Jsp International S.R.O. v. Alacrity Ltd and Others

HCA 205/2021

[2022] HKCFI 977

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 205 OF 2021

____________

____________

_______________

J U D G M E N T

_______________

A.  INTRODUCTION

1.By a summons of 29 October 2021, the Plaintiff seeks default judgment under RHC O.19 r.7 against the 1st to 4th, 6th to 10th, 12th, 15th and 18th Defendants, which are all companies incorporated in Hong Kong (“the Summonsed Defendants”).

2.The Plaintiff sought to amend the summons by a further summons of 28 February 2022. I give leave to amend and make an order in terms of paragraphs 1, 2 and 5 of the summons of 28 February 2022. I will proceed determine to determine the application for default judgment by reference to the summons of 29 October 2021 as amended (“the Amended Summons”).

3.The hearing originally scheduled for determination of the Amended Summons was adjourned by reason of the general adjournment of proceedings for public health reasons. Directions were given for the Amended Summons to be determined on the papers instead.

B.  THE BACKGROUND

B1.  The factual background

4.The following facts appear from the Amended Statement of Claim (“ASOC”).

5.The Plaintiff, a corporation registered in the Czech Republic, is a wholly owned subsidiary of a French corporation, which in turn is a subsidiary of a Japanese joint stock company JSP Corporation (“JSPC”). On 20 October 2020, the Plaintiff’s then financial controller, Ms Charvatova, received a call from a Mr Tanaka, who claimed to be calling on behalf of Mr Sakai, the president of JSPC. Mr Tanaka asked Ms Charvatova to prepare a bank transfer for the purpose of purchasing a company in the Netherlands, and to keep the matter confidential from her colleagues. Ms Charvatova made a few enquiries and considered the call to be legitimate.

6.Later on the same day, Ms Charvatova received an email from a Mr Martin, who claimed to be a lawyer appointed by Mr Sakai. The email attached a power of attorney purporting to be from Mr Sakai, giving Ms Charvatova “full authority to act” including “signing, activation and processing to payment”.

7.Between 20 October and 4 November 2020, acting under the mistaken belief that she was acting on the instructions of Mr Sakai, Ms Charvatova made various transfers from the Plaintiff’s bank accounts to the bank accounts which the 1st, 2nd and 3rd Defendants (“the First Tier Defendants”) maintained in Hong Kong, including the following.

7.1  1st Defendant’s account with CMB Wing Lung Bank Limited (“1st Defendant’s Account”):

Date	Amount
20.10.2020	€985,000
21.10.2020	€926,000
21.10.2020	€478,000

7.2  2nd Defendant’s account with the Hongkong and Shanghai Banking Corporation Limited (“2nd Defendant’s Account”):

Date	Amount
26.10.2020	€990,000
27.10.2020	€995,000
29.10.2020	€711,000
30.10.2020	€998,000
02.11.2020	€997,000

7.3  3rd Defendant’s account with Bank of China (Hong Kong) Limited (“3rd Defendant’s Account”):

Date	Amount
22.10.2020	€993,000

8.The Plaintiff learned of the fraud practiced on it on 5 November 2020. Mr Tanaka and Mr Martin were imposters (“the Imposters”), and Mr Sakai had never given them instructions to contact Ms Charvatova. The Plaintiff reported the matter to the Czech Republic police on the same day, then to the Hong Kong Police Force on 7 November 2020.

9.On 23 March 2021, the Plaintiff obtained a bankers’ books disclosure order from which it learned that there had been various transfers from the 1st, 2nd and 3rd Defendants’ accounts to accounts held by the other Defendants, including the Summonsed Defendants.

9.1  From 21 October to 28 October 2020, there were fourteen transfers of funds from the 1st Defendant’s Account, in HK dollars or US dollars, to various of the Defendants’ accounts, including but not limited to the accounts of some of the Summonsed Defendants.

9.2  From 27 October to 5 November 2020, there were thirty-five transfers of funds from the 2nd Defendant’s Account, in HK dollars, US dollars or Euros, to various of the Defendants’ accounts, including but not limited to the accounts of some of the Summonsed Defendants.

9.3  On 28 October 2020, there were four transfers of funds from the 3rd Defendant’s Account, in US dollars, to various of the Defendants’ accounts, but not including any of the accounts of the Summonsed Defendants.

