ESSILOR MANUFACTURING (THAILAND) CO LTD v. G. DOULATRAM AND SONS (HK) LTD AND OTHERS

HCA 392/2020

[2020] HKCFI 1790

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 392 of 2020

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D E C I S I O N

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A.   INTRODUCTION

1.  In this action, the Plaintiff claims that is it the victim of a fraud.  The Defendants are said to be second layer recipients of funds which had been fraudulently paid out of the Plaintiff’s bank account to a number of first layer recipients, and which were then further transferred to the Defendants.

2.  By various summonses filed in June and July 2020 (“the Summonses”), the Plaintiff applies for:

(1)  Default judgments against the 4^th Defendant (“D4”), the 12^th Defendant (“D12”), the 21^st Defendant (“D21”), the 23^rd Defendant (“D23”), the 25^th Defendant (“D25”), the 30^th Defendant (“D30”), the 31^st Defendant (“D31), and the 40^th Defendant (“D40”) (collectively, “the Subject Defendants”), seeking inter alia certain declaratory relief in relation to the nature of the funds received by those Defendants;

(2)  Vesting orders in relation to remaining balances in the bank accounts of each of the Subject Defendants[1], and orders joining the banks as respondents for such purpose; and

(3)  Continuation of the Mareva injunctions against the Subject Defendants.

3.  These applications concern a developing area of the law which has given rise to a number of recent decisions as to the appropriate approach, both procedurally and substantively, in cases of this nature.  Following the hearing on 15 July 2020, and for the reasons set out below, the Plaintiff withdrew its applications for the vesting orders. I set out below my decision in respect of the Summonses and the brief reasons for the same.

B.   THE PLAINTIFF’S CLAIM

4.  The Plaintiff is a company incorporated in Thailand and is part of the Essilor group of companies, a well known manufacturer of spectacle lenses.

5.  By its Statement of Claim dated 4 May 2020, the Plaintiff sets out the particulars of its claim against the various Defendants.  In summary:

(1)  The Plaintiff was the holder of a US dollar bank account with JPMorgan Chase Bank in New York (“the JPM Account”).

(2)  The Defendants are all corporate entities with bank accounts in Hong Kong.  The Subject Defendants are all Hong Kong incorporated companies.

(3)  The action arises out of a fraud perpetrated against the Plaintiff by one of its employees, Ms Chamanun Phetporee (“Ms Phetporee”), and various other fraudsters whose identities remain unknown.  It is said that between 15 October 2019 to 11 December 2019, Ms Phetporee, together with the unknown fraudsters, caused a total of 87 payments (“First Layer Transfers”) to be made out of the JPM Account to the bank accounts of 5 first layer recipients (“First Layer Recipients”) in Singapore.

(4)  Some of the funds were then further transferred out of the Singaporean accounts to the Hong Kong bank accounts of the Defendants in this action (“Second Layer Transfers”).  The Defendants in this action are all second layer recipients (“Second Layer Recipients”).

(5)  The Subject Defendants received the respective sums in their accounts in or about late November 2019 or December 2019.

(6)  The Plaintiff further pleads that:

(a)  It had no knowledge of, did not consent to and did not authorise the First Layer Transfers; the said transfers were made as a result of inter alia the fraud perpetrated against the Plaintiff, and/or a breach of Ms Phetporee’s fiduciary duties owed to the Plaintiff.

(b)  It had no knowledge of, did not consent to and did not authorise the Second Layer Transfers.

(c)  It never had any business, commercial or other dealings with the First Layer Recipients and/or the Second Layer Recipients.

(7)  The Plaintiff then advances pleas of unjust enrichment, and constructive trust (arising as a result of the fraud).

(8)  In the Prayer for relief, declaratory relief is sought to the effect that:

(a)  The Plaintiff is the owner of and has proprietary interest over the various sums transferred to the respective Defendants;

(b)  It is entitled to perform tracing in relation to the said sums; and

(c)  The respective Defendants hold the sums on constructive trust for the Plaintiff.

(9)  In the Prayer, the Plaintiff also seeks inter alia orders for payment of the various sums to the Plaintiff, accounts and enquiries, costs and interest.

