NELSON MARTAYAN v. HANCHENG INDUSTRIAL CO LTD

DCCJ 3587/2021

[2022] HKDC 1400

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3587 OF 2021

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DECISION

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1.  This is the Plaintiff’s appeal against the Order of a Master dated 15 July 2022, by which the learned Master ordered (i) the default judgment dated 1 September 2021 be set aside; (ii) there be unconditional leave to defend; (iii) the garnishee order nisi dated 30 September 2021 be discharged; and other consequential directions.

2.  In essence, the Plaintiff submits that the Defendant’s application to set aside the default judgment and the garnishee order nisi should be dismissed.

Background

3.  The Plaintiff is a businessman residing in New York.  He claims to be a victim of an email fraud, by which he was tricked into believing that he would receive substantial inheritance from the estate of a deceased relative.  He was induced to send various sums to various bank accounts as per the fraudster’s instructions.  One of such sums was a transfer of US$34,624.00 from the Plaintiff’s bank account to the Defendant’s bank account with HSBC in Hong Kong on 3 June 2020 (“the Sum”). 

4.  The Plaintiff made a report to the Hong Kong Police on 13 October 2020 when he became suspicious enough to realise that he might have been defrauded. He commenced the present case against the Defendant by issuing the writ herein on 28 July 2021.

5.  The Defendant was incorporated in Hong Kong in 2013.  Its registered address was the address of its secretary, which was a service company providing corporate secretarial service.  Mr Jia Shoulin, who resides in Shanghai, has been the Defendant’s sole director.  It appears that Mr Jia also owns another company in Shanghai bearing a similar name to the defendant (Shanghai Hancheng International Trading Co Ltd).  Before the present case, the Defendant did not know the Plaintiff.

The default judgment

6.  The Plaintiff effected service of the writ on the Defendant on 30 July 2021.  According to the Affirmation of Service of Khatab Amar dated 9 August 2021, Mr Amar, the clerk of the Plaintiff’s solicitors, went to the Defendant’s registered office on that day.  He handed an envelope containing the writ to “a member of staff inside the registered office of the Defendant who accepted the envelope”.  He then stated his belief that he duly served the writ on the Defendant by leaving the same at the Defendant’s registered office, and it should have come to the attention and knowledge of the Defendant.

7.  In default of any acknowledgement of service, the Plaintiff obtained a final judgment in default in the sum of US$34,624.00 with costs.  It is expressly stated that the Plaintiff has abandoned all other claims sought in the indorsement of claim, save for the return of the Sum.

8.  On the strength of the default judgment, the Plaintiff further obtained a garnishee order nisi in the amount of the Sum on 30 September 2021.  The return hearing to consider whether the garnishee order should be made absolute was originally scheduled on 31 January 2022.

The defendant’s application to set aside the default judgment

9.  On 28 January 2022, the Defendant issued a summons to set aside the default judgment.  In short, the learned Master acceded to the Defendant’s application and set aside the default judgment after hearing submissions on 15 July 2022.

10.  The Plaintiff filed his notice of appeal on 19 July 2022.  It was perceived necessary to preserve the garnishee order nisi against the Defendant’s bank accounts, so as to ensure that the appeal would not be rendered nugatory. So, he also sought to stay the execution of the learned Master’s Order.  After hearing the parties, the learned Master further ordered on 21 July 2022 that, upon the Defendant paying HK$400,000.00 into court, the garnishee order nisi be discharged without further order.  I am informed that the Defendant has not paid any sum into court, despite having leave to withdraw money from its HSBC account for such purpose.  As things now stand, the Plaintiff’s summons for stay remains extant.

Regularity of service of the writ 

11.  Parties are in agreement that in hearing this appeal, I am not bound by the decision of the learned Master, although I can have regard of it and give the weight it deserves.  They are also in agreement as to the test to determine whether the default judgment ought to be set aside.

