SKANDINAVISKA ENSKILDA BANKEN S.A. v. HONGKONG LILING TRADING LTD AND ANOTHER

HCA 1645/2018

[2018] HKCFI 2676

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1645 OF 2018

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REASONS FOR JUDGMENT

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1.  The plaintiff applies for default judgment in this action, by way of a summons dated 6 November 2018 (“the Summons”). The plaintiff also sought to amend the Summons by way of a summons dated 21 November 2018 (“the Amendment Summons”). At the hearing on 28 November 2018 I allowed the amendment of the Summons, and I gave default Judgment for declarations and other relief. I stated that I would hand down my reasons. These are my reasons.

Background

2.  The plaintiff has fallen prey to a fraud perpetrated in a familiar manner by email. 

3.  On 5 March 2018, Ms Victoria Novikova, a Client Service Manager for the plaintiff’s Investor Services team, received an email attaching payment instructions from the email address of Mr Robin Curry- Lindahl, who is a director of a fund, the Sparrowhawk Fund, domiciled in Luxembourg and for which the plaintiff is a custodian bank.  The email requested Ms Novikova to make a payment in the amount of Euros 900,500.74 to IntelBizz Solutions Ltd.

4.  A colleague of Ms Novikova, Mr Marc Hager, opened the email and saw what he believed to be a standard payment instruction containing the signatures of Mr Curry-Lindahl and Mr Mazine Marechal, who are the authorised signatories on the account of the Sparrowhawk Fund held with the plaintiff (“the Sparrowhawk Account”).  Mr Hager engaged in email correspondence with what he believed to be Mr Curry-Lindahl, to make arrangements for a foreign currency exchange against US dollars so as to facilitate the payment.  The beneficiary bank subsequently blocked the payment asking the plaintiff to confirm the correctness and authenticity of the payment for compliance reasons.  In continuation of the email correspondence, Mr Hager informed what he believed to be Mr Curry-‌Lindahl of the compliance steps being taken, thereby explaining what was likely to be a delay on the payment.

5.  In response, Mr Hager received an email with a new payment instruction from Mr Curry-Lindahl, with an amended beneficiary bank and beneficiary details stating that it was for a subsidiary bank account in Hong Kong.  The amended instructions requested payment of the sum of US$1,107,982.68 to be made into the 2^nddefendant’s bank account at Hang Seng Bank Ltd (“Hang Seng”), account number 369-‌382817-‌883 (“Xihonsen Account”).

6.  On 9 March 2018 the plaintiff executed the transfer in accordance with those email instructions.

7.  On 12 March 2018 the plaintiff received another email from Mr Curry-Lindahl’s email address attaching further payment instructions which also contained his signature and that of Mr Marechal.  This time the instruction was for the Plaintiff to execute a transfer of US$1,107,982.68 into the 1^stdefendant’s bank account at Hang Seng, account number 370-‌323644-‌883 (“Liling Account”)

8.  Following a further confirmation of the instruction the plaintiff executed the transfer to the Liling account, although subsequent documentation demonstrates that in fact the sum of US$1,107,951.68 was credited from the plaintiff to the Liling Account.

9.  On 13 March 2018 the plaintiff received another email from Mr Curry-Lindahl attaching two further payment instructions.  This time Mr Dominici of the plaintiff telephoned Mr Curry-Lindahl to confirm the validity of these payment instructions, and during the course of that telephone call it became clear that Mr Curry-Lindahl was not aware of the earlier payment instructions.  He has since provided the plaintiff with a forensic analysis report from the Telnet Technical Support Team which confirmed that Mr Curry-Lindahl’s email account had been hacked.

10.  Upon discovering the fraud, the plaintiff informed its Payments department to recall the 9 and 12 March transfers.  The plaintiff also contacted Hang Seng, and the Hong Kong police in an effort to trace and block the Liling Account and the Xihonsen Account.  The Hong Kong police informed the plaintiff that a sum of US$1,107,982.68 had been frozen in the Hang Seng Liling Account, but there were no funds remaining in the Xihonsen Account.  On or around 20 March 2018 the plaintiff fully compensated Sparrowhawk in the amount of US$2,215,965.36 for the unauthorised withdrawals made from its account.

