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30 Nov 2020

Four recent civil cases concerning the recovery of the proceeds of fraud

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In May 2017 we published the article ‘Hong Kong Courts change their practice to do the fullest justice to victims of fraud’ (see here) where we explained the grounds on which Deputy High Court Judge Cooney SC1 had given a very helpful judgment to an email fraud victim.

The Judge granted a declaration to the effect that the contents of the defendant’s Hong Kong bank account the victim had mistakenly paid money into was held under a constructive trust for their benefit2 and, because the defendant was absent, made a vesting order requiring the bank to repay the victim the account’s contents relying on section 52(1)(e) of the Trustee Ordinance (“TO”) to do so which provides: 

In any of the following cases, namely – …

(e) where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise and it appears to the court to be expedient…

the court may make an order vesting the right to transfer or call for a transfer of stock, or to receive the dividends or income thereof, or to sue for or recover the thing in action, in any such person as the court may appoint.’

Since 2017, multiple victims of email frauds have been able to make quick and efficient recoveries along the lines of the above. We have frequently acted for clients doing so.

In this article we explain how and why vesting orders have recently come under considerable scrutiny in Hong Kong’s High Court. Whether a fraud victim can now obtain such an order is extremely uncertain.   

Recent cases against vesting orders

In 800 Columbia Project Company LLC v Chengfang Trade Ltd. & Ors [2020] HKCFI 1293 (24 June 2020), the plaintiff was an American construction company whose bank was deceived after its receipt of fake emails to remit in excess of US$5.6 million to the Hong Kong bank account of Chengfang Trade Ltd. which thereafter was dissipated into a further 10 other bank accounts.

All the defendants were absent and default judgments were sought. Recorder Eugene Fung SC held while it was not normal for the court to make a declaration without a trial, particularly where the defendant had acted fraudulently, the rule can be departed from when there was a genuine need.

Here the Recorder was prepared to declare: (i) these defendants were the fraudulent recipients of various sums from the plaintiff which had to be returned; and (ii) the sums were held on a constructive trust for the plaintiff3. With respect to the application for vesting orders, the Recorder stated the court’s jurisdiction was not engaged.

Section 52(1) TO envisaged a vesting order being made on a change in trusteeship. The Recorder found while the defendants’ participation in the unlawful misappropriation of the plaintiff’s property meant they were required in equity to account for the property ‘as if they were trustees or fiduciaries’ they were not trustees and never intended to be, so did not come within section.

Further, while section 52(1)(e) TO may be satisfied when ‘a thing in action is vested in a trustee’, following his default judgments the Recorder found legal title to the contents of the accounts remained with the defendants while equitable title was divested and held on trust for the plaintiff. He did not believe the right to call for payment from the bank had been vested in the defendants by virtue of the Recorder giving default judgments.

The Judge felt the absence of a vesting order did not prejudice the plaintiff unduly because the default judgments he’d granted could be enforced in garnishee proceedings under the Rules of the High Court. In the meantime, these sums were largely safe being earmarked as the plaintiff’s property.    

In Tokic, D.O.O. v Hongkong Shui Fat Trading Ltd. [2020] HKCFI 1822 (4 August 2020), the plaintiff’s accounts department was deceived by someone impersonating their CEO and accordingly paid just under US$2 million to Hongkong Shui Fat Trading Ltd. which was thereafter dissipated to numerous parties which the plaintiff had no prior dealings with.

Deputy High Court Judge Douglas Lam SC granted declarations to the effect that the sums were held on constructive trust and following ‘800 Columbia’ he declined to make vesting orders.  

The Judge found that the TO was concerned with the administration of true trusts4 not constructive trusts where the court has declared that a wrongdoer is to account for certain stocks or choses in action (in the case the right to call for repayment from the bank) ‘as if he were a trustee’ and which did not vest the property in them ‘as a trustee’ or change what was an exercise of equity’s remedial jurisdiction into an institutional trust to which the TO applied.

Alternative remedy?

While the Judge declined to make a vesting order, the plaintiff did not come away empty handed needing to bring separate garnishee proceedings. In cases where the defendants were unlikely to comply with any order of the court, section 25A of the High Court Ordinance (“HCO”) provided: (i) when the court has given a judgment or order directing a person to execute any conveyance, contract or other document which was not performed; (ii) then the court may order that the conveyance, contract or other document be executed by such person as the court may nominate; and (iii) it will have the same effect as if it had been executed by the correct person.

Accordingly, the Judge ordered that the defendants were to execute documents which transferred the contents of their accounts back to the plaintiff and failing that the plaintiff was permitted to seek a further order under section 25A HCO from him.

