Li Huasha v. Ip Wing Hin

DCCJ 5755/2023

[2024] HKDC 915

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5755 OF 2023

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REASONS FOR DECISION

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Introduction

1.Before me is the summons filed by the Plaintiff (“P”) on 2 April 2024 for the following:

(a)  default judgment against the Defendant (“D”) on the basis of D’s default of Acknowledgment of Service and Defence for a sum of HK$290,000 (“Sum”); and interest at the prevailing judgment rate up to the date of payment and costs of this action;

(b)  D, whether by himself or by his servants or agents or otherwise howsoever, be restrained from disposing of or otherwise dealing with the Sum they received or their traceable proceeds otherwise than by delivery up or transfer to P;

(c)  declaratory relief to the effect that the Sum is held by D as constructive trustee in favour of P;

(d)  a vesting order in respect of the Sum;

(e)  leave to join Hang Seng Bank Limited as a respondent (“Respondent”) of the current proceedings for the purpose of giving effect to the vesting order; and

(f)  costs of this application forthwith pursuant to O 13 r 6 and O 19 r 7 of the Rules of the District Court (“RDC”) and section 52(1)(e), 52(2) and (5) of the Trustee Ordinance and inherent jurisdiction (“Summons”).

2.Ms Lilian Ip made submissions on behalf of P.

3.After P served its Writ of Summons dated 20 December 2023 with the Statement of Claim dated 14 December 2023 (“SOC”), D has not filed or served any notice of intention to defend and defence, nor has it filed or served any affirmation in opposition to P’s Summons.

4.D was absent at the hearing. Ms Ip confirmed that all the relevant papers in this application have been properly served on D at its last known address. Two affirmations of service from Yip Ki Chung were produced to that effect in respect of the service of the Writ of Summons issued on 20 December 2023 together with the SOC (and three copies of the acknowledgment of service form) and the Summons.

5.I am satisfied that D has been given proper notice of the hearing and it is appropriate to proceed to hear P’s application notwithstanding D’s absence.

6.The prospective Respondent has also been served a copy of the Summons. Subsequently P’s solicitors sent the Respondent a copy of the Writ of Summons with the SOC under cover of their letter dated 6 May 2024. By letter dated 14 May 2024, the Respondent informed P’s solicitors that it would adopt a neutral stance with regard to the Summons and the applications concerning the Respondent in §§4 and 5 of the Summons.

7.In the event that no vesting order is granted by the court, the Respondent requested that it would not be joined in the proceedings.

8.At the end of hearing the Summons, I gave judgment for P. These are my reasons.

Service of the Proceedings and the Summons

9.P filed the 1^st and 2^nd Affirmations of Yip Ki Chung confirming that it has duly served the Writ with the SOC, and the Summons on D.

10.Neither a notice of intention to defend nor any defence was filed by D.

11.P relied on O 13 r 6 of the RDC in the Summons for default judgment. At the hearing, Ms Ip confirmed that P would no longer rely on O 13 r 6 because the court cannot enter default judgment in respect of a claim for declaration or injunction under that rule (Biostime International Investment Ltd v France Heson Paper (HK) Co Ltd [2015] 2 HKLRD 658 at 660 at §5). The commentary at §13/6/1 of the Hong Kong Civil Procedure 2024, Vol 1 provides as follows:

“Effect of rule — The effect of para (1) is to preclude a plaintiff from entering judgment in default of notice of intention to defend in every case in which the indorsement on the writ contains or includes a claim which is not squarely within rr 1 to 4 of this Order, and to require him to proceed with the action as if that defendant had given notice of intention to defend. If, therefore, there is indorsed on the writ a claim for an account, injunction, specific performance, declaration or rectification or other remedy or relief which falls outside the descriptions specified in rr 1 to 4, the plaintiff cannot enter judgment in default of notice of intention to defend, unless he expressly and finally abandons every such remedy or relief. On the other hand, the plaintiff is free to elect which relief he wants to pursue and he is under no duty to give prior notice of his election to abandon any form of relief which he originally claimed, and on the effective abandonment of every remedy or relief outside the descriptions specified in rr 1 to 4 he is entitled to enter a default judgment under these rules (Morley London Developments Ltd v Rightside Properties Ltd (1973) 231 EG 235 (CA)) (approved in paragraph 20 Russel Peter Brown v Edward Eugene Lehman (CACV 119/2012, [2020] HKEC 1597, (Barma JA)).”

