HALLIBURTON BV MERKEZI HOLLANDA ANKARA MERKEZ TURKIYE SUBESI v. SHENG YI (HK) TRADE CO., LTD AND OTHERS

HCA 1627/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1627 OF 2016

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JUDGMENT

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PROCEDURAL BACKGROUND

1.  The plaintiff in this action, Halliburton Bv Merkezi Hollanda Ankara Merkez Turkiye Subesi, has been a victim of what is commonly referred to as an email fraud.  A succinct summary can be excerpted from the judgment of Recorder Anthony Houghton SC in the present case: Halliburton Bv Merkezi Hollanda Ankara Merkez Turkiye Subesi v Sheng Yi (HK) Trade Co Ltd & others (unreported, HCA 1627/2016, 8 February 2017) at paras 1 –­ 4:

(a) P in these proceedings is the victim of what is said to have been an international fraud, as a result of which P transferred asum of US$4,977,000 to the bank account of the 1^st defendant (“Dl”) in Hong Kong.  That transfer took place on 15 June 2016.

(b) Shortly after the initial transfer to D1 there were further transfers this time from the account of the D1 to the accounts of the 2^nd (“D2”), 3^rd (“D3”) and 4^th (“D4”) defendants.  In money terms the largest recipient was D3 which received about US$2,165,000 from D1.

(c) D2 received US$180,000 and D4 US$200,000 (“the Subject Sum”).

(d) Subsequently yet further transfers were made from the accounts of D2 and D3 to accounts held by the 5^th to 17^th defendants.  The recipients of the transfers from D1 (ie D2, D3 and D4) have been described in submissions as the “2^nd layer recipients”and the recipients of transfers from D2 and D3 as the “3^rd layer recipients”.

2.  On 8 July 2016, an ex parte injunction was granted by Chow J to restrain the disposition of, inter alia, the Subject Sum by, inter alios, D4 (“Mareva/Proprietary Injunction”).  This was continued on an inter partes basis by Mimmie Chan J on 15 July 2016.  No application has been made by D4 to discharge the injunction.

3.  Deputy High Court Judge Cooney SC had earlier entered default judgment against the 1^st, 3^rd, 8^th, 9^th, 11^th – 13^th and 15^th – 17^th defendants: see Reasons of Decision of Halliburton (unreported, HCA 1627/2016, 24 January 2017).

4.  Recorder Anthony Houghton SC however refused to enter default judgment against the 5^th – 7^th defendants on the basis, inter alia, that “a trial is likely to be held in which the relevant factual circumstances are closely aligned with, and may overlap, those relevant to the claim against” the 5^th – 7^th defendants (see para 22, supra).

THE ISSUE BEFORE THE COURT

5.  This is the hearing of the summons of D4, Lo Wah, trading as Wealth International Co, to strike out the whole of the plaintiff’s claims against them.  Mr Michael Lok appeared for the plaintiff and Mr Patrick Tsang and Mr Gavin Wan for D4.

6.  For completeness, I should add that D4 has also issued a summons seeking security for costs which is not before me today.

RELEVANT LEGAL PRINCIPLES

7.  Any pleading may be struck out on the ground(s) that:

(a) it discloses no reasonable cause of action or defence, as the case may be;

(b) it is scandalous, frivolous or vexatious;

(c) it may prejudice, embarrass or delay the fair trial of the action; and/or

(d) it is otherwise an abuse of the process of the court.

See Hong Kong Civil Procedure 2018 at §18/19.

8.  It is only in plain and obvious cases that the court should exercise its summary powers to strike out the indorsement on any writ or any pleading under this rule.  There should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. Nor should the court decide difficult points of law in striking out proceedings.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.  If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out.  One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law.  Hong Kong Civil Procedure 2018 at §18/19/4

FACTUAL BACKGROUND

9.  The essential facts are not in dispute, namely that the D4 received US$200,000 from D1, transferred to her on 16 June, the same day that D1 received the sum the subject of the alleged fraudulent scheme.  The claim against, inter alios, D4 is set out at paragraph 31 et seq of the statement of claim as follows:

“ 31. It is to be inferred from the following facts and matters that the 1^st to 17^th Defendants (1) participated in or perpetrated the aforesaid fraudulent scheme against the Plaintiff; and/or (2) were used as vehicles or intermediaries for the dissipation of the Funds on behalf of the Imposter and/or the 1^st Defendant; and/or (3) received parts of traceable proceeds of the Funds on behalf of the Imposter and/or the 1^st Defendant:-

31.1 The Funds (or parts thereof) received by the 1^st to 4^thDefendants were rapidly dissipated out of their respective bank accounts on the same day of receipt via multiple tranches.

