800 COLUMBIA PROJECT COMPANY LLC v. CHENGFANG TRADE LTD AND ANOTHER

HCA 149/2020

[2020] HKCFI 1293

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 149 OF 2020

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HCA 153/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 153 OF 2020

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HCA 156/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 156 OF 2020

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DECISION

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1.  In these three actions, the plaintiff claims to be a victim of an email fraud and seeks, amongst other things, default judgments against the defendants for various reliefs and vesting orders.  At the hearing on 10 June 2020, I granted the plaintiff default judgments for monetary and declaratory reliefs, but reserved my decision on the claims for vesting orders.  I now give the reasons for my decision for giving the default judgments, and my decision on the vesting orders.

A.      THE RELEVANT BACKGROUND

2.  According to the plaintiff:

(1)  the plaintiff is a company incorporated in Washington for a construction project involving a property in Seattle;

(2)  between 14 and 28 January 2020, using bogus email addresses, certain fraudsters of unknown identity had deceived the plaintiff’s bank into transferring a total sum of US$5,697,724.42 to the defendants in HCA 149/2020;

(3)  very shortly thereafter, the sum was dissipated to, amongst others, the defendants in HCA 153/2020 and those in HCA 156/2020.

3.  The plaintiff has since obtained the following orders from the Hong Kong courts:

(1)  On 7 February 2020, Toh J granted a proprietary and Mareva injunction against the defendants in HCA 149/2020, as continued until further directions following the courts’ closure on 14 February 2020.

(2)  On 13 February 2020, DHCJ MK Liu granted a proprietary and Mareva injunction against the defendants in HCA 153/2020, as continued on 6 March 2020.

(3)  On 18 February 2020, Lok J granted a proprietary and Mareva injunction against the defendants in HCA 156/2020, as continued on 20 March 2020.

(4)  Disclosure orders have been granted against the defendants’ bank, the Bank of China (Hong Kong) Limited (“the Bank”).

4.  In February and March 2020, each of the defendants in the 3 actions was served with a Writ of Summons and a Statement of Claim.  None of them has appeared in the previous hearings in these proceedings, and has not filed any Acknowledgement of Service and Notice of Intention to Defend, or any Defence.

5.  On 15 May 2020, the plaintiff issued 3 summonses seeking, amongst other things, judgments in default and vesting orders.  It has also filed various affirmations in support of its applications.

6.  The Bank has indicated to the plaintiff’s solicitors that it would adopt a neutral position in relation to the plaintiff’s summonses.

B.      DEFAULT JUDGMENTS

7.  In the 3 sets of proceedings, the plaintiff seeks judgments for different sums of money against different defendants, and declarations that the defendants hold the relevant sums as constructive trustees for the plaintiff, and related ancillary orders.

8.  It is not the normal practice of the court to make a declaration without a trial, particularly where the declaration is that the defendant in default of defence has acted fraudulently.  This is, however, only a rule of practice and can be departed from when the plaintiff has a genuine need for the declaratory relief and justice would not be done if such relief were denied.  Where declaratory relief is sought, the court will scrutinise the application for default carefully, and will not hastily grant the relief sought.  The court should not be expected to simply rubber‑stamp the uncontested application.  See Hong Kong Civil Procedure 2020 Note 19/7/20.

9.  The plaintiff issued its summonses for default judgment under RHC Order 13, rule 6 and RHC Order 19, rule 7. RHC Order 13 deals with the situation where a defendant fails to give notice of intention to defend.  As the plaintiff is seeking declaratory relief, I have treated its applications for default judgment pursuant to RHC Order 19, rule 7.

10.  I was satisfied that the plaintiff has duly served the relevant court documents on each of the defendants, and that its applications for default judgments were made after the expiration of the period fixed by or under the rules of court for the service of the defence in accordance with RHC Order 19, rule 7(1).

11.  The plaintiff has pleaded a claim in restitution against each of defendants and I considered it appropriate to grant default judgments for the monetary relief sought.

