NEC TOKIN HONG KONG LIMITED V. CHEUNG KIN KEUNG AND ANOTHER

HCA1960/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1960 OF 2012

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JUDGMENT

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1. There are two summonses before the court to vary the injunction granted by Andrew Chan J on 19 October 2012 as varied by §1 of the order of Poon J of 26 October 2012 and amended on 2 November 2012 and continued by Poon J on 11 January 2013 (“the injunction order”). The injunction order prohibited each of the defendants from removing from Hong Kong, disposing of or dealing with or diminishing the value of his assets within Hong Kong up to the value of US$6,320,108.94 and ordered the disclosure of information.

2. The plaintiff’s summons dated 16 April 2013 seeks to vary the injunction order by (i) increasing the limit of the injunction order from US$6,320,108.94 to US$6,636,239.66; and (ii) removing the provision for the second defendant’s living and legal expenses (“the provision of expenses issue”).  It also seeks an ancillary order for disclosure to allow the plaintiff to trace its misappropriated funds (“the disclosure issue”).  The first defendant was absent at the hearing.

3. As appears from the second defendant’s summons dated 12 April 2013, he was not only content that the injunction order should continue but also that the amount should be increased as requested by the plaintiff.  The only controversial issues left were the provision of expenses issue and the disclosure issue.  At the conclusion of the hearing judgment was reserved which I now give.

BACKGROUND FACTS

4. The plaintiff, NEC Tonkin Hong Kong Ltd, is a company incorporated in Hong Kong engaged in the business of selling electronic parts and devices to distributors and end-users.  The first defendant was engaged as an accounts clerk with a salary of $12,200 in the accounts department of the plaintiff from 9 April 1997.  He rose through the ranks of his department (which was a small one), becoming the manager of that department on 1 April 2010. He was summarily dismissed 19 October 2012. At that date his salary was $25,800.

5. The second defendant Yip Kwok Keung graduated from the University of Hong Kong in 1999 with a Bachelor of Finance degree.  He obtained a Master of Science (Finance) degree from the Chinese University of Hong Kong in 2004.  From 2 July 1999 to 9 December 2012 he was an account executive/account officer of China Everbright Securities (HK) Ltd and China Everbright Forex & Futures (HK) Ltd.  Since resigning from China Everbright, allegedly due to the pressure and mental distress brought about by this litigation and related police investigations, he is and remains unemployed.

6. There is little evidence of the second defendant’s earnings other than the information contained in 2 joint applications made by the defendants in September 2004 to the Hang Seng Bank for a loan of $4.62 million to be secured by a mortgage to purchase the Sorrento property and the second defendant’s home loan application to HSBC in 2006 to purchase the Arch property.  The earlier joint mortgage application dated 10 September 2004 stated the second defendant’s monthly income as $32,000 but in the second application made 10 days later, on 20 September 2004, his monthly salary was stated to be only $28,386.  Then in the home loan application dated 26 April 2006 made to HSBC for $7 million, his salary was stated to be $89,584 with 2 income sources: his employment by China Everbright and consultancy fees of $58,000 per month from Topwell Electronics (HK) Ltd.  That would make his salary from China Everbright in 2006 about $31,584 per month.

7. The second defendant distances himself from that information in as much as he claimed to have signed all three application forms in blank and that it was the first defendant who had completed the particulars. However he never adduced any evidence as to his earnings.  In the circumstances, it would be reasonable to take his earnings in 2004 to 2006 to be of the order of $30,000 per month, give or take $1500 either way.

8. The first defendant first opened an account with China Everbright in December 2000.  The account executive was none other than the second defendant.  Then in June 2004, the first defendant changed his account to a margin account.  As appears from the handbook for the new account which was signed by the second defendant as the responsible account executive, it was stated that he had known the client i.e. the first defendant for approximately 6 years.  In other words they first met in or about 1998.

9. But in the second defendant’s defence, it was pleaded that he first met the first defendant sometime in 2002.  The second defendant subsequently sought to explain the discrepancy away by saying that what he meant by “met” was when he and the first defendant first started “dating”.  It is the second defendant’s case that he formed an intimate relationship with the first defendant sometime in 2003 and that relationship continued until 19 October 2012.

