QL CREDIT GAIN FINANCE CO LTD, previously known as HONG KONG CREDIT GAIN FINANCE CO LTD and KP FINANCIAL SERVICES LTD v. MORTGAGE & CREDIT LTD), previously known as AA MORTGAGE LTD and FULLYWELL CREDIT LTD

DCCJ 6940/2020

[2021] HKDC 628

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 6940 OF 2020

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BETWEEN

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DECISION

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1.  This is the plaintiff’s application for default judgment under Order 13, rule 6 and Order 19, rule 7 of the Rules of the District Court.

2.  I am satisfied by the affirmations of service filed by the plaintiff that the defendant has failed to give notice of intention to defend and is in default of defence.  The defendant has been duly informed of the hearings and the adjournment but failed to appear.

The plaintiff’s case

3.  The following facts are taken from the statement of claim filed by the plaintiff in this action (“the SOC”). 

4.  The plaintiff and the defendant are both licensed money lenders.  They have fallen victim to fraud perpetuated by Mr Li Sing Tung (“the fraudster”).

5.  The fraudster’s father and stepmother (hereinafter called “the father” and “the stepmother” respectively) are the registered owners of a real property in Bayview Garden, Tsuen Wan.  Between September 2014 and June 2015, the fraudster defrauded several money lenders by:

(a) claiming, by means of forged power(s) of attorney, that he represented the father and the stepmother in procuring loans and offering the property as security; and

(b) procuring the transfer of such loans or part thereof to himself.

6.  Using the above modus operandi, the fraudster obtained a loan from the defendant on 3 December 2014 with himself as borrower and the father and the stepmother as mortgagors (“the defendant’s loan”).  As security for the loan, a Second Mortgage dated 3 December 2014 in respect of the property was executed by the fraudster purportedly on behalf of the father and the stepmother in favour of the defendant (“the defendant’s mortgage”).

7.  Similarly, the fraudster applied for a loan from the plaintiff in around December 2014 purportedly on behalf of the father and the stepmother as borrowers and mortgagors on the strength of a power of attorney dated 26 November 2014 (“the POA”) with himself as guarantor.  The application was approved and, pursuant to loan documents including a facility letter, a Memorandum of Agreement dated 9 January 2015 and a Second Legal Charge dated 9 January 2015 signed by the fraudster purportedly on behalf of the father and the stepmother, the plaintiff agreed to lend them HK$3 million (“the plaintiff’s loan”).

8.  Messrs Alan Ho & Co, solicitors, (“AH&Co”) acted for the plaintiff in the plaintiff’s loan and prepared the aforesaid loan documents.  On 9 January 2015, the plaintiff paid the loan proceeds to AH&Co with the instruction to, inter alia, release a sum from the loan proceeds to the defendant to discharge the defendant’s mortgage, deduct various sums from the loan proceeds, and pay the remainder to the borrower(s) or guarantor. 

9.  On 14 January 2015, AH&Co paid (a) HK$1,280,500 (“the Sum”) to the defendant to redeem the defendant’s mortgage; and (b) HK$1,612,000 to the fraudster pursuant to the plaintiff’s instruction.

10.  On 3 February 2015, the defendant registered a Receipt on Discharge of a Charge at the Land Registry to confirm the discharge of the defendant’s mortgage (“the defendant’s receipt”).

11.  When the plaintiff’s loan was defaulted, the plaintiff commenced HCA 1922/2015 in the High Court against the fraudster, the father and the stepmother claiming repayment of the loan plus interest, vacant possession of the property and costs (“the High Court action”).

12.  In the High Court action, the father and the stepmother pleaded that:-

(a) the fraudster forged their signatures on the POA;

(b) the fraudster, without their knowledge, purportedly executed the defendant’s mortgage in favour of the defendant on 3 December 2014 by way of the POA;

(c) they did not have knowledge of and have not consented to the execution of the loan documents respecting the plaintiff’s loan; and

(d) they reported the matter to the police.

