DCMP730/2018

DCMP730/2018

A A B B DCMP 730/2018 C [2018] HKDC 575 C D IN THE DISTRICT COURT OF THE D HONG KONG SPECIAL ADMINISTRATIVE REGION E E MISCELLANEOUS PROCEEDINGS NO 730 OF 2018 F F --------------------- G G IN THE MATTER of the amount of H USD51,652.44 and any and all H interest accrued on that amount since 6 July 2017 deposited in the I I bank account (account number 369- 278262-883) of YI HE (HK) J TRADING CO., LIMITED held at J the Hang Seng Bank Limited (Hong K Kong K L and L IN THE MATTER of Order 15 M M Rule 16 of the Rules of the District Court (Cap 336H) N N -------------------- O O BETWEEN P P st PRIMEWAY INTERNATIONAL LIMITED 1 Plaintiff Q LEGEND STAR LOGISTICS LIMITED 2nd Plaintiff Q and R R YI HE (HK) TRADING CO., LIMITED Defendant S S -------------------- T T U U V V  -2- A A B B Before: Deputy District Judge Vincent Lung in Chambers C Date of Hearing: 10 May 2018 C Date of Decision: 10 May 2018 D D Date of Reasons for Decision: 23 May 2018 E E ---------------------------------------- F F REASONS FOR DECISION G ----------------------------------------- G H H Introduction I I 1. By Originating Summons issued on 8 March 2018 (the “OS”), J J the plaintiffs sought:- K K (1) A declaration that the amount of US$51,652.44 (the L L “Funds”) held by the defendant in its account no. 369- M 278262-883 (“D’s Account”) maintained with Hang M Seng Bank Limited (the “Bank”) are funds held on a N N constructive trust in favour of the 1st plaintiff or O alternatively the 2nd plaintiff; and O P P (2) An order that the Bank shall forthwith release and Q return the Funds to the 1st plaintiff or alternatively the Q 2nd plaintiff. R R S 2. The defendant did not appear at the hearing on 10 May 2018. S Upon hearing Mr Patrick Chiu, counsel for the plaintiffs, I gave judgment T T st for the 1 plaintiff in relation to the declaratory relief with costs, but I U U V V  -3- A A B B declined to make an order for the release of the Funds by the Bank. These C are the reasons for my decision. C D D The background facts E E 3. This is yet another “email fraud” case. The plaintiffs’ case is F F set out in the 2 affirmations by Mr Menghour Abderezak (“Menghour”), G who is a director of both plaintiffs. G H H 4. In short, the plaintiffs were incorporated in Hong Kong and I have been carrying on trading and shipping businesses, primarily from I Mainland China to Algeria. Since January 2017, the plaintiffs have been J J trading with an entity known as Intersport International Hong Kong K (“Intersport”). Normally, the plaintiffs would place orders for goods with K Intersport; Intersport would inform the plaintiffs of the identity of the L L supplier in question together with the payment details, and the plaintiffs M would then make payment for their orders directly to the ultimate supplier M in accordance with such information. N N O 5. The plaintiffs’ contact point with Intersport is one Ms Erica O Gao (“Gao”). The parties communicate mainly through email and Wechat. P P Gao’s (proper) email address is [email protected]. On the other Q hand, Menghour uses his personal email [email protected] to Q communicate with Gao. R R S 6. In early July 2017, the 2nd plaintiff placed several orders with S Intersport. Gao provided the 2 nd plaintiff with the names of the suppliers, T T one of which was Xiamen C&D Enterprise Co Ltd (“Xiamen C&D”). U U V V  -4- A A B B C 7. On 5 July 2017, Gao requested the 2nd plaintiff to make C payment into the respective bank accounts of the suppliers. The amount D D due from the 2nd plaintiff to Xiamen C&D was US$51,652.44. E E 8. Soon thereafter but still on 5 July 2017, Menghour received F F an email purporting to be sent by Gao but from email address G [email protected], as follows:- G H H “Re: URGENT REPLY NEEDED – 2nd shipment from China to Algeria I I Dear Rezak, J J Please confirm by reply mail asap over my previous email so I send you the other branch bank account to make the payment K K waiting for your reply. Best regards, L Erica Gao” L M M 9. This email was sent as a reply to the earlier chain of emails N between Menghour and Gao. Menghour did not notice that it was in fact N sent from an address other than Gao’s usual email address and thought he O O was still corresponding with Gao. Upon a reply from Menghour, he P received another email, purportedly from Gao through P [email protected], as follows:- Q Q R “Dear Rezak, R Find the attached right banking information for the payment of S the 2nd china shipment due to the problem we are having on the S other bank. Please once done payment send me the T/T copy so T we can proceed without further delays. T Thanks U U V V  -5- A A B B Erica Gao” C C 10. The attachment to this email directed payment of the Funds D D into D’s Account. E E 11. Menghour further enquired for whom (ie which supplier) the F F payment was intended, and the response, again purportedly from Gao G through [email protected], was that it was a payment for G Xiamen