10. The plaintiff has adduced evidence to show that, to date, the first defendant has misappropriated a total sum of US$6,636,239.66 (or HK$51,099,045.35) from its funds.  The following table which is taken from the first page of Annex I to its skeleton submissions provides a convenient summary:

TOTAL MISAPPROPRIATIONS FOR THE BENEFIT OF BOTH DEFENDANTS

11. A substantial portion of the misappropriated funds went to the second defendant.  The following table (also taken from Annex I) provides a useful summary of the amounts transferred out of the plaintiff’s various bank accounts to the bank accounts of the second defendant as well as payments to third parties for the benefit of the second defendant.  What has not been included in the table below is the sum of $6,192,638 spent on purchases at gold and jewellery shops by the second defendant using a supplementary credit card on the first defendant’s account (see §51 below). When that is taken into account, effectively, approximately two-thirds of the misappropriated funds went to the second defendant.

AMOUNT MISAPPROPRIATED IN FAVOUR OF THE 2^ND DEFENDANT

12. It will be seen from the above table that the second defendant admits to the receipt of HK$24,509,676.03 but that admission was made in response to the amount claimed by the plaintiff in the statement of claim.  That statement of claim has now been superseded by an amended statement of claim showing the revised figure of US$3,728,573.63 (or HK$28,710,016.92) to which the second defendant has yet to respond by filing an amended defence (due 27 May 2013).

13. The misappropriations identified span the period from August 2004 to July 2012.  In fact the plaintiff believes that the misappropriations commenced earlier and is investigating various suspicious transfers made since 15 November 2011.  But the relief sought is not grounded on these earlier transfers.

14. On the facts outlined above, it is the plaintiff’s case that the second defendant had knowledge of the first defendant’s breach of trust, participated in the breach and enjoyed the fruits of those misdeeds.  The second defendant denies that he had any knowledge of the first defendant’s breach of trust.

DID THE SECOND DEFENDANT KNOW?

15. The second defendant’s evidence may be summarised as follows: at the time he met the first defendant, he only knew that the first defendant’s job was in accounting and did not know until later that he was working for a company called NEC.  Even then the second defendant said that he did not know its full name or the nature and scope of the business until he was informed by the police on 19 October 2012.

16. In the course of their relationship, the first defendant also told the second defendant that he was an account manager and that his work was mainly concerned with checking accounting data, that the department was a small one and he was its head and among the top management of NEC.  The second defendant had no specific knowledge of the amount the first defendant was earning and he was never shown the first defendant’s tax returns. The second defendant was told that the first defendant derived his income from salary, freelance accounting work, legitimate profits from selling spare parts of products under the NEC brand and an allowance from NEC by way of reimbursement of entertainment and souvenir expenses against receipts, the allowance granted in lieu of an increment in his salary, and an allowance of a certain amount a month which could be as much as $100,000.

17. The second defendant admits that he was given substantial amounts of money by the first defendant as gifts and support for his living expenses but that given their intimate relationship, he believed it was out of the first defendant’s love and affection for him that these substantial gifts were made.  It is the second defendan’st case that whenever such gifts were made, the first defendant would pay the money or deposit the same into the second defendant’s bank or credit card accounts without any involvement whatsoever on the second defendant’s part.  The second defendant would only be told after such payments or deposits had been made. In other words, he was a passive recipient of the gifts.

18. In §14 of his 4^th  affirmation, the second defendant reiterated §10 of his 3^rd  affirmation to the effect that:

“Exceptionally, in some cases, I would inform [the first defendant] of some of my liability to third parties. Upon hearing this, [the first defendant] would sometimes indicated his willingness to help and sometimes pay such a liability for me. He always shows his kindness to me and helps me to solve my problems. To me, he is an honest and reliable man. In fact, [the first defendant] had always taken a dominant role in our relationship and I had always looked up to him for counsel and guidance. Gradually I got used to rely on help from [the first defendant] to solve the issues I encountered in life. On the other hand, [the first defendant] has always regarded privacy as important in our relationship. He did not talk or share much about his work and business except on a few occasions. I respected his privacy. I trusted and believed what he said to me.”

19. The plaintiff sought to show that the second defendant lied under oath in his affirmations.  It identified 3 such instances:

(i)  Knowledge of the first defendant’s salary

20. In support of his plea that he had no notice of the first defendant’s misdeeds, the second defendant claimed that he had no knowledge of the first defendant’s monthly salary. The plaintiff drew attention to the fact that in the joint mortgage applications, it was stated that the first defendant’s salary was $18,800-$20,500 per month and in the account opening handbook it was stated to be $15,000.  The second defendant’s evidence was to the effect that he had signed those forms in blank because given their relationship he had come to trust the first defendant who had connections with the bank and offered to take care of the matter.  Other than the second defendant’s signatures, it is apparent from the face of the forms that the handwritten entries were in a different hand.