12.As D has not filed any defence, P is entitled to apply for judgment pursuant to O 19 r 7 of the RDC.

13.In an application for judgment on the default of service of a defence under O 19 r 7, the court cannot receive any evidence, but must give judgment according to the pleadings alone: Leung Pak Ki v The Estate of Pang Kau [2016] HKEC 515 at §5; 升力科技有限公司 v C & C International Technology Ltd [2017] HKEC 118 at §8). It is therefore not necessary on the hearing of the summons for judgment to prove the case by evidence (Lam Shing Shou v Lam Hon Man [2001] HKEC 1988; 升力科技有限公司 v C & C International Technology Ltd [2017] HKEC 118). See §19/7/11 of the Hong Kong Civil Procedure 2024, Vol 1.

14.The task of the court is to see whether P appears to be entitled to a judgment on its SOC. The statement of claim must show a case for the order that P seeks to obtain: 升力科技有限公司 v C & C International Technology Ltd [2017] HKEC 118 at §7. See §19/7/14 of the Hong Kong Civil Procedure 2024, Vol 1.

15.Notwithstanding the wording in O 19 r 7(1), the court’s power to grant default judgment is discretionary and not mandatory: see §19/7/14 of the Hong Kong Civil Procedure 2024, Vol 1; Seto Yim King v Soo Hooyet Dew [2019] HKCFI 2640 at §12; Times Square Ltd v Lee Kwun Kit [2020] HKCFI 438 at §14.

P’s SOC

16.This is a case of fraud perpetrated on P in which P was induced by three representations (“Representations”) to deposit monies to D through the guise of investments. P is the holder of an account at Bank of China (Hong Kong) Limited (“P’s Account”) in which P had made the transfer of funds mistakenly to D as a result of the alleged fraud perpetrated on her.

17.D is the holder of an account number 780439683888 at Hang Seng Bank Limited (“D’s Account”) who was the recipient of the funds constituting the Sum transferred from P.

18.P neither had any business nor personal dealings with D prior to the four wrongful transfers in the total sum of HK$270,000 (“Wrongful Transfers”).

19.On or around 29 June 2022, while P was using the social media platform Tik Tok, a person who represented himself as “Allen” initiated a chat conversation with P and asked P to download Line so the parties could communicate via Line. Subsequently, P opened a Line account and communicated with “Allen” using her account with Allen’s Line account. From time to time, P and Allen also communicated via calls made on Line.

20.On 30 June 2022, Allen represented to P that (a) Allen would teach P to do trading in foreign currencies as he was an expert in the field, building on the information disclosed by P earlier that she was interested in stock trading; (b) Allen then sent a website to P, valuetrades123.com (“Website”) and asked P to create a user ID on the Website, and thereafter Allen would teach P to do foreign currencies trading; (c) the initial deposit required by P was just HK$20,000; and (d) Allen made assurances to P that the trading of foreign currencies would have a high likelihood of generating profits (collectively “1^st Representations”).

21.Induced by and in reliance of the 1^st Representations made by Allen, P had, on the same day, made a deposit of HK$20,000 from P’s Account to D’s Account as directed by the customer service personnel of the Website (“1^st Wrongful Transfer”).

22.Allen induced P to withdraw cash from her account on the Website. Through Allen’s instructions, P successfully withdrew US$200 from her account on the Website.

