CONCRETE WATERPROOFING MANUFACTURING PTY. LTD. v. CHANGXUAN CO., LTD

DCCJ 1065/2020

[2020] HKDC 547

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1065 OF 2020

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JUDGMENT

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Background

1.  The plaintiff is a private limited company incorporated in Australia which manufactures and distributes waterproofing and concrete repair products worldwide.  The defendant is a private limited company incorporated in Hong Kong in April 2016.  It is the plaintiff’s case that it had never had any dealings with the defendant and it fell victim to an email fraud and was induced into paying US$112,700 into the defendant’s bank account no 012-878-2-010038-1 (the “Defendant’s Account”) held with Bank of China (Hong Kong) Limited (the “Bank”).

2.  On 18 December 2019, Mr Robert Saric (“Mr Saric”), the Finance Manager of the plaintiff, received an email from someone (the “Fraudster”) purporting to be Mr Robert Godson, the Managing Director of the plaintiff from the email address “android.techbox2gulshantaufiquetextile.com”.  The Fraudster wrote in the 1^st Email: “Robert, Process the forwarded attached invoice asap.  Beneficiary Details is included in the attachment….”.

3.  On the same day, the Fraudster sent another email to Mr Saric attaching an invoice purportedly issued by the defendant under invoice number 09137 dated 2 December 2019 (the “Invoice”).  Mr Saric replied to the email, stating that “Invoice printed off and awaiting your signature to authorise set up of payment.”

4.  The Fraudster replied by email that: “Rob, The Invoice is Authorized, Just go ahead with the payment and send the remittance attachment as soon as its paid…. as you can see from the Invoice date is due for payment, Go ahead for now and I will sign later.”

5.  The plaintiff thus transmitted US$112,700, being 50% of the total amount of the Invoice, to the Defendant’s Account.

6.  The plaintiff discovered the fraud when the real Mr Robert Godson (“Mr Godson”), using his genuine email address at “robg@xypex.com.au” replied to Mr Saric’s confirmation of transfer of funds and informed Mr Saric that he had never requested the plaintiff to make payment pursuant to the Invoice.  Mr Godson asked the payment to be stopped immediately.

7.  The matter was reported to the Hong Kong Police and the New South Wales Police respectively on 20 December 2019 and 3 January 2020.  The Hong Kong Police emailed on 7 February 2020 and informed the plaintiff that they had intercepted the transfer.  On 5 March 2020, the Bank informed the plaintiff that the Defendant’s Account still had US$112,686.14 remaining.

The plaintiff’s claim

8.  By a Statement of Claim issued on 13 March 2020, the plaintiff seeks the following relief:-

(1)  a declaration that the sum of US$112,686.14 is held by the defendant on trust for the plaintiff;

(2)  an order that the sum of US$112,686.14 be returned to the plaintiff forthwith;

(3)  further or alternatively, an order that the defendant do pay to the plaintiff damages in the sum of US$112,700;

(4)  interest;

(5)  costs

9.  By a summons dated 2 June 2020 (the “Summons”), the plaintiff applies for the following orders:-

(1)  Default judgment under Order 13 Rule 5 and Order 19 Rule 7 of the Rules of the District Court.

(2)  A vesting order pursuant to section 52(1)(e) and 52(5) of the Trustee Ordinance (Cap 29) in respect of US$112,686.14.

(3)  Leave to join the Bank for the purpose of giving effect to the vesting order.

(4)  An order directing the Bank to pay US$112,686.14 into an account designated by the plaintiff.

Service

10.  In the present case, I am satisfied that the plaintiff has served the documents in accordance with the requisite requirements, and has shown that the documents had come to the attention and knowledge of the defendant, but it had no intention of defending the present action for the following reasons:-

(1)  On 17 March 2020, the plaintiff left a sealed copy of the Writ of Summons and 3 copies of the Acknowledgement of Service Forms at the proposed registered address of the defendant (as shown in the records of the Companies Registry in the Incorporation Form dated 26 April 2019).  The documents were delivered and not returned. Section 827 of the Companies Ordinance (Cap 622) has been complied with.

