AICI TAN v. ZHU YUAN MU GYXY TRADE LTD AND OTHERS

DCCJ 2078/2022

[2023] HKDC 739

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2078 OF 2022

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BETWEEN

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D E C I S I O N

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1.  This is an application by the plaintiff by summons filed on 21 February 2023 to enter default judgment against the 6^th defendant pursuant to Order 19, rule 7 of the Rules of the District Court (Cap 336H) (“RDC”).

Background

2.  The plaintiff claims that she is a victim of a fraudulent investment scheme whereby she was induced to transfer sums totalling US$225,700 to the bank accounts of the 1^st to 5^th defendants in April and May 2020. According to her case, her funds were subsequently transferred from the 1^st to 5^th defendants’ bank accounts to a number of “second-tier” recipients, one of which is the 6^th defendant, which received sums totalling US$182,700 belonging to her.

3.  As shown in the plaintiff’s statement of claim:-

(1) The plaintiff resides in the United States and is a naturalised US citizen.

(2) On 9 March 2020, the plaintiff was first acquainted to one Law Yin Wing (“Law”) on Facebook. Law represented to the plaintiff that he was a data analysis consultant of a financial securities company in Hong Kong.

(3) On 7 April 2020, Law advised the plaintiff that he had a reliable source of information regarding an investment, and that the plaintiff would be able to make a lot of money by making such investment. Relying on Law’s expertise, and pursuant to his instructions, the plaintiff made a wire transfer of US$20,000 to the 1^st defendant’s bank account in Hong Kong on 8 April 2020 as her initial investment.

(4) Thereafter, Law told the plaintiff that she had made profits from her initial investment and had to pay taxes. At around the same time, Law and his supervisor surnamed Zhang (“Zhang”) also asked her to make further investment. Pursuant to the instructions of Law and Zhang, the plaintiff then made five wire transfers totalling US$205,700 to the respective bank accounts of the 2^nd to 5^th defendants between 21 April 2020 and 27 May 2020 either for tax payment or for investment purposes, with details as follows:-

(a) US$46,000 on 21 April 2020 to the 2^nd defendant;

(b) US$60,000 on 27 April 2020 to the 2^nd defendant;

(c) US$56,700 on 6 May 2020 to the 3^rd defendant;

(d) US$32,000 on 19 May 2020 to the 4^th defendant; and

(e) US$11,000 on 27 May 2020 to the 5^th defendant.

(5) After the last wire transfer on 27 May 2020, the plaintiff was no longer able to contact either Law or Zhang. She then realised that she fell victim to a fraudulent investment scheme.

(6) Based on the bank records obtained by the plaintiff pursuant to a Norwich Pharmacal order, she discovered that the funds she had transferred to the 1^st to 3^rd defendants’ bank accounts have since been transferred out to the 6^th defendant, which received in its account with Bank of China (Hong Kong) Limited (“Account”) the following sums:-

(a) US$60,800 on 9 April 2020;

(b) US$45,950 on 22 April 2020;

(c) US$96,450 on 28 April 2020; and

(d) US$125,000 on 7 May 2020.

(7) The plaintiff is entitled to restitution of the payments received by the 6^th defendant on the ground of unjust enrichment. Further, the 6^th defendant is liable as constructive trustee to account and/or deliver up to the plaintiff the payments received and/or any property representing all or part of such payments.

Procedural history

4.  The plaintiffs issued a generally endorsed writ on 6 June 2022, and served the amended writ of summons on the 6^th defendant on 21 November 2022.

5.  On 5 December 2022, the 6^th defendant, through its then solicitors, YW Lo & Associates (“YWL”), filed and served an acknowledgement of service of the amended writ, in which it gave notice of intention to defend the action.

6.  On 16 January 2023, the plaintiff filed the statement of claim and served the same on YWL.

7.  The time for the 6^th defendant to file a defence expired on 13 February 2023. No defence has ever been filed or served by the 6^th defendant.