B2.  The proceedings

10.The Writ in these proceedings was issued against the First Tier Defendants on 3 February 2021.

11.The Plaintiff obtained leave to join the 4th to 24th Defendants (“the Second Tier Defendants”) to the action on 6 July 2021.

12.Service of the Amended Writ was effected on the Summonsed Defendants. The 7th Defendant filed an acknowledgement of service, but did not file any defence. The other Summonsed Defendants did not acknowledge service of the Amended Writ. The application for default judgment was made after the time fixed for service of a defence expired.

13.The Amended Summons seeks relief against each of the Summonsed Defendants of the following nature:

13.1  restitution and repayment of the total amount transferred to the Summonsed Defendant by the Plaintiff, with interest (“the Restitutionary Relief”);

13.2  a declaration that the Summonsed Defendant holds each of the sums[1] transferred to its bank account by the Plaintiff (in the case of the First Tier Defendants) or by the 1st, 2nd or 3rd Defendant (in the case of the Second Tier Defendants) “together with the traceable proceeds and/or fruits thereof (including interest accrued thereon, if any) on trust for the Plaintiff” (“the Declaratory Relief”);

13.3  an order directing the Summonsed Defendant to “pay, release or transfer the sums referred to in [the corresponding item of Declaratory Relief] to the Plaintiff” (“the Payment Order Relief”);

13.4  damages and/or equitable compensation of €8,073,000, being the total amount which the Plaintiff mistakenly transferred to the First Tier Defendants (“the Equitable Compensation Relief”);

13.5  “Further or alternatively, all necessary accounts and inquiries, directions and orders (including tracing) to enable the Plaintiff to trace and recover the Funds and the proceeds and fruits thereof” (“the Miscellaneous Relief”);

13.6  interest and costs.

C.  PRINCIPLES ON AN APPLICATION FOR DEFAULT JUDGMENT

14.On an application for default judgment under O.19 r.7, the court gives such judgment as the plaintiff appears entitled on the statement of claim: O.19 r.7(1). Note 19/7/11 to Hong Kong Civil Procedure 2022 states that the court cannot receive any evidence in cases under O.19 r.7, and will disallow the costs of any affidavit filed in support. There has been some debate in the cases as to the origin, rationale and scope of this rule. It seems to me that useful guidance is given in the observations of Lord Woolf in Phonographic Performance Ltd v Maitra [1998] 1 WLR 870 at 875G to 876H, which may be summarised as follows.

14.1  By reason of the terms of O.19 r.7, and following the judicial practice noted in note 19/7/10 of the English Supreme Court Practice 1997, judgment in default is given upon the facts pleaded in the statement of claim, and affidavit evidence to supplement or support those facts is not appropriate as the pleaded facts are deemed to be admitted.

14.2  However, this rule is not rigidly applied where the court has to exercise a discretion as to whether to grant the relief sought. Facts which go to the exercise of that discretion and which are not deemed to be admitted may properly be brought to the court’s attention by way of affidavit or otherwise. The court may also seek an explanation in relation to matters relevant to the exercise of its discretion before coming to any decision.

14.3  The costs reasonably incurred in providing such evidence and information may be allowed.

15.It is not the normal practice of the court to make a declaration without a trial. However, this is only a rule of practice which should not be followed when the plaintiff has a genuine need for the declaratory relief and justice would not be done if such relief were denied. The court will scrutinise the application carefully and will not hastily grant the relief sought. The declaratory relief should not be in terms wider than what the plaintiffs are entitled to and what is necessary to do justice to them. The court expects that maximum assistance will be provided. The court should not be expected to deal with the matter on a “do-it-yourself basis” and simply rubber-stamp the uncontested application. See Hong Kong Civil Procedure 2022, note 19/7/20.

D.  THE 5TH DEFENDANT

16.The 5th Defendant is not one of the Summonsed Defendants. However, it sought to make submissions opposing the grant of the Declaratory Relief sought by the Plaintiff, in particular as against the 1st Defendant, on the grounds (inter alia) that this would be prejudicial to it. It says that it had bona fide dealings with the 1st Defendant and received the Sums from the 1st Defendant as payment pursuant to a genuine contract for the sale of fabrics.