12.  It is the Defendant’s case that the service of the writ by Mr Amar was defective; hence the default judgment was irregularly obtained.

13.  Mr Mok, counsel for the Defendant, argues that Mr Amar did not state in his affirmation how he ascertained the person to whom he gave the writ to be a member of whose staff.  Therefore, it was not known whether the writ was actually given to a stranger who just so happened to be at the defendant’s registered address.  This, he submits, also sits well with Mr Jia’s affirmation that he made enquiries with the company secretary, but he was told the company secretary never received the writ.

14.  I am told that, just before the hearing of the learned Master, the Defendant’s solicitors handed up the judgment in P & L Concepts Limited v Planners & Designers and Associates Limited DCCJ 2310/2002 (Deputy Judge W Chan; 17 October 2002).  The Defendant submitted that P & L was factually indistinguishable from the present case, and hence the learned Master ought to follow it to find the service of the writ in the present case irregular.  The learned Master was ultimately persuaded to accept the Defendant’s submissions.

15.  In P & L, the writ was served by a clerk at the registered address of the defendant.  The clerk deposed that she gave the writ to a man there, who had confirmed that the defendant was indeed the company at that address.  The plaintiff obtained a default judgment by stating that it successfully served the writ by leaving it at the registered address of the defendant, pursuant to s 356 of the then Companies Ordinance (Cap 32).

16.  After referring to s 356, the court held at §14:

“In other words, under Section 356 of the Companies Ordinance, it is neither necessary nor sufficient to give the document to someone at the registered office (cf., for example, the wording of Order 81, rule 3(1)(b) of the Rules of the District Court dealing with the service of a writ on a firm). The document should simply be left physically at the registered office.” (Emphasis as original)

17.  The court went on to find that service was improper, as the plaintiff was unable to provide the name of the man to whom the writ was given, nor the position he occupied in the defendant company.  The court held that giving the writ to a man in the circumstances could not be equated with leaving of the same at the registered office of the defendant.

18.  Mr Mok submits that I should, like the learned Master, accept the correctness of P & L, and continue to apply it to the present case.

19.  Mr Chan, counsel for the Plaintiff, submits otherwise.  He submits that P & L could not have been correct.  Of the authorities he has referred me to, I find it useful to highlight BEC Construction Ltd v Melt Hythe Ltd [2020] EWHC 970 (TCC).

20.  In BEC, the claimant sought to serve the claim form on the defendant at its principal place of business.  That principal place of business was also the address of a dental practice, which shared a common director with the defendant.  The claimant left the claim form on the reception desk in the custody of an employee of the dental practice.  The employee gave her signature to acknowledge the receipt of the claim form.

21.  Cockerill J rejected the defendant’s argument that service was improper.  Her Ladyship found it conclusive that, since evidence shows that the claim form was left on the reception desk, there was successful service by leaving it at the relevant place, ie the principal place of business.  She went on to hold that, even if the claim form was handed to the defendant’s employee, the service was still effective.  The reasoning was set out in §18:

“It was entirely accepted by Miss Jabbari that, assuming for the moment, the correct address were found, the Claimant could simply have entered that correct address and dropped the documents on the floor and that would have amounted to good service. It seems to me that it cannot be the case that by taking steps to better alert the Defendant the Claimant should be prejudiced – and that is effectively what was done here out of an abundance of caution. Rather than just going to the door and dropping the documents on the floor, Mr Barlow took the prudent step of trying to identify a human person into whose at least extended custody the documents could be placed to ensure that they were not mislaid, and the person he chose was the receptionist. As the Claimant submits, it is a common and normal function of receptionists to accept delivery. The fact that there was more than one business being run out of Sunnyside is effectively a matter of the way the Defendant manages its business. So, per se, the employer of the receptionist should not be a material consideration, in these circumstances.”