C.   THE PROCEDURAL HISTORY

6.  This action first came before the Court on 27 March 2020 when the Plaintiff sought ex parte injunctive relief. On that date, Hon Lisa Wong J granted an ex parte proprietary injunction over the amounts of monies which had been paid into the respective Defendants’ accounts, and a Mareva injunction over the assets of the Defendants in Hong Kong.  The ex parte injunction was continued on the return date (24 April 2020) by order of Deputy High Court Judge Whitehead SC, and directions were given in respect of those defendants who had entered an appearance and sought to contest the interlocutory injunction.

7.  Insofar as the Subject Defendants are concerned, I am satisfied on the basis of the evidence before me that the various documents filed in these proceedings, including, importantly, the Writ, the Statement of Claim, and the Summonses, have been duly served on each of the Subject Defendants.

8.  Save for D40 who entered an appearance by Counsel at the return date hearing on 24 April 2020 and had filed an Acknowledgment of Service, none of the other Subject Defendants have ever taken any steps in these proceedings.  D40 has not taken any further steps after the filing of the Acknowledgment of Service.  All of the Subject Defendants were absent from the hearing.

D.   DEFAULT JUDGMENT

9.  It is well settled that in relation to applications for default judgment pursuant to O 19, r 7, Rules of the High Court (“RHC”), the Court looks only at the pleadings and not any evidence.  Furthermore, declaratory relief is not given as of right.  Instead, the Court exercises its discretion and will only grant such relief where it is necessary in order to secure the plaintiff’s proprietary, as opposed to personal, claim [2].

10.  As summarized at paragraph 5(8) above, the Plaintiff seeks declaratory relief in relation to the various sums which were paid to the Subject Defendants.  In so doing, it relies upon the well known dicta of Lord Browne-Wilkinson in Westdeutsche Bank v Islington London Borough Council [1996] AC 669 at 716C-D to assert its proprietary claim:

“… when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient; the property is recoverable and traceable in equity.”

The Westdeutsche approach has been followed in Hong Kong in a number of cases [3].

11.  I am satisfied that in the circumstances of the present case, declaratory relief is necessary and ought to be granted.  The Plaintiff requires this relief in order to safeguard its proprietary (as opposed to merely personal) rights, and also to put such funds out of reach of any competing claims by other creditors of the Subject Defendants.

12.  On the basis of the claim as pleaded, I am satisfied that the proprietary relief is justified and accordingly grant default judgment in the terms sought.

E.   VESTING ORDERS

13.  This part of the application proved less straightforward.

14.  The Plaintiff originally relied on a line of authorities whereby a practice has built up (most commonly in “email fraud” cases), where an application for a vesting order pursuant to S.52, Trustee Ordinance (Cap 29) is often coupled with an application for default judgment [4]. The underlying rationale invariably cited is that the defendants will be unlikely to comply with the judgment, and it will be impossible or difficult to deal with the property without such an order.  As is the situation in the present case, in many of the “email fraud” type cases, the plaintiffs would have obtained interlocutory relief and identified the bank accounts into which the funds had been paid.  In seeking default judgment, they will thus simultaneously seek the vesting order(s) in relation to the funds in those bank accounts and in most, but not all, cases also apply to join the banks in question by way of the same application so as to ensure compliance by the banks.

15.  A number of issues have arisen as a result of a number of recent decisions on this type of application:

(1)  The first is the decision in 800 Columbia Project Company LLC v Chengfang Trade Ltd and others [2020] HKCFI 1293, where Recorder Eugene Fung SC declined to make the vesting order sought.  In a detailed and characteristically well-reasoned decision, the learned Recorder opined that he did not consider S.52, Cap 29 afforded appropriate jurisdictional basis to make the vesting order. Whilst the entirety of his decision bears reading, the crux of his reasoning is found at paragraph 16(9) of his decision:

“The condition in section 52(1)(e) may be satisfied when ‘a thing in action is vested in a trustee whether by way of mortgage or otherwise’. Ms Ng submitted that this condition is satisfied because the debts owing by the Bank to the defendants (ie choses in action) are vested in the defendants by virtue of my granting of the declarations. In the present case, before I gave default judgments declaring that the various sums of money are held on a constructive trust by the defendants for the plaintiff, the defendants were the absolute owner of the money in the relevant bank accounts, or more accurately, the absolute owner of the right to call upon the Bank to repay the amount of the credit balance on the relevant bank accounts. After the giving of default judgments, the legal title in the right to call for repayment would continue to be held by the defendants, but the equitable title in such a right would have been divested from the defendants who would hold the same on trust for the plaintiff. I do not believe it is apt to say that the right to call for repayment from the Bank was vested in the defendants by virtue of my giving of the default judgments.”

