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