23.Thereafter, Allen had made the following further representations to P: (a) Allen said the continued injection of capital on the Website would generate remarkable profits as the Website was an excellent platform for investment; (b) the excellent returns were demonstrated by P being able to gain US$200 shortly after she injected funds via the Website; and (c) P should make a further injection of HK$100,000 to yield more profits (collectively “2^nd Representations”).

24.Induced by and in reliance on the 2^nd Representations made by Allen, P on the same day made a further deposit of HK$100,000 from P’s Account to D’s Account as directed by the customer service personnel of the Website (“2^nd Wrongful Transfer”).

25.From around 1 to 2 July 2022, Allen continued to make further representations to P: (a) to continue to yield more profits, P would need a larger capital base for her account on the Website; and (b) Allen would assist P in investing on the Website (“3^rd Representations”).

26.Induced by and in reliance on the 3^rd Representations made by Allen, P on 1 and 2 July 2022 made further deposits of HK$80,000 (“3^rd Wrongful Transfer”) and HK$90,000 (“4^th Wrongful Transfer”) respectively.

27.P claims that the Representations made by Allen on behalf of D are all false in that (a) the account on the Website did not generate any profit for P at all; and (b) the investments on the Website did not exist at all; there was never any account details and/or mandate for which P could have the opportunity to inspect.

28.On 3 July 2022, as P was suspicious, she communicated with the personnel of the Website to request the repayment of her injected funds in her account on the Website. However, the personnel on the Website used numerous excuses to reject P’s request and asked P to further inject more capital to her account. At that juncture, P’s suspicion grew and she started to believe that she was a victim of fraud. On 6 July 2022, P reported the fraud to Kwun Tong police station.

29.In reliance on the fraud and/or fraudulent misrepresentations of Allen and the personnel on the Website, P provided a total sum of HK$290,000 and has thereby suffered loss.

30.Further and/or alternatively, the Wrongful Transfers were made on the basis of a total failure of consideration.

31.At all material times, P was and continues to be, the lawful owner with full rights and proprietary entitlement over the Sum and in relation to the traceable proceeds and equivalent of the Sum.

32.Accordingly, P claims against D for the following: (a) the Sum; (b) an injunction restraining D, whether by himself or by his servants or agents or otherwise howsoever from disposing of or otherwise dealing with the Sum they received or their traceable proceeds otherwise than by delivering up or transfer to P; (c) a declaration that the Sum is held by D as constructive trustee in favour of P; (d) an order for the immediate release and return of the Sum received by D arising from the Wrongful Transfers or the sum equivalent held on constructive trust from D’s Account maintained at Hang Seng Bank Limited and/or the assets representing their profits, benefits or traceable proceeds/assets to P; (e) interest; and (f) costs.

Discussion

33.P based its case on fraudulent misrepresentation and through a claim of proprietary constructive trust.

34.At the hearing, Ms Ip confirmed that P no longer relied on her alternative claim based on a total failure of consideration, given that there was no pleaded case on unjust enrichment.

35.In Chinabase Holdings Ltd v Robert Chun Chung Ip [2016] 4 HKLRD 304 DHCJ Manzoni SC observed at 318 and 319 that:

“43. … There is no dispute between the parties that to sustain a valid cause of action for fraudulent misrepresentation or deceit the plaintiff must plead, and prove, that:

(1) There has been a representation of fact;

(2) The representation was made with knowledge that it is false (or at least made in the absence of a genuine belief that it is true, recklessly ie not caring whether it is true or false);

(3) The representation was made with the intention that it should be relied upon by the plaintiff in the manner which resulted in damage to him;

(4) The plaintiff in fact acted upon the false statements; and

(5) The plaintiff has sustained damage by doing so.

