SHAM WAI BUN AND ANOTHER v. NET EFFECT LTD

HCA 499/2021

[2021] HKCFI 2409

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 499 OF 2021

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REASONS FOR DECISION

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1.  This case came before me on 13 August 2021 for the hearing of 2 summonses issued by the 1^st and 2^nd Plaintiffs on 29 July 2021.

2.  The first summons was for leave to rely on and make use of the Defendant’s banking documents, which had been disclosed by The Hongkong and Shanghai Banking Corporation (“HSBC”) on 6 August 2021 pursuant to the Order of Mr Recorder Manzoni, SC herein dated 9 July 2021, primarily for the purpose of lodging a report to the relevant law enforcement authorities and defending a related court proceedings in Texas, USA (the “Disclosure Summons”). By the second summons, the Plaintiffs apply to enter judgment against the Defendant in default of defence (the “Default Judgment Summons”).

3.  For the reasons set out hereinbelow, upon hearing Mr Mark West of Messrs. Reed Smith Richards Butler for the Plaintiffs, I granted the orders under both the Disclosure Summons and the Default Judgment Summons in the terms contained in the respective draft orders submitted by the Plaintiffs with minor amendments. Here are my reasons for the decisions.

Background

4.  The Writ of Summons herein was issued on 31 March 2021.  In a Statement of Claim of the same date, the Plaintiffs claimed that:

(a)  In 2017, they came to know Mr Paul Lincoln Heffner (“Mr Heffner”), who was the sole shareholder and director of the Defendant, a company incorporated in the British Virgin Islands (“BVI”).

(b)  Between June 2018 and January 2020, the Plaintiffs respectively entered into various subscription agreements and loan agreements with the Defendant for certain investment projects which had been pre-approved by the Plaintiffs.

(c)  Between 20 June 2018 and 3 January 2020, the 1^st Plaintiff invested a total of HK$109,500,000 under the various agreements with the Defendant. Meanwhile, between 20 March 2019 and 1 April 2020, various sums in the aggregate of HK$53,989,640 were repaid (or caused to be repaid) by the Defendant to the 1^st Plaintiff in the guise of interest or return on investment under the various agreements. Hence, a net sum of HK$55,510,360 remained unaccounted for.

(d)  Likewise, between 20 June 2018 and 20 November 2019, the 2^nd Plaintiff invested a total of HK$174,500,000 under the various agreements with the Defendant. Meanwhile, between 21 March 2019 and 24 January 2020, various sums in the aggregate of HK$97,908,700 were repaid (or caused to be repaid) by the Defendant to the 2^nd Plaintiff in the guise of interest or return on investment under the various agreement. Hence, a net sum of HK$76,591,300 remained unaccounted for.

(e)  Since about January 2020, there had been delays on the part of the Defendant in making payments to the Plaintiffs by way of returns on their investment as promised. On behalf of the Defendant, Mr Heffner procrastinated by proffering various excuses such as inability of the downstream borrowers in making repayments due to the closure of banks during the COVID-19 pandemic.

(f)  By June 2020, the index of suspicion was heightened whereupon the Plaintiffs commissioned investigation into the financial status and accounting information pertinent to the Defendant and Mr Heffner. It was discovered that Mr Heffner had siphoned off substantial portions of the money invested by the Plaintiffs to various companies controlled by him and/or his business partner, one Barry Lau.

(g)  Thereafter, when being chased, Mr Heffner issued 2 post-dated cheques from his personal account with HSBC which were drawn in favour of the 1^st Plaintiff in the sums of HK$40,000,000 and HK$30,000,000 with due dates falling on 18 and 30 November 2020 respectively.

(h)  Similarly, Mr Heffner issued 3 post-dated cheques from his personal account, which were drawn in favour of the 2^nd Plaintiff in the sums of HK$40,000,000, HK$30,000,000 and HK$15,500,000 with due dates falling on 18 and 30 November 2020 and 31 March 2021 respectively.

(i)  All these 5 cheques issued by Mr Heffner were dishonoured upon presentment.

(j)  Further, Mr Heffner purported to repay the 1^st Plaintiff in part by transferring to him (or his nominee), the Defendant’s unidentified and unknown interest in Adamas Ping An Fund, which did not materialize. Likewise, the Mr Heffner also purported to repay the 2nd Plaintiff in part by transferring to her (or her nominee) the Defendant’s interest in (1) 2 unfinished luxury boats; and (2) certain shares in Adamas Group Limited, a BVI company, said to carry with it the benefits of certain management fee in the sum of US$8,000,000 to be received. All these purported transfers of assets did not materialize and/or were unenforceable for one reason or another.

(k)  In brief, it is alleged that Mr Heffner, through the Defendant, had perpetrated a classic fraudulent “Ponzi scheme” against the 1^st and 2^nd Plaintiffs.

(l)  The claims are framed on the grounds of restitution and constructive trust for which various declarations were sought.

5.  More importantly, Mr Heffner procured a Deed of Trust dated 21 July 2020 (the “Deed of Trust”) to be executed by Tex-Gas Holdings LLC, a company incorporated in Texas, USA (“Tex-Gas Holdings”) in favour of the 1^st and 2^nd Plaintiffs purportedly to guarantee the repayment of a loan in the sum of US$30,000,000 provided by the Defendant and/or its affiliated entity, Fortune Insight Limited, another BVI company, to Tex-Gas Holdings and its affiliated entity, Gate Corporation Limited.

