EMPIRE SUMMIT INTERNATIONAL LTD (IN COMPULSORY LIQUIDATION) v. SUN HONGMEI

HCA 282/2022 and HCMP 729/2023
(Heard Together)

[2024] HKCFI 907

HCA 282/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTIONS NO 282 OF 2022

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AND

HCMP 729/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 729 OF 2023

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(Heard Together)

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J U D G M E N T

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1.  In March 2016, Wang Chiyu transferred HK$40,433,247.93 of Empire Summit’s monies to Sun Hongmei’s bank account no. 861516702581 (the account) with International and Commercial Bank of China (ICBC). The monies were transferred in three tranches. Wang was Empire Summit’s sole director at the time and there was no reason at all for the transfer. Thus, in acting as he did, Wang breached his fiduciary duty to Empire Summit. The monies in Sun’s account were consequently imbued with a resulting trust in Empire Summit’s favour.

2.  The transferred monies were used to pay off a debit balance of HK$6,450,152.33 in the ICBC account. Sun transferred HK$16 million to another account and dissipated the same. The remainder of the transferred monies was used to acquire 19,887,592 Greater China Financial Holdings Ltd shares and 4,504,000 ShiFang Holding Limited shares (collectively, the shares). On 10 April 2019, the 4,504,000 ShiFang shares were consolidated into 1,126,000 ShiFang shares. The shares are currently held in a margin account no. 201165 (the OSL account) with Orient Securities (Hong Kong) Limited (OSL). The transferred monies being imbued with a trust, Empire Summit must be entitled to claim an equitable title in the shares and to trace into the shares held by OSL.

3.  In these proceedings, Empire Summit is seeking judgment in default of acknowledgement of service against Sun. More specifically, Empire Summit seeks the following relief by way of a default judgment against Sun:

(1)  A Declaration that Sun holds the sum of HK$40,433,247.93 (or its traceable proceeds or substitutes, including but not limited to 19,887,592 shares in Greater China Financial Holdings Limited and 1,126,000 shares in ShiFang Holding Limited) on trust for Empire Summit.

(2)  An Order for Sun to remit or transfer the sum (or its traceable proceeds or substitutes, including but not limited to the shares held on trust for Empire Summit) to Empire Summit.

(3)  An Order that all necessary accounts and inquiries be taken to enable Empire Summit to trace and recover the sum (or its traceable proceeds or substitutes).

(4)  Equitable compensation, an account of profits, or damages to be assessed.

(5)  Relief by way of an equitable charge over Sun’s other shares (as identified in paragraph 6 of the Statement of Claim) held in the OSL account to the value of HK$6,450,152.33.

(6)  Alternatively, restitution of the sum by Sun to Empire Summit.

(7)  An equitable lien over the shares up to the value of the sum.

(8)  Interest at the commercial rate of 6.25% (that is, 5.25% (the Hong Kong dollar prime rate on 22 March 2016 when the last tranche of monies was transferred) + 1%) per annum on the amount of HK$22,450,152.33 from 22 March 2016 until the date of judgment and thereafter at judgment rate until full payment.

(9)  Costs of this action, including all reserved costs.

4.  The Writ and Statement of Claim were served by various modes (including substituted service) on Sun in Hong Kong and mainland China. But Sun has not acknowledged service. Consequently, for the purposes of obtaining judgment in default, the matters pleaded in the Statement of Claim must be assumed to be true.

5.  On relief (1), HK$40 million does not suddenly turn up in one’s bank account. Sun must have realised that he was not entitled to the transferred monies. If he were truly innocent of complicity with Wang, he should at least have conducted reasonable inquiries to ascertain the source of the transferred monies. He would have known or ought to have realised that the monies had been transferred to his ICBC account in breach of Wang’s fiduciary obligation to Empire Summit. Accordingly, as a matter of law, Sun held the monies not just on resulting, but also on constructive, trust. I therefore make the Declaration sought in relief (1).

6.  Reliefs (2) and (3) are consequences of the Declaration in relief (1). Having granted relief (1), I also grant the Order sought by reliefs (2) and (3). As for relief (4), having granted reliefs (1), (2) and (3), it seems to me superfluous and unnecessary to grant relief (4).

7.  Relief (5) in effect seeks an order that Empire Summit have an equitable charge over Sun’s other shares (as identified in paragraph 6 of the Statement of Claim) in the OSL account, up to the amount of HK$6,450,152.33 (that is, the amount of the debit balance which a part of the transferred monies was used to discharge). This relief follows logically from relief (1). I therefore grant an order that Empire Summit have such an equitable charge.

8.  Relief (6) seeking restitution, is an alternative relief. Given what I have already granted, it seems superfluous and unnecessary. As a result of Reliefs (1), (2), (3) and (5), Empire Summit is in effect obtaining restitution of the amount by which Sun was unjustly enriched through Wang’s wrongful transfer of monies. Similarly, given reliefs (1), (2) and (5), it seems redundant and unnecessary to grant an equitable lien over the shares as sought by relief (7).

9.  The interest claimed by relief (8) is reasonable and usual in commercial cases. I grant the same. The amount of US$20,450,152.33 is obtained by adding up the HK$6,450,152.33 used to pay off the debit balance in the account and the HK$16 million that Sun dissipated.

10.  As for the costs sought under relief (9), Empire Summit is entitled to its costs, including reserved costs. Given the fraud involved, costs are awarded on an indemnity basis.

11.  Empire Summit also applies by Originating Summons for (1) an order vesting the shares in Empire Summit and (2) an order that OSL transfer the shares to it. OSL has consented to the vesting and the transfer. I therefore order the vesting and the transfer. As agreed between Empire Summit and OSL, the reasonable costs incurred by OSL in complying with my Order for transfer are to be borne by Empire Summit.

12.  For completeness, I note that the prayer for vesting in the Originating Summons is premised on the court’s powers under the Trustee Ordinance (Cap. 29) (TO). That provides:

“52. (1) In any of the following cases, namely:

....

(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... .”

13.  In my view, TO section 52(1)(e) applies to the present circumstances. Since the transferred monies were imbued with a trust from the moment when Wang wrongly remitted the same to the account, Sun held the monies as trustee for Empire Summit. Thereafter, Sun used the monies to purchase the shares. The shares were therefore likewise held on trust by Sun for Empire Summit. OSL, with whom the shares were deposited by Sun, must in turn therefore ultimately have held the shares on trust for Empire Summit.

14.  TO section 2 defines a “trustee” as follows:

“... the expression trust (信託) and trustee (受託人) extend to implied and constructive trusts ... .”

The reference to “trustee” in section 52(1)(e) thus encompasses trustees under an express, resulting (implied), or constructive trust. The words “or otherwise” in section 52(1)(e) are wide enough to cover the situation in which shares are vested in a person such as Sun or OSL as trustee under a resulting or constructive trust.