ALMAR SALES CO. INC. v. CHUANGYOU TRADING CO., LTD

DCCJ 1036/2020

[2020] HKDC 472

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1036 OF 2020

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BETWEEN

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JUDGMENT

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The plaintiff’s claim

1.  The plaintiff is a private limited company incorporated in the state of New York, USA.  The defendant is a private limited company incorporated in Hong Kong in April 2017.  It is the plaintiff’s case that it fell victim to an email fraud and was induced into paying US$122,667.84 into the defendant’s bank account no.000662340 (the “Defendant’s Account”) held with DBS Bank (Hong Kong) Limited (the “Bank”).

2.  The plaintiff has no business dealings with the defendant, nor does the plaintiff know of the defendant’s sole director and shareholder, Ma Liguang.  The defendant has no legitimate reason to receive or expect to receive any payment from the plaintiff.

3.  The plaintiff does business with a PRC supplier named Zhangzhou Best Clothing Co Ltd (“Zhangzhou Best Clothing”).

4.  On 6 October 2019, the plaintiff received a genuine email from Zhangzhou Best Clothing (email address: sales@bt0596.com) notifying the plaintiff of a change in its bank account details in relation to various outstanding invoices issued to the plaintiff for a total sum of US$303,119.76.

5.  The plaintiff verbally verified the authenticity of the said change in bank details with Zhangzhou Best Clothing, which was confirmed.

6.  On 10 October 2019, the plaintiff received another email purportedly from Zhangzhou Best Clothing notifying the plaintiff that the last bank detail change applied to local to local transfer and new change of bank account details were sent to the plaintiff.  The email was sent from sales@bt05196.com (the “Fraudster’s Email Address”).  The number “1” does not exist in Zhangzhou Best Clothing’s genuine email address of sales@bt0596.com.  This was unfortunately not picked up by the plaintiff.  After repeated demands sent from the Fraudster’s Email Address, the plaintiff transferred US$122,667.84 into the Defendant’s Account on 18 October 2019.

7.  After the transfer, another email was sent from the Fraudster’s Email Address on 23 October 2019, notifying the plaintiff that the bank account details need to be changed yet again, and that the remaining balance of US$181,119.76 needed to be paid.  This roused the suspicion of the plaintiff who carried out investigations with Zhangzhou Best Clothing who informed the plaintiff that they had fallen victim to a scam.

8.  The plaintiff had subsequently filed reports with the FBI as well as the Hong Kong Police.  The Hong Kong Police had informed the plaintiff that US$58,000 had been frozen by them.

9.  By a Statement of Claim issued on 17 March 2020, the plaintiff seeks the following relief : -

(1) a declaration that the sum of US$122,667.84 is held by the defendant on trust for the plaintiff;

(2) an order that the sum of US$122,667.84 be returned to the plaintiff forthwith;

(3) pending the enforcement and/or execution of the court’s orders herein, an injunction restraining the defendant from dealing with the sum of US$122,667.84 in the Defendant’s Account;

(4) further and if necessary, an order vesting the sum of US$122,667.84 with the plaintiff pursuant to s 52 of the Trustee Ordinance, Cap 29;

(5) interest;

(6) costs.

Service

10.  In the present case, I am satisfied that the plaintiff has satisfied the service requirements, and has shown that the documents had come to the attention and knowledge of the defendant, but it had no intention of defending the present action for the following reasons: -

(1) On 17 March 2020, the plaintiff sent by registered post a letter (with documents enclosed) to the registered address of the defendant (as shown in the records of the Companies Registry in the 2019 Annual Return).  The documents were delivered and not returned. Section 827 of the Companies Ordinance (Cap. 622) has been complied with.

(2) On 12 May 2020, the plaintiff sent by registered post a letter to the defendant, again at its registered address, informing it of the plain tiff’s application for default judgment and today’s hearing.  The documents were delivered and not returned. Section 827 of the Companies Ordinance (Cap. 622) has been complied with.

(3) The address of the sole director and shareholder of the defendant (as shown in the records of the Companies Registry in the 2019 Annual Return) is 河南省鄧州市穰東鎮穰西居委會穰西.  Research indicates that this is an incomplete address as the resident committee (居委會) has a total of 5 village groups with 706 accounts and 2,960 people.  This points to an intention to deliberately leave an incomplete/false address on the part of the sole director and shareholder of the defendant.

Legal principles

11.  Having been satisfied as to service, I turn to the legal basis of the plaintiff’s application.

12.  The court has the power under Order 32 rule 5(1) to proceed at its first hearing or any resumed hearing in the absence of a party thereto if, having regard to the nature of the application, it thinks it expedient to do so.  As noted above, I am satisfied that notice of the time appointed for this adjourned hearing was duly served on the defendant.  I am also satisfied that in view of the nature of the present case, it is expedient to proceed with the plaintiff’s application.

13.  The deadlines for the filing of acknowledgment of service, notice of intention to defend or defence have passed and no filing of any document has been made by the defendant, to indicate that it intends to defend the plaintiff’s claim. The plaintiff is therefore entitled under Order 19 rule 7 to apply for judgment in default of defence being filed.

