AESTHETICS ARCHITECTURE PTY LTD v. MAIN CROWN ENTERPRISES LTD

CACV 188/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 188 OF 2013

(ON APPEAL FROM HCA 483/2012)

____________

BETWEEN

____________

______________________________

REASONS FOR JUDGMENT

______________________________

Hon Cheung CJHC:

1.  At the conclusion of the hearing, we dismissed the defendant’s appeal from the judgment dated 29 August 2013 of Suffiad J whereby the learned judge dismissed the defendant’s appeal from the order of Master de Souza dated 17 January 2013. We also awarded costs against the defendant. We now give our reasons.

The facts

2.  The facts have been clearly stated in the judge’s judgment.  Very briefly, the plaintiff is the victim of a fraud perpetrated by a fictitious investment company known as “Smith & Olsson”, as a result of which the plaintiff, an Australian company, remitted two sums of US$299,612.22 and US$414,639.61 into the HSBC bank account of the defendant on 8 and 17 November 2011 respectively.  According to Smith & Olsson, the defendant was their “transfer agent” in Hong Kong to receive the plaintiff’s monies for the purposes of making “investment” through Smith & Olsson.

3.  The defendant is a Hong Kong company beneficially owned and controlled by a Jacob Dov Senderowicz (“Jacob”).  Its business is said to be “project management services for property projects in Hungary, Bulgaria, Romania, Poland and India”.  Its business operations are controlled by Jacob from Antwerp, Belgium where he apparently resides.

4.  After receiving the two remittances from the plaintiff, by nine transfers, Jacob caused the defendant to remit the monies to two recipients, that is, Daniel Stone Realty & Development Corporation (“Daniel Stone”) and LJ Charbit (“Charbit”):

Date	Amount (US$)	Recipient
17 November 2011	230,000.00	Daniel Stone
17 November 2011	29,900.00	Charbit
22 November 2011	320,000.00	Daniel Stone
25 November 2011	45,000.00	Charbit
10 December 2011	4,300.00	Charbit
21 December 2011	44,054.00	Charbit
28 January 2012	13,300.00	Charbit
9 February 2012	8,000.00	Charbit
12 March 2012	15,600.00	Charbit

5.  The last and third last remittances to Charbit were in fact not made by the defendant directly, but by a Singaporean company, Crown Group Services Pte Ltd (“Crown Group”), also beneficially owned and controlled by Jacob, by means of another HSBC account maintained by Crown Group with that bank.  I will presently return to the last remittance.

6.  After discovering the fraud and reporting the matter to the police, the plaintiff commenced the action below against the defendant for the return of the two remittances as money had and received.  The writ (endorsed with the statement of claim) was issued on 23 March 2012.  On the same day, the plaintiff obtained an ex parte Mareva injunction to freeze the defendant’s HSBC account.  The writ together with the injunction papers were served on the defendant’s registered address in Hong Kong on the same day.  The ex parte injunction was continued on 13 April 2012 until further order of the court.

7.  The defendant did not enter any appearance, so judgment in default was entered for the plaintiff on 26 April 2012.  On 27 June 2012, the plaintiff issued a garnishee order to show cause in respect of the defendant’s funds in its HSBC account to satisfy the default judgment.

8.  On 10 July 2012, the defendant applied by summons to set aside the default judgment.

9.  According to Jacob’s supporting affidavit, he and the defendant were totally ignorant of the fraud practised on the plaintiff.  According to him, he has a business friend known as Michael Shaked (“Shaked”), whom he found to be “trustworthy and reliable”.  In September 2011, Shaked asked Jacob to “receive and disburse” for him approximately US$700,000, being proceeds of sale from certain property transactions in Australia.  Shaked told Jacob that one of the beneficiaries in the transactions, Charbit, was going through divorce proceedings with his wife, and needed the funds to be disbursed to him as and when he required.  Shaked assured Jacob that the transactions, as indeed his handling of the monies, would be “perfectly legitimate” and that the parties involved were all “respectable”. He also told him that he would receive a small handling remuneration of 0.5% of the amount, but he (Shaked) was not profiting out of these transactions as the persons involved were good friends of his.

10.  “Confident of the integrity of [Shaked] and believing that there was nothing illegal or untoward with the transactions and [his] handling of the money”, Jacob agreed to the suggestion and to using the defendant’s HSBC account for the transactions. According to Jacob, that was how the defendant came to be remitted with the two sums of money from the plaintiff, with which he and his company had had no dealings whatsoever.  And, in accordance with the instructions of Shaked given over the telephone, he caused his two companies to make the nine bank transfers described above in favour of Daniel Stone and Charbit respectively.