31.2 The 1^st, 2^nd, and 3^rd Defendants hold themselves out as carrying out various unrelated businesses (i.e. trading in clothing, electronics, and furniture, respectively) and could not have had any genuine business dealings which could result in the 2^nd Layer Transfers.

31.3 The 2^nd to 4^th Defendants appear to be ‘designated beneficiaries’ named in the internet banking system for D1’s Account to facilitate the speedy dissipation of funds up to HSBC’s HK$20,000,000 (equivalent to approximately US$2,577,552) maximum daily transaction limit for transfers to third party beneficiaries.

31.4 The 1^st to 17^th Defendants (with the exception of the 4^th Defendant) are all companies set up with a similar modus operandi in that (1) they are each held and controlled by a sole shareholder/director purportedly resident in various (in some instances overlapping) regions in China and (2) only maintain a registered office with either a company secretarial services provider or consultant service company with no ascertainable physical offices or premises (with the exception of the 10^th Defendant).

31.5 The 1^st to 17^th Defendants do not appear to have any genuine business operations whether in or outside Hong Kong, and whether with each other or otherwise.

32. It is to be further inferred from the aforesaid matters that the 1^st to 17^th Defendants knew or ought to have known at all material times that the 1^st Transfer, the 2^nd Layer Transfers, and the D2/D3 3^rd Layer Transfers, respectively, wholly or partly consisted of proceeds of fraud, fraudulent misrepresentation, deceit and/or were made in breach of trust.

33. As a result of the fraudulent scheme particularised in section B above and the subsequent rapid dissipation of the Funds as particularised in section C above, the Plaintiff has suffered loss and damage.

34. It is and was at all material times unconscionable for the 1^st to 17^th Defendants to retain the benefit of any part of the Funds or its traceable proceeds as the 1^st to 17^th Defendants never had any valid or legitimate entitlement to receive or retain the same.

35. In the premises, the 1^st to 17^th Defendants at all material times held and still hold the Funds or the traceable proceeds of the Funds received by them as particularised in the Schedule annexed hereto (or in such amounts as the Court may determine) together with the fruits and/or proceeds thereof (including interest accrued thereon, if any) on constructive trust for the Plaintiff and are liable to account for the same as constructive trustees.

36. Further or in the alternative, the Plaintiff is entitled to trace into and claim equitable title to (1) the Funds paid to and retained in Dl’s Account from P’s Account and (2) the proceeds of the Funds paid into and retained in the 2^nd to 17^th Defendants’ respective bank accounts from Dl’s Account, D2’s Account and D3’s Account, respectively, as particularised in section C above and in the Schedule annexed hereto (or in such amounts as the Court may determine), which the 1^st to 17^th Defendants respectively hold on trust for the Plaintiff.

37. Further or in the alternative, the 1^st to 17^th Defendants are liable to the Plaintiff for sums equivalent the Funds or the traceable proceeds of the Funds received by them as particularised in the Schedule annexed hereto (or in such amounts as the Court may determine) together with the fruits and/or proceeds thereof (including interest accrued thereon, if any) as money had and received.

38. Further or in the alternative, the 1^st to 17^th Defendants are liable to the Plaintiff to account for the Funds or the traceable proceeds of the Funds received by them as particularised in the Schedule annexed hereto (or in such amounts as the Court may determine) together with the fruits and/or proceeds thereof (including interest accrued thereon, if any) and/or for equitable compensation on the basis of knowing receipt and/or dishonest assistance.

39. Further or in the alternative, it is to be inferred from the facts andmatters pleaded above that the 1^st to 17^th Defendants combined orconspired together to carry out or facilitate the fraudulent scheme particularised in section B above and to dissipate or facilitate the dissipation of the Funds as particularised in section C above, having the intent, or predominant intent, of causing pecuniary injury and damage to the Plaintiff.  In the premises, the 1^st to 17^th Defendants are jointly and severally liable to the Plaintiff for damages, to be assessed.

