E-TRADE SECURITIES LLC v. CEDALIAN CARE SERVICES CONSULTANTS LTD AND OTHERS

HCA 2312/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2312 OF 2016

________________________

BETWEEN
	E*TRADE SECURITIES LLC	Plaintiff
and
	CEDALIAN CARE SERVICES CONSULTANTS LIMITED	1st Defendant
	HAVI INDUSTRIAL (H.K.) CO., LIMITED	2nd Defendant
	HONG KONG XIE YING TRADING CO., LIMITED	3rd Defendant
	KWOK WAI ELECTRONIC LIMITED	4th Defendant

________________________

Before: Mr Recorder Anthony Houghton SC in Chambers

Date of Hearing: 22 February 2017

Date of Decision: 22 February 2017

Date of Reasons for Decision: 9 March 2017

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REASONS FOR DECISION

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1.  The plaintiff is a company incorporated in the state of Delaware in the United States of America, and carries on business as an online stockbroker. ‌The plaintiff was the victim of a fraudulent email scheme which caused the plaintiff to transfer sums of money to various accounts, including a payment to the 3^rd defendant in these proceedings, on 10 August 2015. It appears that a sum of HK$466,500 was paid on to the bank account held by the 4^th defendant shortly after being received by the 3^rd defendant. Default judgement has been entered by the court against the 1^st to 3^rd defendants.

2.  The 4^th defendant was not, initially, named as a party to these proceedings but was joined by order of the court on 26 September 2016.  On the same date a Mareva injunction was obtained over the bank account of the 4^th defendant.  The writ was served upon the 4^th defendant on 27 September 2016.  ‌However no notice of intention to defend proceedings was given by the 4^th defendant, and the plaintiff took out a summons for default judgement.  ‌At the last minute an acknowledgement of service was prepared and served by the 4^th defendant, and default judgement against it was thereby avoided.

3.  The plaintiff filed and served its statement of claim on 26 October 2016, however the 4^th defendant served no defence within time, and the plaintiff applied for judgement to be entered, with the Mareva injunction to be continued. That application was heard on 2 December 2016.  ‌The 4^th defendant attended that hearing through counsel, having, it appears, only engaged its legal team at the very last minute.  No evidence was filed on behalf of the 4^th defendant, and absent any explanation for the 4^th defendant’s inaction, the judge entered judgement in default.  In doing so he noted that it was nevertheless open to the 4^th defendant to seek to set aside that judgement if it was able to show sufficient merits in its substantive defence.

4.  The 4^th defendant took out a summons seeking to do so on 16 December 2016 and the parties filed evidence (or further evidence in the case of the plaintiff) relevant to that summons.  The matter was heard by me on 22 February 2017 following which I ordered that judgement be set aside.  I indicated at that hearing that a brief summary of my reasons for doing so would be set out, and I now do so.

5.  There is no dispute, on the facts, that the sum of money referred to by the plaintiff as having been paid to the account of the 4^th defendant, was in fact paid and received by the 4^th defendant. The principal issue for the court therefore was as to whether the affidavit evidence filed on behalf of the 4^th defendant demonstrated a defence to which the court ought to pay heed; one which carried a real prospect of success. In order to obtain an extension of time for service of its defence the 4^th defendant was required also to present an acceptable explanation for the delay hitherto.

6.  The explanation provided by the 4^th defendant as to why the money was paid to it carried some unusual features.  In essence it was said that the bank account of the 4^th defendant was being used, exclusively, by a “money service operator” trading in the name of Panda Money Exchange Co (“Panda”).  That business appears to operate along the lines of a remittance service for payments to and from China, as was explained in the 2^nd affirmation of Lee Lai Kwan. It is said that the money received by the 4^th defendant, was a payment to Panda, in respect of which it incurred, and discharged, a corresponding payment obligation.

7.  Counsel for the 4^th defendant therefore contended that the 4^th defendant was in the position of a bone fide purchaser, for value, without notice of the preceding illegality.  It was further contended that the 4^th defendant’s position was analogous to the position of a bank such that the 4^th defendant would be entitled to rely upon a defence of ministerial receipt, having received funds as agent for its customer, and having paid away such funds to the order of its customer.  Reliance was placed by the 4^th defendant on the decisions in Jones v Churcher [2009] EWHC 722, and Jeremy D Stone Consultants Ltd v National Westminster Bank plc [2013] EWHC 208.

