TOKIĆ, D.O.O. v. HONGKONG SHUI FAT TRADING LTD AND OTHERS

HCA 381/2020 [2020] HKCFI 1822 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 381 OF 2020 _________________ BETWEEN TOKIĆ, D.O.O. Plaintiff and HONGKONG SHUI FAT TRADING LIMITED 1st Defendant YFX TRADE CO., LIMITED 2nd Defendant YI ZHIJIA TRADING LIMITED 3rd Defendant ZHONGFENG TECHNOLOGY SERVICE CO., LIMITED 4th Defendant YOSN LIMITED 5th Defendant HUAXIA YUANQUAN TRADING LIMITED 6th Defendant XU WANGSHAN 7th Defendant WU JIANKE 8th Defendant ZHOU SHENGWEI 9th Defendant DU ZHILIANG 10th Defendant _________________ Before: DHCJ Douglas Lam SC in Chambers Date of Hearing: 27 July 2020 Date of Decision: 27 July 2020 Date of Reasons for Decision: 4 August 2020 ___________________________________ R E A S O N S F O R D E C I S I O N ___________________________________ Introduction On 27 July 2020, I heard an application by the plaintiff for default judgment and other reliefs against the 1st, 4th, 5th and 6th defendants under RHC Order 19 r.7. It is unnecessary for present purposes to set out the background of the matter, save that it is another all-too-familiar case of email fraud where the plaintiff’s accounting department was deceived by a fraudulent email from a rogue impersonating the plaintiff’s CEO into remitting some US$1,977,500 into the 1st defendant’s account in the period between 21 to 27 February 2020. The bulk of the sums were quickly dissipated from the 1st defendant’s account and remitted into various accounts of the 2nd to 10th defendants. The plaintiff had no prior dealings with any of the defendants. The plaintiff thus claimed against the defendants for inter alia declarations that they held the sums received as constructive trustee for the plaintiff, repayment of the sums as money had and received, equitable compensation and vesting orders pursuant to section 52(1)(e), (2) and (5) of the Trustee Ordinance (Cap 29) (the “TO”). After hearing the application, I granted judgment in default of defence and the declaratory reliefs sought against the 1st, 4th, 5th and 6th defendants, being satisfied that this was a case where it would be just to do so (see e.g. Mesirow Financial Administrative Corporation v Best Link Industrial Co Ltd (unreported), HCMP 1846/2015, 25 January 2016 (per Recorder L Wong SC). The plaintiff also applied for vesting orders under section 52(1)(e) of the TO in respect of bank balances standing to the credit of the 1st and 5th defendants which were traceable to the proceeds of the fraud, and which I have declared to be held by them as constructive trustees in favour of the plaintiff. After hearing Mr Tse Sing Yu of Oldham Lie & Nie, solicitors for the plaintiff, I dismissed the application and indicated that I would hand down my reasons in writing in due course, which I now do. Section 52(1)(e) of the TO Section 52(1) of the TO, which is based upon and mirrors the wording in section 51(1) of the English Trustee Act 1925 (the “1925 Act”), provides that inter alia: 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… Mr Tse referred me to the recent decision of DHCJ Paul Lam SC in Wismettac Asian Foods Inc. v ZL Trade Limited & Ors [2020] HKCFI 1504, a case also concerning the proceeds of an email fraud. In that case, which was also an application for default judgment, the plaintiff sought vesting orders under section 52(1)(e) in respect of traceable proceeds of the fraud in various bank accounts of the defendants. In his decision, the learned deputy judge conducted a survey of a long line of first instance decisions in Hong Kong where the courts considered vesting orders under the section in respect of proceeds of fraud. In the cases reviewed, with the exception of one, no issue was apparently raised as to the applicability of section 52(1)(e), and the courts proceeded on the assumption that they had jurisdiction to make an order under the section. The one exception was the recent decision of Recorder Eugene Fung SC in 800 Columbia Project Company LLC v Chengfang Trade Ltd and others [2020] HKCFI 1293. The case was, similar to Wismettac and the present case, again concerned with proceeds of an email fraud. The learned Recorder granted default judgement and declaratory reliefs, and then proceeded to consider the vesting orders sought. After examining the scope of the section, the Recorder concluded at §16 that he was “…not satisfied that the court’s jurisdiction under section 52(1)(e) of the [TO] 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”. In his decision, the Recorder noted at §16(8), inter alia, that there were two types of constructive trust (citing Williams v Central Bank of Nigeria [2014] AC 1189) and then continued at §16(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.” After considering 800 Columbia, the learned deputy judge in Wismettac declined to follow the decision and held that section 52(1)(e) was in fact wide enough to cover situations such as the present. He noted that section 2 of the TO provides that, unless the context otherwise requires, the expressions “trust and trustee” extended to “implied and constructive trusts”. Further, the phrase “or otherwise” in section 52(1)(e), given its natural and ordinary meaning, intended for the section to be “extremely broad” and thus included constructive trusts arising in respect of proceeds of fraud: “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”. He therefore held that the section applied to such cases and moved on to consider whether it was expedient to make vesting orders (and concluded that it was). In the light of the conflict in the authorities, this is an issue that would benefit from appellate guidance, and hence, there is limited jurisprudential value in me embarking upon another lengthy analysis of the law. However, having considered the reasoning in both Wismettac and 800 Columbia, I am of the view that the latter must be correct, and I respectfully adopt the same. I also venture to make a few additional observations. As the Recorder correctly pointed out in §16(8) of his decision, there are two types of constructive trust. This distinction is now well settled in both Hong Kong and the United Kingdom and often alluded to in cases concerning limitation periods. In Hong Kong, section 2(1) of the Limitation Ordinance (Cap 347) (the “LO”) (following the English Limitation Acts) defines the meaning of trust and trustee as having the same meaning respectively in the TO. Hence, the references to trust and trustee in section 20 of the LO, which is concerned with limitation of actions in respect of trust property, are to be construed accordingly. As mentioned above, the Recorder referred in his decision to Williams v Central Bank of Nigeria [2014] AC 1189, a majority decision of the UK Supreme Court, where Lord Sumption JSC (with whom Lord Hughes JSC agreed) explained at §9 the two types of constructive trusts: “The first comprises persons who have lawfully assumed fiduciary obligations in relation to trust property, but without a formal appointment. They may be trustees de son tort, who without having been properly appointed, assume to act in the administration of the trusts as if they had been; or trustees under trusts implied from the common intention to be inferred from the conduct of the parties, but never formally created as such. These people can conveniently be called de facto trustees. They intended to act as trustees, if only as a matter of objective construction of their acts. 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. Others, such as company directors, are by virtue of their status fiduciaries with very similar obligations. In its second meaning, the phrase “constructive trustee” refers to something else. It comprises persons who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either they have dishonestly assisted in a misapplication of the funds by the trustee, or they have received trust assets knowing that the transfer to them was a breach of trust. In either case, they may be required by equity to account as if they were trustees or fiduciaries, although they are not. These can conveniently be called cases of ancillary liability. The intervention of equity in such cases does not reflect any pre-existing obligation but comes about solely because of the misapplication of the assets. It is purely remedial. The distinction between these two categories is not just a matter of the chronology of events leading to liability. It is fundamental. In the words of Millett LJ in Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400, 413, it is “the distinction between an institutional trust and a remedial formula—between a trust and a catch-phrase”. (See also §§54-56 of the speech of Lord Neuberger of Abbotsbury PSC, with whom Lord Hughes JSC also agreed) In Hong Kong, the same distinction was recognised and confirmed by the Court of Final Appeal in Peconic Industrial Development Ltd v Lau Kwok Fai and Others (2009) 12 HKCFAR 139 at §§17-25, per Lord Hoffmann NPJ, with whom their other Lordships agreed). In my view, it is clear that the defendants in the present case (as were those in Wismettac) were no more than recipients of proceeds of fraud and not “true” trustees, constructive or otherwise. Although their exposure to equitable remedies arose not from the unlawful misapplication of trust assets, as such, but from knowing receipt or retention of proceeds of fraud under the principle in Westdeutsche Bank v Islington London Borough Council [1996] AC 669, this makes little difference. The fact remains that they are merely required by equity to account as if they were trustees or fiduciaries, although they are not. It is purely remedial. Like the dishonest assister or knowing recipient of trust assets in breach of trust, their sole obligation of any practical significance is to restore the assets immediately to the plaintiff. It is also clear that the 1925 Act, and by the same token, the TO, were never intended to apply, and can have no application, to persons in this category. As Lord Sumption JSC explained in §26 of Williams: “The Trustee Act 1925 is concerned with the administration of true trusts. It is not concerned with constructive