14.  The plaintiff’s prima facie case has been borne out by the documentary evidence exhibited to his affirmation.  I accept the plaintiff had been defrauded as alleged.  Where property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient so that the property is recoverable and traceable in equity[1]

15.  DHCJ Marlene Ng (as she then was) in Heitkamp & Thumann KG v Living Profit Trading Develop Limited and Ors[2] held that regarding a claim based on unjust enrichment, money paid under a mistake of fact is prima facie recoverable provided that (a) the payer did not intend the payee to have the money in any event, (b) the money was not paid for good consideration and (c) the payee has not in good faith changed his position.

16.  I am satisfied that the plaintiff has a genuine need for the declaratory relief that the defendant is liable to account to the plaintiff for the sum of US$122,667.84 together with interest; and that US$122,667.84 or any part thereof in the defendant’s Account was held by the defendant as constructive trustee for the plaintiff.  The plaintiff is entitled to a proprietary claim to the US$122,667.84.  Without the declaration of a constructive trust, the plaintiff may eventually lose out to other creditors of the defendant[3].

17.  I am however not convinced that the plaintiff is entitled to an order pursuant to section 52(1)(e) of the Trustee Ordinance (Cap 29) vesting the defendant’s right to recover US$122,667.84 from the Bank to forthwith release and return the said US$122,667.84 to the plaintiff.

18.  The Bank was not a party to these proceedings and in its letter it had not indicated that “We understand … that a hearing for the captioned proceedings is fixed on 26 June 2020 at 2:30 pm at the District Court and out Bank will not be named as a respondent. On such basis, we take a neutral stance in the Plaintiff’s application … to seek for default judgment.”  This clearly indicated the Bank’s stance that it remains neutral, on the basis that it will not be joined as a respondent.  If the plaintiff wishes to press on with joining the Bank as a respondent, the Bank will need to be present to make submissions thereon before the Court will grant such order.

19.  Further, I share Deputy High Court Judge Paul Lam SC’s concerns in the case of International Automotive Components Group sro v Xuke Trading Ltd & Anor[4], on whether s 52 of the Trustee Ordinance may be invoked to compel a bank to release funds in a bank account in these circumstances: -

“ I must say that I have serious reservations whether section 52 of the TO may be invoked to compel a bank to release funds in a bank account in these circumstances.  Section 52(1)(e) refers to the vesting of the right to “sue for or recover the thing in action”.  As the balance in a bank account represents a debt owed by the bank to the account holder, it may be regarded as a thing in action.  Hence, the right to sue for or recover such a debt may be described as a right to sue for or recover a thing in action.  However, in the present context, the plaintiff does not merely want to have the right to claim the debt payable by HSBC (represented by the Remaining Sum) to be vested in its name.  Quite simply, it wants to have the Remaining Sum back.  Further, as submitted by Mr D’Souza, unless the bank is joined as a party (which is unusual in these circumstances), the bank will be deprived of the right to make representations on whether a vesting order and consequential directions should be made; and if so, the terms thereof.”

20.  Deputy District Judge Lung in Primeway International Ltd v Yi He (HK) Trading Co Ltd[5] also observed that: - .

“31. As explained in International Automotive, there are basically 3 ways to require the Bank to transfer the Funds to the 1st plaintiff, namely (i) a vesting order; (ii) notice to non-parties; and (iii) a garnishee order.

32. The first 2 ways are irrelevant, because the Bank was not joined as a party to this action, and there is no evidence that the Bank was previously notified of these proceedings or the hearing. There is also no indication from the Bank that it would adopt a neutral position and/or that it would abide by the order of this Court.

33. As to the third way, it is sufficient to point out that there is no live application for a garnishee order before me and there are designated procedures for such an application under O.49 RDC.

34. Procedural difficulties aside, there is a more fundamental objection. There is no evidence before me as to what transactions had taken place within D's Account. There might be deposits and withdrawals both before and after the Funds were deposited by the 1st plaintiff; and it is plausible that those funds were subject to other trusts or rights of third parties (eg they represented monies obtained by similar frauds). If it should happen that part of the "mixed" funds were then withdrawn or dissipated, the usual tracing rules would dictate the beneficial title to the remaining monies. The Bank itself may also be entitled to a set-off against the Funds (eg the defendant maintains a separate account with the Bank that is in overdraft).

35. If I were to make an order as sought by the plaintiffs to compel the Bank to transfer the Funds back to the 1st plaintiff, it would in effect give priority to the 1st plaintiff over the credit balance within D's Account (or part thereof up to an amount equivalent to the Funds), possibly to the detriment of third parties who might have an equal or even better title to the same. It would in my judgment be wrong in principle to do so without giving them an opportunity to be heard; at the very least the Bank ought to be heard because it will have knowledge as to transactions that had taken place within D's Account (if any).”

21.  I am thus of the view that the granting of a vesting order is inappropriate in the circumstances and the plaintiff ought to recover the US$30,000 via garnishee proceedings, following the procedure prescribed by Order 49 r 2.

Orders

22.  In the premises, I make the following orders: -

(1) a declaration that the defendant is liable to account to the plaintiff for the sum of US$122,667.84 together with interest.  Interest to be calculated at HSBC prime rate + 1% from 18 October 2019 up to the date of judgment, thereafter at judgment rate.

(2) a declaration that the US$122,667.84 or any part thereof in the defendant’s Account was held by the defendant as constructive trustee for the plaintiff.

(3) The defendant shall pay and return the said US$122,667.84 (together with interest accrued thereon) to the plaintiff forthwith.

(4) The defendant is to pay the plaintiff’s costs of these proceedings, to be taxed if not agreed