Jurisdiction of the Court to grant a vesting order in fraud cases calls for appellate clarification
Introduction
In the case of fraud where the defrauded sum is remitted from the victim
to the fraudster’s bank account, it remains unsettled whether the court has the
jurisdiction to grant a vesting order pursuant to
s.52(1)(e) of the Trustee Ordinance (Cap. 29) (the “TO”) to the victim for the release of the defrauded sum from the
bank. In
our previous article “Email fraud cases: How best to recover
the scammed funds”, we have discussed the uncertainty in the
this area. In
the recent case of Flora Education Ltd
v Yuet Co Ltd [2023] HKDC 394, the District Court of Hong Kong (the “Court”) considered the 2 conflicting
lines of authorities in the Court of First Instance of Hong Kong, and once again concluded
that the issue would benefit from appellate guidance or clarification.
Background
The present case is a paradigm email fraud
case. The plaintiff is a Hong Kong company providing educational services (the
“Plaintiff”) which regularly placed
orders for textbooks from its supplier (the “Supplier”). When the Plaintiff placed orders from the Supplier on
or about September 2021, a fraudster impersonated the staff of the Supplier and
provided the Plaintiff with a fake bank account number, to which the Plaintiff
made 2 remittances with a total amount of HK$336,987.01 (the “Remitted Sum”). Upon investigation of the
fraud, it was discovered that the fake bank account which had been frozen by
the Police belonged to a Hong Kong company, Yuet Co Ltd (the “Defendant”). The Plaintiff hence
applied to the Court for a declaratory relief (asking the Court to say that the
Remitted Sum belongs to the Plaintiff) and a vesting order that the Remitted Sum
be returned to the Plaintiff.
No notice of intention to defend has been given by the Defendant nor the garnishee
bank.
Declaratory
relief
When considering whether the Plaintiff is
entitled to the declaratory relief, the Court had no difficulty in concluding
that it was unconscionable for the Defendant to retain the Remitted Sum, as the
Defendant would have been put on notice that the remittances from the Plaintiff
were suspicious when the Police froze its bank account. Further as the
remaining balance of the Defendant’s bank account exceeded the Remitted Sum,
there is no issue identifying the traceable proceeds of the fraud. The Court
considered it an appropriate case for summary determination pursuant to Order 28 rule 4 of the Rules of District Court
(Cap.336H), and that the declaratory relief shall be granted to the Plaintiff.
Vesting
order
Conflicting lines
of authorities
The Court however came to a fork in the
road when considering whether the Plaintiff is entitled to a vesting order. Pursuant to s.52(1)(e) of the TO, where stock or a thing in
action (e.g. money and funds) 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. The Court recognised that
there are two conflicting lines of first instance decisions upon the rule of
vesting.
One of the leading case against the
application of s.52(1)(e) of the TO in similar fraud cases as the present is 800 Columbia Project Company LLC v
Chengfang Trade Ltd and Ors [2020] HKCFI 1293. The Court of First
Instance was not satisfied that s.52(1)(e) of the TO shall be engaged as a
defendant holding certain sums of money in a bank account on a constructive
trust for a plaintiff could not be said to have been “appointed” by the court
for the purpose of the TO.
The other line of authorities nevertheless
rule in favour of the application of s.51(1)(e) of the TO. In Wismettac Asian Food, Inc v United Top
Properties Ltd & Ors [2020] 3 HKLRD 732, the Court of First
Instance concluded that the TO is wide enough to accommodate the situation of a
constructive trustee arising by operation of law, such as a proprietary claim
by a victim of fraud to recover property that
is traced into the hands of the trustee. The court may hence make an order of
vesting allowing victims to recover money traced into the account of the
constructive trustee. The Court can direct the garnishee bank to release the
amount to the victims upon the application of s.51(1)(e) of the TO.
The position of Wismettac Asian Food, Inc v United Top Properties Ltd & Ors is further supported by Donald Henry Case v Prolifting International Ltd [2021] 2 HKLRD 16 by the Court, in which it was held that constructive trust comes into existence at the moment the fraudster or the subsequent recipient receives the victim’s money or its traceable proceeds by operation of law. When the court grants a declaration in this respect, it is merely affirming the legal position but is not creating any trust by such order. Besides, the use of the word “or otherwise” in s. 52(1)(e) is wide enough to cover vesting of thing in action in a constructive trustee by operation of law.
Decision
The Court considered that appellate
guidance or clarification on whether s.52(1)(e) of the TO shall be engaged in
similar fraud cases would be beneficial. In the absence of such guidance or
clarification from the Court of Appeal, the Court inclined to follow Wismettac Asian Food, Inc v United Top
Properties Ltd & Ors, which was agreed and preferred in most
subsequent and recent cases and ruled that the Court has jurisdiction to grant
a vesting order in a situation like the present case.
The Court also clarified that it is
usually expedient to make a vesting order when it is impossible or difficult to
deal with the property without such an order. In present case as the Defendant
and its director were absent from the hearing, it would be unrealistic to
expect them to comply with any order
to return the misappropriated funds.
The Court was therefore satisfied that it is appropriate and necessary to
grant the vesting order sought by the Plaintiff.
Key takeaways
The legal position in Hong Kong on whether
vesting order can be granted in the context of fraud remains ambiguous. Although the Hong Kong courts tend to rule in favour of a
grant of vesting order, it is still an area requiring appellate guidance or
clarification. When victims of frauds are in doubt of their legal entitlement
to claim against the defendants for the defrauded sum, it is highly advisable
that they seek opinions from legal professionals.
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2023 |