The proceedings

11.  On 16 July 2018 the plaintiff issued a writ of summons against the 1^st and 2^nddefendants for, amongst other things, declaratory relief that the sum of US$1,107,982.68 (and any and all interest accrued thereon) transferred from the Sparrowhawk Account into each of the Liling Account and the Xihonsen Account were funds held on trust for the plaintiff.

12.  The plaintiff obtained from this court a Banker’s Books Order requiring Hang Seng to provide the plaintiff with bank statements and transaction details for each of the relevant accounts and as a result of that,the plaintiff obtained an Injunction Order which has had the effect of freezing the sum of US$854,992.28 in the Liling Account, and US$1,106.61 in the Xihonsen Account.  I am satisfied that those amounts do in fact emanate from the initial payments made by the plaintiff, and therefore are funds held on trust for plaintiff.

13.  In this context it is well established that when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient, so that the money is recoverable and traceable in equity: see Mesirow Financial Administrative Corporation v Best Link Industrial Co Ltd unreported, HCMP 1846/2015, 25 January 2016 at [33]; Guaranty Bank and Trust Co v Zzzik Inc Ltd unreported, HCA 1139/2016, 18 July 2016 at [28]–[31]; and Halliburton BV Merkezi Hollanda Ankara Merkez Turkiye Subesi v Sheng Yi (HK) Trade Co Ltdunreported, HCA 1627/2016, 24 January 2017 at [6], all of which are cases concerning fraud perpetrated by email in a similar manner.

14.  Consequently I am satisfied, based on the pleaded case, which in the light of the procedural history is deemed to be admitted by the defendants, that the email instructions sent to the plaintiff requesting the transfers are attributable to the 1^st and 2^nddefendants, and that the plaintiff has made out a proprietary claim for the sums of US$1,107,951.68 and US$1,107,982.68 credited from the plaintiff to the Liling Account and the Xihonsen Account respectively. 

15.  Further even if a recipient of money was not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the money, the defrauded claimant has a tracing remedy.  Thedefendants have knowledge of the fraud because of the injunction order, thestatement of claim, the Summons and the affidavits all of which have been served upon them.  Notwithstanding these, the defendants have neither paid nor made any attempt to pay the funds to the plaintiff.  I consider it unconscionable for the defendants to retain the funds for the following reasons:

(1)   there is no dealing between the defendants and the plaintiff or the Sparrowhawk fund; and

(2)   there is no legitimate reason for the defendants to receive the funds and it would be unconscionable for them to retain those funds.

16.  In all the circumstances I am satisfied that the defendants holdthe funds on trust for the plaintiff and they are recoverable and traceable in equity.

Service

17.  On 17 July 2018 the writ of summons was served on the registered offices of the defendants as obtained from the Companies Registry, as follows:

(1)   the 1^stdefendant at Room 1802B-A8, Fortress Tower 250 King’s Road, North Point, Hong Kong (“North Point Address”);

(2)   the 2^nd defendant at Room 517, New City Centre, 2 Lei Yue Mun Road, Kwun Tong, Kowloon, Hong Kong (“Kwun Tong Address”).

18.  On 7 August 2018 the plaintiff also sent a copy of the writ of summons to the 1^st and 2^nd defendants’ correspondence address in MainlandChina, obtained from the defendants’ bank account statements provided byHang Seng.  It was delivered to the 1^st defendant’s correspondence addressbut was returned undelivered from the 2^nd defendant’s correspondence address.

19.  Neither defendant has filed an acknowledgement of service within the time required under the rules of court, or at all.

20.  On 18 December 2018 the plaintiff served the statement of claim on the 1^st and 2^nddefendants at the North Point Address and Kwun Tong Address respectively.  On the same day the plaintiff also sent copies of the statement of claim to the defendants’ correspondence address in Mainland China and, similarly to the writ of summons, it was delivered to the 1^stdefendant but returned undelivered from the 2^nddefendant.

