JOHN JOSEPH DORAN v. LB SHOE CO., LTD AND OTHERS

HCA 886/2022

[2023] HKCFI 847

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 886 OF 2022

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J U D G M E N T

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1.  The Plaintiff is applying for judgment against the 1^st, 2^nd, 3^rd, 7^th and 9^th Defendants in default of acknowledgment of service and defence under Order 19, rule 7 of the Rules of the High Court (“RHC”). The 4^th and 8^th Defendants have filed a Defence and are not included in this application. The 5^th and 6^th Defendants are abroad and also not included.

Service

2.  The 1^st, 2^nd, 3^rd, 7^th and 9^th Defendants are all Hong Kong registered companies and have been served at their registered offices. The 7^th and 9^th Defendants have applied for deregistration at the Companies Registry but the process has been withheld upon objection of the Plaintiff.

3.  The 7^th Defendant uses a co-working space and service has been effected by leaving the papers with the receptionist of the co-working space at the outer office rather than the particular room stated in the company registration. Be that as it may, I am satisfied that all the Defendants have been duly served.

The Claim

4.  An application for default judgment under O19, r7 of the RHC is decided by reference to the statement of claim alone without reference to the evidence: Leader Screws Manufacturing Co., Ltd v Huang Shunkui [2021] HKCFI 141.

5.  As gleaned from the Statement of Claim, the case involved an online investment fraud. The Plaintiff had developed a romantic or amorous affair with a female called Angela. Angela befriended the Plaintiff on Facebook enticed him to invest in foreign exchange purportedly through an online App called MetaTrader5 (“MT5”).

6.  Angela represented that a customer service specialist called Cassie had served her uncle and others VIPs for years, and the transections would be conducted through an alleged a legitimate and licenced broker called Pion Market International Co., Ltd (“PMI”). Angela said her uncle would give instructions as to when to buy and sell, and transactions would be risks free and 100% profitable with her uncle’s instructions. Thereafter, Cassie instructed the Plaintiff to make several deposits with the 1^st and 2^nd Defendants (“1^st Layer Recipients”).

7.  On 8 April 2022, the Plaintiff made the initial deposit of US$250,000 with the 1^st Defendant. The transfer was stopped by the Plaintiff’s banker as the ownership and finances of PMI were unknown. Angela, Cassie and persons purportedly operating PMI (collectively termed the Fake Customer Service) actively dispelled the Plaintiff’s suspicion. Angela said the 1^st Defendant’s bank account was used to host funds of MT5 and not other purposes. Cassie said MT5 would deposit the customers’ funds with top banks of the world with so-called trust guarantee.

8.  As a result, the Plaintiff continued with the first transaction and had made the purported profits of US$55,800.

9.  On 13 April 2022, the Plaintiff requested the withdrawal of US$50,000 and it was done within the next day. This allayed any concerns of the Plaintiff.

10.  Between 6 April and 10 May 2022, in reliance on the representations, the Plaintiff transferred US$4,005,000 to the 1^st and 2^nd Defendants in the belief that he was genuinely investing in Forex trades.

11.  As at 1 June 2022, the Plaintiff had transacted six trades making total profits of US$3,406,450. But in reality, such profits were never made and the balance of the Plaintiff’s trading account with MT5 was likely to have been manipulated by PMI.

12.  On 6 June 2022, Cassie orchestrated a trade which wiped out the Plaintiff’s alleged profits and resulted in a net loss of US$7,205,950.

13.  Between 7 April to 11 May 2022, the 1^st and 2^nd Defendants systematically transferred the Plaintiff’s deposits to the other Defendants (“2^nd Layer Recipients”) on the same or next day of the transfer.

14.  The representations were false in that PMI was not a licenced broker, and Google search had yielded nil result. There is one Pion Market Limited registered in the United Kingdom but it is not a licenced broker. There is a website of pionmarkets.com but the website had been flagged by specialist in locating scam websites, and the email of the registrant of the domain was reported to have been used for scams.