13.  The father and the stepmother counterclaimed against the plaintiff in the High Court action for: (a) a declaration that the Memorandum of Agreement and the Second Legal Charge in respect of the plaintiff’s loan are void and/or unenforceable against them; (b) a declaration that the plaintiff is not entitled to any repayment under the Memorandum of Agreement and security under the Second Legal Charge; (c) an order that the registration of the Second Legal Charge at the Land Registry be vacated; (d) damages to be assessed; (e) interest; and (f) costs.

14.  In this action, the plaintiff has pleaded the following cause(s) of action against the defendant:-

(a) the plaintiff’s loan was procured by the deceit and fraudulent misrepresentation of the fraudster and is null and void in law as against the father and the stepmother; (para 16 of the SOC)

(b) the defendant’s loan, including the defendant’s mortgage and the defendant’s receipt, was procured by the deceit and fraudulent misrepresentation of the fraudster and are null and void in law as against the father and the stepmother; (para 16 of the SOC)

(c) the plaintiff is entitled to restitution of the Sum on the basis of unjust enrichment upon mistake, in that the plaintiff would not have paid the Sum or any part thereof to the defendant but for its mistaken belief: (i) that the plaintiff’s loan was entered into genuinely/validly by the father and the stepmother; and/or (ii) that the Sum was genuinely/validly owed to the defendant under the defendant’s mortgage and that the father and the stepmother were indebted to the defendant; (para 17 of the SOC)

(d) the transfer of the Sum was induced by the deceit and fraudulent misrepresentation of the fraudster and the Sum or any part thereof is held on constructive trust by the defendant in favour of the plaintiff; (para 18 of the SOC)

(e) further or alternatively, there was a total failure of consideration in that: (i) the transfer of the Sum did not achieve the intended objective as the defendant’s loan was not a legally effective transaction; (ii) the transfer had no commercial reasons or justification; (iii) the plaintiff had no prior dealing with the defendant; and (iv) the defendant had no reason to receive and no entitlement to the Sum or any part thereof; and (para 19 of the SOC)

(f) the defendant’s enrichment was unjust and at the expense of the plaintiff. (para 20 of the SOC)

15.  Despite demand, the defendant has failed and/or refused to repay the plaintiff.  The plaintiff therefore claims the following relief against the defendant:-

(a) A declaration that the defendant is liable to account to the plaintiff for the sum of HK$1,280,500 or any part thereof as constructive trustee;

(b) A declaration that the sum of HK$1,280,500 or any part thereof are funds held on constructive trust by the defendant for the plaintiff;

(c) An order that the defendant shall pay and return the said sum of HK$1,280,500 or any part thereof to the plaintiff forthwith;

(d) Interest; and

(e) Costs.

Discussion

16.  It is well settled that by making default, the defendant is taken to have admitted all the allegations in the statement of claim.[1]  In an application for default judgment, it is not necessary for the plaintiff to prove his case by evidence and the court should give judgment according to the pleadings.[2]  Having said that, the function of the judge is not “confined to checking that there is an affidavit of due service and that the time periods prescribed by the rules have elapsed; and that, subject to those checks he is required to act as a judicial rubber stamp” and the judge’s discretion is engaged.[3]

17.  At the hearing on 27 May 2021, Mr Lau, the solicitor representing the plaintiff, fairly updated me on the progress of the High Court action.  He said that both the claim and the counterclaim in the High Court action have been dismissed by consent of the parties. 

18.  I was concerned about the effect of the dismissal on the plaintiff’s claim herein, as the plaintiff has told the High Court before that: [4]

“As confirmed by Mr Pow SC on behalf of KPS [one of the plaintiff’s predecessors] at the hearing on 27 September 2017, KPFS’s position in respect of the allegations of forgery and lack of authority raised by the various defendants in the 4 actions [including the High Court action] is that it would put them to strict proof of those allegations…”

I called the plaintiff back and invited for further submission.  Hence, the adjournment.

19.  At the adjourned hearing,[5] Mr Lau addressed me fully with reference to the pleadings in the High Court action.  A copy of the order dated 19 March 2021 (“the Consent Order”) was also submitted for my reference. 