21. It was said that the explanation was stretching one’s credulity.  While it is impossible to reach any firm conclusion based on affidavit evidence alone, I agree that where the party concerned is a well-educated person with tertiary degrees in his chosen discipline of finance, it is highly unlikely that such a person would have acted so imprudently.

(ii)  Knowledge of the full name of the first defendant’s employer

22. The second defendant claimed that he only knew that the first defendant was working for a company called NEC.  It was pointed out that the joint mortgage applications and the securities account handbook both stated the plaintiff’s full name.  But whether or not the second defendant had seen the entries, mentally registering its full name is another matter.

23. As regards the handbook, the difficulty is that the information containing the full name of NEC was part of the original cash account documentation in 2000 that was ‘incorporated’ by reference into the margin account handbook in 2004.  It is unclear when the information in the original account documentation physically became part of the 2004 handbook.  In any event, there is no evidence to suggest that it occurred at the time the margin account handbook was completed and signed.

(iii)  The date the second defendant first met the first defendant

24. Finally, there is the discrepancy between the second defendant’s pleaded defence and the entries in the handbook as to the length of time the second defendant had known the first defendant. See §§ 8-9 above.  The excuse proffered by the second defendant is lame and unconvincing. The second defendant has been less than frank.

25. While the first and third of the instances relied on by Mr Wong SC, counsel for the plaintiff, offer some support for the view that the second defendant might have been less than truthful, in assessing whether or not the second defendant had knowledge of the first defendant’s misappropriations from the plaintiff, it is more helpful to focus on the bigger picture.  For a proper perspective, it is necessary to set the size and frequency of the funds misappropriated for the benefit of the second defendant against the background and known earnings of the defendants during the same period.

26. The table in §11 above shows the amounts misappropriated from the plaintiff’s US $ Savings Account with HSBC, its HSBC Current Account and its Current Account with SMBC and transferred to or applied for the benefit of the second defendant.  The following table adapted from Annex II to the plaintiff’s skeleton submissions gives a breakdown of the misappropriated amounts deposited into the second defendant’s bank account and credit card accounts respectively in favour of the second defendant in each relevant year.  Importantly, it shows the total average amount (expressed in Hong Kong dollars) per month that went into the second defendant’s bank and credit card accounts.

AMOUNTS MISAPPORPRIATED IN FAVOUR OF THE 2^ND DEFENDANT IN EACH RELEVANT YEAR

27. Looking at the last column of that table, it will be seen that the monthly average of misappropriated funds that found its way into the second defendant’s bank and credit card accounts increased from $642,000 for a 5 month period in 2004 (or $128,400 per month) to almost $153,000 per month in 2005.  It then increased significantly by more than two and a half times to almost $400,000 per month in 2006, a level more or less maintained in subsequent years save for 2009 when the financial crisis was felt.

28. The funds were misappropriated in one of three ways, by:

(1)  transfers from the HSBC US$ savings account into the second defendant’s DBS account;

(2)  cheques drawn on SMBC in favour of the second defendant; and

(3)  cheques drawn on the HSBC current account and applied for the second defendant’s benefit.

29. There are a number of factors that give strong support to the view that the second defendant knew or must have known that the substantial ‘gifts’ made to him by the first defendant did not have a legitimate source:

(1)  No independent and/or private means

   (a)  It is not suggested that either defendant comes from a monied background.  There is no evidence that either of them had independent private means to support their lavish style of living.

   (b)  While much was made of the fact that the second defendant reaped a significant profit totalling about HK$1 million in 2004/2005 from the sale of properties he owned in Banyan Garden and Sky Tower purchased in 2003 and 2004 respectively, that has to be offset against a loss incurred of about HK$0.6 million on the disposal of Dawning Height in early 2004, thus leaving a net gain of only HK$0.4 million.

(2)  Scale of the transfers

   (a)  The amounts involved are very significant sums of money when the second defendant’s own earnings were no more than about $30,000 a month.  Even taking at face value what is said to be the income components of the first defendant’s earnings, it takes some believing that the first defendant was ever in a position to make gifts of that value.

   (b)  The sheer magnitude of the amounts paid into the second defendant’s bank and credit card accounts on an annual basis can be seen from the following table:

Year	Amount in HK$
2004	1.28 m (annualised)
2005	1.83 m
2006	4.55 m
2007	4.54 m
2008	3.77 m
2009	2.75 m
2010	5.30 m
2011	4.98 m

   (c)  Only the seriously wealthy would be in a position to make gifts of that value.