15.  Both the 1^st and 2^nd Defendants were shell companies appearing not to be operating any legitimate business. The 1^st Defendant’s sole shareholder cum director is resident in a remote village in Mainland China, and the 1^st Defendant has been exposed to be the designated recipient of proceeds in another Forex trading fraud.

16.  The 2^nd Defendant’s registered address showed names of other companies but not the 2^nd Defendant, and the premises were locked and did not appear to have any business conducted threat.

17.  The 2^nd Layer Recipients also appear to be shell companies with nominal correspondence addresses and no legitimate business identifiable from public searches.

18.  The 1^st and 2^nd Defendants had no dealings with the Plaintiff whatsoever, and had no entitlement or commercial justifications to retain the sums transferred by the Plaintiff.

19.  The 2^nd Layer Defendants had knowingly received fraudulent proceeds from the 1^st and 2^nd Defendants which were unconscionable and subject to tracing.

20.  The prayer for relief stated:

(1)  As against the 1^st Layer Recipients:

(a)  An order for payment of the sums of:

(i)  As against the 1^st Defendant, the sum of US$2,200,000; and

(ii)  As against the 2^nd Defendant, the sum of US$1,800,000.

(b)  Damages and/or equitable compensation (to be assessed).

(2)  As against the 2^nd Layer Recipients, an order for payment of the sums of:

(a)  HK$1,950,000 and US$667,016 from the 3^rd Defendant;

(b)  (concerning the 4^th Defendant);

(c)  (concerning the 5^th Defendant);

(d)  (concerning the 6^th Defendant);

(e)  US$364,491.69 from the 7^th Defendant;

(f)  (concerning the 8^th Defendant); and

(g)  US$428,578.14 from the 9^th Defendant.

(3)  As against all the Defendants:

(a)  A declaration that each of the Defendants holds such part of the Defrauded Sums and/or their traceable proceeds or assets that each of them has respectively received on trust for the Plaintiff;

(b)  An order for the delivery up or transfer of such part of the Defrauded Sums and/or their traceable proceeds or assets that each of them has respectively received on trust for the Plaintiff;

(c)  All necessary accounts and inquiries to enable the Plaintiff to trace and recover the Defrauded Sums that each of them has respectively received on trust for the Plaintiff;

(d)  Interest, including compound interest, in equity or pursuant to sections 48 and 49 of the High Court Ordinance (Cap 4); and

(e)  Costs.

Injunctions

21.  The Plaintiff has obtained Mareva and proprietary injunctions against all the Defendants. The total sums frozen is about US$1.2 million. The Plaintiff has also asked for extension of the injunctions for eight months post judgment in aid of execution.

Decision

22.  Apart from money judgment and assessment of damages which the Plaintiff is entitled to, the Plaintiff has prayed for discretionary remedies like declaration of constructive trust and extension of the injunction, etc., hence the application for instead of entering of default judgment.

23.  In determining whether to grant default judgment, the Court must consider the application according to the pleadings alone, and decide whether the plaintiff appears to be entitled to judgment on the statement of claim: see Hong Kong Civil Procedure at §19/7/11; Seto Yim King v Soo Hooyet Dew [2019] HKCFI 2640 at [10] per K Yeung J.

24.  The Plaintiff has pleaded the tort of deceit and fraudulent misrepresentation and conspiracy to defraud by the 1^st and 2^nd Defendants, Angela, Cassie, PMI and the Fake Customer Service in causing the Plaintiff to have made the transfers or deposits to the 1^st and 2^nd Defendants. I am satisfied the claim has been made out in the context of default judgment.

25.  From the circumstances as pleaded, the Plaintiff has also made out the unjust enrichment and restitution claim against the 2^nd Layer Recipients.

26.  The claims of the 1^st, 2^nd, 3^rd, 7^th and 9^th Defendants are severable. The Defence of the 4^th and 8^th Defendant pleaded bona fide recipients and change of position. Hence, they do not impact of the claims of the 1^st, 2^nd, 3^rd, 7^th and 9^th Defendants.

27.  Although it is not the normal practice to grant a declaration upon a default judgment, it may be granted when it is necessary to do fullest justice to the plaintiff to which it is entitled: see Hong Kong Civil Procedure at §19/7/11; Seto Yim King v Soo Hooyet Dew op. cit. As declaration of constructive trust is necessary for the plaintiff to effect tracing of the proceeds of fraud, the declaratory relief should be granted.