20.  The Consent Order was made by the consent of the plaintiff of the one part and the father and the stepmother of the other part, in pursuance of which “the claims of the Plaintiff against the 1^st and 2^nd Defendants [ie the father and the stepmother]” and “the counterclaim of the 1^st and 2^nd Defendants against the Plaintiff” have been dismissed by consent.  The dismissal was premised upon the following acknowledgment and undertaking as recorded in the preamble of the order:

“UPON the acknowledgement made by the parties herein that the Memorandum of Agreement dated 9^th January, 2015 and the Second Legal Charge dated 9^th January, 2015 are unenforceable and void in law

AND UPON the Undertaking given by the Plaintiff not to take any steps to enforce the Memorandum of Agreement dated 9^th January, 2015 and the Second Legal Charge dated 9^th January, 2015 against the 1^st and 2^nd Defendants upon the dismissal of the respective claims of the Plaintiff and the 1^st and 2^nd Defendants”

21.  As submitted by Mr Lau, the defendant herein was not a party to the High Court action and the dismissal did not dispose of the central issue in this case, namely, the validity of the defendant’s loan and the defendant’s mortgage.  I do not think the dismissal has compromised the plaintiff’s claim herein against the defendant.

22.  According to Mr Lau, the plaintiff is claiming against the defendant based on unjust enrichment and/or constructive trust.

23.  Approaching the unjust enrichment claim in terms of the framework set out in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at para 67, it is clear that, given the payment on 14 January 2015, the defendant was enriched to the extent of the Sum at the expense of the plaintiff. 

24.  As to why the enrichment was unjust, Mr Lau has focused his argument on mistaken identity with reference to the case of AXHT Company Limited v Freeway Finance Company Limited [2020] HKCFI 1603. In so doing, he has avoided the complications associated with the alternative ground of total failure of consideration discussed in paras 25-28 of Zief Incorporated v Tekchandani Ajai Mohan (trading as D’Ziner Collections (Hong Kong) [2021] HKCFI 38.

25.  The facts in AXHT are almost identical to this case.  AXHT and Freeway, both money lenders, were victims of fraud committed by the fraudster there (Soe) who had purported to be the sole shareholder/director of a company (WWL) which held a valuable property.  Through the use of some documents forged by Soe, (i) Freeway advanced a loan of HK$2 million with WWL and Soe as borrowers, whilst Soe purportedly executed a legal charge over the property on behalf of WWL to secure the loan and, thereafter, (ii) AXHT advanced a loan of HK$25 million to WWL which was secured by a mortgage (to the extent of HK$15 million) and a second mortgage (to the extent of HK$10 million) over the property purportedly executed by Soe on behalf of WWL.  Part of the AXHT’s loan (HK$2,134,023) was used to discharge Freeway’s loan, and Freeway subsequently registered a receipt on discharge of a charge at the Land Registry.

26.  Unlike the present case, the defendant in AXHT (Freeway) entered an appearance and contested the claim and the trial judge (Deputy High Court Judge Eva Sit SC) had the benefit of full argument.

27.  One of the issues debated before the court was whether Freeway had a right to receive the HK$2,134,023.  In the learned Judge’s analysis:[6]

(a) The paradigm situation of mistaken identity is where A makes an offer to B, B accepts it, but believing that he is dealing with C, in circumstances where A knows of B’s mistake and may have even deliberately caused it.  In such a case, there was no contract with C because C was not aware of the transaction and there was no consensus ad idem.  If A purported to act as C’s agent, A would have acted without authority and the contract would also not be binding on C.

(b) Applying the above, Freeway’s loan agreement must be void as between Freeway and WWL, as WWL was not aware of and never consented to entering into the same.

(c) Freeway’s loan agreement is also void as between Freeway and Soe.  Given the evidence that Freeway intended to contract with Soe only on the basis that he was the sole shareholder/director of WWL, the presumption that Freeway intended to contract with Soe is rebutted.

