HYPERTEC SYSTEMS INC. v. YIFIM LTD AND ANOTHER

HCA 1308/2021 & HCMP 1829/2021

[2022] HKCFI 482

HCA 1308/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1308 OF 2021

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AND

HCMP 1829/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1829 OF 2021

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(Heard Together)

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REASONS FOR JUDGMENT

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1.  Due to email fraud, the plaintiff has caused to transfer sums of its money, which landed into the bank accounts of the two defendants in Hong Kong. The plaintiff commenced HCA 1308/2021 (“the Action”) to recover from the defendants the sums or their traceable proceeds, and HCMP 1829/2021 (“the MP”) for vesting orders of the right to recover directly from the banks the sums currently standing in the accounts pursuant to any judgment in the Action. After hearing, this court granted the default judgment and vesting orders sought. To do fairness to counsel’s submissions, I find it appropriate to give reasons in detail.

Background

2.  Briefly, by hacking into the email of the plaintiff’s key personnel as well as using bogus email addresses and deploying false instruments, fraudsters of unknown identities (the “Fraudsters”) deceived the plaintiff into making payments of a total sum of US$1,360,500 to the 1^st defendant and a sum of US$250,000 to the 2^nd defendant (the “Fraud”). The money ended up in the defendants’ accounts with OCBC Wing Hang Bank Limited (“OCBC”) and Bank of Communications (Hong Kong) Limited (“BComm”) in the respective sums of US$1,360,384.93 and US$249,892.30.

3.  Upon discovering the fraud, the plaintiff, amongst other steps taken, came to this court ex parte on 31 August 2021 when, after hearing, this court granted a Mareva and proprietary injunction in favour of the plaintiff against the defendants (the “Injunction”) and a disclosure order against the banks.

4.  The writ and statement of claim herein in the Action were subsequently filed and served.

5.  On 10 September 2021, the Injunction was continued inter partes until further order of the court.

6.  The defendants have defaulted in entering appearance. By summons filed in the Action on 15 November 2021, the plaintiff sought default judgment against the defendants.

7.  The MP were commenced by the plaintiff for orders that the right to sue for and recover the sums transferred to the defendants and currently standing in their bank accounts should be vested in the plaintiff. Incidental to that, the plaintiff sought the continuation of the Injunction save that it might be varied to the extent that would allow the banks to comply with the vesting orders, if made, in aid of the enforcement of the judgment sought.

Service of proceedings

8.  Affirmations of service have been filed.

9.  The writ and the Injunction were served by leaving at the registered offices of the defendants on 2 September 2021. As of that day, the 2^nd defendant’s registered address was at Shun Tak Centre in Sheung Wan, Hong Kong (the “Sheung Wan Address”). They were however returned to the plaintiff’s solicitors by courier on 15 September 2021. It was later discovered that a notice of change of address was apparently filed with the Companies Registry on 8 September 2021 on behalf of the 2^nd defendant for change to another address in Mongkok (the “Mongkok Address”). Such change was said to take effect from 25 August 2021.

10.  In my judgment, the above circumstances did not serve to compromise the validity of service on the 2^nd defendant.

11.  As a corporate addressee, service may be effected by leaving at its registered address: see section 827 Companies Ordinance (“CO”). So long as it is the address according to the prevailing public record, service at the address will be good whether or not the addressee might have vacated from the address by the time of service: see (by analogy) Ho Kwok Wah v Group Jewellery Arts Limited [2000] 3 HKC 595 at §11. A company also may not benefit from its own failure to learn of the service of the writ upon it at its vacated registered office: see United Venture Navigation Co Ltd v Shum Yuen Nim [1991] 2 HKC 73, 86.

12.  This was so in the present case where the Sheung Wan Address was the 2^nd defendant’s registered address according to public record as of 2 September when the plaintiff could not have knowledge about the change, of which the Companies Registry was notified only on 8 September. Nor was there suggestion that the 2^nd defendant had actually vacated from the address or that the plaintiff had knowledge about such removal at the time of the service.

13.  In any event, on 16 September 2021, the plaintiff took the course of effecting service of documents including the writ and the Injunction by leaving at the Mongkok Address as well. The time for the 2^nd defendant to enter appearance counting from then would still have elapsed before the issuance of the summons for judgment.