   (d)  In the present case, the second defendant knew that the first defendant was a mere employee who was then only in his early 30s.  Whatever progress he might have made up the corporate ladder, it was wholly improbable that the second defendant with his degrees as Bachelor of Finance and Master of Science (Finance) could have believed that the first defendant was already in the top management of NEC and that, after providing for his own living expenses, the first defendant was able to make gifts of that magnitude.  Given the second defendant’s background and education, not to mention the probability that he had sight of the information in the joint mortgage application, it simply defies belief that he had no inkling of the likely range of the first defendant’s earnings.

(3)  Transfers from the plaintiff’s HSBC US$ savings account

   (a)  The US$2,712,843.28 misappropriated from the plaintiff’s US$ savings account were transferred directly into the second defendant’s DBS account commencing 4 November 2005.  The transfers were made ostensibly to settle alleged invoices issued by the second defendant to the plaintiff said to have been due in favour of the second defendant when (and this is common ground) the plaintiff had no business dealings whatsoever with the second defendant.

   (b)  In respect of each transfer, the second defendant was sent a remittance advice by DBS stating the plaintiff’s name as the ordering party together with the purpose of the remittance and therefore he must have known that the reasons given for the payments were bogus.  Descriptions such as “pay for yr Oct’s invoice”, “pay for May inv” are typical examples.  There were 108 such remittances.  The second defendant could not but have known about these remittances and that the ostensible reasons for them were wholly fictitious.

   (c)  He sought to explain this away by the feeble excuse that the advices had been sent to an address in Chai Wan where his relatives lived which was his former address up until 2000/2001 and that he recalled opening letters that looked like the remittance advices when he visited his relatives at intervals of one or two months.

   (d)  That has the trappings of a cock and bull story.  In his HSBC loan application made in April 2006, the Chai Wan address was given as his home address. Even if, on his case, the first defendant had made that entry, it is hardly likely that the first defendant would have given an out-of-date address given their relationship.

   (e)  But the second defendant admits to having seen at least some of these remittances advices.

   (f)  In my view, the evidence is compelling that the second defendant must have known of these massive and frequent payments into his account and the bogus reasons appearing on the face of the advices justifying the payments.

(4)  Bank statements

   (a) In any event, the second defendant admits that he checked his bank statements online.  Credits of that magnitude and frequency must have attracted his attention.  For the reasons already given, he could not seriously have believed that they were gifts made out of love and affection from the first defendant.

   (b) In the circumstances, the inference is irresistible that the second defendant knew that these were not legitimate payments.

(5)  Transfers from the plaintiff’s SMBC current account

   (a) When the transfers were being made out of the plaintiff’s US$ savings account into the second defendant’s account, transfers were also being made out of the SMBC current account.  See the table in §11 above.  Approximately HK$7.36 million was made directly payable out of that account to the second defendant commencing August 2004 and, in total, a sum of HK$7.12 million was misappropriated to settle his credit card accounts.

   (b) In that connection, reference should be made to the second defendant’s evidence recited in §18 above to the effect that “exceptionally” he would inform the first defendant of some of his liability to third parties.  Notwithstanding that evidence, during the period of 4 months or so from 16 August 2011 to 28 December 2011, the second defendant had forwarded 9 of his credit card statements by e-mail to the first defendant to “follow up”.  That was nothing less than an express invitation to pay and again illustrates the general lack of frankness in the second defendant’s evidence.

   (c) As noted in §17 above, the second defendant portrayed himself as the passive recipient of all this bounty.  He does however admit that two cheques both dated 28 July 2010 for the sums of $38,000 and $76,000 respectively were handed to him by the first defendant. It was said that these represented legitimate profits of the first defendant selling spare parts.  However, that does not explain why the cheques were issued to him rather than the first defendant.  On the hypothesis (which I consider highly unlikely), for present purposes, that the first defendant earned commission from the plaintiff for selling spare parts, it is not believable that the plaintiff would have paid commission due to the first defendant by means of a cheque made payable to the second defendant with whom it had no dealings.

   (d) Further, the second defendant’s explanation does not account for the nature of the numerous other payments into his bank and credit card accounts.

   (e) The second defendant admits that unauthorised cheques have been used by the first defendant to settle his tax bill and commission due to the estate agent regarding the sale of 60A Grand Waterfront Property that he previously owned.