…

48. … an essential element of the cause of action for fraudulent misrepresentation or deceit is that the representation must be made with knowledge that it is false, or at least recklessness as to whether it is true or false. Put simply this means that there must be some element of a “guilty mind” in the 1^st defendant in order for the cause of action to be sustained…”

36.In Wing Wah Love Technology Service Ltd v Wong Ka Yan [2023] HKEC 1030 at §22, DDJ Joseph Vaughan cited Xie Li Xin v Law Ka Yan Thompson [2022] HKCFI 1591 at §183 which set out the elements for fraudulent misrepresentation, or the tort of deceit, as set out in Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29 at 35 and 36:

“15. In order to examine whether the claim on fraud has been properly pleaded it is necessary to remind oneself the elements of fraud or deceit. …

(1) There must be a representation of fact made by words or conduct.

(2) The representation must be made with knowledge that it is or may be false. It must be wilfully false, or at least made in the absence of any genuine belief that it is true.

(3) The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him.

(4) It must be proved that the claimant has acted upon the false statement.

(5) It must be proved that the claimant suffered damage by so doing.”

37.Ms Ip referred me to §17 of the SOC where it is pleaded that the Representations made by Allen on behalf of D are all false in that (a) the account on the Website did not generate any profit for P or at all; and (b) the so-called investments on the Website did not exist at all, and there was never any account details and/or mandate for which P could have the opportunity to inspect. Accordingly, the Representations were made with knowledge that it is or may be false, or at least made in the absence of any genuine belief that it is true.

38.I accept P’s case regarding the fraud. The elements of fraudulent misrepresentation have been made out on the pleading. P’s account of events leading to the Wrongful Transfers to D’s Account and of her attempt to request the Website for repayment of her injected funds in her account on the Website (summarised in §§17 to 28 above) in reliance on the Representations was uncontested due to the non-appearance of D. I see no reason not to accept P’s case on the facts.

39.When property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient so that the property is recoverable and traceable in equity: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, per Lord Browne-Wilkinson at 716C-D, applied by Recorder Lisa Wong SC in Mesirow Financial Administrative Corporation v Best Link Industrial Co Limited, unreported judgment HCMP 1846 of 2015 (25 January 2016) at §33; Sakhrani J in Michael Chen Kang Huang v Peter Lit Ma [2009] 6 HKC 191 at §§199I-200C.

40.In Guaranty Bank and Trust Company v ZZZIK Inc Ltd, unreported judgment of DHCJ Cooney SC HCA 1139 of 2016 (18 July 2016), DHCJ Cooney SC at §28 referred to Lord Browne-Wilkinson’s proposition in Westdeutsche Landesbank Girozentrale which was applied in Papamichael v National Westminister Bank plc [2003] 1 Lloyd’s Rep 341:

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

41.Insofar as the proposition specifically relates to fraud, it has been accepted as representing the law: see §29 of Guaranty Bank and Trust Company.

42.The authors of Goff & Jones The Law of Unjust Enrichment 10^th Ed, at §§8-69 and 8-70 state as follows:

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

43.The authors of Chitty on Contracts 35^th ed, Vol 1, §33-178 state as follows:

“Equity has employed the mechanism of a trust in order to compel the ‘trustee’ to convey property to the ‘beneficiary’ where, quite apart from the intention of the parties, the rules of Equity decide that property is in the wrong hands. The constructive trust arises by operation of law in a number of circumstances, including … where property has been obtained by fraud, … or where the defendant has received property unconscionably, such as where the defendant is aware that money had been paid by mistake, or was aware that an asset which had been transferred pursuant to a void contract was not available for him to treat as his own.” (my underlining)

44.I consider that the Sum transferred to D’s Account was obtained by fraud. P, who has been defrauded, may trace property into the hands of the recipient D. P can follow the Sum in equity through D’s Account where it has been mixed with other monies as equity treats monies in D’s Account as charged with the repayment of P’s Sum: Commerzbank AG v IMB Morgan plc [2005] 2 All ER (Comm) 564 at 572 at §36.