6.  Mr Heffner died on 1 January 2021 (see paragraph 22 of the Statement of Claim). Thereafter, on 29 June 2021, Tex-Gas Holdings took out an action in the Southern District Court of Texas (Galveston Division) claiming, inter alia, a declaration that the Deed of Trust was extinguished on the ground that it was procured by fraud and/or that the money under the loans giving rise to the Deed of Trust had never been received (see paragraph 18 of the Statement of Claim and paragraphs 20 to 24 of the First Amended Original Complaint (under Case No. 80092 and Adversary No. 21-08002) in Exhibit KMA-1 to the Affidavit of Keith M. Aurzada dated 4 August 2021).

7.  In short, the Deed of Trust may be rendered worthless to the Plaintiffs if the allegations of Tex-Gas Holdings are proven.

Procedural History 

8.  On 27 April 2021, leave was granted by Master Kot to issue a Concurrent Writ of Summons and to serve the Defendant outside jurisdiction at its registered office or elsewhere in BVI. Service of the Concurrent Writ of Summons along with the Statement of Claim were effected by hand on 6 May 2021 (see Affidavit of Dwight Hutchinson Jnr dated 3 June 2021).

9.  By the order of Master Kot, the expiry of time for filing Acknowledgement of Service was extended to 28 days after service instead of the usual 14 days applicable to a defendant within jurisdiction under Order 12 Rule 5 (ie up to 3 June 2021).

10.  By operation of Order 18, Rule 2, the time for serving a defence did not expire until 1 July 2021 (ie 28 days from 3 June 2021). 

11.  Meanwhile, the Plaintiffs took out a summons (dated 18 June 2021) to enter default judgement (“the previous summons”). By leave of Master Hui granted on 30 June 2021, the previous summons was also served on the Defendant at its registered BVI address on 7 July 2021 (see Affidavit of Kelly Smith dated 19 July 2021).

12.  The hearing of the previous summons was listed before me on 29 July 2021 whereupon Mr West applied to withdraw the same upon realizing that it was pre-mature. In the premises, I granted leave for the Plaintiffs to withdraw the previous summons with no order as to costs. Further, in the exercise of my case management power, I granted leave for the Plaintiffs to serve all further documents herein on the Defendant at its registered address or elsewhere in BVI.

13.  Meanwhile, the Plaintiffs obtained an ex parte order from Mr Recorder Manzoni, SC against HSBC for the disclosure of banking documents pertinent to the account(s) maintained by the Defendant. On or about 6 August 2021, the bank duly complied with the order and provided various items of the Defendant’s banking documents to the Plaintiffs.

14.  Against the foregoing background, the Disclosure Summons and the Default Judgment Summons were issued on 29 July 2021.  On the strength of the 2^nd Affidavit of Dwight Hutchinson Jnr dated 9 August 2021, I am satisfied that the Defendant has been duly served with both summonses.

Disclosure Summons

15.  The documents disclosed by HSBC to the Plaintiffs as aforesaid shows the transfer of various sums from the Defendant’s account to Gate Corporation Limited, which is related to Tex-Gas Holdings.

16.  Such transfers would be directly relevant to the Plaintiffs’ defence to the claim of Tex-Gas Holdings in the proceedings before the Texas court. Further, I am satisfied that it would be unreasonable to require the Plaintiffs to incur disproportionate costs to take out separate proceedings for discovery before the Hong Kong Court or seek a discovery order through the Texas court, even assuming that it is legally feasible.

17.  Accordingly, pursuant to the Disclosure Summons, I granted an order in terms of paragraph 1 of the draft order submitted by the Plaintiffs (as amended by the Court) giving leave to the Plaintiffs to use the documents disclosed by HSBC for the purpose of reporting to the relevant law enforcement authorities and establishing or defending their legal rights save and except against HSBC (the “Disclosure Order”).

18.  That said, I saw fit to give the Defendant 2 clear days to apply to set aside paragraph 1 of the Disclosure Order, if necessary, on an expedited or urgent basis, after it has been served with the Disclosure Order. Consequentially, a moratorium was imposed on the effective date of paragraph 1 of the Disclosure Order.

19.  The Disclosure Summons is akin to an application on the part of the Plaintiffs to be released from an implied undertaking not to use documents obtained in this action for another purpose. Accordingly, I ordered costs of the Disclosure Summons in the cause.

Default Judgment Summons

20.  I am satisfied that the Defendant has been properly served with the Concurrent Writ of Summons, the Statement of Claim and the Default Judgment Summons.

21.  On the face of it, the Statement of Claim disclosed various valid causes of action against the Defendant as recited in paragraphs 4 to 7 hereinabove.

22.  The granting of declarative relief is a matter within the discretion of the Court although it is not the normal practice to do so without trial (see Hong Kong Civil Procedure (2021) n.19/7/20). In this case, I am satisfied that the declarations sought were inextricably linked to the Plaintiffs’ monetary claims, which were grounded on constructive trust and restitution. There was no indication of any competing interest or any intention to contest the Plaintiffs’ claims. 

23.  In the premises, I granted an order in terms of the draft submitted by the Plaintiffs with minor amendments, with costs of the action (including costs of the Default Judgment Summons) to the Plaintiffs to be taxed summarily.

24.  As a reminder, the Plaintiffs should file the 2^nd Affidavit of Dwight Hutchinson Jnr (dated 9 August 2021) as soon as practicable after the original has been made available.