EN WORLD JAPAN K.K. v. BAOYOU TRADING CO LTD AND ANOTHER

DCMP 4111/2019

[2020] HKDC 661

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 4111 OF 2019

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JUDGMENT

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Introduction

1.  This is the first hearing of the plaintiff’s originating summons dated 20 December 2019 (“the OS”). The hearing was adjourned by this court from 19 March 2020 due to the General Adjournment Period.

2.  On 13 January 2020, the plaintiff took out a time summons (“the Time Summons”) to apply for an extension of time to serve an affirmation in support of the OS.  Subsequently, the plaintiff filed an affirmation of Sawako Homma dated 21 January 2020 and an affirmation of Scott David Wallace dated 12 February 2020 out of time and without leave.

3.  On 18 June 2020, the plaintiff issued another summons (“the Amendment Summons”) to apply for leave to amend the OS, principally to include a claim for a vesting order to be made under section 52(1)(e) of the Trustee Ordinance, Cap. 29 (“the TO”).

4.  This is an all-too-common case of email fraud. The 1^st defendant, Baoyou Trading Co., Limited, (“the Company”) has never responded to the present proceedings and the 2^nd defendant, Bank of China (Hong Kong) Limited, (“the Bank”) has indicated its neutral position on the Time Summons and the Amendment Summons. I see no prejudice caused to either of them by these two Summonses and hence I accede to both applications and make orders in terms thereof.     

The Claim

5.  The Company is a locally incorporated company and was only 3-month old at the material time. I am satisfied by the affirmations of service filed on the plaintiff on diver dates that the OS and all the relevant court documents including the notice of the present hearing have been duly served on the Company at its registered address in Kwun Tong. There is no reason why I should not proceed to determine the OS in its absence pursuant to O.32, r.5(1), Rules of the District Court (“RDC”).

6.  Furthermore, I accept the plaintiff’s suggestion that the OS should be disposed of summarily on merits at the first hearing in the absence of any opposition raised thereto by the Company pursuant to O.28, r.4(1), RDC.

7.  I should first outline the undisputed facts gleaned from the said two supporting affirmations filed by the plaintiff.

8.  On 19 November 2019, an unknown fraudster(s) whose identities and whereabouts are totally obscure hacked into the email account of Mr Wallace, the Sales Director of the plaintiff and sent an email therefrom to Ms Homma, the Financial Planning & Control Manager of the plaintiff (“the Email”). By the Email, Mr Wallace asked Ms Homma to settle an invoice purportedly issued by the Company to the plaintiff (“the Invoice”) for a sum of US$260,310 (“the Sum”) by way of payment to the bank account of the Company with the Bank (“the Account”).

9.  In compliance with the request of Mr Wallace, Ms Homma arranged a remittance of the Sum from the plaintiff’s bank to the Account by telegraphic transfer on 19 November 2019. The remittance was effected on the following day.

10.  On 21 November 2019, the plaintiff discovered the fraud. Mr Wallace did not send the Email to Ms Homma. The Invoice was fake. The plaintiff had no business relationships or dealings with the Company whatsoever.      

11.  The plaintiff tried to stop the remittance but in vain. The plaintiff reported this matter to the police in Hong Kong on 23 November 2019. The plaintiff’s solicitors also wrote to the Bank and claimed interest in the Sum in the Account. By its letter dated 19 December 2019, the Bank confirmed that the Sum remained intact in the Account meaning that no part of it has ever been withdrawn from the Account and it would comply with any court order binding on it.

Relief sought

12.  On the foregoing evidence supported by contemporaneous documents, I accept that the plaintiff’s restitutionary claim in the Amended OS is amply made out. I conclude that the plaintiff is the beneficial owner of the Sum and any interest accrued thereon in the Account. The Company (and not the Bank) merely holds the Sum or, to be exact, the right to recover the Sum from the Bank (“the Right”) as constructive trustee of the plaintiff, see the analysis of HH Judge Winnie Tsui in Minimax GMBH & Co KG (Singapore Branch) v Gopom Products Limited and Anor. [2019] HKDC 760 at §§26-27.

13.  I am convinced that the plaintiff is entitled to and genuinely in need of the declaration sought in the Amended OS so that its beneficial interest in the Sum is made clear to all other creditors of the Company. Accordingly, I make the declaration sought in the OS to do full justice.

Vesting Order

14.  Now I turn to the claim for a vesting order. The plaintiff asks for an order vesting in the plaintiff the Right pursuant to section 52(1)(e) of the TO. The entire section 52(1) reads as follows,

 (1)  In any of the following cases, namely—

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

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

(i) is under disability; or

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

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

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

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

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

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

(e)  where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise and it appears to the court to be expedient,

the court may make an order vesting the right to transfer or call for a transfer of stock, or to receive the dividends or income thereof, or to sue for or recover the thing in action, in any such person as the court may appoint:

Provided that —

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

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

(2)  In all cases where a vesting order can be made under this section, the court may, if it is more convenient, appoint some proper person to make or join in making the transfer:

Provided that the person appointed to make or join in making a transfer of stock shall be some proper officer of the bank, or the company or society whose stock is to be transferred.