40. The Plaintiff further claims and is entitled to claim interest, whether compounded or not, on all sums found to be due to it at such rates and for such period as the Court thinks fit pursuant to sections 48 and/or 49 of the High Court Ordinance (Cap. 4) or the Court’s equitable jurisdiction.”

THE PARTIES’ SUBMISSIONS AND THE COURT’S DECISION

The Statement of Claim discloses no cause of action.

10.  D4 submits that there is no reasonable cause of action and seeks to rebut the allegations in the statement claim by evidence of what actually transpired and specifically by reference to past dealings between the parties, but importantly as Mr Tsang conceded no evidence shall be adduced on an application under this head of Order 18.  Indeed Mr Tsang submitted on behalf of D4 that “A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleadings are considered”: Hong Kong Civil Procedure 2018 §18/19/5.

11.  Whilst there are undoubtedly differences in the claims as pleaded against D4 and a number of the other defendants as appears from paragraph 31.2 and 31.4 of the statement of claim, there is nonetheless at the very least a coincidence of timing in the transfer of US$200,000 from D1 to D4, D4 like D2 appears to be a designated beneficiary named in D1’s internet banking system at HSBC and there is both a tracing claim and a claim for account against D4 in relation to the funds it received.

12.  D4 says that this pleading is insufficiently particularized to justify it going forward whereas the plaintiff submits that whether sufficient facts are being pleaded and particularized needs to be looked at in context of each case ie in this case the plaintiff being a victim to an alleged email fraud, and here relies on the rejection of a similar argument by B Chu J in Ubiquiti Networks International Ltd v Chan Kim Chuen formerly t/a San Chun Technology Co Ltd & another (unreported, HCA 1606/2016, 26 May 2017).

13.  It is useful to cite the learned judge’s discussion at paras 76, 79 – 83 of her decision:

“ 76. Ds complained that P’s conspiracy claim lacks the particulars required and hence discloses no reasonable cause of action.

…

79. It was Mr Whitehead’s submission that P has not properlyparticularized its claims as to how Ds are alleged to have becomeparties to the alleged conspiracy, and that the one overt act alleged against Ds, namely the receipt of monies must be considered in the context that D1 attempted to give the money back but was prevented to do so because of the Mareva Injunction, and D2 was not a party to the 1^st Action but alleged to be a co-conspirator in the present case, returned the money shortly after it had been transferred into his bank account. Thus even though the overt act of ‘receipt of money’ has been pleaded, P has failed to say how that gives rise to the inference that Ds were parties to the said conspiracy, and thus the plea of conspiracy is fundamentally flawed.

80. Mr Maurellet had however referred this court to Yong Weng Chye v Ho Yu Kuen, HCA 1303 of 2009, 17 March 2010 where Master Marlene Ng (as she then was) had remarked that ²⁴:

‘ Conspiracies by their nature are often concealed, and hence the conspiratorial combination or agreement can beinferred from overt acts if it is proved that the conspirators knew what was going on. So in most cases where conspiracy is averred, it will be necessary to look at the overt acts as pleaded to see what inferences can be drawn as to the existence or otherwise of the alleged conspiratorial combination or agreement”

81. She then went on later to say that ²⁵:

---

²⁴ At para 83

²⁵ At para 88

‘ It is trite that fraud and/or conspiracy must be distinctly pleaded with utmost particularity and distinctly proved, and it is not allowable to leave such pleas to be inferred from the facts (see Davy v Garratt [1877] 7 Ch D 473, 489). But one must also consider the practical reality of modern commercial life. As submitted by Mr Lam, fraud and/or conspiracy by their very nature are clandestine and difficult to uncover, so quite often proofis not readily obtained. Hence, the averments of fraudand/or conspiracy cannot be too precise. In an application to strike out a fraud and/or conspiracy claim, the court will look upon such application with care to the above considerations, but at the same time will bear in mind that loose allegations that are not properly particularised will be oppressive as regards the defendants when the action goes to trial. The broad question for the court is whether from the facts as pleaded it can be argued that Ds sufficiently know P’s case on the conspiratorial combination(s) or agreement(s) that they have to meet.”