(6)  Transfers out of the plaintiff’s HSBC current account

   (a) As regards the third mode of misappropriation amounting to HK$281,000 via unauthorised cheques, two such cheques both dated 31 March 2010 were made payable to the second defendant’s credit card account.

30. In relation to transfers from the SMBC account into the second defendant’s bank accounts (see §29(5) above), Mr Wong SC submitted that there is evidence to suggest that the second defendant had deposited some of the unauthorised cheques into the bank himself.  Mr Wong drew attention to the fact that the second defendant had endorsed two of the unauthorised cheques.

31. The difficulty I see with that submission is that, other than a single instance, the mobile number written on the back of the cheques is that of the first defendant rather than second defendant and there is no evidence that the endorsement is in the second defendant’s hand.  In the joint mortgage applications, the mobile numbers of both the defendants are clearly stated.  The first defendant’s number ends in “8361” while the second defendant’s ends in “1891”.  It will be seen that the number endorsed on those cheques corresponds to that of the first defendant’s.  In fact there are at least 5 other cheques at the back of which the same mobile number was written.  Two of them (dated 4 May 2007 and 9 August 2007) form part of exhibit KN-84 to Mr Nakano’s 4^th affirmation.  The other cheques are dated 12 June 2007, 3 July 2007 and 20 January 2009(C8/507, 396 and 440).

32. The only example of the second defendant’s mobile number being given is the third cheque dated 19 May 2006 in exhibit KN-84 and drawn on the plaintiff’s SMBC current account for HK$58,000.

33. Mr Wong further contended that some of the cheques were deposited at the United Centre branches of DBS and BOC both of which were in close proximity to the second defendant’s office at Far East Finance Centre.  These are at exhibit KN-58.  I have reviewed the cheques exhibited.  I note that there is a hand written account number on the back of each of cheques but I do not consider that there is sufficient evidence from which one could legitimately infer that the second defendant deposited the plaintiff’s cheques (other than the two cheques mentioned in §29(5)(c) above) into his accounts.  That conclusion however does not detract from the strength of the plaintiff’s case against the defendants.

Topwell Electronics

34. In the second defendant’s application to HSBC for a home loan of HK$7 million to purchase the Arch property in April 2006, it showed that he had 2 sources of income: as employee of China Everbright and as consultant to Topwell Electronics (HK) Ltd. Those consultancy fees were said to be $58,000 per month.  Coincidentally, the second defendant’s HSBC passbook shows that sums of $58,000 were credited to his account from SMBC cheques that match exactly in terms of date and sum his alleged consultancy with Topwell Electronics. Further, HSBC was provided with a false salary statement signed by the first defendant as ‘Administration Manager’ of Topwell Electronics.

35. There is incontrovertible evidence that Topwell Electronics is a figment of someone’s imagination: it is a bogus company and has never existed.

36. The second defendant proclaimed his innocence and sought to put all the blame on the first defendant, using the same excuse that he had for the joint mortgage application, i.e. that he had signed the form in blank and left everything to the first defendant to handle.  But there is a significant difference between the 2006 home loan application and the joint mortgage application in that it is only the second defendant who is the borrower in the former case.  In those circumstances, that HSBC would have accepted an application from a third party rather than the applicant appears somewhat far-fetched.

37. Suffice it to say that on paper, the plaintiff has shown a strong and compelling case that the second defendant must have been involved even if it was the first defendant who had created the false documents and signed the false declaration.  In that regard, the cheque endorsed with the second defendant’s mobile number assumes significance when the number endorsed on all the other cheques was that of the first defendant.  It strengthens that case against the second defendant that he was involved in the misdeeds.

38. There is another point and it is this.  Obtaining a home loan is one thing; repayment is another.  Again, given the second defendant’s background, would he have applied for a loan of that size without working out whether he could afford to do so particularly as there were mortgage repayments to be made on the Sorrento property?  There is a telling lack of evidence from him as to how the repayments were to be financed.

Conclusion

39. The plaintiff has put forward a compelling case. There is sufficient evidence to warrant the inference that the second defendant knew that the lavish and substantial gifts to him did not have a legitimate source.  That may explain why the continuation of the injunction order and the increase in amount were not resisted.

APPLICATION OF MISAPPROPRIATED FUNDS

40. The misappropriated funds have been used for a variety of purposes including the discharge of the second defendant’s credit card liabilities, the settlement of all kinds of liabilities such as service apartment rental, management/service fees, trading of stocks, insurance premium, etc.  But the relief the plaintiff seeks, the assets it is interested in pursuing are not consumables but properties and gold and jewellery acquired with its funds.

