CARDONE INDUSTRIES, INC. v. HAONIGEN TRADE CO., LTD AND ANOTHER

DCCJ 4536/2019

[2020] HKDC 70

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4536 OF 2019

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REASONS FOR JUDGMENT

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INTRODUCTION

1.  This is the plaintiff’s application for judgment in default under RDC O 19 r 7 by way of a summons dated 25 November 2019 (“Default Judgment Summons”).

BACKGROUND

2.  The plaintiff is a company incorporated in the United States.  It claims to be the victim of a sophisticated email fraud which resulted in USD165,478.79 and CAD227,194.64 of its funds (“the Funds”) being paid out of its accounts in the United States, into a bank account of the defendant held with the Bank of China (Hong Kong) Limited (“BOCHK” and “the Account”).

3.  The defendant was incorporated in Hong Kong.  Its sole shareholder and sole director are said to be individuals of different names and addresses, both overseas.

4.  The plaintiff’s pleaded case is that an unknown individual (or individuals) from 20 June 2019 impersonated the employees of a legitimate creditor of the plaintiff.  They did so by using, amongst other things, fake email addresses from a newly-registered domain name which was extremely similar to that used by the legitimate creditor.  It is said, using such technique, that those individual(s):-

(a)  falsely and fraudulently claimed to the plaintiff that balances of invoices issued by the legitimate creditor had to be settled by way of payment into the Account (on the basis that there were “issues” with the creditor’s actual bank account, and as the Account was a multi-currency account that could receive funds sin USD and CAD); and

(b)  deceived the plaintiff into paying the Funds from its USD and CAD accounts into the Account, which were settled there on 24 June 2019.

5.  It is further pleaded that such payments were not authorised and were procured as a result of fraud, since inter alia there were no such emails or requests from employees of the creditor, nor any reasons to justify such transfers to the defendant – with which the plaintiff had no dealings prior to the alleged fraud and its discovery.

6.  The plaintiff therefore claims that it is the equitable owner of the Funds and that the defendant holds or held such as constructive trustee, and is liable to return or restore sums to the plaintiff, as well as tracing. The plaintiff also advances other claims in knowing receipt, dishonest assistance, and unjust enrichment.

7.  In terms of relief, the plaintiff therefore seeks inter alia declarations that the defendant holds the Funds as constructive trustee, that the plaintiff is the beneficial owner of the Funds, that the defendant is liable to return the Funds to the plaintiff together with all profits generated therefrom, repayment of such, and orders pursuant to s 52 Trustee Ordinance (Cap 29).

8.  The plaintiff has filed affirmations confirming that the Writ and Statement of Claim in this action were left at the defendant’s registered address in Hong Kong on 23 September 2019 and 25 October 2019 respectively.

9.  The defendant did not file any Notice of Intention to Defend, or Defence.  Hence by the Default Judgment Summons, the plaintiff sought default judgment pursuant to RDC O 19 r 7 against the defendant.  The relief sought included declarations against the defendant and BOCHK that the Funds were held on trust, and an order requiring BOCHK release and transfer the Funds to the plaintiff.

10.  At the hearing of the Default Judgment Summons on 10 December 2019 the question arose as to whether, how, and in what capacity BOCHK had been added as a party to the proceedings.  The Default Judgment Summons did not include a request for such relief (although it did unilaterally name BOCHK as a “respondent” thereto).  And neither the defendant nor BOCHK appeared at that hearing.

11.  For reasons discussed in more detail below, I therefore adjourned the Default Judgment Summons to 18 December 2019 so that both the defendant and BOCHK could be informed of:-

(a)  the plaintiff’s application to add BOCHK as a respondent in respect of the Default Judgment Summons; and

(b)  certain updated terms (including in relation to the vesting order sought) of the draft order sought by the plaintiff in relation to the Default Judgment Summons.

12.  At the resumed hearing of the Default Judgment Summons on 18 December 2019, I made orders:-

(a)  granting leave for BOCHK to be added as a respondent in respect of the Default Judgment Summons; and

(b)  ordering that there be default judgment to the plaintiff including in terms of its claim for:-

(i)  declarations as against the defendant that it held the Funds on trust for the plaintiff as a constructive trustee and was their beneficial owner;

(ii)  an order vesting, in the plaintiff, the defendants’ right to payment from the respondent of amounts in the Account which could be traced from the Funds[1]; and

(iii)  an order that the respondent do pay out such amounts, net of bank charges and its agreed legal costs, to the plaintiff.

I had also indicated that I would give my reasons for making such orders at a later date, which I now do.

DEFAULT JUDGMENT

13.  The plaintiff’s application under the Default Judgment Summons is made pursuant to RDC O 19 r 7 and, as I have mentioned, seeks declaratory relief and orders as against both the defendant and BOCHK.

14.  In Sultana Distribution Services Inc v Hongkong Fuheng Technology Co Ltd [2018] HKCFI 1480, Deputy High Court Judge Alexander Stock SC succinctly set out the principles and considerations relevant to applications under RDC O 19 r 7 where declaratory relief is sought, with particular regard to similar cases concerning allegations of email fraud:-

“7.  The principles applicable to an application under Order 19, rule 7 have been discussed in several recent cases which concern alleged email frauds[2]. The power to grant judgment under rule 7 is discretionary. The court is required to scrutinise whether the matters pleaded in the Statement of Claim entitle the plaintiff to the judgment sought. The court’s decision is made on the basis of the pleaded facts, rather than on evidence.

8.  As to declaratory relief, it is not the normal practice of the court to grant a declaration without going to trial.  This is, however, only a rule of practice, rather than a rule of law, and gives way to the paramount duty of the court to do the fullest justice to the plaintiff to which he is entitled.  In a number of cases involving email fraud, declaratory relief has been granted on the basis that there is a genuine need for such relief to secure the plaintiff’s proprietary as opposed to merely personal claim, particularly given that the defendant may have other creditors [3].”