8.  The plaintiff was critical of almost all aspects of the 4^th defendant’s purported defence, and of Panda’s business.  Since the matter will proceed to a trial I do not propose to rehearse the matters comprehensively canvassed on behalf of the plaintiff.  The plaintiff also criticised the delay on the part of the 4^th defendant and the explanation for the delay which had proffered.

9.  As to the apparent merits of the 4^th defendant’s defence, it appears to me, given the somewhat unorthodox circumstances, and the explanations which have been tendered, that this is a matter which ought to be considered by the court so as to adjudicate on the merits of this defence.  I accept that a defence with apparent merits and a reasonable prospect of success has been shown to be potentially available to the 4^th defendant.

10.  Evidence was placed before the court explaining the delay on the part of the 4^th defendant, this involving primarily the failure to take action beyond the service of the acknowledgement of service of the writ.  This was blamed on a misunderstanding of legal procedure by the sole shareholder of the 4^th defendant, one Zhang Guo Wei, who is based in China.  By itself that would be an inadequate explanation, however it is to be viewed more sympathetically given that the party more properly affected by the injunction and subsequently the judgement, Panda, was, it says, not properly informed of the legal claims until immediately before the hearing before Mr Justice Lam.  Having regard to the proper approach explained by Cheung JA in The Decurion [2012] 1 HKLRD 1063 I have considered the 4^th defendant’s delay in the context of the overall justice of the case; the requirement for parties to adhere to timetables set by the court; and in particular that a party should not be deprived of an adjudication on the merits due to a procedural default unless there is prejudice to the other party which cannot be compensated in costs.

11.  In the present case, the 4^th defendant made an offer, through counsel, to bring into court the sum of money claimed by the plaintiff.  It appeared to me that this would significantly ameliorate any prejudice otherwise faced by the plaintiff pending a determination of the merits of its claim and, in the circumstances, an appropriate order for costs would indeed largely compensate any residual prejudice.

12.  Accordingly, the 4^th defendant’s application to set aside the default judgement was allowed, conditional upon the payment in by the 4^th defendant of the sum of HK$466,500, plus interest in the sum of HK$10,000.

13.  I record that it was common ground between the parties that although the setting aside application strictly speaking addressed only paragraph 2 of the order of Lam J dated 2 December 2016, the setting aside, together with the payment in by the 4^th defendant carried with it the discharge of the Mareva injunction set out at paragraph 1 of that order.  Consequential directions as to the filing of a defence within 14 days were made, and by agreement of the parties an order for the costs of the summons to be in the cause was also made.

  

  

(Anthony Houghton SC) Recorder of the High Court

  

Mr Dominic James, of Sidley Austin, for the plaintiff

Mr Lawrence Cheung and Ms Leona Chan, instructed by Francis Kong & Co, for the 4^th defendant

  

HCA 2312/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2312 OF 2016

______________________

BETWEEN

	E*TRADE SECURITIES LLC	Plaintiff
	and
	CEDALIAN CARE SERVICES CONSULTANTS LIMITED	1st Defendant
	HAVI INDUSTRIAL (H.K.) CO., LIMITED	2nd Defendant
	HONG KONG XIE YING TRADING CO., LIMITED	3rd Defendant
	KWOK WAI ELECTRONIC LIMITED	4th Defendant

______________________

Before:  Hon G Lam J in Chambers

Date of Hearing:  2 December 2016

Date of Decision:  2 December 2016

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D E C I S I O N

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1.  I have before me an application by the plaintiff by summons filed on 28 November 2016 to enter final judgment against the 4th defendant in the form of a monetary judgment proposed and for continuation of a Mareva order made on 26 September 2016 against the 4th defendant until satisfaction of the judgment. 

2.  Until this morning, the 4th defendant was unrepresented and had not filed anything in opposition to the application.  This morning, however, a Notice to Act has been put before me, showing that solicitors will now act for the 4th defendant, and Miss Leona Chan, who had been instructed at very short notice, has appeared before me to oppose the application for judgment, seeking time to file a proper application for an extension of time to file a defence out of time. 