8.  On 14 February 2023, the plaintiff served on YWL a notice of intention to enter judgment. On the same day, YWL informed the plaintiff that they had applied to cease to act for the 6^th defendant.

9.  On 15 February 2023, the plaintiff served a notice of intention to enter judgment at the 6^th defendant’s registered address. The present summons was served on YWL and at the 6^th defendant’s registered address on 22 February 2023.

10.  On 8 March 2023, leave was granted for YWL to cease to act for the 6^th defendant, which has since been unrepresented in this action.

11.  On 30 March 2023, the plaintiff entered default judgment against the 2^nd defendant in the sum of US$106,000. For the present purposes, Mr Chin, counsel for the plaintiff, submitted that the plaintiff would give credit for the judgment sum entered against the 2^nd defendant and thus limit her claim against the 6^th defendant to US$76,653.90, viz. the sum total of US$19,972.30 and US$56,681.60, which she said belonged to her and formed part of the funds transferred by the 1^st and 3^rd defendants to the 6^th defendant on 9 April 2020 and 7 May 2020 respectively.

12.  I am satisfied that the summons was duly served on the 6^th defendant. I therefore proceeded with this hearing in the 6^th defendant’s absence.

The relevant legal principles

13.  The relevant legal principles on granting default judgment under RDC Order 19, rule 7 are well established and may be summarised as follows:-

(1) In determining whether to grant default judgment, the court must consider the application according to the pleadings alone, and decide whether the plaintiff appears to be entitled to judgment on her statement of claim: Seto Yim King v Soo Hooyet Dew [2019] HKCFI 2640, §10.

(2) The court cannot receive any evidence, and it is thus not necessary for the plaintiff to prove her case by evidence: Times Square Limited v Lee Kwun Kit trading as JL Music and Anor [2020] HKCFI 438, §14(3).

(3) Notwithstanding the wording in Order 19, rule 7(1), the court’s power to grant default judgment is discretionary and not mandatory: Times Square Limited (supra), §14(4).

14.  With these principles in mind, I turn to the facts of the present case.

Discussion

15.  The plaintiff’s claims against the 6^th defendant are based on restitution and constructive trust. I shall deal with them in turn below.

(a) The plaintiff’s claim for restitutionary relief

16.  The plaintiff claims that the 6^th defendant is liable in restitution to return the sum of US$76,653.90 to her on the ground of unjust enrichment.

17.  It is well established that the following framework is adopted in determining the validity of a claim in unjust enrichment: (1) Was the defendant enriched? (2) Was the enrichment at the plaintiff’s expense? (3) Was the enrichment unjust? (4) Are any of the defences applicable? See Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, §67, per Ribeiro PJ; Yukio Takahashi v Cheng Zhen Shu (2011) 14 HKCFAR 558, §26, per Ribeiro PJ. If the first three matters are established by the plaintiff, it is then for the defendant to prove that there is a defence: Samsoondar v Capital Insurance Co Ltd [2021] 2 All ER 1105, §18, per Lord Burrows.

18.  In the present case, the 6^th defendant was not a direct recipient of funds from the plaintiff. Therefore, whilst there can be no question on the facts as pleaded in the statement of claim that the 6^th defendant was enriched in the sum of US$328,000, being the sum total of the funds referred to at §3(6) above, it may be questioned whether part of the 6^th defendant’s enrichment, to the extent of US$76,653.90 for the present purposes, could be said to have been at the expense of the plaintiff.

19.  In JSP International SRO v Alacrity Limited and Others [2022] HKCFI 977, §20, Cheng J relevantly held as follows:-

“It was recognised in Investment Trust Companies v. Revenue & Customs Commissioners [2018] AC 275 at [46] to [50] that there may be situations in which, whilst the parties have not dealt directly with one another, or with one another’s property, the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit. These are generally situations in which the difference from the direct provision of a benefit by the claimant to the defendant is more apparent than real. At [48], Lord Reed referred to various such situations, one of which he described as follows.