15.  I agreed with and adopted this approach in the present case.

Service on the defendant

16.  I was satisfied that the Writ and Statement of Claim had been properly served on the defendant, and that it was in default of its obligations to file a Notice of Intention to Defend and a Defence.

17.  I was also satisfied that the Default Judgment Summons had been served on the defendant, and at the resumed hearing of the Default Judgment Summons that the plaintiff had sought to inform the defendant and the respondent of the updated draft order, and of the plaintiff’s application to join BOCHK as respondent to these proceedings.

Entitlement to judgement and the orders sought

18.  It appeared to me that the pleaded facts, as summarised above, entitled the plaintiff to the substantive relief sought in relation to the Default Judgment Summons, and that I was satisfied that I this was a situation where:-

(a)  the plaintiff was beneficially entitled to the Funds and to a declaration stating such;

(b)  it was appropriate to make an order under s 52 Trustee Ordinance vesting, in the plaintiff, the defendant’s right to require that BOCHK pay amounts in the Account, in the plaintiff; and

(c)  it would also be appropriate for such amounts to be released to the plaintiff.

19.  In doing so, I considered apposite and followed the reasoning of Her Honour Judge Winnie Tsui at Paragraphs 26 to 39 of Minimax GmBH & Co KG (Singapore Branch) v Gopom Products Limited & anor [2019] HKDC 760 since:-

(a)  A declaration that the plaintiff is entitled to the Funds would not in and of itself mean that BOCHK can release the money to the plaintiff without being at risk of being sued by the defendant for the same amount.  After all, BOCHK is a third-party to the trust and the contractual relationship rests with its customer, not the beneficiary (citing Paget’s Law of Banking at para 28.23).

(b)  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.  In this case, the defendant cannot realistically be expected to deal with such a sum by paying it to the plaintiff.  To surmount this issue, a vesting order could and should therefore be made under ss 52(1)(e) Trustee Ordinance as it would be expedient to vest the defendant’s cause of action (namely to claim the money from BOCHK) in the plaintiff as beneficiary[4]. That order would ensure that the plaintiff (a fraud victim) is legally entitled to demand that BOCHK release the money in the Account, and on such release the debt owed by BOCHK would be discharged.

20.  However, the request for a vesting order and for orders that BOCHK transfer amounts in the Account to the plaintiff gave rise to the following issue.

CAPACITY AND STATUS OF BOCHK IN THE PROCEEDINGS

21.  As I have mentioned, BOCHK had been named as a “respondent” to (and served with) the Default Judgment Summons.  Yet there was no order, and in the Default Judgment Summons no application, that BOCHK be added to the proceedings in any capacity, whether it be as a defendant, respondent, or third-party.

22.  The plaintiff had previously sought and obtained non-party discovery against BOCHK by way of a previous summons in the action, in which BOCHK was named as a respondent.  That would have been on a different basis as it is open to the court to make (as the learned Master did in this case) such an order against a “non-party”, pursuant to well-established procedures including ss 47B of the District Court Ordinance (Cap 336), and/or s 21 Evidence Ordinance (Cap 8).

23.  In raising this issue, I also had in mind the obiter observations of Deputy High Court Judge Paul Lam SC at paragraph 22 of International Automotive Components Group SRO v Xuke Trading Ltd & anor [2017] 3 HKC 137[5] and similar concerns as expressed by Deputy District Judge Vincent Lung at paragraphs 31-32 of Primeway International Ltd v Yi He (HK) Trading Co Ltd [2018] 2 HKLRD 1416.

24.  Nevertheless, after considering Mr Phillips’[6] submissions, it seemed clear that there was and is a practice which has originated in the High Court whereby even if a bank takes a neutral stance, it can and should be joined, on application by a plaintiff, as a respondent in proceedings to ensure that it can make a transfer to the plaintiff in circumstances where (as in this case) a constructive trust of the aforesaid nature is pleaded and established, a vesting order is sought under s 52(1)(e) Trustee Ordinance, and declarations/directions are sought in relation to the manner in which the right to transfer the chose in action is to be exercised under s 52(5) Trustee Ordinance.  This is done to ensure that the bank can be notified of, is able to make submissions in relation to, and will be bound by, the orders sought: see Guaranty Bank and Trust Company v Zzik Inc Ltd HCA 1139/2016, unreported, Cooney SC DHCJ at paragraph 40; Skandinaviska Enskilda Banken SA v Hongkong Liling Trading Ltd & anor [2018] HKCFI 2676 per Recorder Manzoni SC at paragraphs 30-32[7]; Prescient Corporation v Dunse Trading Ltd [2019] HKDC 735 per A Li DJ at paragraph 35[8]; Tai Ching-Ling v Cai Guo Chuan; Bank of China (Hong Kong) Limited [2019] HKCFI 2251 per M Ng J at paragraph 20; Comtel Solutions v Yi Li Trade (HK) Co Ltd, Bank of Communications [2019] HKCFI 2407 per S Leung DHCJ at paragraph 10; SBM Bank (Mauritius) Ltd v Warner Trading Ltd & ors [2019] HKCFI 2956 per S Leung DHCJ at paragraph 18.

25.  As the plaintiff only made such an application at the hearing, and as BOCHK had not unequivocally indicated its position in relation to the application, I directed that the plaintiff seek to notify BOCHK and the defendant of such application.  As events transpired, there was no opposition to the application and BOCHK asked for their attendance to be excused at the resumed hearing (which request I granted).  I hence made the order at paragraph 12(a) above to facilitate the order at paragraph 12(b)(iii) above.

26.  I thank Mr Phillips for his assistance.