82. Here in the present case, paragraph 16 of the statement of claim has particularized the unlawful Fraudulent Scheme including the acts carried out by the purported Mr Pera, the purported Mr Evans and the various different recipients in various jurisdiction.  Ds were the direct recipients of the 5^th and 6^th Transfers.

83. I am of the view that from the facts as pleaded Ds would sufficiently know P’s case on the conspirational combinations(s) or agreement(s) that they have to meet.”

14.  Subsequently in refusing leave to appeal against her decision, the learned judge said this at paras 17 – 18:

“ 17. I have said in paragraphs 82 and 83 of the Decision that paragraph 16 of the statement of claim has particularized the unlawful Fraudulent Scheme including the acts carried out by the fraudsters and the various different recipients in various jurisdictions and Ds were the direct recipients of the 5 and the 6^th Transfers. I have already come to the view in paragraph 83 that from the facts pleaded Ds would sufficiently know P’s case on the conspirational combinations(s) or agreement(s) that they have to meet.

15.  The plaintiff also referred me to the following comments of Deputy High Court Judge Saunders in Ferrari North American, Inc v Changhon International Energy Co Ltd & others (unreported, HCA 852/2017, 29 June 2017) (a case similarly arising out of an ‘email fraud’) at para 25:

“ Circumstances where, following an Internet email fraud, a substantial sum is deposited in the account of one company, and then distributed, immediately, in apparently random sums, to a number of other companies, each with no apparent relationship to the distributor, have become commonplace in the courts. Equally commonplace is the suggestion by the ultimate recipients of the funds that the amount received precisely matches a transaction undertaken at the time the deposit was made. These are ‘coincidences’ which cannot be ignored by the courts.”

16.  It is the plaintiff’s submission that the mere fact of receipt of theSubject Sum by D4 on the very same day that the original misappropriated sum had been received is in fact of paramount significance.

17.  I am satisfied that it would be wrong to deprive the plaintiff of the opportunity to prove its case; it is clear to me that in the case of an email fraud such as is pleaded here, there needs to be this opportunity and the opportunity to test the evidence on both sides.  I make no findings as to which party is ultimately the most likely to succeed but I do not see my function on an application under Order 18, rule 19 to weigh submissions based on untested evidence.  The pleading is less particularized than is ideal, but that is the nature of these sorts of cases and the pleading is manifestly in my view not unarguably bad, nor is it impossible that the claim would succeed, which is the test I am required to apply.

The claim should be struck out in the inherent jurisdiction of the court.

18.  D4 adds a claim that in the exercise of its inherent jurisdiction“and filed affirmation evidence” the claim should be struck out.  D4 relies here on its submissions in relation to evidence filed not only on this application but also on its application for security for costs which has yet to be heard in order to maintain an argument that it is a bona fide purchaser for value without notice.

19.  The plaintiff by way of response points out that D4 does not identify any specific ground on which the court could exercise its inherent jurisdiction and in any event says that it faces a hurdle which it cannot hope to clear since it needs to show that the plaintiff clearly cannot prove its claim and that it is without any solid basis.  Mr Lok cited the words of Deputy High Court Judge To in Koo Ming Kown v Pacific Online Ltd(unreported, HCA 2333/2016, 16 May 2017) at paragraph 42 where he said this ground is only invoked where the claim “has absolutely no chance of success … absolutely groundless, time-barred … where the pleading is entirely without substance”.

20.  The plaintiff also relies on the observation of Deputy High Court Judge Douglas Lam SC in Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & others (unreported, HCA 3023/2016, 2 May 2017 at para 42): “the existence of a good arguable defence does notnecessarily negate a good arguable case … as it is entirely possible to have, at the interlocutory stage, both the claim and the defence being more than barely capable of serious argument and not necessarily having a better than 50% chance of success.”

21.  The plaintiff submits further that it is clear that its claim is founded on a sound legal basis even though there may be limited facts available at the moment and whilst it is prepared to concede that D4 might have grounds for establishing that it received the funds as a result of a genuine transaction, that must be a highly factual matter which needs to be determined at trial after proper discovery and cross examination.  Both counsel referred me to voluminous evidence filed on not only this application but also for the purpose of D4’s summons for security for costs, which the plaintiff says reinforces the need for the facts to be investigated fully.