12.  For the following reasons, I was satisfied that the declarations sought by the plaintiff were appropriate.

(1)  In its statements of claim, the plaintiff has pleaded that each of the defendants has received the relevant sums of money which belonged to the plaintiff, and should hold the same on a constructive trust for the plaintiff.

(2)  In Westdeutsche Bank v Islington LBC [1996] AC 669, Lord Browne‑Wilkinson at 716C‑D said obiter that stolen moneys are traceable in equity, and that equity imposes a constructive trust on the fraudulent recipient when property is obtained by fraud.  It appears that his Lordship considered that the thief’s unconscionable conduct in committing theft and his retention of the stolen property would be sufficient to give rise to a constructive trust.

(3)  In Shalson v Russo [2005] Ch 281, Rimer J at §§110 and 11 declined to follow Lord Browne‑Wilkinson’s dicta that property obtained by fraud is automatically held by the recipient on a constructive trust for the person defrauded.  One of the difficulties identified by Rimer J was this.  A constructive trustee must have legal title to the property subject to the trust.  However, a thief ordinarily acquires no property in what he steals, and therefore cannot possess legal title to, or become a trustee of, the stolen property for the victim.

(4)  In Hong Kong, Lord Browne-Wilkinson’s dicta has previously been followed in default judgment cases.  See eg Michael Chen Kang Huang v Peter Lit Ma [2009] 6 HKC 191 at 199I‑200C (Sakhrani J); Mesirow Financial Administrative Corporation v Best Link Industrial Co Ltd (unreported, HCMP 1846/2015, 25 January 2016) §33 (Recorder L Wong SC); 巨展皮具香港有限公司v 上海兄弟海運有限公司(unreported, HCA 2731/2016, 17 January 2018) §27 (DHCJ K Yeung SC).

(5)  In its pleadings, the plaintiff has alleged that the defendants are the fraudulent recipients of various sums of money, and that it is unconscionable for them to retain them.  It appears that the plaintiff seeks proprietary remedies on two bases: namely that the plaintiff is claiming that the money can be followed into the hands of the defendants (giving rise to a straight-forward proprietary remedy), and/or that the money is held on a constructive trust by the defendants for the plaintiff.  As far the latter basis is concerned, in the light of (a) the Hong Kong default judgment authorities following Lord Browne-Wilkinson’s dicta, and (b) the fact that no submissions have been advanced by the defendants as to why such dicta should not be followed, I was prepared to hold that the plaintiff is entitled to a constructive trust that the defendants hold the various sums of money on trust for the plaintiff.

(6)  There are well-established reasons as to why a proprietary remedy may have certain advantages over a personal remedy.  Where a plaintiff is entitled to bring a personal restitutionary claim and a proprietary restitutionary claim, one such advantage of a proprietary remedy is that the plaintiff may gain priority over the defendant’s general creditors in the event of the defendant’s insolvency if the plaintiff can identify his original property (or its traceable proceeds) in the hands of the defendant.  There may be other advantages where (a) the product of the original property may now be worth more in value than the original property itself, and (b) the limitation period governing the proprietary claim may be longer than that governing the personal claim.  See generally Goff and Jones: The Law of Unjust Enrichment (9th ed, 2016) 37-02.

(7)  I was satisfied that the plaintiff has a genuine need for the declaratory reliefs in these proceedings and justice might not be done if such reliefs were denied.  Accordingly, I granted default judgments in favour of the plaintiff for the declaratory reliefs sought.

C.      VESTING ORDERS

13.  In addition to the default judgments, the plaintiff also sought the following orders from the Court (1) various vesting orders pursuant to section 52 of the Trustee Ordinance (Cap 29) that the defendants’ rights to sue for and recover various sums against the Bank be vested in the plaintiff, and the Bank to transfer the sums directly to the plaintiff (“the Vesting Orders”), (2) the Bank be joined as a respondent in the proceedings for the purposes of complying with the Vesting Orders, and (3) the various injunction orders be continued save that each of them is varied to the extent which allows the Bank to comply with the Vesting Orders.