E.  THE PLAINTIFF’S CLAIMS

E1.  Unjust enrichment; the Restitutionary Relief

17.In relation to each Summonsed Defendant, the Plaintiff claims restitution of the Sums received by it, based on the principles of unjust enrichment, citing Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at [67].

18.In relation to the First Tier Defendants, I would accept that the Plaintiff has pleaded a valid claim that the Summonsed Defendants were enriched by the receipts of the Sums, at the Plaintiff’s expense, and that the enrichment was unjust, having been made by reason of the Plaintiff’s mistake which was in turn brought about by the fraud practiced on it.

19.The Second Tier Defendants were not direct recipients of funds from the Plaintiff. It may therefore be questioned whether the enrichment of the Second Tier Defendants could be said to have been “at the expense of the Plaintiff”.

20.It was recognised in Investment Trust Companies v. Revenue & Customs Commissioners [2018] AC 275 at [46] to [50] that there may be situations in which, whilst the parties have not dealt directly with one another, or with one another’s property, the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit. These are generally situations in which the difference from the direct provision of a benefit by the claimant to the defendant is more apparent than real. At [48], Lord Reed referred to various such situations, one of which he described as follows.

“There are also situations where the defendant receives property from a third party into which the claimant can trace an interest. Since the property is, in law, the equivalent of the claimant’s property, the defendant is therefore treated as if he had received the claimant’s property.”

21.This being an application under O.19 r.7, I have considered whether the ASOC properly pleads a case that the Second Tier Defendants received the Sums from the First Tier Defendants, being funds originally transferred by the Plaintiff to the First Tier Defendants. I am satisfied that this has been done.

22.I therefore grant the Restitutionary Relief claimed against the Summonsed Defendants.

E2.  Constructive trust; the Declaratory Relief and Payment Order Relief

23.In addition to the personal remedy of restitution, the Plaintiff also claims proprietary remedies. It seeks a declaration that each of the Summonsed Defendants holds the sums transferred to its bank account, and proceeds or fruits thereof, on trust for the Plaintiff (the Declaratory Relief), and an order directing the payment of these sums to the Plaintiff (the Payment Order Relief).

24.Counsel for the Plaintiff, Ms Natalie So, submits that each of the Summonsed Defendants hold the Sums received by it on a constructive trust.

24.1  The claim against the First Tier Defendants is on the basis that “the sums received by [them] were obtained by fraud, irrespective of whether or what role each of them played in the inducement

vis-à-vis Ms Charvatova”.

24.2  The claim against the Second Tier Defendants is on the basis that “[t]hey have also received property imprinted with a constructive trust and continue therefore to be liable to account”.

E2.1  The First Tier Defendants

25.I will first consider the position of the First Tier Defendants.

26.Ms So cites Guaranty Bank and Trust Company v ZZZIK Inc Limited, unreported, HCA 1139/2016, 18 July 2016 at [28] 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. The proposition originates from a dictum of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669. As noted by G Lam JA in R Stahl Inc v AJ Development Ltd [2021] HKCA 1093 at [30], the dictum has been the subject of some debate, although it has been applied in Hong Kong in a number of cases involving cyber fraud; assuming that it represents the law, it nevertheless applies only in respect of a “fraudulent recipient”.

27.I turn to the pleadings to consider the case of fraud pleaded against the Defendants. Paragraph 31 of the ASOC pleads that:

“It is to be inferred from the following facts and matters that the 1st to 24th 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 Imposters and/or the 1st to 3rd Defendants; and/or (3) received parts of traceable proceeds of the Funds on behalf of the Imposters and/or the 1st to 3rd Defendants:

(i) The 1st to 3rd Defendants were expressly stipulated as the direct recipients of the Funds as per the instructions of the Imposters;

(ii) The 1st to 3rd Defendants were all incorporated in 2019 so they do not have a long presence in Hong Kong;

(iii) The 1st to 3rd Defendants have not entered an appearance in these proceedings at all;

(iv) The Funds (or parts thereof) received by the 1st to 3rd Defendants were rapidly dissipated out of their respective bank accounts via multiple tranches as particularised in section E above;

(v) The Plaintiff has never had any business relationship or dealings with any of the 1st to 24th Defendants; and

(vi) At least half of the 1st to 24th Defendants only maintain a registered office with either a company secretarial services provider or consultant service company and appear to have no ascertainable physical offices or premises.”