14.  On 15 October 2021, the plaintiff served the statement of claim on both defendants by leaving at their respective registered addresses. The copy of the pleading served on the 1^st defendant was subsequently returned to the plaintiff’s solicitors. However, section 827 mentioned above merely provides for service by leaving at the company’s registered address. Counsel was prudent in drawing this court’s attention to the case of Li Ngan Kwan v Gao Li Hui [2007] 4 HKLRD 592. However, as counsel also pointed out, that was very much a case of unique circumstances in the context of service pursuant to the repealed section 338 of the CO. Unlike the case of O10, r1(3) of the Rules of the High Court, Cap 4A, the plaintiff is not required to depose to its belief that the documents so served would have come to the addressee’s knowledge within 7 days. This reinforces the proper reading of what is or is not required under section 827.

15.  The summonses for default judgment and the originating summons for the vesting orders were served on 18 November 2021 by leaving at the registered offices of the defendants respectively.

16.  The MP were separately commenced pursuant to the comment of the court in previous decided case, which will be discussed below. As far as the MP were concerned, the defendants have entered no appearance. OCBC and BComm were named as respondents in the MP. Both banks indicated their neutral stance in relation to the application for the vesting orders.

The Action

17.  Strictly, evidence was not admissible for the purpose of obtaining default judgment. However, evidence was admissible for the purpose of the application for the vesting orders. Striking such difference in the circumstances of this case may seem more academic than real.

18.  In any event, the matters pleaded in the Action in explanation of the Fraud suffice in establishing factual basis for the claim in the Action. Amongst others, the plaintiff was deceived into causing the transfer of money. The exact identities of the Fraudsters are not known, and with whom the plaintiff had no prior or existing business dealings. The money entered into the bank accounts of the defendants in Hong Kong. The defendant had no known or established business. The plaintiff had no business dealings with either of the defendants at any time.

19.  As a matter of law, constructive trust arose by law out of the transfer and receipt by way of the Fraud so that the money in the bank accounts of the defendants became recoverable and traceable in equity: see Creative Impact (Hong Kong) Limited v Luckon Travel Limited [2021] HKCFI 1552 at §§17-18.

20.  As recipients of the sums, the circumstances were such that it would be unconscionable for the defendants to receive and to retain them. The defendants’ state of knowledge that they were not so entitled made it unconscionable to receive or to keep the money: see Guaranty Bank and Trust v Zzzik Inc HCA 1139/2016 (18 July 2016) at §§32-33. Such knowledge need not be acquired at the time but could be acquired after the money has come in their hands: see Lewin on Trusts (20^th ed) at §42.83.

21.  The defendants would acquire such knowledge by the service of the Injunction and these proceedings at the latest, but apparently retaining the sums without legitimate reason. Therefore, a constructive trust arose as a matter of law in respect of the sums being held by the defendants in their respective bank accounts.

22.  It has been repeated in decided cases that whilst declaratory relief would normally not be granted by default without a trial, that is only a rule of practice. The court retains the discretion to do the fullest justice to the plaintiff to which he is entitled in the circumstances of the case: see Hong Kong Civil Procedure (2022) at §19/7/14; Creative Impact (above) at §19.

23.  In a case like the present one, a monetary judgment without declaratory relief would also put the plaintiff into the category of an unsecured creditor, with the result that its proprietary entitlement to the money in question and tracing could not be effectively recognised. Declaratory relief is therefore appropriate: see Creative Impact (above) at §20; Zzzik (above) at §38. The declaration would cover the amounts that landed in the bank accounts of the defendants respectively.

24.  The plaintiff also relied on the cause of claim for unjust enrichment to the extent of the money received by the defendants. To establish such claim, the plaintiff would have to prove that (i) the defendants have been enriched; (ii) they were enriched at the plaintiff’s expense; (iii) it was unjust; and (iv) there is no defence entitling them to the enrichment: see Zzzik (above) at §27. The present case involved the Fraud and transfer of the sums to the defendants respectively as the first recipients. The pleaded facts suffice to satisfy the requirements.

25.  The plaintiff also relied on the cause of claim for conspiracy. Conspiracy takes the form of a combination of parties to act with the intention of causing damage to a third party who thus incurs the intended damage: see Clerk & Lindsell on Torts (23^rd ed) at §24-98. On the one hand, there was no direct evidence of combination between the defendants or between them and the Fraudsters. On the other hand, neither of them has appeared or shown any intention of coming clean as merely innocent parties or offering restitution to the plaintiff. The fact is that they have been retaining the sums so received for no legitimate reason. There was therefore basis for the plaintiff to ask the court to draw inference against the defendants as parties facilitating the perpetration of the Fraud. This cause of action was particularly relevant to the claim for monetary judgment for the whole sum lost by the plaintiff against both defendants.

26.  In the circumstances, the claim for personal relief was established. For the loss of the sums, the plaintiff should be entitled to damages in the same amount out of its pocket as a result of the Fraud against both defendants.