(2)  On 2 June 2020, the plaintiff sent by ordinary post a letter to the defendant, again at its registered address, informing it of the plaintiff’s application for default judgment and today’s hearing.  The documents were delivered and not returned. Section 827 of the Companies Ordinance (Cap 622) has been complied with.

Legal principles

11.  Having been satisfied as to service, I turn to the legal basis of the plaintiff’s application.

12.  The court has the power under Order 32 rule 5(1) to proceed at its first hearing or any resumed hearing in the absence of a party thereto if, having regard to the nature of the application, it thinks it expedient to do so.  As noted above, I am satisfied that notice of the time appointed for this adjourned hearing was duly served on the defendant.  I am also satisfied that in view of the nature of the present case, it is expedient to proceed with the plaintiff’s application.

13.  The deadlines for the filing of acknowledgment of service, notice of intention to defend or defence have passed and no filing of any document has been made by the defendant, to indicate that it intends to defend the plaintiff’s claim. The plaintiff is therefore entitled under Order 19 rule 7 to apply for judgment in default of defence being filed.

14.  The plaintiff’s prima facie case has been borne out by the documentary evidence exhibited to his affirmation.  I accept the plaintiff had been defrauded as alleged.  Where property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient so that the property is recoverable and traceable in equity[1]

15.  DHCJ Marlene Ng (as she then was) in Heitkamp & Thumann KG v Living Profit Trading Develop Limited and Ors[2] held that regarding a claim based on unjust enrichment, money paid under a mistake of fact is prima facie recoverable provided that (a) the payer did not intend the payee to have the money in any event, (b) the money was not paid for good consideration and (c) the payee has not in good faith changed his position.

16.  I am satisfied that the plaintiff has a genuine need for the declaratory relief that the defendant is liable to account to the plaintiff for the sum of US$112,700 together with interest; and that US$112,700 or any part thereof in the Defendant’s Account was held by the defendant as constructive trustee for the plaintiff.  Subject to whether there were existing funds in the defendant’s Account, the plaintiff may be entitled to a proprietary claim to the US$112,686.14.  Without the declaration of a constructive trust, the plaintiff may eventually lose out to other creditors of the defendant[3].

Vesting Order

17.  The Bank had notice of the Summons and had indicated by letter dated 10 June 2020 that they took “a neutral stance” towards the plaintiff’s application for a vesting order, subject to the Bank’s costs being paid on an indemnity basis. There was also no objection from the Bank being joined for the purposes of carrying out the vesting order, should one be granted.  However, such consent from the Bank alone does not automatically render the plaintiff entitled to an order pursuant to section 52(1)(e) of the Trustee Ordinance (Cap 29) (the “Trustee Ordinance”) vesting the defendant’s right to recover US$112,686.14 from the Bank to forthwith release and return the said US$112,686.14 to the plaintiff.

18.  The issue of whether a plaintiff who is a victim of fraud can apply for a vesting order pursuant to section 52(1)(e) of the Trustee Ordinance directing a bank to transfer the sums standing in a fraudster defendant’s account to the plaintiff has generated conflicting authorities, both from the District Court as well as the Court of First Instance in the High Court.

19.  In the past, I had held, for various reasons, that a vesting order should not be granted in cases with similar backgrounds.  Recently there are two conflicting Court of First Instance decisions on the topic.  With the benefit of the comprehensive arguments in these two decisions, I turn to consider whether a vesting order should be granted in the present case.

20.  Recorder Eugene Fung had recently in the case of 800 Columbia Project Company LLC v Chengfang Trade Ltd and Anor[4] explained why the court’s jurisdiction under section 52(1)(e) of the Trustee Ordinance is not engaged:-

“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 (19^th 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 (20^th 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.”

