GUARANTY BANK AND TRUST CO v. ZZZIK INC LTD

HCA 1139/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1139 OF 2016

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R E A S O N S   F O R   D E C I S I O N

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Introduction

1. The plaintiff is the victim of an email fraud and by summons, dated 16 June 2016, it applies for judgment in default of service of defence under Order 19, rule 7(1) of the Rules of the High Court and a vesting order for payment of the monies defrauded and held on trust by the defendant, pursuant to s52(1)(e) and s52(2) of the Trustee Ordinance, Cap 29.

2. At the end of hearing the application I gave judgment for the plaintiff.  These are my reasons.

3. The plaintiff founds its claim in unjust enrichment and through a claim of proprietary constructive trust.

4. The plaintiff claims a declaration that the defendant holds US$1,856,010.90 on trust for the plaintiff and payment of that sum, alternatively, an account of funds and their traceable proceeds and payment of the amount found due upon the account.

5. The plaintiff has its headquarters in Denver, Colorado, United States of America.  It provides comprehensive banking and other financial services throughout Colorado to consumers and small to medium-sized businesses.

6. The defendant is a company registered in Hong Kong.  It has an issued share capital of HK$100.  The address of its single shareholder is in Russia.  The defendant has one director, a Ukrainian passport holder, whose address is in Shanghai.  The Business Registration Certificate states the defendant's business as "Trading, Investment & Consulting".

Background

7. On 28 March 2016, several of the plaintiff's employees received an email with malware or a virus attached which would enable the fraudster to steal banking credentials and other personal information so as to gain access to financial records.

8. One of the plaintiff's employees acted on the email, as a result of which the fraudster gained access to the plaintiff's online banking system.

9. On 7 April 2016 (US time zone, 8 April 2016 Hong Kong time), the fraudster used the information to change the account details regarding the account of one of the plaintiff's customers.  The fraudster then used those new account details to gain access to the customer's account and to instruct the plaintiff to effect an electronic transfer of US$1,856,010.90 to the defendant's bank account, number 848-378295-838, with HSBC in Hong Kong. The plaintiff made the wire transfer as instructed.

10. The fraud was discovered on the day it happened.  The plaintiff's customers receive alerts whenever password or contact information changes are made.  Such an alert was sent to the email address of the compromised user profile of the customer, which then contacted the plaintiff to report that it had not made or authorized any user profile changes.  Upon discovery, the plaintiff notified Wells Fargo Bank (the plaintiff's correspondent bank through which the transfer was processed) of the fraud.  Wells Fargo Bank had already made the transfer and notified HSBC, and there is an indication in an email from Wells Fargo Bank to the plaintiff that HSBC intended to contact the defendant to arrange the return of the money.

11. The plaintiff cancelled the debit to the customer's account because of the fraud and the transfer was made on the plaintiff's account.

12. The money has never been refunded or repaid to the plaintiff.

13. Discovery of accounts provided by HSBC confirm that a sum of US$1,856,010.90 ("the funds") was transferred to the defendant's account on 8 April 2016.  The amount currently in the defendant's account stands at US$1,856,002.51, after deduction of what is likely to have been bank charges.

14. On 29 April 2016, the plaintiff issued and served a writ on the defendant and applied for and obtained Mareva and proprietary injunctions freezing the funds.  The plaintiff served a statement of claim on the defendant on 16 May 2016.

15. Because the defendant failed to give notice of intention to defend within the prescribed time (14 days), upon serving the statement of claim, the plaintiff proceeded with the action as if the defendant had given notice of intention to defend, pursuant to RHC Order 13, rule 6(1).

16. The defendant failed to file a defence within the prescribed time (28 days) and, on 16 June 2016, the plaintiff filed the summons which is before me. 

17. Also before me is an application by summons, dated 29 June 2016, to amend the summons, with time for service to be abridged.  The amendment application is made upon a request by the first respondent, HSBC, by letter dated 28 June 2016, for clarification regarding transfer of the funds to the plaintiff.  HSBC asked the plaintiff's solicitors to consider adopting words, the effect of which would direct HSBC to pay the funds to the plaintiff.  Subject to certain amendments made by me, which bring the order into line with s52, the amendment sought is appropriate.  The relief sought by the summons is not affected and remains the same.  The amendment summons and supporting affidavit were served on the defendant by leaving them at the defendant's registered address.  I shall allow the amendment and I make an order in terms of the draft order, dated 4 July 2016, as amended by me.

18. By letter, dated 14 June 2016, HSBC advised the plaintiff's solicitors that it adopts a neutral position in this action and agrees to be bound by any order made by the court.