22.  Finally, it is the plaintiff’s submission that it must be implicit that it has at the very least a good arguable case since D4 has not applied to discharge the Mareva/Proprietary Injunction and thus it would lie ill in D4’s mouth to say that the plaintiff’s claim should be struck out for enjoying no reasonable prospects whatsoever.

23.  I cannot see any basis for me to conclude that in the inherent jurisdiction of the court the plaintiff’s claim is obviously frivolous or vexatious.

RULING

24.  I therefore find in favour of the plaintiff and the defendant’s summons to strike out the plaintiff’s claim against her is dismissed.  Against this background I make a cost order nisi that D4 should pay the plaintiff’s costs of this summons.

HCA 1627/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1627 OF 2016

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J U D G M E N T

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1.  The plaintiff in these proceedings is the victim of what is said to have been an international fraud, as a result of which the plaintiff transferred a sum of US$4,977,000 to the bank account of the 1^st defendant in Hong Kong. That transfer took place on 15 June 2016. In the application before me the plaintiff seeks judgment in default of defence against certain of the defendants to its Action.

2.  Shortly after the initial transfer to the 1^st defendant there were further transfers this time from the account of the 1^st defendant to the accounts of the 2^nd, 3^rd and 4^th defendants. In money terms the largest recipient was the 3^rd defendant which received about US$2,165,000 from the 1^st defendant.  The 2^nd defendant received US$180,000 and the 4^th defendant US$200,000. The other relevant misappropriated funds were “caught” by an injunction obtained by the plaintiff over the assets of the 1^st defendant.

3.  Subsequently yet further transfers were made from the accounts of the 2^nd and 3^rd defendants to accounts held by the 5^th to 17^th defendants.  The recipients of the transfers from the 1^st defendant (i.e. the 2^nd, 3^rd and 4^th defendants) have been described in submissions as the “2^nd layer recipients” and the recipients of transfers from the 2^nd and 3^rd defendants as the “3^rd layer recipients”.  For convenience I will adopt that shorthand description.  It must be borne in mind however that the 5^th, 6^th and 7^th defendants received funds from the 2^nd defendant whereas the other 3^rd layer recipients received funds from the 3^rd defendant.

4.  Judgment has been entered (or proceedings settled or withdrawn) against all of the defendants except the 2^nd defendant and the 5^th 6^th and 7^th defendants.

5.  The 2^nd defendant has filed both a notice of intention to defend the proceedings, and a defence.  The 5^th 6^th and 7^th defendants have not filed any such notice of intention to defend proceedings, nor has a defence been filed on behalf of any of those defendants.  In those circumstances the plaintiff applied for judgment in default against the 5^th 6^th and 7^th defendants.

The statement of claim

6.  The plaintiff's claim describes the alleged fraudulent scheme giving rise to the transfer of funds to the 1^st defendant and sets out also the allegations regarding what it describes as the subsequent dissipation of those funds, from the account of the 1^st defendant to the 2^nd, 3^rd and 4^th defendants, and onwards to the 3^rd layer recipients.

7.  The plaintiff alleges that the facts and matters set out in the Statement of Claim give rise to the reasonable inference that the 1^st to 17^th defendants were perpetrators or participants in the fraudulent scheme against the plaintiff and/or were used as intermediaries for the dissipation of funds and/or received part of the traceable proceeds of the funds on behalf of the fraudster for the 1^st defendant.  It is alleged that the 1^st to 17^th defendants “knew or ought to have known” that the transfers of each layer wholly or partly consisted of the proceeds of fraud and that such transfers were made in breach of trust.

8.  In the alternative the plaintiff asserts an entitlement to trace into, and claim equitable title to, the proceeds of the funds in the accounts of the 1^st to 17^th defendants which, it is alleged, those defendants hold on trust for the plaintiff's.

9.  As noted above the 2^nd defendant defends the plaintiff’s claims and has served a defence accordingly.  The 2^nd defendant contends that its business is the trading and export of mobile phones and mobile phones accessories, but includes, as a subsidiary business, currency exchange and remittance services.  It is contended by the 2^nd defendant that the remittance made to it by the 1^st defendant on 16 June 2016 was part of a genuine currency exchange arrangement.