21.  Deputy High Court Judge Paul Lam SC in Wismettac Asian Foods, Inc v United Top Properties Ltd and Others[5] gave a comprehensive overview of the authorities on the topic and came to the opposite conclusion:-

“33. In my view, whether a vesting order can be made in these circumstances must depend on a proper construction of s. 52 of the TO, in particular, s. 52(1)(e). The Plaintiff also seeks on rely on s. 52(1)(b)(iv). It is essential to construe these statutory provisions properly because they prescribe the jurisdiction of the court. As Mummery LJ held in Orwin v Attorney General [1998] 2 BCLC 693 at 699f:

“The jurisdiction of the court only exists, however, if the application falls within s 51.  If, on the facts and law, it does not fall within that section there is no other more general jurisdiction which the court can exercise to make a vesting order.”

He said further at 702a-b:

“…First, although the court has a wide discretion under s 51 as to whether to make a vesting order, it only has jurisdiction to exercise that discretion in the specified cases…”

34. S. 52 of the TO is based on, and virtually identical to S. 51 of the Trustee Act 1925. As observed in Lewin on Trusts (20^th ed., 2020), vol. 1, §17-031, the jurisdiction of the court to make vesting and similar orders is codified in ss. 45 to 56 of the Trustee Act 1925. For example, s. 44 of the Trustee Act 1925, which is the same as s. 45 of the TO, deals with vesting orders of land. S. 51 of the Trustee Act 1925, and s. 52 of the TO, deals with “stock and thing in action”.

35. One should begin with s. 52(1) which provides that in the following cases as stipulated in sub‑sub‑sections (a) to (e), the court may exercise the power set out in that sub‑section. It is critical that, in my view, the five different cases set out in those sub‑sub‑sections should be construed disjunctively. In other words, so long as the facts of a particular case fall within any one of the five different cases, the court’s statutory power may be invoked.

36. The first case, as stated in sub‑sub‑section (a) is, apparently the most common situation 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.  A vesting order is necessary and consequential to the appointment of a new trustee in many cases because, in law, upon appointment, the new trustee only acquires the right to call for the trust assets to be vested in him but he obtains neither equitable nor legal interest in the property.  In my recent judgment in Re Tam Kwong Cheung [2020] HKCFI 1387 at §§40-42, I exercised the court’s power under ss. 52(1)(a) and (5) to direct that the balance in a bank account be transferred to a new trust account to be opened by the new trustee appointed by the court.  In cases involving email frauds, the fraudster and the subsequent recipient of the victim’s money would, in law, become the constructive trustees of the money and its traceable proceeds.  However, it would be wrong in substance and also a misuse of language to say that, by declaring that the fraudster and the subsequent recipient hold the victim’s money and its traceable proceeds on constructive trust, the court has “appointed” them as trustees.  In this respect, I agree with §§16(7) and (8) of Mr Recorder Fung SC’s judgment in 800 Columbia Project Company LLC.  Hence, I take the view that s. 52(1)(a) cannot be invoked in these circumstances.  This is not, however, the end of the matter.  It is necessary to consider the four other cases mentioned in s. 52(1), which, I wish to stress, does not require or involve the appointment of a new trustee.

…

41. What is left is s. 52(1)(e). This is indeed the sub‑sub‑section used by the court in the precedents where vesting orders were granted.  It covers the situation “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”.  This statutory provision may be invoked if two conditions are satisfied:

(a)    First, a thing in action is vested in a trustee whether by way of mortgage or otherwise; and

(b)    Second, it appears to the court to be expedient.