“There are also situations where the defendant receives property from a third party into which the claimant can trace an interest. Since the property is, in law, the equivalent of the claimant’s property, the defendant is therefore treated as if he had received the claimant’s property.””

20.  On the facts as pleaded in the statement of claim, it seems to me that there is a clear pattern of transfers of funds which originated from the plaintiff to the 1^st and 3^rd defendants, who in turn made transfers to the Account within a day after receiving the plaintiff’s funds and in amounts which are invariably larger than the plaintiff’s wire transfers. Given the proximity in time between the plaintiff’s wire transfers to the 1^st and 3^rd defendants and the latter’s transfers to the Account, and the amounts involved, I am satisfied that the 6^th defendant’s enrichment, to the extent of US$76,653.90, came from the plaintiff’s funds and was thus at the plaintiff’s expense.

21.  The 6^th defendant’s enrichment would be unjust if it is caused by a mistake of fact or law by the plaintiff. On the facts as pleaded in the statement of claim, I am satisfied that the 6^th defendant’s enrichment in the sum of US$76,653.90 is unjust, in that if the plaintiff had known the true state of affairs, namely, that her funds were not applied for investment or tax payment purposes, she would not have caused the payments to be made: cf. Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349, 399C-D, per Lord Hoffmann.

22.  For the above reasons, and there being no defence from the 6^th defendant, I am of the view that the plaintiff has established a case of unjust enrichment against the 6^th defendant on the facts as pleaded in the statement of claim, and is thus entitled to recover the sum of US$76,653.90 in restitution from the 6^th defendant. I would therefore grant the restitutionary relief as pleaded by entering judgment against the 6^th defendant in the sum of US$76,653.90.

(b) The plaintiff’s claim for declaratory relief

23.  In addition to the personal remedy of restitution, the plaintiff also seeks declarations that (1) the sum of US$76,653.90, or any part thereof, in the Account is held by the 6^th defendant on a constructive trust for the plaintiff, and (2) the 6^th defendant is liable to account to the plaintiff for the sum of US$76,653.90.

24.  Mr Chin, in his submissions, fairly accepted that it is not the normal practice of the court to grant a declaratory relief by way of default judgment, since a declaration could be based only on unproved allegations and the court ought not to declare as fact that which might not have proved to be such, had the facts been investigated: Top One International (China) Property Group Co Ltd v Top One Property Group Ltd [2011] 1 HKLRD 606, §§83 and 85, per Fok J (as he then was).

25.  Nonetheless, Mr Chin submitted that the rule that the court will not make a declaration in default without a trial is a rule of practice and not of law. The paramount duty of the court is to do the fullest justice to the plaintiff to which she is entitled. The practice will thus give way where the plaintiff has a genuine need for declaratory relief which the court can properly grant on the merits of the case: Lai Wai Kuen v Wong Shau Kwong [2004] 4 HKC 528, §6, per Lam J (as Lam PJ then was); Mesirow Financial Administrative Corporation v Best Link Industrial Co, Ltd, HCMP 1846 of 2015 (25 January 2016), §35, per Recorder Lisa Wong SC (as she then was).

26.  My attention was also drawn to instances in which the court declared, in the absence of the defendant, the existence of a constructive trust in respect of funds which payment was procured by a cyber fraud: Mesirow Financial Administrative Corporation (supra), §38; Guaranty Bank and Trust Company v Zzzik Inc Limited, HCA 1139 of 2016 (18 July 2016), §38; Sultana Distribution Services Inc v Hongkong Fuheng Technology Co, Limited [2018] HKCFI 1480, §12; Creative Impact (Hong Kong) Ltd v Luckon Travel Ltd and Anor [2021] HKCFI 1552, §20.

27.  It is pertinent to note that the defendants in all of the foregoing cases were first-tier recipients. No authorities were cited by Mr Chin to support his proposition that a constructive trust should be imposed on a second-tier recipient of funds originally derived from fraud, who is prima facie one step removed from the fraudulent scheme.