10.  It is also contended that the 5^th defendant and the 7^th defendant were regular customers of the 2^nd defendant in respect of its currency exchange remittance services.  The 2^nd defendant contends that it arranged the purchase of US currency from the 6^th defendant, to enable it to meet requests for such currency from the 5^th and 7^th defendants, on or about 15 June 2016.

11.  In summary therefore the 2^nd defendant denies any involvement in the alleged fraudulent scheme and contends, rather, that it received those funds without any notice of the alleged fraud.  The 2^nd defendant is, it says, an innocent purchaser for value in respect of the US$180,000 which it received from the 1^st defendant.

The terms of the judgment sought

12.  No notice of intention to defend having been given, and no defence having been served, the plaintiff applied for judgment in default against the 5^th 6^th and 7^th defendants. Counsel for the plaintiff helpfully provided to the court a draft order setting out the terms in which such judgment was sought.  The formulation was slightly different in respect of the 5^th defendant as compared to the 6^th and 7^th defendants because of issues relating to the service of the Statement of Claim which are of no significance for present purposes.  Broadly what was sought against each defendant was an order for repayment of a specified sum to the plaintiff; an order directing the release or transfer of sums in specific bank accounts to the plaintiff; declarations that each defendant holds monies as a constructive trustee for and on behalf of the plaintiff, and that the plaintiff is the beneficial owner of such funds; an order for an account in respect of the relevant amounts; and interest.

13.  The basis for this was that, whether or not the 5^th 6^th and 7^th defendants were participants in the fraud, they would be constructive trustees of the relevant funds if their state of knowledge was such as to make it unconscionable to retain those funds.

14.  The plaintiff acknowledged that it was not the normal practice of the court to grant declaratory judgment without a trial, but submitted that this was a matter of practice, not of law, which would give way to the need to do justice between the parties in circumstances in which the declaration could properly be granted.  I was reminded that the judge giving judgment against the majority of other defendants on 24 November 2016 had made such declarations.

Appearance by D2

15.  Submissions were made on behalf of the plaintiff objecting to appearance by the counsel for the 2^nd defendant at the application for judgment against the 5^th, 6^th and 7^th defendants.  It was contended by the plaintiff that the 5^th 6^th and 7^th defendants were thereby circumventing the requirement for a company to appear by counsel unless authorised to appear by a director.  It was contended also that the 2^nd defendant had no locus to make submissions on behalf of the 5^th 6^th and 7^th defendants.

16.  In any event, there was no dispute however that the evidence which had been filed on behalf of the 2^nd defendant was relevant to the matters under consideration in respect of the 5^th, 6^th and 7^th defendants.

17.  In part this “locus” issue arose because of an agreement which it is said has been made between the 2^nd defendant and each of the 5^th 6^th and 7^th defendants as part of which the 2^nd defendant was said to have obtained the consent of the other defendants to oppose the application for judgment against them.

18.  It was the position of the 2^nd defendant that it had locus because it had a direct interest in the outcome of the default judgment summons.  This was because, it was contended, a declaration that the 5^th 6^th or 7^th defendants were constructive trustees in respect of part of the funds fraudulently taken from the plaintiff would entail or imply involvement by the 2^nd defendant in the alleged fraudulent scheme.  Moreover it was contended that the 2^nd defendant had locus simply as a party to the proceedings.

19.  I received written and oral submissions on behalf of the 2^nd defendant on the basis that these were made on its own behalf, and not as a representative or quasi‑representative of the 5^th 6^th or 7^th defendants.

The entitlement to judgment under order 19 rule 7

20.  The relevant rule entitles a plaintiff to apply for judgment where no defence has been served after the expiration of the period fixed for service of such a pleading.  When such an application is made the court “shall give such judgment as the plaintiff appears entitled to on his statement of claim”.  Where there are several defendants, and not all are in default, then such an application may be made by the plaintiff in circumstances in which the claim against the defaulting defendant or defendants is severable from claims against the other defendants.