11.  According to Jacob, his attempt to transfer the last sum of money (US$15,600) to Charbit from the defendant’s HSBC account in around the second week of March 2012 was unsuccessful.  When he telephoned the bank to inquire why, he was told that the Hong Kong Police had frozen that account.  He therefore called the Commercial Crime Bureau, and was told that “the account could not operate because illegal money had been paid into it”. The officer that Jacob spoke to refused to explain the matter to him further but asked him to visit him in Hong Kong.  That notwithstanding, Jacob still arranged for the remittance of US$15,600 to Charbit through his other company, Crown Group, on 12 March 2012.

12.  As to the default judgment, Jacob’s explanation was that through omission, he had failed to cause the immediate shareholder of the defendant, a Canadian company known as BrucalInternational Inc (“Brucal”), to file its annual returns for two years, and the company was therefore deregistered.  That was why even though he was aware of the service of the writ and the grant of injunction, he could not, through Brucal, give instructions to his solicitors (Kenneth Sit) to file an acknowledgment of service to defend the proceedings, until 27 April 2012 when the registration of Brucal was reinstated in Canada.  On 30 April 2012, Kenneth Sit attempted to file the defendant’s acknowledgement of service to give notice of intention to defend, but could not do so because the court had already granted a default judgment on 26 April 2012.

13.  Jacob claimed that he had absolutely no knowledge of the fraud, and had no connection whatsoever with the fraudsters. He claimed that he came into possession of the monies in question innocently and had parted with them innocently before commencement of proceedings. Through counsel, he relied on the defence of ministerial receipt.

The decisions below

14.  On 17 January 2013, the defendant’s setting aside application was dismissed by Master de Souza, who also made the garnishee order absolute.  On 28 January 2013, Master Herbert Au Yeung dismissed the defendant’s application for a stay of execution of the default judgment and the garnishee order absolute.  On 5 March 2013, as a result of the garnishee order absolute all the funds in the defendant’s HSBC account (totalling approximately HK$1.1 million) were paid over to the plaintiff’s solicitors, in partial settlement of the judgment.

15.  As mentioned, on 29 August 2013, the judge handed down a judgment dismissing the defendant’s appeal from the order of Master de Souza made on 17 January 2013.

16.  The judge did not accept Jacob’s explanation for the default.  Nor did he accept that the defendant had shown a manifestly arguable case on the merits.  In particular, the judge took the view that after the telephone conversation with the police officer of the Commercial Crime Bureau, there was no possible reason for Jacob to cause his Singaporean company to make the last remittance (on behalf of the defendant).  The judge plainly did not accept Jacob’s (and therefore the defendant’s) claim of innocence in the matter.

This appeal

17.  Before us, there was no dispute that the judgment was a regular one.  As such, it should only be set aside if the defendant could show a defence on the merits with a real prospect of success.  In considering how its discretion should be exercised, the court would of course also take into account the explanation (if any) given for the default.

18.  The applicable legal principles relating to ministerial receipt were not in dispute.  On the facts of the present case, everything turned on whether the defendant had acted in good faith and without notice in relation to the money transactions.

No meritorious defence

19.  The defendant’s failure to show a defence on the merits with a real prospect of success was determinative of this appeal.

20.  First, there was next to nothing by way of documentary evidence to substantiate the existence of Shaked and his alleged relationship with Jacob.

21.  Secondly, the alleged reason for Shaked’s wanting to use Jacob’s company’s account in Hong Kong for the purposes of receiving and disbursing the monies in question sounds highly suspicious.  There is no document to substantiate the claim.  Nothing is known, and no details are supplied, in relation to the supposed Australian property transactions, or for that matter, Charbit and Daniel Stone.  The instructions for the nine transfers were, rather surprisingly, given not by e-mails but by telephone calls, so there is again nothing whatsoever to evidence those supposed instructions.

22.  Thirdly, the supposed business of the defendant is again a mystery.  Apart from the bare allegations in Jacob’s affidavit, little if any evidence has been exhibited to back the suggested business operations of the defendant, whether in Hong Kong or elsewhere.  The bank statements of the defendant appear to indicate some activities (apart from the remittances and transfers mentioned in this judgment), but there is no explanation as to what these other activities were.