45.Ms Ip confirmed at the hearing that there is no evidence that “Allen” was D. However, the Sum was transferred to D’s Account. Even if the recipient of the Sum was not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the money, the defrauded claimant has a tracing remedy: Guaranty Bank and Trust Company at §32; Commerzbank AG at §36.

46.Knowledge does not have to be acquired at the time of receipt, it can be acquired subsequently while the money is in the recipient’s hands: Lewin on Trusts 20^th ed, §42-083.

47.D has knowledge of the fraud because of the Writ of Summons and SOC, and the Summons for judgment, which all have been served, as confirmed by the 1^st and 2^nd Affirmations of Yip Ki Chung. However, D has neither paid nor made any attempt to pay the Sum to P.

48.Furthermore, I consider it unconscionable for D to retain the Sum. P has neither had any business nor personal dealings with D prior to the Wrongful Transfers. There was no legitimate reason for D to receive the Sum from P.

49.I find that D holds the funds on trust for P and the funds are recoverable and traceable in equity.

50.P also seeks an order that D, whether by himself or by his servants or agents or otherwise howsoever, be restrained from disposing of or otherwise dealing with the Sum they received or their traceable proceeds otherwise than by delivery up or transfer to P. I note that P did not previously apply for an interlocutory injunction.

51.It is well-established that the court has jurisdiction to grant permanent injunctions in default judgments on an O 19 r 7 application: see Hong Kong Civil Procedure 2024, Vol 1 at §19/7/17; Biostime International Investment Ltd at §§12-13 and 15; Times Square Ltd at §14; Tang Chok Lam v Che Wen Seen Yuen Co Ltd [2011] HKEC 1381 at §15.

52.Hong Kong Civil Procedure 2024, Vol 1, at §19/7/17 refers to an action for damages for libel and for injunction. The defendant made default of notice of intention to defend and the service of a defence. The plaintiffs abandoned their claim for damages and under O 19 r 7, the court granted the injunction (Dykes v Thomson [1909] WN 104).

53.On the facts as pleaded, I am satisfied that P is entitled to an injunction to restrain D (whether by himself or by his servants or agents) from disposing of or otherwise dealing with the Sum they received or their traceable proceeds. I consider there is a risk of future interference with P’s proprietary rights by transferring the Sum if an injunction is not granted to restrain D from disposing or otherwise dealing with the Sum: see Snell’s Equity 34^th Edition at §18-027.

Declaratory relief

54.P seeks a declaration to the effect that the Sum is held by D as constructive trustee in favour of P.

55.Had D appeared and defended these proceedings and the Court found the facts asserted by P after trial, P would be entitled to have declared that the Sum was held by D on trust for P.

56.It is not the normal practice of the court to make a declaration without a trial. However, this is a rule of practice and not a rule of law: Guaranty Bank and Trust Company at §37; Mesirow Financial Administrative Corporation at §35. The paramount duty of the court is to do the fullest justice to P to which she is entitled.

57.I also note Hong Kong Civil Procedure 2024, Vol 1, at §19/7/20 which observes that in cases which concerned alleged email frauds where a proprietary claim was asserted, the courts have granted declaratory relief in the default judgment context in order to secure the plaintiff’s proprietary as opposed to merely personal claim, particularly given that the defendant may have other creditors: Sultana Distribution Services Inc v Hongkong Fuheng Technology Co Limited [2018] HKCFI 1480; Spruce Australia Pty Ltd v New Senjia Trade Limited [2019] HKCFI 101; Mesirow Financial Administrative Corp.

58.The practice will give way where the plaintiff has a genuine need for declaratory relief which the court can properly grant on the merits of the case: Hong Kong Civil Procedure 2024, Vol 1, at §15/16/2; Lai Wai Kuen v Wong Shau Kwong [2004] 4 HKC 528.