(3)  The person in whom the right to transfer or call for the transfer of any stock is vested by an order of the court under this Ordinance may transfer the stock to himself or any other person, according to the order, and all companies, banks and societies shall obey every order under this section according to its tenor.

(4)  After notice in writing of an order under this section it shall not be lawful for any company, bank or society to transfer any stock to which the order relates or to pay any dividends thereon except in accordance with the order.

(5)  The court may make declarations and give directions concerning the manner in which the right to transfer any stock or thing in action vested under the provisions of this Ordinance is to be exercised.

(6)  The provisions of this Ordinance as to vesting orders shall apply to shares in ships registered under the enactments relating to merchant shipping as if they were stock.

[cf.1925 c.19 s.51 U.K.]”

15.  Contrary to a number of earlier authorities concerning email or cyber fraud cases (produced by both the District Court and the High Court), Mr Recorder Eugene Fung SC in 800 Columbia Project Company LLC v Chengfang Trade Ltd and Ors [2020] HKCFI 1293 held that the court’s jurisdiction under section 52(1)(e) is not engaged at all on the facts of that case, which are not dissimilar to all other email or cyber fraud cases after a thorough analysis of section 52(1) of the TO.   

16.  Not long afterwards, DHCJ Paul Lam SC handed down his decision in Wismetic Asian Foods, Inc. v United Top Properties Limited & Ors. [2020] HKCFI 1504. The deputy judge made an extensive review of all the authorities known to him on applications for vesting orders under section 52(1) including 800 Columbia Project Company LLC and then came to the conclusion that the provision was engaged indeed in the email fraud case before him.

17.  The plaintiff’s solicitors, upon the invitation of this court, lodged written submissions on these conflicting decisions and urged this court to follow Wismetic Asian Foods, Inc. and not 800 Columbia Project Company LLC.

18.  Subsequent to the said two authorities, two further decisions were handed down in the District Court in which the same issue was canvassed. In Jensonn Power Systems PTE Ltd v Lishan Zhi Trading Co., Limited [2020] HKDC 629, HH Judge Leung agreed with the analysis in Wismettac Asian Foods Inc., and maintained that the court does have the power to make a vesting order in respect of the balance of the bank account held by a fraudster as constructive trustee under section 52(1)(e) of the TO.

19.  In Concrete Waterproofing Manufacturing Pty. Ltd. v Changxuan Co., Limited [2020] HKDC 547, HH Judge Phoebe Man rendered her analysis of the differences between 800 Columbia Project Company LLC and Wismettac Asian Foods Inc. and opined that there is more support for the interpretation adopted by DHCJ Paul Lam SC in the latter case. However, the judge made it clear that her view was only obiter because she refused the application for a vesting order on the ground that the bank was not joined as party and there was no evidence that the remaining balance in the defendant’s account represented the money from the plaintiff or its traceable proceeds, following International Automotive Components Group sro v Xuke Trading Ltd & Anor. [2017] 3 HKC 137 and Primeway International Ltd v Yi He (HK) Trading Co Ltd [2018] 2 HKLRD 1416.    

20.  Refraining from overburdening this Decision, I should simply adopt the reasoning of the deputy judge in Wismettac Asian Foods Inc., to which I entirely agree.

21.  To start with, as pointed out by the deputy judge, section 52(1) provides five separate and distinctive grounds in sub-sub-sections (a) to (e) to invoke the court’s discretion to grant a vesting order. The focus here should be section 52(1)(e) and there are two conditions to be fulfilled in this ground.

22.  For the first condition, there must be stock or a thing in action vested in a trustee whether by way of mortgage or otherwise. There is no debate that the Right is a thing in action. There is little doubt that the Right has been vested in the defendant as a result of the fraud. The Recorder in 800 Columbia Project Company LLC and the deputy judge in in Wismettac Asian Foods Inc. did not differ in that the deceitful recipient of the money of the plaintiff is a constructive trustee.  Their difference is when the vesting of the rights of the plaintiff in relation to the money took place. The Recorder opined that it was not until the declaration granted by default judgment that there came a split of the legal and equitable ownership of the money in question and the defendant became a constructive trustee. Even then the defendant cannot be said to have been appointed by the court as a trustee.

23.  I agree with the deputy judge that the constructive trust comes into existence at the very moment the fraudster or the subsequent recipient receives the victim’s money or its traceable proceeds in their bank accounts by operation of law. A declaration by a court granted subsequently merely confirms the legal position of the fraudster as a constructive trustee. In the present case, the Right was vested in the defendant upon its receipt of the Sum in the Account from the plaintiff.