22.  I find Cockerill J’s judgment, albeit obiter, persuasive.  I have difficulty in accepting that the literal wording of s 356 of the old Companies Ordinance – now s 827 of the Companies Ordinance (Cap 622) – should be as narrowly construed as Mr Mok submits.  I agree with Mr Chan that it would be absurd if the legislation intends that a writ must be left on a physical surface (eg on the floor, on the reception desk) first before any human contact.  If one accepts that service under s 827 would still be effective even if the writ was left at an obviously vacant office as long as it was the registered address of a limited company, it must be the legislative intent that, once a writ reaches the registered address, the duty is on the limited company to ensure it has due notice of it.  The risk as to how the writ may be handled within the registered address must be assumed by the limited company.

23.  As such, it is strictly not necessary for me to further comment on P & L.  The service of the writ in the present case was effective.  In any event, I would think P & L was decided on the basis of the specific set of facts in that case, which can be distinguished from the present case.  In P & L, the person to whom the writ was passed was described as a man who said the address was the defendant’s address.  The court accepted there was insufficient information to show that man’s connection with the defendant limited company.  On the other hand, Mr Amar deposed that he gave the writ to a member of staff at the defendant’s registered address. Since there is no dispute that it was a service company there, the strength of Mr Amar’s evidence must be that he passed the writ to a staff member of the defendant’s secretary.  In the absence of any application to cross examine Mr Amar, I cannot see why I should not give full weight to Mr Amar’s evidence.

24.  I have the misfortune of differing from the learned Master to find that the default judgment was regularly obtained.  I am certain the learned Master would have come to the same view if he had the same assistance from counsel as I have.  Thus, it is for the Defendant to show a defence with a real prospect of success in order to persuade me to set aside the default judgment.

The Defendant’s proposed defence

25.  The Defendant accepts that it was enriched at the Plaintiff’s expenses, and such enrichment is unjust from the Plaintiff’s point of view.  But it argues that it can retain the Sum because it has a defence by relying on (i) change of position; and (ii) bona fide purchase.

26.  Mr Mok submits that the Defendant changed its position after receipt of the Sum by paying its supplier US$100,000.00 on 10 June 2020, with the belief that it was entitled to the use of the Sum.

27.  I accept the Plaintiff’s submissions that the Defendant’s reliance on the change of position defence is doomed to fail.

28.  It is trite that, for the change of position defence to succeed, a defendant unjustly enriched at a plaintiff’s expense must prove that, on a but-for basis, he changed his position because of the enrichment.  It was decided in Scottish Equitable pls v Derby [2001] 3 All ER 818 that the defence failed because the defendant would have changed his position (ie repaying the mortgage) irrespective of the receipt of funds from the plaintiff.  Similarly, in Barons Finance v Kensington Mortgage Co Ltd [2011] EWCA Civ 1592, the English Court of Appeal rejected the defence because there was no evidence to show that the defendant would not have changed its position (ie taking up contractual obligations) if it did not receive the enrichment from the plaintiff.

29.  In the present case, there is a dearth of evidence to show (i) when the Defendant incurred the obligation to pay US$100,000.00 to its supplier(s); (ii) how was such obligation incurred; and (iii) what the Defendant considered when it decided to repay the US$100,000.00.  Mr Jia did not even assert that the receipt of the Sum was causally linked to the repayment of US$100,000.00. I do not think the Defendant has demonstrated any real prospect of success regarding the change of position defence.

30.  Next, the Defendant says it is a bona fide purchaser of the Sum, because it sent goods to its buyer in Nigeria, and it was told that the Sum was part of the payment made transmitted by the buyer to its HSBC account.

