NOAH TECHNOLOGY CORPORATION v. WSL CO LTD

DCCJ 5425/2021

[2024] HKDC 1190

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5425 OF 2021

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REASONS FOR JUDGMENT

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1.  On the first day of trial of this action, ie 16 July 2024, D was absent.

2.  D’s former solicitors obtained an order on 8 May 2024 to cease to act for D and D was absent at the PTR on 13 May 2024 as well.

3.  P has filed 2 affirmations of service: one deposing to service of the Order made at the PTR and the other of the trial bundle and P’s Opening Submissions. I am satisfied that those documents were duly served, and that D was made aware of the trial date, as such I proceeded with the trial.

4.  P called its 2 factual witnesses, both of whom adopted their written statements, the contents of which support P’s pleaded case.

5.  At the conclusion of P’s case I gave the following judgment :-

5.1  A declaration that D holds the Sum of US$146,390 on constructive trust for P and/or is liable to account to P for the said Sum (or its HK dollar equivalent) or such other assets now or previously in its possession acquired directly or indirectly with any part of the Sum;

5.2  All necessary accounts and inquiries to enable P to trace and recover the aforesaid Sum and assets;

5.3  D do pay P the aforesaid Sum or its HK dollar equivalent at the time of payment;

5.4  Mr Chung Kwok Fai, a partner of Messrs Fred Kan and Co, solicitors for P, do have full power and authority to effect the transfer to its designated bank account the aforesaid Sum or any part thereof from the account(s) in the name of D maintained with the Hongkong and Shanghai Banking Corporation Limited, numbered 801298696838 and 801298696201, and the Injunction Order dated 10 December 2021 made by HHJ H Au-Yeung be continued until such transfer is effected;

5.5  Interest on the aforesaid Sum at commercial rate from 26 May 2021 up to and including 15 December 2022 and thereafter at an enhanced interest rate of 10% above the judgment rate until full payment;

5.6  Costs of the action be paid by D to P, on a party-and-party basis up to and including 15 December 2022 and thereafter on an indemnity basis, with certificate for counsel, to be taxed if not agreed;

5.7  Interest on the above indemnity costs at an enhanced interest rate of 10% above the judgment rate until full payment.

6.  Here are my reasons.

P’s Case

7.  P’s factual case is very straightforward and rather typical of email frauds:-

7.1  A fraudster impersonating the president of a regular supplier of P sent various emails to P starting on 13 May 2021, asking for P’s assistance in an equipment acquisition project;

7.2  Believing that the emails did come from the president of its regular supplier, as well as authenticity of the various enclosed documents and representations made in those emails, P obliged and transferred a sum of US$146,390 (the “Sum”) to an account held by D as instructed, ie HSBC account no 801298696838 (“D’s A/C”);

7.3  P later on 1 June 2021 enquired with a staff member of the regular supplier about the above and was told on 2 June 2021 that the emails did not come from the president;

7.4  P then reported the above to the Hong Kong Police on 7 June 2021 and the police caused D’s A/C to be frozen.

8.  P started the present action on 25 November 2021 and obtained a proprietary injunction on the Sum on 10 December 2021.

9.  P seeks recovery of the Sum, primarily on the basis of a constructive trust claim.

D’s Defence

10.  D in its Defence filed on 23 February 2022 admitted to receipt of the Sum on 26 May 2021, but raised 2 defences:-

10.1  D received the Sum as a bona fide recipient for value without notice – it came about from a purported sale of computers to P, through a purported representative of P, Ameen Marcos (“Marcos”), which D had actually ordered from its downstream suppliers and delivered to the Philippines, as purportedly designated by P (presumably through Marcos);

10.2  As D had onward ordered and paid for such computers in reliance of the above transaction through Marcos, it has changed its position.

Analysis

11.  D has only pleaded non-admissions to P’s factual case on being defrauded, however stringing through D’s defence is the factual case that it received the Sum as a result of a legitimate sale and purchase transaction, for which it had procured supply of goods downstream.

12.  Evidentially, while P’s witnesses have come to adopt their evidence in their respective witness statement, D’s witness has not.

13.  I see no reason not to accept the truthfulness of P’s witnesses as well as the authenticity of the documents pertaining to the fraudster’s emails. I find that P had indeed been defrauded into transferring the Sum to D’s A/C.

14.  The question is thus whether there was such a sale and purchase transaction, both upstream through Marcos and downstream with its own supplier, that could ground the defences D has pleaded, both factually and legally.

15.  Firstly, as to the bona fide recipient defence, as correctly submitted by Mr. Chiu, counsel for P, this defence is not available between direct parties of payment, ie P and D (see Nelson Martayan v Hancheng Industrial Co Ltd [2022] HKDC 1400 at §§31-34).

16.  Hence, even if D genuinely believed that it was transacting with Marcos acting for P, it cannot avail itself of this defence as a matter of law.

17.  Secondly, as to the change of position defence, in short, the evidence before me falls short of establishing the necessary linkage with the upstream transaction with Marcos:-

17.1  The various time points averred to by D in relation to the agreement with Marcos aside, as pleaded D and Marcos only started discussing the transaction in question in April 2021;

17.2  The relevant agreement with Marcos obviously and logically came later;

17.3  However, as pleaded and as seen on documentary evidence, D’s downstream agreement with its supplier came in fact in March 2021, ie before the agreement for which the Sum was paid ever came into existence or even discussed.