14.  Section 52(1) of the Trustee Ordinance provides:

“In any of the following cases, namely—

(a) where the court appoints or has appointed a trustee, or where a trustee has been appointed out of court under any statutory or express power;

(b) where a trustee entitled, whether by way of mortgage or otherwise, alone or jointly with another person to stock or to a thing in action—

(i) is under disability; or

(ii) is out of the jurisdiction of the court; or

(iii) cannot be found, or, being a corporation, has been dissolved; or

(iv) neglects or refuses to transfer stock or receive the dividends or income thereof, or to sue for or recover a thing in action, according to the direction of the person absolutely entitled thereto for 28 days next after a request in writing has been made to him by the person so entitled; or

(v) neglects or refuses to transfer stock or receive the dividends or income thereof, or to sue for or recover a thing in action for 28 days next after an order of the court for that purpose has been served on him;

(c) where it is uncertain whether a trustee entitled alone or jointly with another person to stock or to a thing in action is alive or dead;

(d) where stock is standing in the name of a deceased person whose personal representative is under disability;

(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:

Provided that—

(i) where the order is consequential on the appointment of a trustee, the right shall be vested in the persons who, on the appointment, are the trustees; and

(ii) where the person whose right is dealt with by the order was entitled jointly with another person, the right shall be vested in that last-mentioned person either alone or jointly with any other person whom the court may appoint.”

15.  On behalf of the plaintiff, Ms Ng submitted that (1) bank balances are choses in action and such choses in action are vested in the defendants as constructive trustees by operation of law, (2) it is impossible or difficult to deal with such choses in action without a vesting order because there is no real prospect that any of the defendants will voluntarily comply with any direction by the court to transfer the relevant funds held on constructive trust for the plaintiff, and (3) the court in these circumstances should grant an order vesting the right to recover the choses in action in the plaintiff under section 52(1)(e) of the Trustee Ordinance.  She relied a number of Hong Kong cases whereby vesting orders have been granted to the plaintiff in similar email or cyber fraud cases: namely Guaranty Bank and Trust Company v Zzzik Inc Ltd (unreported, HCA 1139/2016, 18 July 2016); Minimax Gmbh & Co KG (Singapore Branch) v Gopom Products Ltd & Another [2019] HKDC 760 (3 June 2019); Comtel Solutions Pte Ltd v Yi Li Trade (HK) Co Ltd & Another [2019] HKCFI 2047 (23 September 2019); Tai Ching Ling v Cai Guo Chuan [2019] HKCFI 2251 (11 September 2019). 

16.  Having carefully considered the matter, I am not satisfied that the court’s jurisdiction under section 52(1)(e) of the Trustee Ordinance is 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.

(1)  Trust property is vested in the original trustees of a trust by virtue of the complete constitution of the trust at the outset.  When a trustee retires from the trust, or a new trustee is appointed, some means must be found to divest the retiring trustee of, or invest the new trustee with, the trust assets.  The mere fact of a valid retirement or appointment having taken place will confer a right on the new or continuing trustee to call for the trust assets to be vested in him.  But in the absence of statutory sanction, the trustee obtains neither equitable nor legal interest in the property merely by virtue of appointment.  Thus, steps must be taken to achieve it separately.  See Underhill and Hayton: Law of Trusts and Trustees (19th ed, 2016) §73.2.

(2)  Where trust property is required to be vested in person(s) who as a result of a change in the trusteeship become the trustee(s), such vesting may be achieved by a vesting order made by the court, particularly when such vesting cannot be achieved by a vesting declaration under section 41 of the Trustee Ordinance.

(3)  The jurisdiction of the court to make vesting or similar orders is codified in sections 45 to 55 of the Trustee Ordinance (which are equivalent to sections 44 to 53 and 55 of the UK Trustee Act 1925): see Lewin on Trusts (20th ed, 2020) vol 1 §17-031.

(4)  The statutory provisions envisage certain circumstances where the legal estate or interest should be conveyed or transferred but the person who should convey or transfer is not a position to do so.  For example, he may be of unsound mind, or he may refuse to convey, or a company may have been dissolved before executing a conveyance that should have been executed (see section 45 of the Trustee Ordinance).  In cases of this kind, the court makes an order whereby the property is vested in such person or persons as the court directs, without any other conveyance, transfer or assignment.