(d) Freeway’s loan agreement is therefore void.

(e) Given the above, Freeway would not be regarded as having given valuable consideration when advancing its loan, and would have no legal right to receive the HK$2,134,023: see Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, 560F-G (Lord Templeman), 575C-F and 581C-E (Lord Goff of Chieveley). (para 62 of the judgment)

28.  The learned Judge also dealt with the “good consideration” defence (see para 63 of the judgment) and the defence of change of position (see paras 65-69 of the judgment) raised by Freeway.  She held that as Freeway’s loan agreement and Freeway’s charge were void, they created no obligations in favour of Freeway which Freeway had released.  Following South Tyneside Metropolitan BC v Svenska International plc [1995] 1 All ER 545, she held that Freeway cannot rely on a change of position which depends on the underlying void transaction being treated as valid.

29.  In the present case, the plaintiff has pleaded that the defendant’s loan, the defendant’s mortgage and the defendant’s receipt are all null and void.  In the absence of contrary argument and following AXHT, I accept that the enrichment is unjust and no defence arises from the pleadings.  The plaintiff’s claim against the defendant therefore succeeds on the basis of unjust enrichment.

30.  Apart from personal remedy, the plaintiff is also seeking proprietary remedy against the defendant in terms of a declaration that the defendant is holding the Sum on constructive trust for the plaintiff.  Mr Lau refers me to Ying Fu (HK) Industrial Limited v Hefan Trade Limited [2021] HKCFI 399 and submits that declaratory relief should be granted on the basis that there is a genuine need for such relief.  He finds it strange for the defendant – a money lender – to willingly suffer default judgment to be entered against it and submits that the imposition of a constructive trust would give the plaintiff added comfort in the event of the defendant’s insolvency. Having said that, Mr Lau has assured me that the plaintiff has received no notice of winding up of the defendant.   

31.  I am not persuaded by Mr Lau’s effort.

32.  In Ying Fu, the plaintiff fell victim of an email fraud and transferred US$500,000 to the defendant’s account.  There was evidence that after the transfer, there had been no further transaction in the defendant’s account.  The defendant’s banker also confirmed that there was US$500,014.07 remaining in the defendant’s account.  That was the basis upon which the learned Judge concluded that: (i) the remaining balance in the defendant’s account belonged entirely to the plaintiff; (ii) the plaintiff had made out a case that the defendant held the sum and/or any remaining balance on constructive trust for the plaintiff; and (iii) there was a genuine need to give the declaratory reliefs in order to secure the plaintiff’s proprietary, as opposed to merely personal, claim.  See paras 12-14 of the judgment. 

33.  In the present case, we only know from the SOC that the Sum was paid on 14 January 2015 and the defendant later executed the defendant’s receipt to confirm receipt of it.  Unlike Ying Fu, it is not known if the Sum has become mixed with other money of the defendant and there is nothing for the plaintiff to work on to trace what has become of the Sum.  As Lord Toulson explained in Federal Republic of Brazil v Durant International Corpn [2016] AC 297 at para 17:

“The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. If it has ceased to exist, it cannot metamorphose into a later property interest. Ex nihilo nihil fit: nothing comes from nothing.”

34.  It has been said that the courts do not normally grant declaratory relief without a trial or hearing the evidence.  But that is only a rule of practice and, if the plaintiff can demonstrate that he has a genuine need for such relief, the court may be persuaded to make the declaration sought by stating the footing upon which the declaration is made: see Hong Kong Civil Procedure 2021, para 15/16/2.  In the circumstances of this case, I am not minded to grant the declaration sought.  In my view, monetary judgment would give sufficient justice to the plaintiff as in the AXHT case.

Disposition

35.  For the above reasons, I grant judgment on the Sum in favour of the plaintiff with interest thereon at the commercial rate of prime minus 2.5% (as submitted by Mr Lau) from the date of the writ until judgment and costs.

36.  Based on the Statement of Costs submitted by Mr Lau, I summarily assess the plaintiff’s costs at HK$39,565.