18.  As such, as a matter of fact and logic, D cannot begin to show that it had changed its position (ie incurred expenses/liability to pay its downstream supplier in this case) as a matter of “but-for” causation, not to mention in detrimental reliance of its transaction with Marcos. The present case is no different from the scenario in Kaefer AG v Winfield Marine Services Co Ltd [2022] HKCA 807 (see §46 thereof).

19.  In conclusion, I reject both of D’s defences and it has no basis to retain the Sum.

Reliefs

20.  As to the proprietary claim based on constructive trust, the following summary of the relevant principles are apt (see HongKong Windmode Sports Equipment Co Ltd v HK Haolong Industrial Ltd [2024] HKDC 875 at §§29-31) :-

20.1  A constructive trust arises by operation of law in a number of circumstances including where the defendant has received property unconscionably, such as where the defendant is aware that money had been paid by mistake. See Chitty on Contracts (35^th Edition), Volume 1, paragraph 33-178;

20.2  A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds everyone who takes the property or its traceable proceeds except a bona fide purchaser for value without notice. See Foskett v McKeown (HL(E)) [2001] 1 AC 102, at 127F-G;

20.3  In the context of fraud, even if the recipient was not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the money, the defrauded claimant has a tracing remedy. Knowledge does not have to be acquired at the time of receipt, it can be acquired subsequently while the money is in the recipient’s hands. See Sonnex Packaging Nigeria Limited v HK Juyida Limited [2021] HKDC 297, paragraph 18 thereof, citing Guaranty Bank and Trust Company v ZZZIK Inc Limited HCA 1139/2016, unreported, 19 July 2016.

21.  D in the present case, by the latest, must have come to the requisite knowledge by the time the specifically endorsed Writ was served, and by that time the Sum had already been frozen in D’s A/C.

22.  Further, on evidence, the Sum has remained frozen in D’s A/C firstly by the Hong Kong Police and then by the Court and hence remains available and identifiable to be made a subject of proprietary relief.

23.  I therefore gave the declaratory relief to that effect and also granted order for accounts and inquiries to enable P to trace and recover the Sum or what becomes of it further downstream.

24.  It follows also that the Sum has to be returned to P and so I ordered.

25.  On to the mechanism of bringing the above reliefs into actual effect, ie transferring the Sum from D’s A/C to P, P seeks an order under s. 38A of the District Court Ordinance (DCO) that a person be nominated to execute necessary documents to cause a transfer of the Sum to P. This section provides for a scenario where a party fails to execute documents to effectuate what the Court has ordered and what the Court may order after such a scenario has arisen.

26.  Mr. Chiu further referred to O.48, r.5 of the RDC and relied on §45/8/1 of HKCP 2024 Vol 1 and the case of Pacific Electric Wire & Cable Co Ltd v Taxan Management Ltd (unrep, HCA 2230, 2746 & 2736/2004) for the submission that in appropriate circumstances an order under O.45, r.5 in relation to enforcing a mandatory order may be given before an act of disobedience, where there is evidence upon which the Court may reasonably anticipate disobedience.

27.  I accepted that in order to give effect to the reliefs, which included an order to transfer the Sum in D’s A/C to P, both s.38A of the DCO and O.48, r.5 of the RDC could be engaged: the latter covers enforcing a “mandatory order”, in this case the order to return the Sum to P, and the former covers a necessary step in performing such a “mandatory order”, in this case the execution of transfer instructions/documents with the bank.

28.  In the circumstances of the present case, I am also satisfied that there is basis for me to reasonably anticipate disobedience on the part of D: it has since the PTR been absent at all Court hearings despite due notice and knowledge of the hearing dates (through its legal representative when it was represented no less) hence it is highly unlikely that it would somehow re-emerge to cooperate in giving effect to the judgment and order I gave.

29.  I therefore gave the order sought, nominating a partner of P’s solicitors to have authority to effect a transfer of the Sum from D’s A/C to P.

30.  One slight modification required came about from the letter of the Hong Kong Police, which named another account number when stating that the Sum was frozen, i.e. no. 801298696201. For prudence, this account is also specified in the order made, in addition to D’s A/C.

Interests and Costs

31.  After giving the above judgment and order, I was informed that P by letter dated 17 November 2022 made a Sanctioned Offer to D for settling the claim for a sum slightly less than the Sum. By the last day on which this offer could have been accepted without leave, i.e. 15 December 2022, D had not accepted the same.

32.  On the above basis, P seeks indemnity costs and enhanced interest from 16 December 2022 onwards, as well as enhanced interest on such indemnity costs.

33.  Per O.22, r.24 RDC, the Court will order costs on indemnity basis and give enhanced interest unless it is unjust to do so.

34.  As explained in Grupo Pacifica Incorporada v Worldwide Marine Product Ltd. & Ors [2018] HKCFI 2584 at §§8-9, the Court is required to look at all the circumstances of the case, including, inter alia, the information available to the parties at the time of the offer and parties’ conduct.

35.  In the present case, the following features in my view justified indemnity costs and enhanced interest of 10% on top of judgment rate (on the Sum and indemnity costs):-

35.1  When the offer was made, parties had both filed their respective List of Documents and witness statements and there has since been no further evidence filed in any form; as such, parties had full knowledge and information in evaluating the offer;

35.2  It would have been apparent to D that its defences were not viable, in law and in fact, and yet it did not accept the offer;

35.3  After putting up such defences for a whole year (from Writ to the offer) and by the same token running up costs on P’s side for a whole year, D then practically just “disappeared” shortly before the PTR and P was practically forced to go the whole way to trial to resolve its claim.

36.  For all of the above reasons, I gave the judgment and order as recited in §5 above.

37.  I thank Mr Chiu for his assistance.