19. The defendant did not appear in court.

The defendant's identity

20. The address on the wire transfer (16/F, Kowloon Building, 555 Nathan Road, Hong Kong) is different from the defendant's registered address obtained from a company search (15/F, Radio City, 505 Hennessy Road, Causeway Bay, Hong Kong).

21. A representative of the plaintiff's solicitors attended the Nathan Road address but was unable to confirm the existence of a company by the name ZZZIK Inc Limited at that address.  The same representative attended at the Causeway Bay address and found it occupied by Mau I Business Centre. Subsequently, when service was being effected, a person at Mau I Business Centre confirmed that ZZZIK Inc Limited was a client and had its registered office at the Causeway Bay address.

22. In light of the above investigations and given that the amount of the money deposited into the defendant's account is the same as the sum defrauded, I am satisfied that the defendant received the funds.

Service

23. At all material times, the Causeway Bay address has been the defendant's registered office.  Several affidavits of service have been filed regarding service of the various pleadings, applications, evidence and documents in this matter.  Those affidavits confirm that a person at Mau I Business Centre has confirmed that the defendant is a client and that the Causeway Bay address is the defendant's registered address.  On each occasion, bar the last (when the documents were left at the registered office), service has been accepted.  Indeed, it appears that the defendant is aware of service; on one occasion the person at Mau I Business Centre confirmed that the defendant had received the documents and, on another occasion, she said that she had been told not to accept any further service (notwithstanding that instruction, she accepted service). 

24. The writ and the evidence in support of the Mareva injunction, together with other documents, were served on 29 April 2016.  The statement of claim was served on 16 May 2016 and this summons and supporting affidavit were served on 16 June 2016.

25. Where a party to a summons fails to attend on the first or any resumed hearing, pursuant to Order 32, the court may proceed in a party's absence if, having regard to the nature of the application, it thinks it is expedient to do so, provided that the court is satisfied that the summons was duly served on the party.  I am satisfied that service is in order.  As the defendant failed to serve a notice of intention to defend or a defence, I consider that it has no intention to contest or participate in these proceedings.  Accordingly, there is no point in not proceeding today.

Disposition

26. I accept the plaintiff's case regarding the fraud; it has been demonstrated by the plaintiff's evidence and contemporaneous documents and it is uncontested by the defendant.

27. Regarding the claim based on unjust enrichment, money paid under a mistake of fact is prima facie recoverable provided that the payer did not intend the payee to have the money in any event, the money was not paid for good consideration and the payee has not in good faith changed his position:  Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd & anor [1980] QB 677.  This has occurred in the present case because the funds were paid by the plaintiff to the defendant in the mistaken belief that the instructions were given by the customer.  The defendant has not changed its position.  The defendant was thereby unjustly enriched at the expense of the plaintiff.

28. Regarding the proprietary constructive trust claim, counsel relied upon Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, per Lord Browne-Wilkinson obiter at p.716C for the proposition 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. Lord Browne-Wilkinson's proposition has been applied in Papamichael v National Westminister Bank plc [2003] 1 Lloyd's Rep 341, para 241 and Commerzbank AG v IMB Morgan plc [2005] 2 All ER (Comm) 564 at para 36.  It has been applied in Hong Kong in Mesirow Financial Administrative Corporation v Best Link Industrial Co, Limited unrep, HCMP 1846/2015, 25 January 2016, per Recorder Lisa K Y Wong, SC.  In Papamichael, Judge Chambers, QC stated:

"Equity imposes a constructive trust because (in the absence of a supervening barrier such as a contract) that is what justice requires where an asset has been obtained by fraud. The fraudster knows he has no right to the asset. He is in conscience bound to hold the asset for the transferor."

29. I am aware that Lord Browne-Wilkinson's proposition has not been applied in some cases in England, eg, Shalson & ors v Russo & ors [2005] Ch 281, per Rimer J at paras 106-110.  This was a point not raised by counsel.  Nevertheless, insofar as the proposition specifically relates to fraud, it has been accepted as representing the law.  See: Armstrong DLW GmbH v Winnington Networks Ltd [2012] 3 WLR 835 at paras 127-129, Goff & Jones, The Law of Unjust Enrichment 8^th Ed, para 8-15 - 8-16 and Chitty on Contracts, 32^nd Ed, Vol 1, para 29-168.