In Essilor Manufacturing (Thailand) Co. Ltd. v G. Doulatram & Sons (HK) Ltd. & Anor. [2020] HKCFI 1790 (3 September 2020), Deputy High Court Judge Rachel Lam SC heard that the plaintiff was the subject of a fraud perpetrated by one of its employees and various unknown parties whereby 87 payments were made from the plaintiff’s account with JPMorgan Chase in New York between October and December 2019. The payments were made to 5 recipients in Singapore and then paid onto 40 companies in Hong Kong.

Default judgments and vesting orders were sought.

Concerning the default judgments, the Judge stated: (i) declaratory relief is not given as of right; and (ii) the court exercises its discretion and will only grant such relief pre-trial where it is necessary in order to secure the plaintiff’s proprietary not personal claims. Here to put the funds out of reach of any competing claims by other creditors of the defendants, the Judge held that the proprietary relief was justified and granted the default judgments.

The plaintiff’s applications for vesting orders proved less than straightforward and as a result of the above judgments they were ultimately withdrawn.

Recent case for vesting orders

In Wismettac Asian Foods Inc. v United Top Properties Ltd. & Ors [2020] HKCFI 1504 (10 July 2020), Deputy High Court Judge Paul Lam SC heard that the plaintiff’s CEO received emails and instructions purportedly from the Chairman of the plaintiff’s parent and external counsel concerning a ‘confidential acquisition’ of a business and pursuant to which in December 2019 he caused to be paid in excess of US$10.2 million in reliance on these false instructions.

Default judgments were given. Whether or not vesting orders could be made was a matter of section 52(1)(e)’s construction, namely: (i) was a thing in action vested in a trustee by way of mortgage or otherwise; and (ii) was it expedient to make the order.

As to the debt being ‘vested in a trustee by way of mortgage or otherwise’ the Judge stated that the meaning of the word ‘trustee’ in section 2 TO meant ‘trust and trustee’ and was extended to implied and constructive trusts unless the context was otherwise.

In considering whether the context of fraud cases required the exclusion of the constructive trustee, the Judge held it did not and noted the phrase ‘or otherwise’ used in section 52(1)(e) was extremely broad and the trust was imposed by the operation of law when the fraudster or the subsequent recipient received the victim’s money or its traceable proceeds in their accounts. The Judge further stated the court’s declaration was merely affirming the legal position not creating the trust5.

The Judge found the first condition was satisfied. With respect to email frauds, the Judge felt the second condition was also easily satisfied when the defendant was absent because in such circumstances how otherwise would a victim get their money back.

Correct procedure for a vesting order

After considering he could make vesting orders, the Judge then stated it is wrong in principle and can be confusing in practice to make default judgment and vesting order applications together. Instead, the fraudster or the subsequent recipient, and the bank, should be named as the respondents to a separate application in which the plaintiff shall adduce evidence proving that the current balance in the bank account represented the plaintiff’s money or its traceable proceeds and that it has been held on constructive trust.

Noting that Recorder Eugene Fung SC was a renowned expert in this area of the law and his judgment in ‘800 Columbia’ may be preferred (it has been), the Judge held that garnishee proceedings may be best uncontroversial way to make a recovery. Because the plaintiff was the beneficial owner of the money in the defendant’s bank account following the default judgments the Judge made no third party could claim a competing interest in them while the garnishee proceedings took place.

Conclusions

In the last three years seeking vesting orders following frauds (mostly email related) was an expeditious way for a victim to get back their assets once the court had declared them to be held by the defendant as constructive trustee.

Pending appellate guidance, at the moment vesting orders are unlikely to be given.

While victims of email frauds may continue to seek declarations, one of the few points the Judges mentioned above that they could agree about was that garnishee proceedings were an uncontroversial way for fraud victims to make a recovery thereafter.

A reasonably quick recovery may now be possible under section 25A HCO, however Deputy High Court Judge Paul Lam SC in ‘Wismettac’ stated this was an enforcement mechanism, convoluted and he was not sure it was right.



1 See: Guaranty & Trust Company v ZZZIK Inc. Limited & Anor. [HCA 1139/16].

2 Proprietary remedies have advantages over personal remedies including: (i) priority over general creditors in an insolvency provided the original property (or its traceable proceeds) can be identified; (ii) a longer limitation period; and (iii) the right to trace the product of their original property, which can be worth more.

3 The Recorder accepted Lord Browne‑Wilkinson’s comments (that stolen money is traceable in equity which imposed a constructive trust) in Westdeutsche Bank v Islington LBC [1996] AC 669 had been followed in default judgment cases in Hong Kong so he proceeded to do so.

4 Those with powers and duties such as the power to invest, sell or deal with the trust property and the power to retire or appoint new trustees.

5 Lord Browne-Wilkinson had held in Westdeutsche Bank v Islington London Borough Council: “Under an institutional constructive trust, the trust arises by operation of law … from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past.”

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