41. Throughout the period of misappropriation, the defendants have, between them, acquired a total of 14 properties.  So far as it is identifiable, the second defendant appears to have used the plaintiff’s funds for or towards the purchase of various properties.  §§ 28-45 of the 2^nd affirmation of Katsumi Nakano dated 30 November 2012 set out the evidence relating to the first 5 listed below:

Property	Date of acquisition	Price $m	Date sold	Price $m
The Arch	30.06.06	14.462	18.09.07	15.28
62H Grand Waterfront	17.12.07	3.869	07.04.11	4.05
48C Grand Waterfront	24.09.07	7.615	17.06.09	6.70
30D Cullinan	05.02.10	12.016
17D Waterfront	27.01.11	10.880
Victoria Towers	26.08.11	9.180

42. I am satisfied that a good prima facie case has been established in that regard.  

43. It should be mentioned that it is common ground that the second defendant is the current owner of the flats at 30D Cullinan, 17D Waterfront and Victoria Towers.  On the information presently available, it is not known how the purchase of Victoria Towers (which is mortgage free) was funded.

44. The defendants have also spent over HK$15 million at gold and jewellery shops.  The second defendant alone has made purchases at gold and jewellery shops totalling HK$10,559,703.

THE RELIEF SOUGHT

45. It is the plaintiff’s case that it has a strong proprietary claim.  It is clear from the relief sought in its amended statement of claim that its claim is proprietary: effectively its case is that the defendants took its monies.  The only valid defence to such a claim open to the recipient of the monies is that he is a bona fide purchaser for value without notice.  Leaving notice aside, the second defendant cannot possibly claim to be a bona fide purchaser for value in any event because while love and affection may constitute good consideration, it is not valuable consideration. See Megarry on The Law of Real Property, 8^th Edn at p. 260.

46. Mr Ng who appeared for the second defendant contended that the claim is not proprietary.  His submission was based entirely on the distinction “between a trust which arose before the occurrence of the transaction impeached and a claim which arose only by reason of the transaction” and that the present case fell within the second class. Mr Ng cited and relied on the following passage from the speech of Lord Millett in Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at §§139 and 142:

“the expressions “constructive trust” and “constructive trustee” is merely the creation by the court … to meet the wrongdoing alleged: there is no real trust and usually no chance of a proprietary remedy”. The expressions are “nothing more than a formula for equitable relief”.

47. But those observations were made in the context of knowing participation when the trust assets did not get into the defendant’s hands.  Constructive trusteeship should be distinguished from the equitable proprietary remedy of tracing, and a personal action in equity against a fiduciary for an account.  As clearly explained in Hanbury & Martin on Modern Equity, 19^th Edn. under the rubric “Distinction Between Constructive Trusts, Accountability and Proprietary Remedies” at §12-005:

“…

Where a trustee (express or constructive) has had trust property vested in him but has wrongfully disposed of it, he will commonly be regarded as retaining his status as trustee. Subject to what is said below concerning tracing, the absence of trust property means that the remedy against him is personal only. Where, however, no trust property has ever been vested in the defendant (as where liability arises from dishonestly assisting the trustees in a breach of trust), he cannot property be called a trustee, constructive or otherwise. As in the previous example, the remedy against him is personal only. The defendant is accountable; he is not a constructive trustee of any property. If he has insufficient assets, the claimant will be unable to obtain compensation in full.

There is, however, another possibility. It may be possible to show that the property, wrongly obtained and disposed of, is now represented by money or by some other property in the trustee’s or a third party’s hands; and, by use of the equitable proprietary remedy, to ‘follow’ the original property into that for which it has been exchanged. This is done by the technique of ‘tracing’.

The advantages of ‘tracing’ the money (or other property) in this way are twofold. First, if the defendant should become insolvent, the claimant takes in priority to the general creditors, for the money ‘traced’ is trust money, and is kept out of the defendant’s insolvency. Secondly, if the money has been invested successfully by the defendant, the claimant is entitled to a share of the investments which is proportionate to the share which the trust money contributed to the invested fund. A distinction between constructive trusteeship and liability to the ‘tracing’ process is that the latter may be available against a person who is not liable as constructive trustee. For example, where trust property is transferred to an innocent volunteer, i.e. a person who is not a purchaser and who thus takes subject to the trust but who has neither actual nor constructive knowledge of it, the volunteer is apparently not liable as constructive trustee, but the ‘tracing’ remedy lies against him while he still has the property or its identifiable proceeds.