27.  After the above consideration, this court entered judgment in favour of the plaintiff against the defendants respectively. The declaratory relief against each of the defendants was made and the monetary judgment against both defendants as sought were entered with costs order against both defendants (to be taxed if not agreed).

The MP - vesting orders

28.  The MP were commenced for the vesting orders pursuant to section 52 of the Trustee Ordinance (“TO”). The section provides:

“(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

……

(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.” (emphasis added)

29.  The statutory basis and thus jurisdiction of the court to grant the vesting order in circumstances like those in the present proceedings has been a recent subject of debate. Opposite views have been expressed by different first instance courts. Amongst them, this court has in a number of cases granted such vesting orders in circumstances similar to the present case. As of today, the first instance court is entitled to come to its own reasoned decision on this issue.

30.  When the issue came before Mr Recorder Eugene Fung SC in 800 Columbia Project Company LLC v Chengfang Trade [2020] HKCFI 1293, which was also a cyber-fraud case, the learned Recorder, as he was entitled to do so, held that the court’s jurisdiction under section 52(1)(e) TO was not engaged to justify the making of a vesting order of the right to recover the plaintiff’s money transferred due to fraud and landed in the hands of the defendant recipients. The learned Recorder’s reasoning had the support of the court in the subsequent decision of Tokić DOO v Hongkong Shui Fat Trading [2020] 4 HKLRD 189 at §16. The issue again arose before the court in Essilor Manufacturing (Thailand) v G Doulatram [2020] HKCFI 1790 but the application for vesting order was no longer pursued and thus the court’s decision in this respect was actually saved in the circumstances.

31.  The analysis in 800 Columbia Project Company LLC and the previous whole line of decisions in both High Court and District Court levels were rehearsed by Deputy High Court Judge Paul Lam SC in his discussion in the case of Wismettac Asian Foods v United Top Properties [2020] HKCFI 1504. The learned Deputy Judge approached the issue first by construing the wordings of section 52 of the TO naturally and broadly. In a context similar to that of the present case, a constructive trust came into existence by operation of law at the very moment the fraudster or the subsequent recipient received the victim’s money or its traceable proceeds in their bank accounts. The grant of judgment, including the declaration in respect of such already arisen state of affairs by way of court process merely affirms the existing legal position instead of creating the trust only then: see Wismettac (above) at §43. There would therefore be no good reason for regarding constructive trust in such circumstances as something other than a true trust or excluding constructive trustee from the meaning of trustee in the subsection. Section 52(1)(e) should apply, so that a vesting order may be made upon proof that a constructive trust arose by operation of law in respect of the money extracted from the plaintiff by fraud or mistake which ended up in the recipient’s bank account now subject to the trust.

32.  I find the reasoning advanced in Wismettac to be compelling, which I would also adopt respectfully. Before the present case, there were other instances where Wismettac was cited in support of the same conclusion in respect of the applicability of section 52(1)(e) was reached: see for instance Compagnie Financière Mèditerranèe Cofimed SA v. Bank of China (Hong Kong) [2021] HKCFI 2572; Star Therapeutics v Leabon Technology(HK) Ltd [2021] HKCFI 1715.

33.  It was suggested in Wismettac (at §55) that an application for vesting order under section 52(1)(e) should be taken out by way of originating proceedings naming the relevant bank as a respondent. The plaintiff in the present case followed that.

34.  The vesting order will be made only if it is proved that the balance in the bank account in question represents the victim’s money or its traceable proceeds: see Wismettac at §50. The plaintiff by evidence managed to prove and trace the amounts now standing in the accounts of the defendants in the present case, namely a balance in the 1^st defendant’s OCBC account in the sum of US$449,264.79 and a balance in the 2^nd defendant’s BComm account in the sum of US$249,892.30, as originated from the plaintiff’s transfers in the first place.

35.  An order will be made if it appears to the court that it is expedient to do so. This would be where it is impossible or difficult to deal with the property without such an order. The impossibility existed and would persist where the money in the bank account of the recipient could not be moved without his co-operation such as the present case: see Wismettac; Compagnie Financière.

36.  As mentioned, the two banks concerned have indicated that they would adopt a neutral position as regards the vesting orders sought.

37.  All matters considered, this court granted the vesting orders in respect of the bank balances mentioned above. The banks are innocent parties caught by this matter. This court ordered that the plaintiff would have to bear all the reasonable costs incurred by the banks on an indemnity basis in complying with the vesting orders. Such costs together with the costs of the MP (to be taxed if not agreed) shall in turn be borne by the 1^st and the 2^nd defendants.