31.  Mr Chan submits that the bona fide purchaser defence is not available to the Defendant.  He refers to Zief Incorporated v Tekchandani Ajai Mohan (t/a D’Ziner Collections (Hong Kong)) [2021] 3 HKC 69.  Recorder Eugene Fung, SC said this at §30:

“D4 submits that the defence of bona fide purchase for value without notice is a general defence to all claims for unjust enrichment (whether personal or proprietary). This appears to be accepted by P as a matter of general principle. However, it is right to note that there are academic views that the defence is not a general defence in the law of unjust enrichment and is only applicable where the plaintiff’s restitutionary claim is founded on the vindication of property rights: see eg W Swadling ‘Restitution and Bona Fide Purchase’ in W Swadling (ed), The Limits of Restitutionary Claims: A Comparative Analysis (1997); G Virgo, The Principles of the Law of Restitution (3rd Ed, 2015) p 656. Nonetheless, given it is common ground that the defence is generally applicable to all restitutionary claims (and assuming, without deciding, that the agreed premise is correct), I shall proceed to determine whether the defence can be established on this basis.”

32.  The learned Recorder set out his reasons for rejecting D4’s reliance on the bona fide purchaser defence at §33:

“ 33. Insofar as D4 seeks to rely on bona fide purchase as a defence to P’s proprietary claim, there is a further reason why I am not convinced that D4 can establish such a defence in this case.

(1) The defence of bona fide purchase for value without notice is an exception to the general rule of nemo dat quod non habet (no one gives what they do not have) to grant the defendant good title to a property in situation where the title would otherwise be defective. For example, when X steals P’s property and sells it to D, D will obtain title to the property if he is a bona fide purchaser for value without notice, even though X (being a thief) would not otherwise be able to confer title which he does not have.

(2) This is why the defence has been described by Professor Andrew Burrows as ‘bona fide purchase from a third party’ (The Law of Restitution (3rd Ed, 2011), p 573).

(3) In his article ‘Restitution and Bona Fide Purchase’ in The Limits of Restitutionary Claims: A Comparative Analysis (1997), Professor William Swadling at p 94 said:

‘… the defence of bona fide purchase has no work to do in the standard two-party situation. As we have seen, the defence forms an exception to the normal rule of nemo dat. It operates to allow a transferor to confer a title which he does not have. By contrast, two-party restitution cases are concerned with transfers by persons who had a good title to the enrichment concerned. Although their intent to give may be in doubt, their capacity to do so is not in question. And since the transferor in the two-party restitution case starts with a good title to the enrichment in question, there will be no need for the transferee to invoke any exception of nemo dat. The fact that the defendant gave value in exchange for what he received should not blind us to this fundamental fact.’

(4) In A Burrows, A Statement of the English Law of Unjust Enrichment (2012), the defendant is said to have a defence of purchaser in good faith, for value and without notice if he/she ‘(a) is a purchaser in good faith of the benefit for value, without notice, of the claimant’s right to restitution, from a person other than the claimant, and (b) can rely on an exception to the rule that no person can give a better title than the person has.’ (section 27(1)) [emphasis added]

(5) Similarly, Justice James Edelman and Professor Elise Bant describe the defence as operating ‘in cases including those brought for unjust enrichment where more than two parties are involved’ and state that the ‘requirement for more than two parties is because in the simple two-party case the transferor usually has good title’. They further state that in ‘unjust enrichment, the bona fide purchase defence operates only in relation to a three-party situation in which the defendant is a subsequent purchaser from a third party whose title to an asset is defective’. See Unjust Enrichment in Australia (2nd Ed, 2016), pp 372-373.

(6) D4 has not produced any authorities to demonstrate how a defendant in a two-party situation (namely a direct recipient of the enrichment) can rely on the defence of bona fide purchase for value without notice to defeat a plaintiff’s claim in unjust enrichment.”

33.  Mr Mok persuades me that I need not follow Zief Incorporated as a matter of stare decisis.  I do not see the need to decide that point; I endorse the learned Recorder’s reasons and decision in the passages quoted above because I think he is obviously correct[1].

34.  The Defendant was the direct recipient of the Sum.  Therefore, the present case is a two-party situation as described by the learned Recorder. Since the bona fide purchaser defence is only apt for a three-party situation, in which the defendant is a subsequent purchaser for value, I am of the view that the Defendant is also bound to fail in seeking to rely on this defence.