21.  Neither defendant has served an acknowledgement of the writ of summons or a defence.

22.  On 7 November 2018 the plaintiff served the Summons togetherwith the 1^st affirmation of Pooja Shahani on the 1^st and 2^nd defendants at the North Point Address and Kwun Tong Address respectively.  Copies were also sent to the defendants’ correspondence address in Mainland China.  On 22 November 2018 the plaintiff similarly served copies of the Amendment Summons and the 2^ndaffirmation of Pooja Shahani on the defendants, adopting the same approach.

23.  In all the circumstances I am satisfied that each of the writ of summons, the statement of claim, the Summons, and the Amendment Summons have been served on each of the defendants. If any of the documents have not come to the attention of either of the defendants because they have relocated their registered office, this is a default of the defendant’s own making by failing to notify the Companies Registry of any such change. Therefore I am satisfied that it is expedient to proceed to hear the Summons and the Amendment Summons in the absence of the defendants.

The Amendment Summons

24.  The Amendment Summons simply seeks to rectify an error in the Summons about the account number.  The error was pointed out by Hang Seng in its letter to the plaintiff’s solicitors dated 20 November 2018.

25.  There is no prejudice to any party in allowing the amendment, and I allowed it.

Declaratory relief

26.  There is a rule of practice, which is not a rule of law, that a court will not normally make a declaration without a trial.  However where there is a genuine need for declaratory relief the practice will give way to the requirements of justice.  The plaintiff contends that in circumstances where the funds are held on trust, it would be appropriate to make relevantdeclarations so that the funds can be earmarked as belonging to the plaintiff, and it can obtain those funds in priority to other unsecured creditors of the defendants.

27.  This argument has been accepted by the court in each of the three cases I have mentioned in paragraph 13 above.  I too accept the argument.  Hence I am satisfied that it is appropriate to make a declarations sought in paragraphs 1 and 2 of the Summons, as amended.

28.  Insofar as the vesting sought in paragraph 3 of the summons is concerned, similarly to the court in Guaranty Bank and Trust Co v Zzzik Inc Ltd unreported, HCA 1139/2016, 18 July 2016 and Halliburton BV Merkezi Hollanda Ankara Merkez Turkiye Subesi v Sheng Yi (HK) Trade Co Ltd unreported, HCA 1627/2016, 24 January 2017 I am satisfied that it is appropriate to make the vesting order as the defendants cannot be located and are unlikely ever to transfer the money to the plaintiff.

The position of Hang Seng

29.  The plaintiff seeks Hang Seng to be joined as a respondent so that Hang Seng will be bound by any order made by this court.  It also seeks an order that Hang Seng should transfer the sums in the Liling Account and the Xihonsen Accounts within a specified time.

30.  Hang Seng has written a letter seeking to be excused from attendance and confirming that it adopts a neutral stance towards the application.  However Hang Seng has requested that it should not be joined as a respondent and stated that:

“ According to the records, please note that the Liling Foreign Currency Savings Account is subject to the restriction of a regulatory body. For details, please liaise with Detective Inspector Lee Tsz Kei on 3361 9255; and

In the light of the above and for the avoidance of non-‌compliance with the order to be made by the Court, request forcomplying with paragraph 5 of the Summons (if granted by the Court) without any limitation of time.”

31.  The plaintiff proposes that a time limit should be identified, and suggests that payment should be made within 21 days.

32.  In my view it is appropriate to join Hang Seng as a respondent to the action so that it is bound by result. 

33.  In terms of timing, I am not satisfied that it is appropriate to specify a time by which payment should be made.  I do not know full facts that Hang Seng refer to in their letter, and I have no doubt that as a reputable bank in Hong Kong which is now the subject of an order of this court it will comply with that order.  If there is any significant delay incompliance then no doubt the parties can return to court for further directions.  However without full details of the regulatory restrictions it has referred to, I am not prepared to specify a time limit for compliance.  I will therefore make an order that the money be paid to the plaintiff, but will not specify a time by which it must be paid.

34.  I make an order for costs as sought.