C&D. H H I 12. The Funds were accordingly transferred into D’s Account on I 6 July 2017 intending to be a payment for Xiamen C&D. J J K 13. It is convenient to add at this stage that while the order in K question was placed by the 2 nd plaintiff (and Xiamen C&D accordingly L L nd issued an invoice to the 2 plaintiff), the Funds were in fact provided by M the 1st plaintiff. In Menghour’s 1st affirmation he said that this arrangement M was “authorised” by the 2 nd plaintiff. This is a point that affects entitlement N N as between the plaintiffs to which I will have to return. This also explains O O why the reliefs sought in the OS have been framed in the alternative as P between the 1st and 2nd plaintiffs. P Q Q 14. The plaintiffs subsequently discovered the fraud when Gao R chased up on the payment for Xiamen C&D. Gao in fact did not send the R emails that originated from [email protected]. Steps were S S taken, including by the paying bank, to claw back the Funds but they were T unfruitful. Menghour then made a report to the police. Upon oral enquiries T U U V V  -6- A A B B made on or around 8 January 2018, the police confirmed that D’s Account C had been frozen and the Funds remained therein1. C D D Service of the OS on the defendant E E 15. According to the affirmations of service, the OS and the F F related documents were served on the defendant by leaving at its registered G address as reported in its latest annual return. I am satisfied that the G plaintiffs’ efforts to effect service on the defendant complied with s 827 H H Companies Ordinance (Cap 622). I I The relevant legal principles J J K 16. It is now well established that when property is obtained by K fraud, equity imposes a constructive trust on the fraudulent recipient so that L L the property is recoverable and traceable in equity: Westdeutsche M Landesbank Girozentrale v Islington London Borough Council [1996] AC M 669 at 716C-D; Mesirow Financial Administrative Corporation v Best Link N N Industrial Co Ltd (unreported, HCMP 1846/2015, 25 January 2016); O Michael Chen Kang Huang v Peter Lit Ma [2009] 6 HKC 191. O P P 17. The rule that the court will not make a declaration in default Q without a trial is a rule of practice and not of law. The paramount duty of Q the court is to do justice depending on the circumstances of the case. The R R practice will thus give way where there is a genuine need for declaratory S relief: Mesirow at §35. S T T 1 I understand that to mean that D’s Account bore a credit balance equal to, or possibly in excess of, the Funds, as opposed to a confirmation that the sum remained in specie therein. This understanding is confirmed by Mr Chiu, counsel for the plaintiff. U U V V  -7- A A B B C 18. There are numerous instances when the Court of First Instance C and the District Court have declared, in the absence of the defendant, the D D existence of a constructive trust over funds procured or obtained by E deceptive emails: see for example Mesirow at §36 and the cases cited E therein. F F G 19. It is clear that the court has power at the first hearing of an G originating summons to dispose of the action summarily and in chambers H H where there are no triable issues. The burden under this procedure is on I the plaintiff to justify its entitlement to summary judgment: International I Automotive Components Group s.r.o. v Xuke Trading Limited (unreported, J J HCMP 546/2017, 19 April 2017) at §3; Order 28 rule 4(1) Rules of the K District Court (“RDC”, Cap 336H). K L L Analysis M M 20. The burden is therefore on the plaintiffs to show that they are N N (or to be exact, either one of them is) entitled to summary judgment on the O reliefs sought in the OS. O P P 21. The plaintiffs’ account of events leading to the remittance of Q the Funds to D’s Account was uncontested due to the non-appearance of Q the defendant, and I have already held that the defendant was properly R R served with the OS and notified of the hearing. S S T T U U V V  -8- A A B B 22. In any event, the contemporaneous documents all support the C plaintiffs’ case. There is no suggestion, let alone evidence, that the C defendant was entitled to receive the Funds or any part thereof. D D E 23. Accordingly, I see no reason not to accept the plaintiffs’ case E on the evidence. F F G 24. I am also satisfied that the plaintiffs have shown a genuine G need for declaratory relief. Such declaration of constructive trust is H H necessary to affirm the plaintiffs’ (or one of their) proprietary interest in I the Funds: Mesirow at §38. I J J Who is the proper beneficiary? K K 25. As aforesaid, this issue arises because the relevant order was L L placed by the 2nd plaintiff but the Funds came from the 1st plaintiff. There M is a need to resolve who, as between the 1st and 2nd plaintiffs, is the proper M beneficiary under the constructive trust. N N O 26. It is plain that at the time when the 1st plaintiff transferred the O Funds to D’s Account, it did so as the 2 