35.  As a matter of completeness, I also think the Defendant has not demonstrated any real prospect of success on facts.  Mr Jia claims that the Defendant had a long standing trading relationship with the buyer in Nigeria, Saint Path Agricultural Co Ltd.  Since it took a long time for Nigeria banks to approve US dollars currency exchange, Saint Path would use remittance agents to transmit US dollars to overseas.  Mr Jia has produced a letter apparently issued by Saint Path to the agent dated 25 May 2020 requesting the latter to remit US$300,000.00 to the Defendant, as proof that Saint Path and the Defendant had prior dealings using remittance agents. 

36.  I do not accept Saint Path’s letter is sufficient to show that the Defendant reasonably thought the Sum it received was just part of the money the remittance agent sent under the instructions of Saint Path.

(1)  The Defendant has shown me nothing to prove that the remittance agent remitted the US$300,000.00, if at all, to its account at any time after 25 May 2020.  The bank statements put forward by the Defendant give no clue on this.  It is not known whether the money was remitted in tranches, and/or whether the money was sent through any third party accounts.

(2)  As such, I do not think the Defendant has shown there is at least a real chance for it to persuade a trial judge that it would not be alerted when it received the Sum from the Plaintiff, who was admittedly a stranger.

(3)  I do not think DBS Bank (Hong Kong) Limited v Tian Wen Quan HCA 3228/2016 (Anthony Chan J; 12 October 2017) assists the Defendant.  In that case, the court accepted the defendant’s evidence that he had entered to an underground currency exchange transaction.  So the defendant fully expected the money he was going to receive would be from a stranger, and this, in itself, would not alert him to the possibility of a mistaken transfer.  The same cannot be said for the present case, because the Defendant has not shown that the modus operandi of the remittance agent Saint Path used would also involve transmittance from strangers.

(4)  Therefore, I agree with Mr Chan’s submissions that the Defendant could not have been a bona fide purchaser for the Sum, because it failed to conduct any reasonable investigation on the provenance of the Sum when it should have been alerted to the possibility of a mistaken transfer.

(5)  The Defendant has put before me various letters and remittance advices purporting to show that the remittance agent indeed sent, amongst others, the Sum to the Defendant’s HSBC account as per Saint Path’s instructions.  I note that these documents were obtained by the Defendant after it knew of the default judgment.  I have serious reservation as to whether these documents, whilst dated to be contemporaneous to transfer of the Sum, were indeed so created temporally.   

37.  In summary, I do not think the Defendant has shown a real prospect of success in the 2 proposed defences.

Conclusion and orders

38.  I allow the Plaintiff’s appeal, set aside the Order by the learned Master dated 15 July 2022, and make the following orders:-

(1)  The Defendant’s Summons dated 28 January 2022 be dismissed;

(2)  The Garnishee Order nisi dated 30 September 2021 be made absolute;

(3)  The Defendant do pay the Plaintiff’s costs of this appeal and below, and the costs of the application for the garnishee order, together with a certificate for counsel.

39.  The plaintiff’s costs are to be taxed on party-and-party basis.  I do not accept Mr Chan’s submissions that the Defendant’s failure to refer to P & L earlier than at the hearing before the learned Master was sufficiently reprehensible that it should be visited with indemnity costs. 

40.  I will summarily assess the plaintiff’s costs.  For this purpose:

(1)  The plaintiff do file and serve his statement of costs in relation to this appeal, and in relation to his application for stay of execution of the learned Master’s Order, within 7 days from the date of this Decision[2];

(2)  The defendant do file and serve a composite statement of objection (not exceeding 5 pages in total) against the plaintiff’s 2 statements of costs within 7 days thereafter; and

(3)  I shall then assess the plaintiff’s costs on paper.

41.  I thank counsel for their assistance.