30. The authors of Goff & Jones state: 

"There are, however, cases which suggest that in some situations - and more particularly, in cases of theft - C might acquire new rights, insofar as equity might render D a trustee of the original asset for C. This is so notwithstanding that the victim of the theft, C, retains the superior legal and beneficial title, and D, the thief, acquires at best an inferior possessory title."

31. The authors of Chitty state: 

"Equity has employed the mechanism of a trust in order to compel the 'trustee' to convey property to the 'beneficiary' where, quite apart from the intention of the parties, the rules of Equity decide that property is in the wrong hands. The constructive trust arises by operation of law in a number of circumstances, including ... where property has been obtained by fraud, ... or where the defendant has received property unconscionably, such as where the defendant is aware that money had been paid by mistake, or possibly where the payee was aware that there had already been a total failure of basis."

32. Even if the recipient 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:  Commerzbank AG v IMB Morgan plc [2005] 2 All ER (Comm) 564 at para 36.

33. Knowledge does not have to be acquired at the time of receipt, it can be acquired subsequently while the money is in the recipient's hands: Lewin on Trusts 19^th ed, para 42-083.

34. The defendant has knowledge of the fraud because of the injunction order, the statement of claim, the summons for judgment and affidavits, all of which have been served on it.  Notwithstanding, the defendant has neither paid nor made any attempt to pay the funds to the plaintiff.

35. I consider it unconscionable for the defendant to retain the funds for the following reasons:

(1)  There were no dealings between the customer and the defendant; and

(2)  There was no legitimate reason for the defendant to receive the funds from the customer.

36. I find that the defendant holds the funds on trust for the plaintiff and the funds are recoverable and traceable in equity.

37. Regarding the declaratory relief, it is not the normal practice of the court to make a declaration without a trial.  However, this is a rule of practice and not a rule of law.  The paramount duty of the court is to do the fullest justice to the plaintiff to which he is entitled.  The practice will give way where the plaintiff has a genuine need for declaratory relief which the court can properly grant on the merits of the case:  Hong Kong Civil Procedure 2016, Vol 1, para 15/16/2; Lai Wai Kuen v Wong Shau Kwong [2004] 4 HKC 528.

38. Has the plaintiff shown a genuine need for such relief?  Very little is known about the defendant, except that it has received money obtained by fraud.  Nevertheless, I do not think that the plaintiff should face any risk of having to pursue its claim in competition with other creditors.  The plaintiff has made a proprietary claim and I have found in the plaintiff's favour.  However, an order against the defendant for the return of the funds, without more, would put the plaintiff in the position of an unsecured judgment creditor of the defendant.  Such an order would not give the plaintiff any prior or specific rights over the funds.  A declaration by the court that the funds are held on trust for the plaintiff will earmark the funds as the plaintiff's property and put them out of the reach of any other creditors of the defendant and, so, I consider it necessary to make the declaration sought in order to protect the plaintiff in the event that other creditors appear.  I note in Mesirow Financial Administrative Corporation v Best Link Industrial Co, Limited unrep HCMP 1846/2015, 25 January 2016, Recorder Lisa KY Wong SC expressed similar concerns and also considered a declaration to be necessary and appropriate.

39. Turning to the vesting order, pursuant to s52(1)(e) of the Trustee Ordinance, an order would vest the right to sue for and recover the funds, as a thing in action, in the plaintiff.  The court may make a vesting order as to trust property where it is impossible or difficult to deal with the property without such an order: Halsbury's Laws of England (5^th ed, 2013), Vol 98, para 309.

40. Section 52(2) of the Trustee Ordinance, concerning transfer, refers only to stock and not to a thing in action. Pursuant to s52(5), the court may make declarations and give directions concerning the manner in which the right to transfer the thing in action vested under the provisions of the Ordinance is to be exercised.  I shall proceed under s52(5).

41. It would be difficult, if not impossible, to deal with the property, given that the defendant has not appeared in these proceedings, it has not taken action to pay the funds to the plaintiff and it has given instructions to its secretarial service not to accept service.  I consider that there is no realistic prospect that the defendant would be willing to transfer the funds to the plaintiff.

42. The plaintiff has included HSBC as a respondent to the summons so that HSBC can join in making the transfer to the plaintiff.  As I noted above, by letter, dated 14 June 2016, HSBC confirmed that it would agree to be bound by the court's order made in terms of the summons and, by letter dated 28 June 2016, indicated that it was appropriate to direct the order to HSBC itself.  I shall make the vesting order sought, with appropriate amendments.

Conclusion

43. I give judgment in terms of the draft judgment, dated 4 July 2016, as amended by me.

44. I make orders in terms of the draft order, dated 4 July 2016, as amended by me.