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Email fraud cases: How best to recover the scammed funds

2020-09-01

Introduction

Not surprisingly, cybercrimes come along with the development of technology. The Hong Kong courts have considered many cases of cybercrimes, in particular email scams, in which the fraudsters found ways to deceive the victims into transferring money to unauthorised accounts in Hong Kong. Such bank account holders might be part of the fraud group as perpetrators or colluders, or they might be innocent recipients.  Deputy High Court Judge Cooney SC in Halliburton BV Merkezi Hollanda Ankara Merkez Turkiye Subesi v Sheng Yi (HK) Trade Co Ltd and Ors HCA 1627/2016 laid the foundation of a procedural “shortcut” for the victims to recover their defrauded money by obtaining a vesting order under s.52 of the Trustee Ordinance (Cap. 29), which has the effect of compelling the recipient’s bank to transfer the money back to the victim’s account, alongside the obtaining of a default judgment. This is a “shortcut” way of getting the scammed money back because the other route would be to sue the defendants for the scammed money that they have received, obtained a judgment and then apply to enforce the judgment by applying for an order to compel the bank to pay the scammed funds to the victim to satisfy the judgment. By the granting of a vesting order under the judgment granted, it would compel the bank to pay over the scammed funds without the need to apply to enforce the judgment. Since then, this procedural shortcut has not been questioned until lately.

This article is going to look at several recent cases, in which the courts conducted a meticulous examination in relation to the applicability of vesting orders under s.52 of the Trustee Ordinance in the email scam scenarios.


Statutory provision

The rationale of applying the Trustee Ordinance is because equity will impose a constructive trust on the fraudsters or the subsequent recipients of the defrauded money or assets, and hence they become “trustees” holding the defrauded money for and on behalf of the victims (and therefore have a duty to refund the money back to the victims).

The relevant provision is s.52(1)(e) of the Trustee Ordinance “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” then 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”.


Applicability of the Trustee Ordinance

800 Columbia Project Company LLC v Chengfang Trade Ltd and others
 [2020] HKCFI 1293

In 800 Columbia, the focus of the issue was whether the wording under s.52(1)(e) is wide enough to cover the defendants in email scam cases for the victims to be granted a vesting orders to recover funds.

Mr. Recorder Eugene Fung SC in this case took the view that as s.52(1) explicitly states “in any such person as the court may appoint”, a vesting order may only be granted to persons who are appointed to be trustees by the court. However, in email scam cases, according to Mr. Recorder Eugene Fung SC, the fraudsters and any subsequent recipients become constructive trustees by way of a declaration made by the court, and therefore such scams are not contemplated by s.52(1). Accordingly, s.52(1) of the Trustee Ordinance shall not be invoked in the context of email scams.

Wismettac Asian Foods Inc. v United Top Properties Ltd and others
[2020] HKCFI 1504

A different view was taken in the subsequent case of Wismettac Asian Foods, in which Deputy High Court Judge Paul Lam SC agreed to the analysis in 800 Columbia, to the extent that a declaration that a person has become a constructive trustee does not mean that the person has been “appointed” by the court as a trustee for the purpose of s.52(1) of the Trustee Ordinance.

Having said that, the Deputy Judge took the view that s.52(1)(e) is in contemplation of the vesting by way of operation of law in a constructive trust scenario. He stressed that the phrase “a thing in action is vested in a trustee whether by way of mortgage or otherwise”, in particular the word “otherwise” is capable of including vesting by way of operation of law. He further stressed that such a constructive trust is not created by a declaration by court upon the victim’s application for default judgment, but 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.

The merits in Wismettac Asian Foods were later adopted in 2 other recent similar cases: Jensonn Power Systems Pte Ltd v Lishan Zhi Trading Co. Ltd [2020] HKDC 629 and Concrete Waterproofing Manufacturing Pty Ltd v Changxuan Co. Ltd [2020] HKDC 547.

TOKIĆ, D.O.O. v Hongkong Shui Fat Trading Limited
[2020] HKCFI 1822

In contrast, in the most recent case of TOKIĆ, D.O.O., Deputy High Court Judge Douglas Lam SC dismissed the application for a vesting order on the basis that the court had no jurisdiction to do so. He revisited the judgment in 800 Columbia and added that the defendants in email scams were “no more than recipients of proceeds of fraud and not ‘true’ trustees (i.e. the one holding equitable interests), constructive or otherwise.… they are merely required by equity to account as if they were trustees or fiduciaries, although they are not.”  

According to the Deputy Judge, s.52(1)(e) is a provision in the Trustee Ordinance which should be guided by the scope of its definitions provided under s.2. As the scope of trustees under the Trustee Ordinance should only be confined to “true” trustees, the wording “or otherwise” used in s.52(1)(e) as discussed above in Wismettac Asian Foods cannot be said to have an extended the scope of the “trustee” concept wider than the one provided for the entire Trustee Ordinance where no express provision is suggesting otherwise.


Commentary

In light of above these recent conflicting authorities, it appears that whether the court has the jurisdiction to make a vesting order in email fraud cases is unsettled.

Despite the court in Wismettac Asian Foods held that the phrase “or otherwise” under s.52(1)(e) of the Trustee Ordinance shall be construed to cover the granting of vesting orders in email fraud cases, “or otherwise” shall be construed together with the phrase “in any such person as the court may appoint” as a whole. As such, it would be odd to suggest that the two phrases in turn provide for different scopes of application when there is nothing in the wording explicitly suggesting that the provision can be used partially for enforcement purposes. In other words, it does not seem apt to say that constructive trusts are covered in the first-half of the provision whereas it is excluded in the second-half.

Additionally, it is a sound observation by Mr. Recorder Eugene Fung SC in 800 Columbia that there are two types of constructive trustees, in relation to which, in the context of email scams, the defendants in email scams (recipients of the unauthorized/unlawful funds in their bank accounts) are those who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. This is in contrast with the other type of constructive trustees who have lawfully assumed their obligation over the trust property. In the latter case, such “constructive trustees” are viewed as “true” de facto trustees who may fall within the meaning under s.52(1)(e) of the Trustee Ordinance.

In this connection, even if arguably the phrase “or otherwise” is wide enough to cover constructive trustees as suggested in Wismettac Asian Foods, such constructive trustees may not be deemed as a “true” trustee for the purpose of s.52(1)(e).

Taking a step back, with regards to the definition of trustee as provided in s.2 of the Trustee Ordinance, which is only confined to “true” trustee, there seems no convincing reason or necessary need to expand the meaning of trustees out of its scope under s.2 to cover constructive trustees derived in email frauds under s.52(1)(e).

With that said, the law in this area remains unsettled. In the view of the above discussed conflicting cases, for persons who have, in the unfortunate event, succumbed to being victims of email scams, adopting the traditional route of enforcing a judgment by way of obtaining garnishee orders may be the safer approach in order to safely secure enforcement actions against the recovery of funds from banks.




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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 © 2020


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