59.In this case, P has a genuine need for declaratory relief. Very little is known about D, except that it has received the Sum obtained by fraud. The right asserted by P was one of title to property which I have found in P’s favour.

60.An order against D for the return of the Sum would put P in the position of an unsecured judgment creditor of D. Such an order would not give P any prior or specific rights over the Sum. P should not face any risk of having to pursue its claim in competition with other creditors.

61.A declaration by the court that the funds are held on trust for P will earmark the funds as P’s property and put them out of the reach of any other creditors of D.

62.I consider it necessary to make the declaration sought in order to protect P in the event that other creditors appear. In the fraud and proprietary constructive trust cases of Mesirow Financial Administrative Corporation (at §38) and Guaranty Bank and Trust Company (at §38), the court expressed similar concerns and also considered a declaration to be necessary and appropriate. See also Hong Kong Civil Procedure 2024, Vol 1, at §19/7/20.

Vesting order

63.P also seeks leave to join the Respondent in these proceedings for the purpose of giving effect to the vesting order.

64.P relies on O 15 r 6(2)(b)(ii) of the RDC which provides that:

“(2) Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application —

…

(b) order any of the following persons to be added as a party, namely –

…

(ii) any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.” (my underlining)

65.Under O 15 r 6(3) of the RDC,

“An application by any person for an order under paragraph (2) adding him as a party must, except with the leave of the Court, be supported by an affidavit showing his interest in the matters in dispute in the cause or matter or, as the case may be, the question or issue to be determined as between him and any party to the cause or matter.”

66.There was no affidavit filed in support of the joinder of the Respondent. Given the Respondent has indicated by letter dated 14 May 2024 that it would adopt a neutral stance regarding the vesting order and joinder, I allowed P to add the Respondent as a party without an affidavit with leave of the Court. The Respondent is required to be a party to be added for the purpose of giving effect to a relief requested by P, namely the vesting order.

67.In the Summons, P relies on section 52(1)(e), 52(2) and 52(5) of the Trustee Ordinance. Under section 52(1)(e) of the Trustee Ordinance, an order would vest the right to sue for and recover the funds, as a thing in action, in P. The court may make a vesting order as to trust property where it is impossible or difficult to deal with the property without such an order: Halsbury’s Laws of England (5^th ed, 2024), Vol 98, §329, as referred to in Guaranty Bank and Trust Company at §39.

68.I do not think section 52(2) of the Trustee Ordinance is relevant as it refers to a transfer of stock and not to a thing in action.

69.Pursuant to section 52(5) of the Trustee Ordinance, the court may make declarations and give directions concerning the manner in which the right to transfer the thing in action vested under the provisions of the Ordinance is to be exercised.

70.D has not appeared in these proceedings. The Sum has not been repaid to P, despite the Wrongful Transfers having taken place in June and July 2022 and P reported the fraud to the police. It would be difficult, if not impossible, to deal with the Sum. I consider there is no prospect that D would be willing to transfer the funds to P.

71.I shall make the vesting order sought to direct the Respondent to pay P the Sum.

Disposition

72.For all these reasons, I formally make an order in terms of P’s Summons save that in §1 of the Summons “Acknowledgment of Service and” be deleted; and in §4 of the Summons, the addition of the words “to direct the Respondent to pay P the Sum.”

73.Costs should follow the event. I order that costs of this action, including the costs of this application, be paid by D to P to be summarily assessed.

74.For the purpose of the summary assessment of costs, I direct that:-

(a)  P do serve its statement of costs on D and file an affidavit of service confirming the same within 3 days hereof;

(b)  D do, if so advised, lodge and serve its list of objections to P’s statement of costs within 5 days thereafter; and

(c)  Assessment of costs shall be conducted on paper without a further hearing.

75.I thank counsel for her helpful submissions rendered to the court.

Ms Lilian Ip, instructed by Yip, Tse & Tang, for the Plaintiff

The Defendant was not represented and did not appear

The Respondent was not represented and did not appear