23.  Fourthly and most surprisingly, after Jacob was told by the Commercial Crime Bureau that illegal money had been paid into the defendant’s account (and that was why the account was frozen by the police in the first place), Jacob still went ahead with the last transfer.  But instead of using the frozen bank account of the defendant, he used the bank account of his Singaporean company to effect the remittance. No explanation whatsoever has been given by Jacob for this inexplicable transfer.  On Jacob’s own story, and given the bank statements exhibited, “the illegal money” that the Commercial Crime Bureau was referring to would most probably have been the monies remitted to the defendant’s bank account from Australia, after all Jacob did not suggest in his affidavit that the other banking activities evidenced in the bank statements were anything other than normal ones.  This would have been more than sufficient to put Jacob on full alert as to the legality of the sources of the remittances and the truthfulness of the story Shaked told him.  Yet there was no explanation whatsoever for the further transfer, nor was there any suggestion, let alone documentary evidence, of inquiries by Jacob with Shaked regarding the transactions in question.  All this is quite remarkable, and the judge, understandably, was not impressed by the defendant’s case.

24.  Fifthly, Jacob’s story could not hold water because according to him the two remittances, totalling US$700,000, came from certain property transactions in Australia.  Yet according to the evidence available, even by as late as February 2012, the fraudsters were still trying to lure the plaintiff into making a further payment of $186,252.56 into the defendant’s HSBC account in Hong Kong.  In Jacob’s affidavit, there was no explanation as to why money was still being asked to be paid into the defendant’s account, and what (if any) further story Shaked had told him regarding this payment of almost US$200,000 from Australia.  Rather, in paragraph 16 of his affidavit, Jacob deposed that apart from the dealings relating to the two remittances from Australia, neither the defendant nor he himself had had any other transactions with Shaked recently.  Fortunately for the plaintiff, by then it had discovered the fraud and did not make the payment as requested.

25.  Finally, there are two other developments which cast further doubts on Jacob’s story.  The first is that the defendant and Crown Group have since 22 February 2012 been included on the Securities and Futures Commission (“SFC”)’s alert list in relation to a company known as Vanquish Capital Associates.  According to the alert list, that company has used two bank accounts in Hong Kong in the name of the defendant and Crown Group for settlement of transactions as its settlement agents.  Despite Kenneth Sit’s complaint on behalf of the defendant, SFC has refused to remove the defendant and Crown Group from the alert list.

26.  A second matter is a letter dated 13 June 2012 from Holman Fenwick Willan, solicitors for another apparent victim of Smith & Olsson.  The victim was again tricked by the fraudsters into remitting two sums, totalling almost US$100,000, into the defendant’s HSBC account on 19 and 21 October 2011 respectively.  After discovering the fraud, the victim instructed the solicitors to write to HSBC to put the bank on notice of the fraud and of the remittances, and asked that the monies be preserved.

27.  If one reads these two developments together with the fraud practised on the plaintiff and the defendant’s involvement in it, one can immediately see many question marks hanging over Jacob’s story about the defendant’s innocent receipt and payment out of the two sums of money, the subject matter of the present litigation.  Indeed Jacob has given no explanation in these proceedings in relation to Holman Fenwick Willan’s allegations, which clearly cry out for a full reply.

28.  For these reasons, I have come to the conclusion that the defendant has failed to show a defence with a real prospect of success, in terms of good faith and absence of notice.  In my view, the judge rightly dismissed its appeal from the master’s refusal to set aside the default judgment.

Explanation for default

29.  I therefore need say nothing about the defendant’s explanation for the default, save to say that for my part, I am prepared to proceed on the basis that the failure of the solicitor to confirm in his affidavits the factual matters set out in Jacob’s affidavit in explanation of the default does not mean that the solicitor did not support what his client had said on oath.  After all, in the solicitor’s affirmation dated 11 September 2012, paragraph 4, he specifically referred to his client’s affidavit.  I am not prepared to infer that the solicitor, an officer of the court, would have been prepared to allow his client to make an affidavit deposing to facts which he knew were incorrect for the purposes of court litigation, or that he would refer to that affidavit in his own affirmation without specifically saying that he disagreed with some of its contents (if to his knowledge they were untrue).

30.  However, for the reasons given, the presence or absence of a good explanation for the default did not matter in the present appeal.

Disposition

31.  The appeal was accordingly dismissed with costs.

Hon Kwan JA:

32.  I agree with the Reasons for Judgment given by the Chief Judge.

Hon Poon J:

33.  I agree.