42. As to the first condition, the credit balance in a bank account represents a debt owed by the bank to the account holder.  Such debt is plainly a chose in action.  The real question is whether such debt “is vested by way or mortgage or otherwise” because of the order made by the court as a result of the default judgment application that the defendant in this sort of cases shall hold the victim’s money that it has received or its traceable proceeds on constructive trust.  In Prescient Corporation, H H Judge Andrew Li held in §30 that the sum in question was “vested in the defendant by way of constructive trust”.  However, it appears that Mr Recorder Fung SC was the only judge who had considered this issue in detail.  He came to a different conclusion which is indeed the main reason why he declined to follow other cases where vesting orders had been made.  In §16(9) of his judgment in 800 Columbia Project Company LL, he held (and I quote again) that:

“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.”

43. To construe the phrase “a thing in action is vested in a trustee whether by way of mortgage or otherwise”, it is essential to note an important point.  As to the meaning of the word “trustee”, s. 2 of the TO provides that, unless the context otherwise requires, the expression “trust and trustee” extend to implied and constructive trusts. S. 68(17) of the Trustee Act contains the same definition. In Orwin v Attorney General [1998] 2 BCLC 693 at 699e, commenting on the court’s jurisdiction to make a vesting order under s 51 of the Trustee Act 1925, Mummery LJ held that:

“In most cases this jurisdiction is invoked in the case of an express trust, but it is clear from the definition that, in cases where as a matter of fact and law an implied or constructive trust is established, a vesting order can be made.”

44. Therefore, it seems clear that the word “trustee” in s 52(1)(e) would extend to a constructive trustee unless the context otherwise requires.  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 to me that “otherwise”, meaning “any other way”, is capable of including vesting by way of operation of law.  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.  The principle is what Lord Browne-Wilkinson held in Westdeutsche Bank v Islington London Borough Council [1996] AC 669 at 716C-D:

“… when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity.”

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.  Mr Chiu drew my attention to Nanus Asia Co Inc v Standard Chartered Bank [1988] HKC 377 at 399E where Deputy High Court Judge Cruden held that:

“Where a constructive trust exists, the legal title to property vests in one person and the equitable title in another.”

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.  As Lord Browne-Wilkinson held in Westdeutsche Bank v Islington London Borough Council at p  714G:

“Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past.”

45. For these reasons, I take the view that the context does not require excluding constructive trustee from the meaning of “trustee” in s. 52(1)(e).  In these circumstances, the current balance in the defendant’s bank account, insofar that it represents the victim’s money or its traceable proceeds, is vested in the defendant as a constructive trustee by operation of law.  Most importantly, I am satisfied that, looking at the matter in this way, it falls within the case of “a thing in action is vested in a trustee by way of mortgage or otherwise”.  In other words, the first condition in s. 52(1)(e) has been satisfied.  On this crucial point, with the greatest respect, I beg to differ with the conclusion of Mr Recorder Fung SC in 800 Columbia Project Company LLC.

46. The second condition under s. 52(1)(e) is that “it appears in the court to be expedient” to make a vesting order.  This is not a pure question of primary fact.  It involves a judgment by the court as to whether the test of expediency is satisfied on the facts of the case.  Nevertheless, in cases involving email frauds, this condition can be easily satisfied.  As pointed out in similar cases where the court granted vesting orders, as the defendant would invariably fail to appear and cannot be located, it would be virtually impossible to procure the defendant to transfer the remaining balance in the bank account to the victim without the court’s assistance.

47. In this respect, it is pertinent to consider what vesting order the court may make.  S. 52(1) provides that the court may make an order vesting the right to sue for, or recover the thing in action in any such person as the court may appoint.  S. 52(5) provides further that “The court may make declarations and give directions concerning the manner in which the right to transfer any … thing in action vested under the provisions of this Ordinance is to be exercised”.  In International Automotive Components Group sro, §22, I observed that, in this sort of cases, the victim does not merely want to have the right to claim the debt payable by the bank to be vested in its name; it wants to have the money back immediately.  In the past, it appears that the court would only vest the property in a new trustee to be appointed instead of the beneficiary directly. In Re Holland (1881) 16 Ch D 672, a trustee became lunatic; the petitioner, who was the beneficiary, asked that the property be vested in himself.  Cotton LJ refused to do so and held at p 673:

“The Petitioner must have had some object in creating the trust, and he now seeks to put an end to it. The Court, in acting under the Trustee Acts, never administer trusts, but only appoints new trustee when requisite; and even if there is jurisdiction to make the order asked for, which I doubt, I do not feel disposed to exercise it. The petition must stand over, with liberty to amend it by making it ask for the appointment of a new trustee, and a vesting order; and when the order has been made appointing a new trustee, and vesting the estate in him, the Petitioner can take such steps as he may be advised to obtain a reconveyance, and put an end to the trust.”

However, more recently, the court is prepared to take a more liberal approach in appropriate circumstances. In Re G (ET) (a patient) and Re G (TJ) (a patient) [2007] EWHC 1861 (Ch), the trustees were a patient and an accountant who could not be found; the trust property was shares in a company.  The trust provided that, in the circumstances, which had happened, the shares should be held for two beneficiaries in equal shares.  One of the beneficiaries proposed that the court made an order under s. 51 of the Trustee Act 1925 vesting one half of the shares in him and one half in the other beneficiary.  The other beneficiary proposed to appoint a new trustee and to leave it to the new trustee to administer and wind up the trust.  Morgan J held at §82 of his judgment that:

“the simpler course of vesting the shares in [the beneficiaries] severally is to be preferred. That avoids the need to appoint a new trustee. There is no demonstrated need for an investigation as to whether the trust includes other assets or whether any equalization is called for. Accordingly, I will make an appropriate vesting order to this effect.”

In Underhill and Hayton: Law Relating to Trusts and Trustees (19^th ed, 2016), §73.20 at p 1056, in the footnote relating to s.  51(1) of the Trustee Act 1925, the author states that:

“Nowadays to save expense and circuitry of action, if there is a beneficiary who is absolutely entitled, the court will normally vest the property directly in such beneficiary rather than in trustee for him as was the old practice.”

S. 52(1) of the TO indeed provides expressly that, upon satisfaction of the conditions mentioned above, the court may make an order vesting the right to sue for or recover the thing in action “in any such person as the court may appoint”. The phrase “in any such person as the court may appoint” is, prima facie, wide enough to include the beneficiary of a constructive trust. The court’s power in this respect is however subject to two provisos.  The second proviso concerning joint property is irrelevant for the present purpose.  The first proviso is that where the vesting order is consequential on the appointment of a trustee, the right shall be vested in the persons who, on the appointment, are the trustees.  In the present context, the vesting order would not be consequential on the appointment of a trustee.  It follows that the court is at liberty to vest the thing in action in the beneficiary.  This proviso also reinforces my earlier view that s.  52(1)(e) may be invoked in cases where no new trustee is appointed.

48. To complete the picture, s. 57(1) provides that:

“An order under this Ordinance … concerning any … thing in action subject to a trust, may be made on the application of any person beneficially interested in the … thing in action…”

This provision puts beyond doubt that, in the present context, the victim, being the person beneficially interested in the balance in the bank account, has the locus standi to apply for a vesting order.

49. Having considered these authorities, I have decided to withdraw the reservation I 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.

50. All in all, I have come to the conclusion that, in these circumstances, the court has the power to make a vesting order in respect of the balance in the bank account held by the defendant as constructive trustee.”

Analysis

22.  If I understand it correctly, the crux of why Recorder Fung and DHCJ Lam SC came to opposite conclusions lies in whether a fraudster defendant, who is made a constructive trustee by operation of law would trigger the court’s jurisdiction under section 52(1)(e):-

(a)   whether one should interpret s 52 independently and read s 52(1)(a) to (e) disjunctively (as DHCJ Lam SC did at §35), which suggests where a thing in action is vested in a trustee (including implied trustee or constructive trustee), the court may make an order vesting the right to recover a thing in action in any person the court may appoint;  or

(b)  whether one should consider what sections 45 to 55 of the Trustee Ordinance (including section 52) envisage – Recorder Fung seems to be of the opinion that these provisions envisage a vesting order to be made upon a change in the trusteeship, rather than upon the court making a declaration that a defendant holds certain sums of money in a bank account on a constructive trust for a plaintiff, or a person becoming a constructive trustee by the operation of law.