28.I do not consider this to be a sufficient plea that the First Tier Defendants were fraudulent recipients. The court cannot infer dishonesty from facts which are consistent with honesty. See Peconic Industrial Development Ltd & anor v Yu Ka Hong Paul & anor [2006] 4 HKC 406 at [33], per Cheung JA, adopting the judgment of Lord Millett in Three Rivers District Council & others v Bank of England (No 3) [2003] 2 AC 1 at [184] to [186]:

“184 It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake, 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney General for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

185 It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means “dishonestly” or “fraudulently”, it may not be enough to say “wilfully” or “recklessly”. Such language is equivocal. A similar requirement applies, in my opinion, in a case like the present, but the requirement is satisfied by the present pleadings. It is perfectly clear that the depositors are alleging an intentional tort.

186 The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.”

29.In Three Rivers District Council, Lord Millett went on to say:

“189 … If the particulars of dishonesty are insufficient, the defect cannot be cured by an unequivocal allegation of dishonesty. Such an allegation is effectively an unparticularised allegation of fraud…”

30.The six particulars pleaded in paragraph 31 of the ASOC may be consistent with the First Tier Defendants being fraudulent recipients, but they may equally be consistent with the First Tier Defendants being innocent recipients. I therefore do not consider that the pleading is sufficient to bring the First Tier Defendants within the ambit of the “fraudulent recipients” in Lord Browne-Wilkinson’s dictum.

31.In any event, even if the First Tier Defendants could be considered to be “fraudulent recipients”, this in itself is insufficient for the grant of a declaration of constructive trust. As explained in Virgo, The Principles of the Law of Restitution, 3rd ed., at p.567, if a claimant seeks a proprietary remedy it will be necessary to show that the defendant has retained property in which the claimant can identify his or her proprietary interest (whereas if a personal remedy is sought it is enough that the defendant received the property, without needing to show that it was retained).

32.It is not possible to make a declaration of a trust over unidentified property. Cf. Westdeutsche Landesbank Girozentrale, supra, at 705E, per Lord Browne-Wilkinson:

“(iii) In order to establish a trust there must be identifiable trust property. The only apparent exception to this rule is a constructive trust imposed on a person who dishonestly assists in a breach of trust who may come under fiduciary duties even if he does not receive identifiable trust property.”

33.In Milestone Electric, Inc v Meihoukang Trading Co Ltd [2020] HKCFI 2542, Mr Recorder Eugene Fung SC said at [14] to [15]:

“14. Constructive trusts provide proprietary relief. To obtain proprietary relief in relation to the US$850,000 transferred to the defendant or assets derived from it, the plaintiff must establish that the assets claimed can be identified by the tracing process as representing the original trust property. …

15. For the reasons given below, I am not satisfied that the plaintiff can now seek proprietary relief in relation to the US$850,000.

(1) It is well-established that a plaintiff who seeks a proprietary remedy must usually prove that the property to which he lays claim is still in the ownership of the defendant (Boscawen v Bajwa [1996] 1 WLR 328 at 334H (Millett LJ)).

(2) Given that over US$600,000 of the US$850,000 had already been withdrawn from D’s Account as at July 2020, it is no longer possible for the plaintiff to assert its rights in the US$850,000. The statement in P’s Statement of Claim that D retains the benefit of the US$850,000 therefore appears to be incorrect.

(3) Whether or not the plaintiff can assert its rights in the remaining credit balance in D’s Account is not something that the Court is currently in a position to determine. The question depends on a number of considerations including (but not limited to) whether or not there has been any mixing of money in D’s Account, and whether the intermediate balance has fallen to or below zero, since the deposits of the three sums of money transferred from the plaintiff in May 2020, none of which has been pleaded by P in its Statement of Claim.”

34.In the present case, the Plaintiff has pleaded in paragraph 35 of the ASOC that:

“the 1st to 24th 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 prayer (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 of the Plaintiff and are liable to account for the same as constructive trustee.”

35.This is therefore a plea that the First Tier Defendants still hold the funds received by them. At the same time, however, the Plaintiff has also pleaded in paragraph 14 of the ASOC that:

“…The Plaintiff then discovered from the disclosure made by the banks that following the First Tier Transfers, the Funds (less any applicable bank charges) were transferred from the First Tier Accounts to the Second Tier Accounts as particularised herein below.”