21.  As is made clear at 19/7/13 of the Hong Kong Civil Procedure, the rule is discretionary rather than mandatory, and, moreover, the court may order the application to stand over until trial where there are matters affecting other parties waiting to be decided.

Determination

22.  In the exercise of my discretion, having considered the various matters referred to above, it appeared to me that the appropriate course was with no determination, or judgment entered, at this time on the plaintiff's application.  The defendants are to be taken to have admitted the claims made against them in the Statement of Claim, but it appeared to me nevertheless to be premature to enter a judgment which would involve a declaration imputing fraudulent conduct on the part of these defendants in circumstances in which, because of the defence pleaded by the 2^nd defendant, a trial is likely to be held in which the relevant factual circumstances are closely aligned with, and may overlap, those relevant to the claim against 5^th, 6^th and 7^th defendants.

23.  There remains the possibility that the trial judge, in due course, in the light of the evidence received, may come to the conclusion that making such declarations (or granting any of the other relief sought) would be inappropriate.  Therefore, notwithstanding the deemed admission on the part of the defendants, it appeared to me the better course was to leave the matter open for decision, in due course by the trial judge, whose discretion, notwithstanding the deemed admission by the defendants, will be exercised in the light of relevant evidence placed before him or her.

24.  The parties agreed that, in those circumstances, the costs of the summons as between the plaintiff and the 5^th 6^th and 7^th defendants should be to the plaintiff.  The costs of that summons as between the plaintiff and the 2^nd defendant are to be costs in the cause of the action.

HCA 1627/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1627 of 2016

__________________

__________________

________________________

REASONS FOR DECISION

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1.  The plaintiff claims to be the victim of an international fraud by which imposters procured the plaintiff to transfer US$4,977,000 to the 1^st defendant’s bank account held in Hong Kong with HSBC on 15 June 2016. The plaintiff alleges that the 1^st defendant then caused tranches to be transferred to the 2^nd, 3^rd and 4^th defendants, who then transferred tranches to the 5^th to 17^th defendants.

2.  The plaintiff applied by summons, dated 3 November 2016 for default judgment against the 1^st defendant, the 3^rd to 13^th defendants and the 15^th, 16^th and 17^th defendants, a vesting order in respect of frozen monies held in the defendants’ respective bank accounts and a continuation of injunctions which the plaintiff has obtained in aid of execution.

3.  The application was before me on 24 November 2016.  The 2^nd and 4^th defendants were represented and the other defendants were absent.  The 2^nd defendant has filed a Defence.  The plaintiff’s counsel told me that the plaintiff was not seeking judgment against the 10^th defendant.  The plaintiff asked that the summons be adjourned in respect of the 2^nd, 4^th, 5^th, 6^th and 7^th defendants.  The plaintiff asked for summary judgment against the 1^st, 3^rd, 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants.

4.  The plaintiff applied for leave to amend the summons.  I granted leave and I made the following orders:

(1) Final judgment be entered for the plaintiff against the 1^st, 3^rd, 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants.

(2) The Amended Summons for application for final judgment against the 4^th, 5^th, 6^th and 7^th defendants be adjourned to a date to be fixed with three hours reserved in consultation with counsel’s diaries.

(3) The plaintiff’s costs in this action in respect of the claims against the 1^st, 3^rd, 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants, including all costs reserved and the costs of this application be to the plaintiff to be taxed if not agreed.

(4) With respect to the 2^nd, 4^th, 5^th, 6^th and 7^th defendants, costs reserved.

(5) Liberty to apply for further directions.

(6) The plaintiff to serve the Amended Summons and supporting affirmations on the 2^nd defendant within three days of the date of this order.

(7) Order in terms of paragraph 2 of the Amended Summons.

(8) Order in terms of paragraph 3 of the Amended Summons, as amended by me.

5.  Following are brief reasons for my orders.

6.  No defences have been filed by the 1^st, 3^rd, 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants. Order 18, rule 13 of the Rules of the High Court provides that an allegation of fact made by a party in his pleading is deemed admitted by the opposite party unless it is traversed by that party in his pleading or a joinder of issue operates as a non‑admission. Such deemed admission of allegations raised in the Statement of Claim is the basis upon which default judgment is entered.