23.  The approach taken by DHCJ Lam SC seems to follow the literal rule of statutory interpretation, whereas the approach taken by Recorder Fung seems to take the purposive approach.

24.  Ultimately one needs to decide whether one should read into section 52(1)(e) words “upon a change in trustees” and “by the new trustee” so that it reads: “where, stock or a thing in action is vested in a trustee upon a change in trustee where 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 being the new trustee as the court may appoint…”

25.  Some support for taking the purposive approach can be seen in Underhill and Hayton Law of Trusts and Trustees[6] and The Law of Trusts[7].  Section 51 of the Trustee Act 1925, which is the equivalent to section 52 of the Trustee Ordinance (Cap 29) is grouped under the heading: “Vesting of Trust Property in New Trustees”. 

26.  However, the learned authors did not expressly consider whether the relevant section would apply to situations where trust property becomes vested by the operation of law in a fraudster as a constructive trustee, except (as noted by DHCJ Lam SC) by indicating in the footnote, that “nowadays to save expense and circuitry of action, if there is a beneficiary who is absolutely entitled, the court will normally vest the property directly in such beneficiary rather than in trustees for him as was the old practice.”

27.  The statement in the footnote stems from the English Court of Appeal case of Orwin v A-G[8], where Mummery LJ noted that the definition of “trust” and “trustee” extend to implied and constructive trusts.  He further noted that: “In most cases this jurisdiction is invoked in the case of an express trust, but it is clear from the definition that, in cases where as a matter of fact and law an implied constructive trust is established, a vesting order can be made.  The jurisdiction of the court only exists, however, if the application falls within s. 51.  If on the facts and law, it does not fall within that section there is no other more general jurisdiction which the [court] could exercise to make a vesting order.”

Nature of constructive trusts in these contexts

28.  In the interpretation of section 52 of the Trustee Ordinance, it may be helpful to consider the nature of the constructive trust imposed upon a fraudster defendant in an email scam setting.

29.  In Hotung & Anor v Ho Yuen Ki[9], Cheng JA examined the nature of a bare trust:-

“It is one in which property is vested in one person on trust for another, the nature of the trust not being prescribed by the settlor but being left to the construction of the law, as where property is transferred to T ‘on trust for B absolutely.’ In such a case, T must permit B to enjoy the property, and must obey his instructions as to disposing of it. … Snell para 6-30

In case of bare trustee, the beneficiary may call for a conveyance of the legal estate at any time, and the trustee must comply.  In the meantime the trustee has no duties to perform and must deal with the trust property in accordance with the instructions of the beneficiary: Hanbury & Martin on Modern Equity (16^th ed) p 71.

In Halsbury’s Laws of England (4^th ed) (2000 Reissue) Vol 48, para 650, a bare trustee is described as ‘a person who holds property in trust for the absolute benefit and at the absolute disposal of other persons who are of full age and sui juris in respect of it, and who has himself no present beneficial interest in it and no duties to perform in respect of it except to convey or transfer it to persons entitled to hold it, and he is bound to convey or transfer the property accordingly when required to do so.”

30.  As such, the nature of the constructive trust imposed upon a fraudster defendant is a bare trust and the beneficiary has the absolute right to call for the transfer of the funds in the defendant’s account. 

31.  When one takes into account this absolute right of the beneficiary to call for a transfer of funds, and section 57(1) of the Trustee Ordinance where a beneficiary can apply under the Trustee Ordinance for an order under the Trustee Ordinance, it lends support to the argument that Section 52(1)(e) covers the situation where a constructive trust is imposed on a fraudster defendant the instant it induced a plaintiff to transfer the sums by fraudulent means.