28.  The Plaintiff has asked for compound interest in that it may be difficult to trace the profits earned on the defrauded funds given that it is a case of frauds. Ms Tse, counsel for the Plaintiff, cited Libertarian Investments Ltd v Thomas Alexej Hall (2013) 16 HKCFAR 681 per Ribeiro PJ. However, Libertarian Investments was a case of breach of fiduciary duties but such had not been pleaded by the Plaintiff. There has not been any authority cited on application of the principle to unjust enrichment and restitution cases, and it not be apt to accede to such claim without full argument. In the event, Ms Tse is not pressing for compound interest. Hence, interest awarded shall be simple interest.

29.  The Court do grant post-judgment injection in aid of execution in fraud cases: see Leader Screws Manufacturing op. cit. (extension of 15 months) and Spruce Australia Pty Ltd v New Senjia Trade Limited [2019] HKCFI 101 (extension of seven months). The Plaintiff is asking for extension of eight months, and it is in order and granted.

30.  The Plaintiff is asking for execution of documents by other parties as may necessarily be required to effect the defrauded sums under section 25 of the High Court Ordinance (Cap 4).

31.  Section 25A of the High Court Ordinance provides that:

“Execution of instruments by order of Court of First Instance

(1) Where the Court of First Instance has given or made a judgment or order directing a person to execute any conveyance, contract or other document, or to endorse any negotiable instrument, then, if that person—

(a) neglects or refuses to comply with the judgment or order; or

(b) cannot after reasonable inquiry be found,

the Court of First Instance may, on such terms and conditions, if any, as may be just, order that the conveyance, contract or other document shall be executed, or that the negotiable instrument shall be endorsed, by such person as the Court may nominate for that purpose.”

32.  There has been conflicting authorities on section 25A. In Tokić DOO v Hongkong Shui Fat Trading Ltd & Ors [2020] 4 HKLRD 189 per DHCJ Douglas Lam SC at [21] to [22], the Court has granted the “more expedient remedy” to “enable a defrauded victim to have transferred to him those assets and proceeds that are declared by the Court to be held by a defendant as constructive trustee, especially in cases where the defendant is unlikely to respond to or comply with a Court Order”.

33.  However, in Kuo Benjamin Yung-Hsiang v Xu Meiyi [2022] HKCFI 3007 per DHCJ Jonathan Chang SC, the Court declined to do so as “There must first be a judgment or Court order directing a person to execute a specific conveyance, contract or document. It is only upon the defendant neglecting or refusing to comply with the judgment or Court order (or that the defendant cannot after reasonable inquiry be found) would the Court be empowered to order that specific document or instrument be endorsed by such person as the Court shall nominate” [11].

34.  “… whilst the defendant is holding the Sums and their traceable proceeds that may still remain in the defendant’s hands on trust for the plaintiff and is liable to repay the same to the plaintiff, this could not be translated into (and the plaintiff has not pleaded that there is) an obligation of the defendant to specifically execute bank documents to effect any transfer out of the Account…” [12].

35.  Ms Tse submitted that in such case of fraud and also default judgment, and the 7^th and 9^th Defendants have applied for deregistration, it is likely that the Defendants would not be complying with an order of the Court to effect any document of transfer. Hence, the Court should grant the expedient remedy as reasonably necessary expected to be required. It is submitted that the Court should follow Tokić and not Kuo Benjamin.

36.  Be that as it may, in looking at the wordings of section 25A, the power of the Court to order substituted execution by another person is related to a specific document by the person named or intended by the terms of the document itself. In any case, the Court may invoke the power in section 25A as the transaction, document and signatory do specifically arise. Hence, the Court will not grant the s. 25A at this stage.

37.  The Plaintiff shall submit the draft order in terms of the decision above for approval.

38.  The Plaintiff shall be entitled to costs, subject to summary assessment upon submission of the skeleton bill with brief grounds in support.

39.  Lastly, I thank Miss Tse for her helpful submissions.