(5)  In view of the above, it appears that the above-mentioned provisions in the Trustee Ordinance (including section 52) envisage a vesting order to be made upon a change in the trusteeship.   

(6)  Indeed, the language in section 52(1) contemplates an appointment of trustee(s) by the court.  Section 52(1) provides that where one of the five conditions in sub-paragraphs (a) to (e) is satisfied, the court may make an order vesting certain right “in any such person as the court may appoint”.  The provisos in section 52(1) place restrictions on persons in whose favour the vesting order may be made, and also relate to situations where there is an appointment of a trustee by the court.

(7)  The court may appoint a trustee under section 37 or section 42 of the Trustee Ordinance, or under its inherent jurisdiction.  However, where a person becomes a constructive trustee pursuant to a declaration made by the court, I do not think he or she can be said to have been “appointed” by the court to be a trustee for the purpose of section 52 of the Trustee Ordinance. 

(8)  There are two kinds of constructive trust.  The first kind comprises persons who have lawfully assumed fiduciary obligations in relation to trust property, but without a formal appointment. They are true trustees, and if the assets are not applied in accordance with the trust, equity will enforce the obligations that they have assumed by virtue of their status exactly as if they had been appointed by deed.  The second kind comprises persons who never assumed and never intended to assume the status of a trustee, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misappropriation of trust assets.  They may be required by equity to account as if they were trustees or fiduciaries, although they are not.  See Williams v Central Bank of Nigeria [2014] AC 1189 at §9 (Lord Sumption JSC).  In either case, it is incorrect in my view to describe a constructive trustee as having been “appointed” as a trustee by the court.

(9)  The condition in section 52(1)(e) may be satisfied when “a thing in action is vested in a trustee whether by way of mortgage or otherwise”.  Ms Ng submitted that this condition is satisfied because the debts owing by the Bank to the defendants (ie choses in action) are vested in the defendants by virtue of my granting of the declarations.  In the present case, before I gave default judgments declaring that the various sums of money are held on a constructive trust by the defendants for the plaintiff, the defendants were the absolute owner of the money in the relevant bank accounts, or more accurately, the absolute owner of the right to call upon the Bank to repay the amount of the credit balance on the relevant bank accounts.  After the giving of default judgments, the legal title in the right to call for repayment would continue to be held by the defendants, but the equitable title in such a right would have been divested from the defendants who would hold the same on trust for the plaintiff.  I do not believe it is apt to say that the right to call for repayment from the Bank was vested in the defendants by virtue of my giving of the default judgments.

(10)  At the hearing, Ms Ng submitted that I should take a liberal view of section 52 of the Trustee Ordinance to hold that it would be appropriate to grant the vesting orders.  In view of the above, I am not persuaded that section 52(1)(e) is properly engaged on the facts of these cases.  In coming to this conclusion, I respectfully decline to follow the various decisions cited to me by Ms Ng (as mentioned in paragraph 15 above) which granted vesting orders pursuant to section 52(1)(e).  It would appear that those decisions were arrived at without the benefit of having considered the matters highlighted above.

17.  For the above reasons, I decline to make the Vesting Orders pursuant to section 52(1)(e) of the Trustee Ordinance as sought by the plaintiff.

18.  For the sake of completeness, I should mention that the absence of Vesting Orders should not materially affect the plaintiff’s position to be paid.  As Ms Ng acknowledged at the hearing, it is open to the plaintiff to commence garnishee proceedings under RHC Order 49 to enforce the default judgments.

19.  To conclude, save and except the orders which I made at the hearing on 10 June 2020 (namely the various default judgments), I make no other substantive order on the 3 summonses dated 15 May 2020 taken out by the plaintiff.  As to costs, I make an order that the costs in the 3 sets of proceedings, including all costs reserved and the costs of and occasioned by its 3 summonses dated 15 May 2020, be to the plaintiff to be taxed if not agreed.