  There are thus three separate matters to consider: constructive trust, proprietary remedies, and personal actions.  They are all inter-related, but each is distinct. …”

48. Properly understood, the claim against the second defendant is a proprietary claim.  Since the second defendant is not, and cannot claim to be a bona fide purchaser for value without notice, that being the only bar to equitable tracing, he has no defence to the claim.

The disclosure issue

49. In order to make the injunction effective, the second defendant seeks an ancillary order to enable it to trace its misappropriated funds, namely, that the defendants be ordered respectively to make a statement of assets and to give discovery of documents for the purpose of ascertaining:

(a)  the existence, nature and location of assets; and

(b)  the whereabouts of the missing funds.

50. In A v C [1981] 1 QB 956 at 958E-H, Robert Goff J ordered disclosure against a bank “for the purpose of enabling the plaintiffs to trace property acquired by the defendant and so take steps to seize that property if it is derived from their assets.”

51. Mr Ng opposed discovery on the basis that while the plaintiff’s case is that 68% or HK$34,513,341.63 (including HK$6,192,638 spent on gold and jewellery paid by the second defendant’s supplementary cards under the first defendant’s accounts) went directly into bank and credit card accounts owned or controlled by the second defendant, the 3 properties currently owned by the second defendant overtop that amount in that, in the aggregate, they are worth HK$37 million net.  Further, it was said that it was sweeping and disproportionate as more than 600 entries are involved in respect of amounts transferred out of his bank accounts and items of gold and jewellery purchased.

52. The plaintiff has provided the court with draft minutes of order which I have reviewed.  As against the second defendant it now reads (with very minor amendments):

“D2 do file and serve an affirmation within 28 days from the date of the Order to be made herein to explain in detail:

2.1 In relation to funds in the total sum of HK$21,196,737.45 which have been paid into the bank accounts owned or controlled by D2 (as summarized in Sch.1 and Sch.2C of the Amended Statement of Claim):

(a) How the funds have been paid or disposed of, including to whom and/or to what entities (be it legal and/or beneficial owners), the funds or any part thereof have been paid, when the funds were so paid, and for what alleged purpose; and

(b) The whereabouts of the said funds or any part thereof at all times since their receipt by D2, including whether they are now reflected in other asset(s) or form(s) and if so what those asset(s) or form(s) are, the value, location and details of all such assets.

2.2 In relation to the goods (including but not limited to gold and jewelry) that have been purchased by D2 via his credit cards at a total purchase price of HK$10,559,703.00 (as summarized in Sch.6A and Sch.6B of the Amended Statement of claim):

  (a)  The whereabouts of the said goods or any part thereof at all times since their purchase by D1, including whether they are now reflected in other asset(s) or form(s) and if so what those asset(s) or form(s) are, the value, location and details of all such assets.”

53. The over-topping is a non-point since in a tracing exercise, as explained in the passage from Hanbury cited in §47 above, if the monies have been invested successful, the claimant is entitled to a pro rata share of the profits derived from its assets.  In any event, while the tracing claim is limited to assets worth approximately HK$34.5 million the plaintiff’s claim is for just over HK$51 million.

54. As to the width of the order, I agree with what was said by Deputy Judge Poon (as he then was) in CTO (HK) Ltd v Li Man Chiu & Others [2002] 2 HKLRD 875 at § 21 that “[i]n order to render the tracing exercise effective, it is … necessary to begin at the starting point. If the point of enquiry starts somewhere down the line, it is difficult, if not impossible, to perform the task”.

55. The order sought does not strike me as unreasonable although the parties may wish to consider replacing the phrase “goods (including but not limited to …) in §2.2 with “purchases from” and then naming the companies involved which I believe is only a handful and replacing the words “goods” in (a) with “purchases”.  These changes might avoid arguments over what falls within “goods”.  Revised and agreed draft minutes of order should be submitted for approval within 10 days of this judgment.

Exclusion of living expenses and legal expenses

56. On the question of exclusion of living expenses and legal expenses, at the hearing, Mr Wong SC informed the court that the plaintiff

(1)  has no objection to mortgage payments being made in relation to the 3 properties provided the source of payment is identified; and

(2)  has no objection to reasonable fees being paid to assist the second defendant in the tracing exercise provided the fees are submitted in advance for consideration, that the source of payment is identified and that they can only be incurred and paid if no objection is made by the plaintiff within 2 days after receipt of the quotation of fees.