3.  The plaintiff is, on the evidence, the victim of an email fraud whereby it was induced to transfer out three sums of money.  The third sum was transferred to the 3rd defendant on 10 August 2016.  Information was later obtained from the 3rd defendant’s banks in Hong Kong, revealing that a sum of HK$466,500, out of that third sum, was transferred to a bank account of the 4th defendant. Accordingly, on 26 September 2016, the plaintiff obtained an order from this court joining the 4th defendant as a party to the action and obtained a Mareva injunction over the assets of the 4th defendant.

4.  On 30 September 2016, Chow J entered default judgment against the 1st to 3rd defendants.  The writ of summons was duly served on the 4th defendant at its registered office on 27 September 2016, but the 4th defendant failed to give any notice of intention to defend within time.  The plaintiff thereupon took out a summons for default judgment to be entered against the 4th defendant.  But at the last minute, an acknowledgement of service purporting to give notice of intention to defend was filed, forestalling the plaintiff’s application for default judgment.  That acknowledgement of service appears to have been prepared and signed by Mr Zhang, a director of the 4th defendant.  As a result, the plaintiff did not obtain an order for default judgment to be entered but the 4th defendant was ordered to pay the plaintiff’s costs.

5.  A statement of claim was duly prepared by the plaintiff and filed and served on 26 October 2016.  The period fixed by the rules for service of the defence by the 4th defendant therefore expired on 23 November 2016.   No defence was filed on behalf of the 4th defendant.  Accordingly, the plaintiff gave written notice by letter, served by hand and sent by email, on the 4th defendant that the deadline was expiring and should the 4th defendant fail to file its defence, the plaintiff would apply to enter default judgment within two days.  Nothing still was filed or served by the 4th defendant.  Accordingly, the summons dated 28 November 2016 that I mentioned at the outset was taken out by the plaintiff.

6.  As I have already said, up to now, still nothing has been filed on behalf of the 4th respondent and until its lawyers appeared in court this morning, nothing was done to oppose or in any way in response to the plaintiff’s application.  There is, even now, no affirmation from the 4th defendant explaining its delay and why it has not filed and served a defence.  There is no draft defence put before me, or any document or even oral submission indicating the line of the 4th defendant’s defence on the merits of their claim.  Miss Chan, for the 4th defendant, was - and I say this without any criticism of counsel personally - able to give only the barest of information as to why nothing has been done by the 4th defendant until last night, essentially asserting that Mr Zhang was not aware of the importance of the legal documents or the fact that there was a hearing fixed for today.

7.  I have had regard to the explanation of the principles and the relevant considerations set out in “The Decurion” [2012] 1 HKLRD 1063.  Having regard to those principles and to all the circumstances, I consider that my discretion should be exercised in favour of entering judgment for the plaintiff. 

8.  It is of note that this is the second time for the 4th defendant to be in default. It was faced with an earlier application for default judgment which it narrowly escaped.  There is no excuse for the 4th defendant not to know about these proceedings or the plaintiff’s intention to obtain judgment as swiftly as possible, which is understandable in the circumstances.  Notice has been given to the 4th defendant this time that the plaintiff would again apply for judgment to be entered in default of defence.  No acceptable explanation has been given by the 4th defendant for its failure to comply with the rules or make any response otherwise to the plaintiff’s action.

9.  Further, as Mr James, for the plaintiff, submitted, since I have not considered the merits of any competing argument at all on the substance of the action, it is still open to the 4th defendant to apply to set aside a default judgment if it can show sufficient merits in its substantive defence. 

10.  In these circumstances, I consider the appropriate course to be to enter judgment in favour of the plaintiff and to continue the Mareva order  pending satisfaction of the judgment. 

(Submissions on the terms of the orders)

11.  Execution of the judgment against the 4th defendant be stayed for 14 days from the date hereof. 

12.  I will make an order in terms of the order as amended and, therefore, judgment will also be entered in terms of the draft as amended.

	(Godfrey Lam) Judge of the Court of First Instance
	High Court

 

Mr Dominic James, of Sidley Austin, for the plaintiff

Miss Leona Chan, instructed by Francis Kong & Co, for the 4th defendant