28.  The issue of whether a victim of cyber fraud is entitled to proprietary relief against the recipient of her funds was discussed by the Court of Appeal in R Stahl Inc v AJ Development Ltd [2021] HKCA 1093, which post-dated all of the first instance decisions referred to at §26 above. Relevantly, G Lam JA explained (at §§29-30) as follows:-

“29. It is therefore necessary to deal with the merits of the application for summary judgment. The plaintiff relies on a restitutionary cause of action against the defendant based on a payment by mistake. It further asserts a proprietary claim to the funds in the Account, based on the dictum of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 716:

“I agree that the stolen moneys are traceable in equity.  But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity.”

30. While that dictum has been the subject of some debate, it has been applied in Hong Kong in a number of cases involving cyber fraud. Assuming it represents the law, it should nevertheless be noted that the dictum refers to a “fraudulent recipient”. Given that the alleged fraudster is not said to have received any money, and the alleged recipient (the defendant) is not said to be fraudulent as the plaintiff has been at pains to emphasise, it is not clear how the dictum can assist it: cf. Zief Incorporated v Tekchandani Ajai Mohan (trading as D’Ziner Collections (Hong Kong)) & others [2021] HKCFI 38, §45.”

29.  In the premises, it is pertinent for the plaintiff to plead that the 6^th defendant was a fraudulent recipient of her funds in order to make good her case on constructive trust insofar as she relies on Lord Browne-Wilkinson’s dictum as aforesaid. However, in the statement of claim, the 6^th defendant is not said to be a fraudulent recipient of the plaintiff’s funds. Whilst the plaintiff has made an allegation in her affidavit evidence filed in respect of other applications in these proceedings that the 6^th defendant acted fraudulently in receiving her funds, which Mr Chin has invited the court to take into account, such claim has not been pleaded in the statement of claim at all. Pursuant to RDC Order 19, rule 7(1), the court shall not have regard to the same for the present purposes: Times Square Limited (supra), §14(3). As the matter now stands, in the absence of any proper plea that the 6^th defendant is a fraudulent recipient of the plaintiff’s funds, it appears to me (and Mr Chin accepted) that the plaintiff is unable to rely on Lord Browne-Wilkinson’s dictum as regards the imposition of a constructive trust in respect of the 6^th defendant.

30.  Furthermore, in order to impose a constructive trust against the 6^th defendant, the plaintiff must also prove that the property to which she lays claim is still in the ownership of the 6^th defendant: Boscawen v Bajwa [1996] 1 WLR 328, 334H, per Millett LJ (as he then was); JSP International (supra), §§33, 43-44, per Cheng J. However, as Mr Chin accepted, there is no averment in the statement of claim that the plaintiff’s funds or the traceable proceeds thereof are still in the 6^th defendant’s ownership.

31.  For the above reasons, I am not satisfied that the plaintiff is entitled to proprietary remedies against the 6^th defendant on the facts as pleaded in the statement of claim. It follows that the declaratory relief sought by the plaintiff ought not to be granted.

Disposition

32.  In view of my decision above, and having heard counsel’s submissions on the issue of interest, I would make the following orders:-

(1) Judgment be entered against the 6^th defendant in the sum of US$76,653.90, together with interest at the prime rate plus 1% per annum from 7 May 2020 until the date hereof and thereafter at judgment rate until full payment.

(2) The remainder of the plaintiff’s summons be dismissed.

(Submissions on costs)

33.  The hourly rates adopted in the plaintiff’s statement of costs are not commensurate with the prevailing solicitors’ hourly rates on party and party taxation as approved by the Chief Justice, and appear to be excessive.

34.  I shall summarily assess the plaintiff’s costs in accordance with the approved solicitors’ hourly rates, on the District Court scale.

35.  I make a costs order nisi that the 6^th defendant shall pay half of the plaintiff’s costs of the action up to the date hereof, including half of the costs of the present application, summarily assessed at $126,000; the other half of the plaintiff’s costs of the action (excluding the costs of the present application) shall be in the cause.