36.There then follows a lengthy list of various amounts said to have been dissipated from the First Tier Defendants to the Second Tier and other Defendants, in HK dollars, US dollars or Euros. A total is not given, but it would appear that a very substantial proportion of the funds pleaded to have been received by the First Tier Defendants is also pleaded as having thereafter been transferred out from the First Tier Defendants’ accounts.

37.There is therefore no sufficiently pleaded case that the First Tier Defendants have retained property in which the Plaintiff can identify its proprietary interest, such as to justify the grant of a declaration of constructive trust over such property in the hands of the First Tier Defendants.

38.The plea that the First Tier Defendants still hold the funds received by them also needs to be considered against the fact that, as pointed out by the 5th Defendant, the Plaintiff never obtained an injunction against the Defendants, prohibiting them from operating their bank accounts. Whatever may have been the validity of the plea at the time of the Writ, Amended Writ or at the time when the Defendants failed to file their defence (so that the plea may be deemed admitted) does not necessarily hold true today.

39.It is argued that[2] “The claim in constructive trust and unjust enrichment are predicated upon the fact of receipt”, and that “…the judgments sought (as set out in the draft Amended Summons…) track the wording of §19(ii) of Edison Norge AS v BZZ Limited [2021] HKCFI 135…, which make clear the proprietary interest attaches to the specific sum transferred into the receiving bank account (and nothing else).” (Emphasis from the original.)

40.In fact, the declarations granted in Edison Norge AS were only that the plaintiff in that case was the owner of, and had a proprietary interest in, the sums that were paid into the defendants’ accounts. Mr Recorder Manzoni SC declined to grant injunctions that the defendants held the balances remaining in their accounts on constructive trust for the plaintiff. In other words, declarations akin to those currently sought in terms of the Declaratory Relief in the Amended Summons were refused.[3] See Edison Norge AS at [10] to [19].

41.On the basis of the principles cited above in paragraphs 31 to 33, I do not accept that mere receipt of the funds in the First Tier Defendants’ accounts suffices to found a claim for a declaration of constructive trust. It is necessary for the defendants to have retained identifiable property over which a declaration of constructive trust can take effect. Whilst this is an application for default judgment, so that the Plaintiff does not need to prove its case by way of evidence, and can seek judgment on the basis of its pleaded case, I am not satisfied that a sufficient case has been pleaded.

E2.2  The Second Tier Defendants

42.I turn to the Second Tier Defendants. The claim against them was put on the basis that they “received property imprinted with a constructive trust and continue therefore to be liable to account”,[4] rather than that they were themselves fraudsters. [5]

43.It will be recalled that Lord Browne-Wilkinson’s dictum as regards the imposition of a constructive trust applies only in respect of a fraudulent recipient: R Stahl Inc (supra). Furthermore, as set out above, mere receipt of property by a defendant, without retention by that defendant, is insufficient to found a claim for a declaration of constructive trust against the defendant in respect of such property.

44.Thus insofar as it is argued that a declaration of constructive trust against the Second Tier Defendants does not require any finding of fraud or wrongdoing and can be supported by the mere fact of receipt,[6] I do not agree.

45.I further note that no authorities were cited as to the application of Lord Browne-Wilkinson’s dictum in the case of second-tier recipients of funds originally derived from fraud, who are one step removed from the fraudulent scheme. Reference was made only to Guaranty Bank and Trust Company, supra. That case cited Mesirow Financial Administrative Corporation v Best Link Industrial Co Ltd, unreported, HCMP 1846/2015, 25 January 2016 at [33], which in turn cited Michael Chen Kang Huang v Peter Lit Ma [2009] 6 HKC 191 at [56]. In both Guaranty Bank and Trust Company and Mesirow Financial Administrative Corporation, the defendant was a first-tier defendant. In Michael Chen Kang Huang, the defendant was the fraudster himself.

46.I go on to consider whether a claim for the Declaratory Relief can be made out on the basis the Second Tier Defendants were involved in the fraud practiced on the Plaintiff, as paragraph 31 of the ASOC suggests this as a possible basis.

47.On the basis of the particulars of fraud pleaded against the Second Tier Defendants (see paragraph 27 above), I do not consider that it has been sufficiently pleaded that the Second Tier Defendants are “fraudulent recipients” as required for an application of Lord Browne-Wilkinson’s dictum.