trusts imposed by equity on strangers to the trust in the exercise of its remedial jurisdiction. As Millett LJ observed when making this point in [Paragon Finance Plc v DB Thakerar & Co [1999] 1 All E.R. 400], 412, constructive trustees required to account in the exercise of equity’s remedial jurisdiction, “have no trust powers or duties; they cannot invest, sell or deal with the trust property; they cannot retire or appoint new trustees; they have no trust property in their possession or under their control, since they became accountable as constructive trustees only by parting with the trust property. They are in reality neither trustees nor fiduciaries, but merely wrongdoers.” I respectfully agree. The extension of trustees to constructive trustees in section 2 of the TO is thus confined to true constructive trustees or de facto trustees. The use of the phrase “or otherwise” in section 52(1)(e) in the TO (which mirrors the wording in section 51(1)(v) of the 1925 Act), despite its wide import, cannot have the effect of expanding the meaning of “trustee” or “constructive trustee” beyond the scope of the TO to include persons other than true trustees. The fact that the Court has declared that the wrongdoer is to account for certain stock or choses in action (in the present case, the right to call for repayment from the bank) as if he were a trustee does not vest the same in the wrongdoer as trustee or recast what is a remedial formula into an institutional trust to which the TO can apply. I should mention that the deputy judge also referred to Orwin v Attorney General [1998] 2 BCLC 693, where Mummery LJ held at 699e that a vesting order can be made “…where an implied or constructive trust is established”, in support of the proposition that section 52(1)(e) can be applied to constructive trusts. However, this begs the question of what kind of constructive trust was being referred to. It is clear on the facts of that case that the type constructive trust being asserted was a true constructive trust, rather than the type concerned in Wismettac (and the present case). The situation may well be different in cases concerning misappropriations or other breaches of trust by defendants who are true trustees or in a position analogous to true trustees, such as company directors. However, we are not concerned with such defendants here. For the reasons above, I respectfully differ on this issue from Wismettac (and the earlier authorities in the same vein) and find that section 52(1)(e) of the TO has no application to situations such as the present. There is no dispute that the other subsections of section 52(1) are inapplicable. It follows that the Court has no jurisdiction to make the vesting orders sought against the defendants. As Mummery LJ observed in Orwin at 699f-g: “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.” It was therefore unnecessary for me to consider whether it would have been expedient for an order to be made. Alternative Remedies The intention of seeking a vesting order in circumstances such as the present is to enable the plaintiff to have transferred to him expeditiously those assets and proceeds declared to be held by the defendant as constructive trustee. Notwithstanding the unavailability of a vesting order under the TO, the plaintiff is not without remedy. For instance, in 800 Columbia, the Recorder referred to the availability of garnishee proceedings under RHC Order 40 to enforce the default judgment. In my view, there is an additional route that may provide perhaps a more expedient remedy, especially in cases such as the present where the defendants are unlikely to respond or comply with any order of the Court. Section 25A of the High Court Ordinance (Cap 4) (the “HCO”) provides that inter alia where the Court has given or made a judgment or order directing a person to execute any conveyance, contract or other document, if that person neglects or refuses to comply with that judgment or order, the Court may, on such terms and conditions, if any, as may be just, order that the conveyance, contract or other document shall be executed by such person as the Court may nominate for that purpose. A conveyance, contract or document so executed shall have the same effect as if it had been executed by the person originally directed to execute it. In the circumstances, I made an order that the 1st and 5th defendants do within 7 days from the date of service of the order execute such documents as may reasonably be required to instruct the banks in which the relevant bank accounts are held to transfer to the plaintiff the sums which I have declared to be held by them as constructive trustees, failing which the plaintiff be at liberty to apply for an order under section 25A of the HCO. (Douglas Lam SC) Deputy High Court Judge Mr Tse Sing Yu, of Oldham, Lie & Nie, for the plaintiff The 1st defendant was not represented and did not appear The 4th defendant was not represented and did not appear The 5th defendant was not represented and did not appear The 6th defendant was not represented and did not appear