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To vest or not to vest – Or a new way out?

5 Aug 2020

In our article dated 13 July 2020, we referred to recent cases dealing with the Court’s making of a ‘vesting order’ under section 52 of the Trustee Ordinance (Cap. 29) (“TO”). A number of judgments have since emerged, including the decision of Deputy High Court Judge Douglas Lam SC in TOKIĆ, D.O.O. v Hongkong Shui Fat Trading Limited [2020] HKCFI 1822 (4 August 2020).

To recap, vesting orders have been granted in cases involving ‘email fraud’ or ‘cyber fraud’ such that the relevant funds will be transferred directly from the banks (with which the recipient accounts are held) to the victim of the fraud. This is generally considered to be a more expedient alternative to the garnishee procedure.

In our article, we discussed a divergence in approach, as seen in two recent cases, namely 800 Columbia Project Company LLC v Chengfang Trade Ltd and others [2020] HKCFI 1293 (23 January 2020) and Wismettac Asian Foods, Inc. v United Top Properties Ltd and others [2020] HKCFI 1504 (10 July 2020).

Since the above decisions, in Jensonn Power Systems Pte Ltd v Lishan Zhi Trading Co Ltd [2020] HKDC 629 (30 July 2020) and Concrete Waterproofing Manufacturing Pty Ltd v Changxuan Co., Ltd [2020] HKDC 547 (31 July 2020), His Honour Judge Leung and Her Honour Judge Phoebe Man, having regard to the above divergence, likewise came to the view that ‘vesting orders’ should be granted in a similar context, following the decision of DHCJ Paul Lam SC in Wismettac.

Most recently, in TOKIĆ, D.O.O., DHCJ Douglas Lam SC again had the opportunity to consider the rather interesting debate, who ultimately preferred the reasoning of Recorder Eugene Fung SC in 800 Columbia. The learned Deputy Judge considered leading authorities on the nature of a ‘constructive trust’ imposed in cases of fraudulent receipt of proceeds, before concluding 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…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.”

Accordingly, the learned Deputy Judge came to the view that, on its proper construction, the use of the phrase “or otherwise” in section 52(1)(e), despite its wide import, cannot cover persons who are not “true trustees” but have simply been made subject to a Court declaration to account for certain stock or choses in action as if he were a trustee. It follows therefore that the TO has no application to situations like the present, and therefore the Court cannot made the vesting order sought.

Having said the above, the learned Deputy Judge considered that in addition to garnishee proceedings, an available alternative remedy can be found in section 25A of the High Court Ordinance (Cap. 4), which provides at sub-section (1) a right for the Court to order the execution of a conveyance, contract or other document, where the person to whom the Court directs to execute the same has neglected or refused to comply with the order or cannot after reasonable inquiry be found.

In the premises, it was ordered that the relevant defendants do “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.”

Postscript – a new way out?

The debate remains an intense one, and the authors herein expect there to be more authorities on this topic in the months to come. As DHCJ Douglas Lam SC observes, this may well be an issue which would benefit from appellate guidance.

However, what is particularly noteworthy of the recent decision of DHCJ Douglas Lam SC is the (with respect, innovative) suggestion of an additional alternative remedy, i.e. the use of section 25A of the High Court Ordinance (Cap. 4).  This could potentially provide a satisfactory answer to victims of fraud who do not otherwise wish to go through the costs and time involved in garnishee proceedings. It remains to be seen whether this will in itself open up yet further debate: watch this space.

Michael LokJasmine Cheung and Euchine Ng co-authored this article.