47.1  First of all, the opening words of paragraph 31 of the ASOC allege fraud as one of three possible cases against the Second Tier Defendants; it is not entirely clear whether the claim of fraud is limited to the First Tier Defendants or extends to the Second Tier Defendants as well.

47.2  Assuming for the moment that fraud is alleged against the Second Tier Defendants, the particulars in support are limited to an allegation that the Second Tier Defendants received payments from the First Tier Defendants, that the Plaintiff never had any dealings with the Second Tier Defendants, and that “at least half of the 1st to 24th Defendants only maintain a registered office with either a company secretarial services provider or consultant service company and appear to have no ascertainable physical offices or premises.” These particulars are equally consistent with innocence. I do not consider that such particulars can properly sustain a plea that the Second Tier Defendants were fraudulent recipients.

E2.3  The position of the 5th Defendant

48.Counsel for the 5th Defendant, Mr Marc Corlett, objected to the grant of the Declaratory Relief as against the 1st Defendant, on various grounds, but principally because it would prejudice the position of the 5th Defendant. It was said that the 5th Defendant was a bona fide purchaser for value without notice of the Plaintiff’s claim. The 5th Defendant has filed a Defence pleading that it entered into genuine contracts for the sale and purchase of fabrics with the 1st Defendant, and performed the contracts, and that the payments received from the 1st Defendant were made pursuant to those contracts. It was said that if the Declaratory Relief were to be granted against the 1st Defendant, this would pre-empt the 5th Defendant’s claim to be a bona fide purchaser for value without notice of the Plaintiff’s claim.

49.If I am wrong in my view that in order for the Plaintiff to obtain the Declaratory Relief against the 1st Defendant, the 1st Defendant has to have retained property in which the Plaintiff can identify its proprietary interest (and over which a declaration of constructive trust can operate), then, given the 5th Defendant’s pleaded case, there would be an issue as to whether it should be the Plaintiff or the 5th Defendant who can successfully assert a proprietary interest in the Sums paid by the 1st Defendant to the 5th Defendant. In such circumstances, I agree that it would be inappropriate at this stage to grant a declaration to the effect that the 1st Defendant holds, on trust for the Plaintiff, the Sums which it received from the Plaintiff, which would include the amounts subsequently paid by the 1st Defendant to the 5th Defendant, as this could potentially affect the 5th Defendant’s claim to those amounts.

E2.4  The Payment Order Relief

50.It follows from my conclusions on the Declaratory Relief that the Payment Order Relief ought not to be made, since it has been framed as following on from the grant of the Declaratory Relief.

51.Insofar as it is submitted[7] that the Payment Order Relief is instead to facilitate the payment of the amounts for which the Plaintiff has obtained an order for restitution and repayment (ie. pursuant to the Restitutionary Relief), this is not how the Amended Summons has been framed;[8] nor, in any event, is it necessary, since the Restitutionary Relief already includes an order for payment.

E2.5.  Knowing receipt; the Equitable Compensation Relief

52.The Plaintiff claims equitable compensation for knowing receipt.[9]

53.In order to establish a claim in knowing receipt, the plaintiff must show (1) a disposal of his assets in breach of fiduciary duty, (2) the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff, and (3) knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty: Bank of Credit and Commerce International (Overseas) Ltd and anor v Akindele [2001] Ch 437 at 448B.

54.The Plaintiff’s skeleton submissions at paragraphs 28(4) and 29(3) address the third requirement (relating to knowledge) but not the first two requirements.

55.As to the first requirement, it is not clear what is said to constitute the disposal of assets in breach of fiduciary duty, whether in relation to the First Tier Defendants or the Second Tier Defendants. The ASOC does not plead any breach of fiduciary duty or breach of trust. Paragraph 32 of the ASOC does plead that:

“It is to be further inferred from the aforesaid matters that the 1st to 24th Defendants knew or ought to have known at all material times that the First Tier Transfers and the transfers particularised in section E above, respectively, wholly or partly consisted of proceeds of fraud, fraudulent misrepresentation, deceit, were made in breach of trust and/or by mistake.”