24.  It is noteworthy that section 2 of the TO provide that the terms “trust” and “trustee” as used in the TO extend to implied and constructive trusts. There is no exclusion of this extended interpretation of trustee, express or implied, in section 52(1). It follows that section 52(1)(e) is applicable to cases in which stock or a thing in action is vested in a constructive trustee by operation of law.

25.  The issue of appointment does not arise at all. A constructive trustee is not appointed by a court. It is not a requirement under section 52(1)(e) that the trustee referred thereto must be one appointed by a court.

26.  Furthermore, I am in agreement with the deputy judge that there is no limitation as to how the vesting of stock or a thing in action in a trustee is completed in the first condition in section 52(1)(e). The phrase “or otherwise” should be given its natural and ordinary meaning.  I am not sure whether the original intention of section 52(1)(e) is to include vesting of stock or a thing in action in a constructive trustee by operation of law but this is immaterial. So long as the language used in the provision, without any violence done thereto, allows the coverage of such a scenario, I see no reason why it ceases to apply in cases involving constructive trustee. 

27.  In the premises, I am satisfied that the first condition is fulfilled. 

28.  The second condition is that the court should find it expedient to make a vesting order. I have no hesitation that this condition is met in the present case.

29.  In email or cyber fraud cases, invariably the constructive trustees of the trust property would disappear and do not take any part in the recovery actions knowing that criminal liability may attach to their fraudulent conduct. It is unrealistic to expect any defendant would make himself available to be ordered to or comply with an order to return the trust property to the victim.

30.  On the other hand, the imposition of a constructive trust is, to a large extent, an equitable remedy to enable a victim to recover his property which he has parted with his possession as a result of fraud. A vesting order is plainly serviceable to give effect of the constructive trust in email or cyber fraud cases. 

31.  Thus, I am of the view that it is expedient that a vesting order should be made and the second condition of section 52(1)(e) is satisfied.

32.  Another question is that if any one of the 5 scenarios in section 52(1)(a) to (e) is made out, who the appointee of the vesting order should be.

33.  The Recorder in 800 Columbia Project Company LLC opined that section 52 envisages a vesting order to be made upon a change in the trusteeship and section 52(1) contemplates an appointment of trustee(s) by the court.  It follows that the appointee under section 52(1) should be a new trustee.

34.  As pointed out by the deputy judge in in Wismettac Asian Foods Inc., this is indeed the approach of the English court in the old days. However, after referring to Re G (ET) (a patient) and Re G (TJ) (a patient) [2007] EWHC 1861 (Ch) and the latest edition of Underhill and Hayton: Law Relating to Trusts and Trustees (19^th Ed., 2016), the deputy judge preferred a more liberal approach and held that the phrase “in any such person as the court may appoint” is, prima facie, wide enough to include the beneficiary of a constructive trust.

35.  I agree with the deputy judge though I am not convinced that the fact that the beneficiary of a trust property is entitled to make an application for a vesting order pursuant to section 57(1) per se means that the beneficiary himself can be the appointee.

36.  In addition, I believe the first provisos in section 52(1) is more supportive to the entitlement of a beneficiary to be appointed and be vested the rights in respect of stock or a thing in action previously vested in a constructive trustee.

37.  The first proviso is that where the order is consequential on the appointment of a trustee, the right shall be vested in the persons who, on the appointment, are the trustees.

38.  If the appointees are confined to trustees, this first proviso is otiose. It exists for a reason and there must be other cases where the appointees of the court are not trustees. There is no reason why a beneficiary cannot be appointed for the purpose of a vesting order.

39.  For completeness, the second proviso provides that where the person whose right is dealt with by the order was entitled jointly with another person, the right shall be vested in the last-mentioned person alone or jointly with any other person whom the court may appoint. Strictly speaking, it is irrelevant to the present case but it can be seen that in certain cases, there is no need for the court to appoint a new trustee to be vested the right at all. The remaining trustees can be vested such right to avoid useless expense to appoint a new one: Re Watson (1881) 19 Ch D 384 per Jessel, M.R..

Conclusion and costs

40.  By reason of the foregoing analysis and matters, I conclude that section 52(1)(e) is engaged in the circumstances of the present case. In addition to the declaration sought, I find it expedient to make a vesting order to vest the Right in the plaintiff, being the victim of the fraud, to recover the Sum as soon as possible.

41.  I accede to the plaintiff’s application by the OS as amended and I enter judgment in favor of the plaintiff in the absence of any triable issues. I make an order that the defendant, being the fraudster, should pay the plaintiff its costs of the OS on an indemnity basis.

42.  At the conclusion of the hearing, the plaintiff’s solicitors handed up a statement of costs for summary assessment. In total, they ask for HK$364,794.00. Without the sight of all the work and services set out in the statement, I am not in a position to assess the reasonableness of this seemingly large amount. I, therefore, decline to make a summary assessment. The costs payable to the plaintiff should be taxed, if not agreed.

43.  Lastly, I thank Mr Wong for his assistance in this matter.