Accordingly, the exclusion order now sought has to be understood as subject to the qualifications above.

57. The basis of the exclusion order is that an injunction under a proprietary claim is very different in nature from an ordinary Mareva.  There is authority to the effect that the injunction order would not be subject to provisos enabling the use of funds for ordinary living expenses.  The affected fund is a trust fund and the whole purpose of the injunction is to secure the trust fund itself so that it should be available should the plaintiff prove his claim.  It was said that there would be no justification for spending the plaintiff’s money to support the defendant.

58. Polly Peck International plc v Nadir (No. 2) [1992] 4 All ER 769 was a case where the administrators of PPI claimed that N had misapplied PPI’s funds and £149m had been transferred to the London account of IBK and, during the same period, IBK had transferred £49m to the account of the Central Bank of Northern Cyprus bank for currency exchange.  The pleaded case against the Central Bank was one of constructive trust in respect of the whole £45m and a tracing claim in respect of £8.9m standing to the Central Bank’s account at the London clearing bank. Scott LJ stated (at 784f) as follows:

“I nowcome to the question whether a limited injunction preserving, pending trial, the £8.9m should be granted. This would not be a Mareva injunction. It would not be subject to provisos enabling the use of the money for normal business purposes, or for the payment of legal fees, or the like. There is, in general, no reason why a defendant should be permitted to use money belonging to another in order to pay his legal costs or other expenses. The objection in principle to the grant of the Mareva injunction to which I have referred does not apply to an injunction to preserve a fund that, in the contention of PPI, belongs to PPI.”

59. Mr Ng cited the decision of Lloyd J in PCW (Underwriting Agencies) Ltd v Dixon and Ano [1983] 2 All ER 158, a case involving an ordinary Mareva in an action to recover secret profits made at the expense of the plaintiff.  Notably, that was not a case of an injunction granted under a proprietary claim.  But Lloyd J, after referring to the distinction between an ordinary Mareva and a claim to a trust fund on the wider ground, observed (at 164 g-h):

“But even if I could regard the whole of the defendant’s assets as a trust fund, I would be quite unwilling to uphold the ex parte order in the present case on that basis. All injunctions are, of course, in the end discretionary. I would regard it as unjust in the present case if the defendant were compelled to reduce his standard of living, to give up his flat, or to take his children away from school, in order to secure what is as yet only a claim by the plaintiffs. I would regard it as even more unjust that he should be prevented from defending himself properly … merely because the plaintiffs say that in doing so he is using somebody else’s money.”

Mr Ng relied heavily on PCW and the passage cited.

60. I agree that at the end of the day it is a question of discretion.  That of course would depend of the circumstances of the particular case.  In other words, it is fact-sensitive.  In the present case, it is highly relevant that the order made by Poon J on 26 October 2012 increasing the second defendant’s living expenses to $20,000 weekly was subject to the condition that he would disclose his source of living expenses by way of affirmation.  In other words, he was asked to disclose his sources of income out of which his expenses were defrayed.

61. The second defendant has failed to comply with that order.  While a breakdown of his expenses was provided in his 2^nd affirmation filed on 16 November 2012, he did not disclose his source of expenses (i.e. his income) in any way.  Nor did he disclose them in his 3^rd and 4^th affirmations.

62. The remarks of Lloyd J in PCW are strictly obiter since that was not a ‘trust fund’ case.  Moreover the circumstances are very different.  There, the Mareva freezing all the defendant’s assets within the jurisdiction was obtained ex parte save that he was permitted to draw reasonable living expenses limited to £100 a week which the judge considered wholly inappropriate when the defendant was a member of Lloyds and a wealthy man.  The judge was also critical that the summons was not on notice.

63. Here, the case against the second defendant is compelling.  His lavish lifestyle was sustained by the misappropriated funds.  He is currently unemployed and one can only infer that his subsistence is being funded out of the plaintiff’s monies. In all the circumstances, I consider it appropriate to grant the exclusion order subject to the qualifications motioned in §56.

ORDER

64. The injunction order is to be continued but varied by (i) increasing its limit to US$6,636,239.66 and (ii) removing the provision for the second defendant’s living and legal expenses as qualified at the hearing.  Revised and agreed draft minutes of order should be submitted for approval within 10 days of this judgment.

65. I also make an order nisi of costs in favour of the plaintiff.