13 July 2020
‘Email fraud’ or ‘cyber fraud’ has become commonplace in the Court of Hong Kong. Time is always of the essence in order to conduct tracing exercises through what usually involves multiple layers of recipients.
Unsurprisingly, more often than not the relevant fraudsters do not appear in the proceedings. As such, alongside the obtaining of a default judgment, one of the reliefs often sought is to obtain a ‘vesting order’ under section 52 of the Trustee Ordinance (Cap. 29) (“TO”), such that the relevant funds will be transferred directly from the banks (with which the recipient accounts are held) to the victim of the fraud. This is usually considered to be a more expedient alternative to the ‘garnishee’ procedure.
One of the first reported decisions to have adopted such an approach is Guaranty Bank and Trust Company v ZZZIK Inc Limited (Unrep., HCA 1139/2016, 18 July 2016) per Deputy High Court Judge Cooney SC, followed closely by a decision by the same learned Deputy Judge in Halliburton BV Merkezi Hollanda Ankara Merkez Turkiye Subesi v. Sheng Yi (HK) Trade Co., Limited (Unrep., HCA 1627/2016, 24 January 2017). Similar orders were made in, inter alia, SBM Bank (Mauritius) Ltd v Warner Trading Ltd and others  HKCFI 2956.
Recently, in 800 Columbia Project Company LLC v Chengfang Trade Ltd and others  HKCFI 1293 and Wismettac Asian Foods, Inc. v. United Top Properties Ltd and others  HKCFI 1504, Recorder Eugene Fung SC and Deputy High Court Judge Paul Lam SC conducted a meticulous examination of the relevant juridical basis of a ‘vesting order’.
In 800 Columbia, the learned Recorder analysed the provisions of section 52(1) of the TO, before arriving at the conclusion that the Court’s jurisdiction under section 52(1)(e) of the TO is not engaged upon the making of a declaration that a defendant holds certain sums of money in a bank account on a constructive trust for a plaintiff (see the learned Recorder’s detailed analysis at §16).
In Wismettac Asian Foods, the learned Deputy Judge agreed with the analysis in 800 Columbia, to the extent that section 52(1)(a) cannot be invoked in these circumstances. In particular, the learned Deputy Judge agreed that a declaration that a person has become a constructive trustee does not mean that he or she has been “appointed” by the Court to be a trustee for the purpose of section 52 (see 800 Columbia at §§16(7)-(8)).
The learned Deputy Judge then went on to consider whether the remaining parts of section 52(1) may come into play. Eventually, it was held that section 52(1)(e) could be invoked in the present context. Section 52(1)(e) is applicable “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”. After a thorough discussion, DHCJ Paul Lam SC held that section 52(1)(e) does not exclude constructive trustee. In particular, it is worth highlighting the following constituents of the learned Deputy Judge’s analysis at §§43-44:-
(a) The word “trustee” in s 52(1)(e) would extend to a constructive trustee unless the context otherwise requires.
(b) In considering whether the context requires the exclusion of constructive trustee, one must note that the statutory provision prescribe the mode of vesting in the following way ie “by way of mortgage or otherwise”. The phrase “or otherwise” is extremely broad. In general, it means “in any other way” (Packwood v Union-Castle Mail Steamship Co Ltd (1920) 20 TLR 59 at 60). This is precisely what the Chinese version (which is equally authentic) says i.e. “其他方式”. There is no reason why, in this context, the word “otherwise” should not be given its natural and ordinary meaning. In particular, it seems that “otherwise”, meaning “any other way”, is capable of including vesting by way of operation of law.
(c) In a constructive trust arising in this sort of cases, the trust is imposed by the operation of law as a result of which the legal title of the victim’s money or its traceable proceeds is vested in the fraudster or the subsequent recipient but the victim retains or holds the equitable or beneficial interest therein.
(d) In respect of constructive trust which is imposed by law, it is permissible to say that the legal title to the property is vested in the constructive trustee. The constructive trust comes into existence the moment the fraudster or the subsequent recipient receives the victim’s money or its traceable proceeds in their bank accounts by operation of law. When the Court grants a declaration in this respect upon the victim’s application for default judgment, it is merely affirming the legal position but is not creating any trust by such order.
Interestingly, DHCJ Paul Lam SC at §48 “decided to withdraw the reservation [he] expressed in International Automotive Components Group SRO. Under s.52(1), the Court may make an order vesting the trust properly directly in the beneficiary, which would have the effect of putting an end to the trust. In the present context, it would mean that, firstly, the Court is entitled to order that the right to claim the remaining balance in the bank account be vested in the victim, who is the equitable or beneficial owner of the money. Secondly, having regard to the wide discretion given to the Court under s.52(5), the Court may then direct the bank to release the balance to the victim immediately. In other words, the victim is enforcing the chose in action immediately once it is vested in it”.
In addition, the learned Deputy Judge noted that “Deputy High Court Judge Leung was plainly right in holding in SBM Bank (supra.), §19 that “[I]t would be for the plaintiff to establish that such current balances are indeed attributable to the plaintiff as the source of money over which it asserts a proprietary claim …””.
Finally, DHCJ Paul Lam SC helpfully summarised his view on the proper procedure for applying for a vesting order, at §§52-56, which provides a very clear and useful roadmap going forward.
The judgments cited above, particularly the illuminating analyses by Recorder Eugene Fung SC and DHCJ Paul Lam SC, merit close reading for any practitioner interested in this area. In the meantime, however, it appears that the debate remains somewhat unsettled.
From a broader perspective, a lot of parties have perceived ‘email fraud’ as a rather straightforward kind of cases. That is probably right as far as the rather repetitive factual patterns are concerned. However, as demonstrated by the discussion referred to herein, complex legal questions can often arise which certainly warrant particular attention.
Michael Lok (who appeared for the Plaintiff in Halliburton BV* and SBM Bank), Jasmine Cheung (who appeared for the Plaintiff in SBM Bank*) and Euchine Ng (who appeared for the Plaintiff in 800 Columbia) co-authored this article.
*In a related hearing