56.However, what the “breach of trust” relied on is not pleaded, whether in relation to the receipt by the First Tier Defendants or the receipt by the Second Tier Defendants. It will be remembered that the transfer to the First Tier Defendants was made by the Plaintiff, which could not be said to have been in breach of trust or fiduciary duty. It is also not clear how the onward transfer from the First Tier Defendants to the Second Tier Defendants is said to have been made in breach of trust or fiduciary duty.

57.As to the second requirement, the trust property must be received by the defendant for his own use and benefit, rather than ministerially, as agent for another: Agip (Africa) Ltd v Jackson [1990] Ch 265 at 292A.[10] As far as the Second Tier Defendants are concerned, however, even if they participated in the fraudulent scheme, the pleaded case is that they may have been doing so as agents, receiving the Plaintiff’s funds on behalf of the Imposters or the First Tier Defendants. It will be recalled that the opening words of paragraph 31 of the ASOC plead that:

“It is to be inferred from the following facts and matters that the 1st to 24th 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 Imposters and/or the 1st to 3rd Defendants; and/or (3) received parts of traceable proceeds of the Funds on behalf of the Imposters and/or the 1st to 3rd Defendants…” (Emphasis added.)

58.I am therefore not satisfied that a case for knowing receipt has been sufficiently pleaded so as to entitle the Plaintiff to default judgment. I decline to grant the Equitable Compensation Relief.

E2.6  The Miscellaneous Relief

59.This appears to have been included in the Amended Summons as a “catch-all”.[11] No specific relief has been sought in the Plaintiff’s skeleton submissions under this head.

60.It would not be satisfactory to make an order in terms of this paragraph, as it is so broadly framed as to be unclear what exactly is being ordered.

E2.7  Interest

61.I am satisfied that interest should be granted on the amounts owing to the Plaintiff.

F.  DISPOSITION

62.I make an order in terms of paragraphs 1(1), 2(1), 3(1), 4(1), 5(1), 6(1), 7(1), 8(1), 9(1), 10(1), 11(1), 12(1) and 13(3) of the Amended Summons.

63.I dismiss the remainder of the Amended Summons save that I make costs orders nisi as follows.

64.The Plaintiff has asked for costs of the action, including costs of the present application, to be paid by the Summonsed Defendants, insofar as they are not costs attributable to the 5th Defendant’s opposition. I make a costs order nisi that these be paid by the Summonsed Defendants, to be summarily assessed.

65.As to the costs which the Plaintiff says it has incurred by reason of the 5th Defendant’s opposition, the Plaintiff says in the event that it is entirely successful on its application, these costs should be paid by the 5th Defendant. The 5th Defendant says that the costs should “follow the event”.

65.1  It was primarily the Declaratory Relief that was opposed by the 5th Defendant. As I have not granted this relief, it would not be right for the 5th Defendant to have to pay the Plaintiff’s costs.

65.2  On the other hand, the 5th Defendant’s opposition was based not only on the point that it might be prejudiced by the relief sought, but on numerous other points, including service, timing of the Plaintiff’s application, suspicions about Ms Charatova, and a lack of digital forensics evidence in support of the Plaintiff’s case; an additional set of hearing bundles was lodged as well. Whatever the eventual outcome of the proceedings as between the Plaintiff and the 5th Defendant may be, it would not be right for the Plaintiff have to pay the 5th Defendant’s costs in this regard.

65.3  In the circumstances, it seems to me that the fairest order would be for the Plaintiff and the 5th Defendant to each bear their own costs arising out of the 5th Defendant’s opposition. Accordingly, insofar as the costs of and occasioned by the Amended Summons are attributable to the 5th Defendant’s opposition, on a nisi basis, I make no order as to costs.

66.In the event that any party seeks to vary the costs orders nisi, the application should be made within 14 days of this judgment; any objection thereto should be made within 7 days thereafter; and any reply within 7 days thereafter. The matter will thereafter be disposed of on the papers. As the Plaintiff has already lodged its statement of costs, I will also deal with the summary assessment of costs at that time.

Ms Natalie So, instructed by Norton Rose Fulbright Hong Kong, for the Plaintiff

Mr Marc Corlett, instructed by ONC Lawyers, for the 5^th Defendant

The 1^st to 4^th, 6^th to 10^th, 12^th, 15^th and 18^th Defendants were not represented and did not appear