32.  Further, as shown in other statutes, where it is intended that a vesting can only be made to a newly expressly appointed trustee, or specifically to a beneficiary,  it is expressly provided:-

(1)  Section 33(3) of the Probate and Administration Ordinance (Cap 10)(the “PAO”): “The court may, if satisfied that the due and proper administration of the estate and the interests of the persons beneficially entitled thereto so require, suspend or remove an executor or administrator…and provide for the succession of another person in place of such executor or administrator and for the vesting in that other person of any property belonging to the estate.”  This contemplates a vesting being made from one trustee to another trustee (not to a beneficiary).  The power to vest is limited to “that other person” – being the newly appointed person.

(2)  Section 66(3) of the PAO: “An assent to the vesting of a legal estate shall be in writing signed by the personal representative, and shall name the person in whose favour it is given, and shall operate to vest in that person the legal estate to which it relates; and an assent not in writing or not in favour of a named person shall not be effectual to pass the legal estate.”  This contemplates the vesting from an administrator or executor to a beneficiary.

There is thus a split power in the PAO.  In contrast, there is no such dichotomy contemplated in the Trustee Ordinance and section 57 of the Trustee Ordinance expressly allows a beneficiary to apply for an order under it. 

33.  Based on the above analysis, it seems that there is more support for the interpretation adopted by DHCJ Lam SC. 

34.  However, my observations and analysis in this instance can only be considered as obiter because I will decline to order a vesting order in the present case whichever interpretation is adopted.

35.  As observed by DHCJ Lam SC in Wismettac Asian Foods, Inc (supra.):-

“50. It is, however, important to bear in mind that it is not necessarily the case that any remaining balance in the defendant’s account is subject to a constructive trust. This will be the case if and only if the remaining balance represents the money received from the victim or its traceable proceeds. In practice, it is possible that, after the fraudster, or the subsequent recipient, receives the victim’s money or its traceable proceeds, there are deposits and withdrawals before the remaining balance is frozen by an injunction; and it is also possible that, there are already pre-existing deposits in the relevant bank account which would be mixed with the money belonging to the victim (as pointed out by Deputy District Court Judge Vincent Lung in Primeway International Ltd v Yi He (HK) Trading Co Ltd at §34). Deputy High Court Judge Leung was plainly right in holding in SBM Bank (Mauritius) Ltd v Warner Trading Ltd and others, §19 that:

“It 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 …”

A vesting order can only be made if it can be proved that the balance in the bank account in question indeed represents the victim’s money or its traceable proceeds.

51. It is also necessary to bear in mind that, in an application for a vesting order, as highlighted in some of the authorities, it is necessary to join the bank as a party. In respect of the chose in action in issue i.e. the debt represented by the credit balance in the account, the bank is the debtor.  It is entitled to be heard, and it must be joined before an order can be made to direct it to release the money to the victim.”

36.  As the bank was not joined, and more importantly, as there was no evidence before the court that proves the remaining balance in the Defendant’s Account represents the money from the plaintiff or its traceable proceeds, I do not think it is appropriate to grant a vesting order in the circumstances.  The plaintiff ought to recover the US$112,700 via garnishee proceedings, following the procedure prescribed by Order 49.

Orders

37.  In the premises, I make the following orders:-

(1)  a declaration that the defendant is liable to account to the plaintiff for the sum of US$112,700 together with interest. Interest to be calculated at HSBC prime rate + 1% from 18 December 2019 up to the date of judgment, thereafter at judgment rate.

(2)  a declaration that the US$112,700 or any part thereof in the defendant’s Account was held by the defendant as constructive trustee for the plaintiff.

(3)  the defendant shall pay and return the said US$112,700 (together with interest accrued thereon) to the plaintiff forthwith.

38.  The defendant is to pay the plaintiff’s costs of these proceedings, to be taxed if not agreed.