IQ SOLUTIONS INC v. WKJ LTD

HCA 1791/2023

[2024] HKCFI 559

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1791 OF 2023

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REASONS FOR DECISION

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1.  This is the application by summons filed on 10 January 2024 of IQ Solutions Inc (“the Plaintiff”) for default judgment pursuant to RHC Order 19, rule 7 and various declarations against WKJ Limited (“the Defendant”) in the sum of US $1,980,800 (“the Sum”).

2.  The Defendant who has been served with the writ, the statement of claim and the summons has neither filed an acknowledgement of service nor defence. The Defendant has not entered an appearance and is absent at this hearing.

3.  The Plaintiff is a company incorporated in Delaware, USA and carries on the business of providing health communications and digital technology solutions.

4.  The Defendant is a Hong Kong company. It holds a multi-currency Hong Kong bank account with Dah Sing Bank (“D’s Account”).

5.  The Plaintiff is the victim of an email fraud. On 3 November 2023, it obtained a proprietary injunction together with a Mareva injunction (collectively, “the Injunction”) against the Defendant in respect of the Sum paid into the D’s Account.

6.  The facts which give rise to the Plaintiff’s claim are pleaded in §§5 to 12 of the Statement of Claim. In summary, an unknown fraudster(s) (“Fraudster”) hacked into the email account of the Plaintiff’s CFO and his account on the Plaintiff’s Teams Application Exchange System while the Plaintiff’s CFO and CEO were both on holiday.

7.  The Fraudster then sent instructions from the CFO’s email account to the Plaintiff’s accounting manager to process a wire transfer for the Plaintiff (being the Sum) to D’s Account. The Plaintiff’s VP also received an email purportedly from the CFO instructing him and the accounting manager to inform him once the transfer is approved. In the belief that those emails were genuine, the Sum was paid into D’s Account.

Default judgment

8.  As the Statement of Claim (“SOC”) has been served and no defence has been filed, the court has power pursuant to RHC Order 19, rule 7 to order that a default judgment be entered in favour of the Plaintiff based on the facts pleaded in the SOC. Those facts are deemed to be admitted by the Defendant under Order 18, rule 13.

9.  Where property has been obtained by fraud, equity imposes a constructive trust on the fraudster recipient so that money is recoverable and traceable in equity: see Tai Ching Ling v Cai Guo Chuan [2019] HKCFI 2251 at §15 and the authorities cited.

Declaratory relief

10.  The Plaintiff also seeks various declarations directed at seeking recognition that the funds paid to the Defendant were the Plaintiff’s property. In the absence of any defence, the funds in D’s Account remain the Plaintiff’s property. They do not involve any declaration that the Defendant has acted fraudulently or was involved in the fraud other than as the recipient of the proprietary funds.

11.  Declaratory relief in the default judgment context have been granted in cases where a proprietary claim is asserted in order to secure the plaintiff’s proprietary claim: see Sultana Distribution Services Inc v HongKong Fuheng Technology Co Ltd [2018] HKCFI 1480 at §§8 and 12; Hong Kong Civil Procedure 2024, §19/7/20.

12.  Without such declaratory relief, the Plaintiff cannot obtain the fullest justice as it will be exposed to the risk that other creditors may seek to claim against assets held by the Defendant or the Defendant’s account balance. In that event, the Plaintiff would be forced to share its property with other creditors: see Terence John Stott v Larks Trading Limited & Ors [2019] HKCFI 1317 at §15.

13.  The specific declarations sought are the following:

(1)  the Plaintiff is the owner of the funds paid to the Defendant;

(2)  the Plaintiff is the owner of the entire balance in D’s Account as at the end of 13 October 2023; and

(3)  the Plaintiff is the owner of the balance of D’s Account (less HKD 400).

D’s Account

14.  Banking documents obtained from DSB pursuant to the section 21 banker’s disclosure order show the starting balance and transfers in and out of that account during the relevant period between 9 October 2023 and 10 November 2023. During the relevant period there were no subsequent deposits other than interest of USD 1.11 paid into the account on 31 October 2023.

15.  Although there were 8 transfers of substantial funds amounting to USD 1.481 million paid out of that account on 12 October 2023, they were all cancelled and returned to that account on 13 October 2023. A number of payments (a little over USD $500) relating to those transactions were made out of D’s Account.

16.  The effect of that is that the starting balance was in fact greater in value than the payments paid out of that account by a nominal sum. Applying the first in first out presumption, a total of HKD 353.40 should still remain in D’s Account after making the payments associated with those transactions.

17.  In view of the above which only came to light after the Plaintiff’s written submissions dated 5 February 2024, at the hearing, Mr Jeffrey Yau, counsel for the Plaintiff explained the minor calculation error and submitted supplemental submissions dated 15 February 2024 to explain the error. The net effect is that the proprietary amount under the declaration originally sought in respect of D’s Account as at 10 November 2023 is reduced by HKD $400.

18.  Having heard counsel and perused the revised draft order that corrects the error, I am satisfied with the explanation.

19.  As the only subsequent payment into D’s Account was the interest, that amount was carved out from the 3^rd declaration. That declares that the balance as at 10 November 2023 (being the end of the relevant period) less the interest is the Plaintiff’s property.

20.  Accordingly, I made an order in terms of the revised draft order.

21.  The Plaintiff also sought to continue the Injunction against the Defendant post-judgment to help secure the funds in D’s account pending the Plaintiff’s recovery of the Sum. Such post-judgment extension of the injunction have been granted by the court in the Sultana and Terence John Stott cases.

22.  The period of continuation sought was for 6 months. I consider that a reasonable period in the circumstances and granted the continuation.