7.  I am satisfied by the evidence that the plaintiff has been a victim of the fraud alleged and that the monies have been disbursed as alleged.

8.  Victims of fraud would prima facie have a valid claim in money had and received and may assert a proprietary claim against the recipients insofar as the fraudulently obtained funds are traceable into their hands, unless the recipients can establish the defence of bona fide purchaser for value without notice:  Leonard Koutsomihalis & anor. v Aki Enterprises & anor. unrep., HCA 2509/2014, 16 June 2015 per Chow J at para 22; Zimmer Sweden AB v KPN Hong Kong Ltd & anor. unrep., HCA 2264/2013, 2 May 2014 per DHCJ Yee at paras 89‑93.  See also: Arrow ECS Norway AS v Xin Cheng Holdings (Intl) Co Ltd unrep., HCA 239/2016, 12 May 2016 per Au‑Yeung J at para 13.

9.  The court’s approach in granting default judgment in cases of fraud has been set out in Guaranty Bank & Trust Co v Zzzik Inc Ltd unrep., HCA 1139/2016, 18 July 2016 at paras 28‑33, 37.  A similar approach was adopted by Recorder Lisa KY Wong SC in Mesirow Financial Administrative Corp v Best Link Industrial Co Ltd unrep., HCMP 1846/2015, 25 January 2016 at paras 35‑38.

10.  Pursuant to section 52(1) of the Trustee Ordinance, Cap 29, an order would vest the right to sue for and recover 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 and may under section 52(5) 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:  Guaranty Bank & Trust Co v Zzzik Inc Ltd at paras 39‑40.

11.  The facts pleaded in the Statement of Claim enable the plaintiff to assert a proprietary interest in the traceable proceeds of the funds and to claim for their return on the basis that the funds were obtained by fraud or fraudulent misrepresentation.

12.  As against the 1^st, 3^rd, 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants, the facts pleaded in the Statement of Claim are deemed to be admitted under Order 18, rule 13.

13.  The 1^st defendant’s position is straightforward.  It received the whole of the funds (US$4,977,000) and is accordingly liable to repay the same amount to the plaintiff.  Also, the 1^st defendant held the funds on constructive trust for and on behalf of the plaintiff and the plaintiff is entitled to assert a proprietary interest in them.

14.  Regarding the 3^rd defendant, the claim is also straightforward and is based on tracing the funds dissipated from the 1^st defendant’s account into its account.

15.  The claims against the 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants involve tracing the flow of funds dissipated from the 2^nd and 3^rd defendants’ account after the funds were mixed with other funds in the 2^nd and 3^rd defendants’ accounts. 

16.  In the Statement of Claim and in the summons for default judgment, the plaintiff has applied the pro‑rata/rateable approach to tracing the proceeds of the funds from mixed funds into the hands of the 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants.  I am satisfied that this is a fair and efficacious manner of apportioning liability amongst the 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants.

17.  Further, the declarations sought by the plaintiff are necessary and will serve a genuine purpose, as it is not clear whether the 1^st, 3^rd, 8^th, 9^th, 11^th, 12^th, 13^th, 15^th, 16^th and 17^th defendants have any other creditors.  The plaintiff’s proprietary claim over the funds or their traceable proceeds should not be subordinated to a mere monetary claim which ranks pari passu with other unsecured creditors.  This approach was adopted in Guaranty Bank & Trust Co v Zzzik Inc Ltd and Mesirow Financial Administrative Corp v Best Link Industrial Co Ltd.

18.  I consider there is no real prospect that any of the defendants will voluntarily comply with any direction to transfer the portion of the funds held on trust to the plaintiff.  It will be difficult, if not impossible, to deal with the funds unless a vesting order is made.

19.  HSBC indicated by letter, dated 15 November 2016, that it agrees to be bound by any order made.

20.  I also consider it appropriate to continue the Mareva injunction.

Mr Derek JY Chan, instructed by Norton Rose Fulbright Hong Kong, for the plaintiff

Mr Oscar Tan, instructed by Cheung & Liu, for the 2^nd defendant

Mr Ernest Ng, instructed by Day & Chan, for the 4^th defendant

1^st defendant, 3^rd defendant, 5^th‑13^th defendants, 15^th‑17^th defendants, unrepresented, absent