(2)  The second is the decision in Wismettac Asian Foods, Inc v United Top Properties Limited & Ors [2020] HKCFI 1504, where Deputy High Court Judge Paul Lam SC performed a detailed review of the authorities to date (including those cited in Footnote 4 above, as well as the 800 Columbia Project Company LLC decision), and inter alia came to the alternate conclusion that S.52(1)(e), Cap 29 did apply and afforded the Court jurisdiction to make the vesting order sought.  The learned Deputy Judge also made observations on the appropriate procedure to be adopted in applications of this nature, opining that it was more appropriate that the application for vesting orders should be made after the default judgment had been granted, by way of separate Originating Summons against the recipient of the funds (ie the named account holder) and the banks.

16.  At the hearing, Counsel for the Plaintiff, Mr Sebastian Hughes, very fairly drew my attention to both authorities and the divergent opinions. I also raised with Mr Hughes at the hearing the issue of tracing and the nature of the evidence required to satisfy the Court that the Plaintiff was, in fact, entitled to the sums in the respective bank accounts identified. This was the subject of the first set of further written submissions dated 16 July 2020.

17.  Following the hearing, on 4 August 2020, the Reasons for Decision of Deputy High Court Judge Douglas Lam SC were handed down in the case of Tokic, D.O.O. v Hongkong Shui Fat Trading Ltd [2020] HKCFI 1822. In that decision, the learned Deputy Judge agreed with the reasoning of Recorder Fung SC and noted that appellate guidance would be beneficial on this issue.

18.  As a result, there is presently a significant degree of uncertainty as to:

(1)  Whether S.52, Cap 29 may be deployed so as to afford a party in the Plaintiff’s position a basis for seeking a vesting order / orders at all.

(2)  If S.52, Cap 29 does in fact apply and the Court has the jurisdiction to make the vesting orders sought:

(a)  What considerations apply in the exercise of the discretion as to whether to grant the same; and

(b)  What the appropriate procedure ought to be (particularly, whether it is appropriate to roll up the application together with the application for default judgment, or whether separate originating process for the vesting order application is required).

19.  In light of the developments after the hearing, I invited the Plaintiff to make further submissions on the above-mentioned issues. By written submissions dated 18 August 2020, the Plaintiff indicated that it was no longer pursuing the applications for vesting orders.

20.  There is little that I can helpfully add to the existing first instance jurisprudence on these issues, in particular in relation to the jurisdictional basis. I would agree that this area of the law would very much benefit from appellate guidance, as it would appear the prior practice has been quite consistently followed, and vesting orders regularly made. I would note that in light of what appears to have been the accepted practice, and the way in which matters have developed, the Plaintiff cannot necessarily be faulted for having taken out the applications in the first place.

F.   CONCLUSION

21.  Accordingly, I make the following orders:

(1)  I grant default judgments in terms as sought in §1 of the Summonses against each of D4, D12, D21, D23, D25, D30, D31 and D40.

(2)  I continue the Mareva injunctions in the terms as sought in §5 of the Summonses, save that the injunctions granted against D30 and D31 shall be discharged.

22.  As to costs, the final orders for the action against the Subject Defendants shall include orders that the said Defendants shall pay the costs of the action, including the costs of the present applications.  The Plaintiff invited me to perform a summary assessment under O 62, r 9(4)(b), RHC, and in connection therewith, handed up a Statement of Costs at the hearing.  The approach adopted therein was to seek the full costs of the Summonses, but insofar as the main action and other interlocutory applications were concerned, the Plaintiff has notionally apportioned to each defendant 1/44^th of the costs (in view of the fact that there were originally 44 defendants when the proceedings commenced).

23.  Upon consideration of the Statement of Costs, and bearing in mind the approach as set out in Practice Direction 14.3 and Hong Kong Civil Procedure 2020, §62/9/10, I accordingly summarily assess the costs of the action (inclusive of the interlocutory applications) at HK$115,000 for each Subject Defendant, save that as against D30 and D31, there shall be no order as to costs.