoint some proper person to make or join in making the transfer:

Provided that the person appointed to make or join in making a transfer of stock shall be some proper officer of the bank, or the company or society whose stock is to be transferred.

…

(5) The court may make declarations and give directions concerning the manner in which the right to transfer any stock or thing in action vested under the provisions of this Ordinance is to be exercised.

…”

24.  Section 2 provides that the terms “trust” and “trustee” as used in the Ordinance extend to implied and constructive trusts.

25.  And, lastly, section 57 provides as follows:-

“57. Persons entitled to apply for orders

(1)  An order under this Ordinance for the appointment of a new trustee or concerning any interest in land, stock, or thing in action subject to a trust, may be made on the application of any person beneficially interested in the land, stock, or thing in action, whether under disability or not, or on the application of any person duly appointed trustee thereof.”

26.  I have already ruled that the plaintiff is beneficially entitled to the sum in the Account and the 1^st defendant holds that sum on trust for it.  However, as a matter of legal analysis, the 1^st defendant does not hold the money itself on trust.  What it holds instead is the right to call upon the bank to repay the sum. 

27.  Generally speaking, when a customer pays money into his account, the bank obtains title to the money, in law and equity, and assumes a contractual liability to repay an equivalent amount to the customer.  At any given time, the bank is liable to repay its customer on demand the amount of the credit balance on the account, subject to any right of set off.  In other words, at the time of deposit, the customer’s title to the money is replaced by a cause of action exercisable against the bank for repayment of the money upon demand, ie a debt: Paget’s Law of Banking (15^th ed) at paras 22.50 and 28.23.

28.  Here, as regards the sum now sitting in the Account, as the 1^st defendant is the 2^nd defendant’s customer, the right to demand the 2^nd defendant to repay the money vests in the 1^st defendant.  Pursuant to my ruling, the 1^st defendant should exercise that right to instruct the 2^nd defendant to pay the sum to the plaintiff.

29.  Now, obviously, given that the 1^st defendant is part of the fraudulent scheme and that it has been absent all along in these proceedings, it would be wholly unrealistic to expect it to do so.  The next question is therefore this.  In light of the court’s declaration to the effect that the plaintiff is beneficially entitled to the money in the Account, can the 2^nd defendant proceed to release the money to the plaintiff in the absence of consent from the 1^st defendant, without incurring any risk of being sued later by the 1^st defendant, its customer, for the same amount?

30.  I think it is clear that the declaration is not sufficient to absolve the bank of such potential risk.

31.  As a matter of general banking law, the bank is under a duty to obey the customer’s mandate.  Where it acts and makes payment outside the mandate, it cannot debit the customer’s account and the debt which it owes to the latter remains subsisting.  Such duty is a fundamental aspect of the contractual relationship between the bank and its customer: Paget’s at paras 22.51, 23.1 and 23.2.

32.  In a situation where the customer holds the account on trust, ordinarily, the bank is a third party to the trust and its contractual relationship rests with its customer, and not the beneficiaries: Paget’s at para 28.23.  As such, the bank should generally act according to the customer’s mandate and should not deviate from it even when the beneficiaries so demand.

33.  Hence, from the bank’s perspective, notwithstanding the court’s declaration, it remains to be the case that the 2^nd defendant cannot proceed to release the money to the plaintiff without running the potential risk of being claimed by the 1^st defendant subsequently.

34.  So the situation comes down to this.  Although the money in the Account is in effect the plaintiff’s, it cannot realistically expect the 1^st defendant to pay it back.  Yet even though the 2^nd defendant, the bank, is neutral on the payment out, it may not do so owing to the contractual constraint imposed by its relationship with the 1^st defendant.  These are the difficulties standing in the way of the plaintiff now trying to re-claim the money stolen from it.

35.  In the circumstances, I am satisfied that a vesting order should be made under Section 52(1)(e).  It would be expedient to vest the 1^st defendant’s cause of action to claim the money from the 2^nd defendant in the plaintiff.  Upon such vesting, the plaintiff is legally entitled to demand the 2^nd defendant to release the money in the Account; and upon such release, the debt owed by the 2^nd defendant on the Account would be discharged.

36.  It is clear that by virtue of sections 2 and 57, the plaintiff, as the beneficiary under the constructive trust, is entitled to apply under section 52(1)(e) to have the debt owed by the bank, which is a thing in action, vested in itself.  

37.  The court may make a vesting order as to trust property where it is difficult, if not impossible, to deal with the sum without a vesting order: Halsbury’s Laws of England (5^th ed, 2019) Vol 98, para 308.  A vesting order is clearly appropriate here to resolve the difficulties faced by the plaintiff.  As a fraud victim, the plaintiff should be able to claim back its money expeditiously.

38.  I would therefore make a vesting order accordingly. 

39.  The plaintiff now asks for the money to be released by the 2^nd defendant.  The right to make such demand now being vested in the plaintiff, I grant the relief in para 13(3) above, subject to the removal of the reference to interest.

The alternative of garnishee proceedings

40.  It has been suggested that a victim in the position of the plaintiff may resort to the garnishee proceedings under Order 49 for recouping the stolen money: see, eg, International Automotive Components Group SRO v Xuke Trading Ltd [2017] 3 HKC 137 at para 35.  It is no doubt a viable option for the plaintiff.  The garnishee proceedings are one of the enforcement mechanisms generally available to a judgment creditor who knows of the whereabouts of the assets of the judgment debtor. 

41.  But, here, the plaintiff has successfully made out a proprietary claim over the sum in the Account.  In that sense, it has a “better” right than an ordinary judgment creditor.  To require the plaintiff to now go down the route of garnishee proceedings, more costs would be incurred and the recovery of the money would be further delayed.  The plaintiff is beneficially entitled to the money and it is simply more expedient and just to vest the debt directly in the plaintiff, rather than requiring it to resort to the more time-consuming and tortuous route of obtaining a garnishee order for achieving the same outcome. 

42.  This approach would accord more with the spirit of one of the underlying objectives of our civil procedural rules, namely to ensure that a case is dealt with as expeditiously as is reasonably practicable: Order 1A, rule 1(b).

43.  I should add that in International Automotive, the judge expressed “serious reservations whether s 52 of the TO may be invoked to compel a bank to release funds in a bank account in these circumstances” (at para 22).  That remark was obiter as the point did not arise for consideration in that case.  There, the bank was not joined as a party and hence did not have the opportunity to make any representation on an order which would affect its rights and obligations.  This is not the case here. 

44.  In any event, for the above reasons, I am of the view that a vesting order ought to be made in the present case such that the plaintiff is in a position to demand payment of the money in the Account directly and immediately.

Conclusion

45.  I make an order in terms of paras (1), (3) and (4) of the originating summons, save that the words “(together with any interest accrued thereon)” be deleted in para (3)[1].