nd plaintiff’s agent; that explains P P why Menghour confirmed that the 1 plaintiff’s payment of the Funds was st Q “authorised” by the 2nd plaintiff. Q R R 27. In my judgment, the proper beneficiary under the constructive S trust ought to be the 1st plaintiff being the entity from which the Funds S originated. T T U U V V  -9- A A B B 28. First, insofar as locus is concerned, Mr Chiu submitted, and I C accept, that both the agent and the principal may sue: Bowstead and C st Reynolds on Agency (21 edition) §§9-099 to 9-100. D D E 29. Second, as a matter of commercial reality, since the 1st E plaintiff was the entity against which the Funds were debited, it should also F F be the entity that would ultimately be “reimbursed”. To this extent, even G if I should declare the 2nd plaintiff (as principal) to be the beneficiary under G the constructive trust, in all likelihood the 2nd plaintiff would, and in fact it H H should as a matter of agency law, “forward” the Funds to the 1 st plaintiff I upon recovery of the same. I J J Payment out by the Bank K K 30. The next question is how, in law, the Bank may be procured L L to release the Funds to the 1st plaintiff. I am not persuaded that I should M make an order requiring the Bank to release the Funds as sought. M N N 31. As explained in International Automotive, there are basically O 3 ways to require the Bank to transfer the Funds to the 1st plaintiff, namely O (i) a vesting order; (ii) notice to non-parties; and (iii) a garnishee order. P P Q 32. The first 2 ways are irrelevant, because the Bank was not Q joined as a party to this action, and there is no evidence that the Bank was R R previously notified of these proceedings or the hearing. There is also no S indication from the Bank that it would adopt a neutral position and/or that S it would abide by the order of this court. T T U U V V  - 10 - A A B B 33. As to third way, it is sufficient to point out that there is no live C application for a garnishee order before me and there are designated C procedures for such an application under Order 49 RDC. D D E 34. Procedural difficulties aside, there is a more fundamental E objection. There is no evidence before me as to what transactions had F F taken place within D’s Account. There might be deposits and withdrawals G both before and after the Funds were deposited by the 1st plaintiff; and it is G plausible that those funds were subject to other trusts or rights of third H H parties (eg they represented monies obtained by similar frauds). If it should I happen that part of the “mixed” funds were then withdrawn or dissipated, I the usual tracing rules would dictate the beneficial title to the remaining J J monies. The Bank itself may also be entitled to a set-off against the Funds K (eg the defendant maintains a separate account with the Bank that is in K overdraft). L L M 35. If I were to make an order as sought by the plaintiffs to compel M the Bank to transfer the Funds back to the 1st plaintiff, it would in effect N N give priority to the 1st plaintiff over the credit balance within D’s Account O (or part thereof up to an amount equivalent to the Funds), possibly to the O detriment of third parties who might have an equal or even better title to P P the same. It would in my judgment be wrong in principle to do so without Q giving them an opportunity to be heard; at the very least the Bank ought to Q be heard because it will have knowledge as to transactions that had taken R R place within D’s Account (if any). S S 36. Mr Chiu referred me to Mesirow at §§1-2, Northeast Metal T T Traders, Inc v Huiguan Electronic Industry Co Limited (unreported, U U V V  - 11 - A A B B DCMP 1837/2017, 19 September 2017) at §2 and Dialog Services Saudi C Arabia Company Limited v Youtai International Trading Co Limited C (unreported, DCMP 1215/2017, 14 July 2017) at §§1-2. In these cases, in D D addition to declarations of constructive trusts, the court seemed to have E made orders directing the recipient bank to repay the victim. Nevertheless, E it would appear that the propriety of such an order was not raised as a live F F issue in any of those cases. On the other hand, International Automotive is G a decision directly relevant to the point. Furthermore, Mesirow was G decided before International Automotive, and although the other 2 cases H H came after International Automotive, it was not cited in the decisions. I I would therefore prefer to follow International Automotive on this point. I J J Conclusion K K 37. For these reasons, I granted the declaratory relief in favour of L L the 1st plaintiff with costs (which I summarily assessed with certificate for M counsel), but declined to make an order requiring the Bank to release and M return the Funds to the 1st plaintiff. N N O O P P Q ( Vincent Lung ) Q Deputy District Judge R R S Mr Patrick P H Chiu, instructed by Haldanes, for the 1st and 2nd plaintiffs S The defendant was not represented and did not appear T T U U V V