Can you get a Vesting Order for cyber fraud cases?

Cyber frauds, in particular email scams, have become a common trend of crime in Hong Kong in recent years.  Fraudsters use various means to deceive the victims into transferring money to unauthorised bank accounts.  Upon discovery of the fraud and based on information obtained from the bank, the victim may apply for an injunction from the court to freeze the recipients’ bank accounts and if the victim is lucky enough, there will be some credit balance left to recover.

In most if not all of the cases, the fraudsters and the subsequent recipients, understandably, would not appear in the proceedings, and the victim would apply for a default judgment.  One type of relief often sought is a vesting order under s.52 of the Trustee Ordinance (Cap. 29), compelling the bank to pay the money in the recipients’ accounts back to the victim.  In the past, courts have commonly granted the vesting order sought.

The relevant statutory provision that requires construction by the court is s.52(1)(e) of the Trustee Ordinance (Cap. 29) which provides as follows:

(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:

Recorder Fung SC’s Decision

In a recent case, 800 Columbia Project Company LLC v Chengfang Trade Ltd and others [2020] HKCFI 1293, Recorder Eugene Fung SC came to the conclusion that section 52 is not engaged in the context of email scam cases. 

In gist, Mr. Recorder Fung SC considered that section 52 envisages a vesting order to be made upon a change in trusteeship and the statutory provisions envisage certain circumstances where the legal estate or interest should be conveyed or transferred by the outgoing trustee to the incoming trustee but the outgoing trustee who should convey or transfer is not in a position to do so, e.g., he may be of unsound mind, or he may refuse to convey.  In cases of this kind, the court makes an order whereby the property is vested in the incoming trustee without any conveyance, transfer or assignment (para. 16(4) & (5) of the Decision).

Mr. Recorder Fung SC examined the concluding paragraph of s.52(1) which provides as follows:

[1(a) – (e)] … 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:

The learned Recorder took the view that the phrase “in any such person as the court may appoint” contemplates an appointment of trustee(s) by the court and thus places restrictions on persons in whose favour the vesting order may be made (para. 16(6) of the Decision). In other words, he considered that a vesting order may only be made in favour of trustee(s) to be appointed by the court.

The learned Recorder took the view that before he gave the default judgments, the various sums of money were held by the defendants and the defendants were the absolute owner of the money. 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 right would be divested from the defendants who would hold the same on trust for the victim.  The learned Recorder did not agree that the right to call for repayment from the bank was vested in the defendants by virtue of the giving of the default judgments, hence declined to make the vesting order.

DHCJ Paul Lam SC’s Decision

In a subsequent case Wismettac Asian Foods Inc. v. United Top Properties Ltd and others [2020] HKCFI 1504, Deputy High Court Judge Paul Lam SC came to a different conclusion from that of Mr. Recorder Fung SC.

The Deputy Judge considered Recorder Fung SC’s Decision and took the view that the phrase “a thing in action is vested in a trustee whether by way of mortgage or otherwise”, in particular the word “otherwise” in s.52(1)(e) is wide enough to cover the vesting by way of operation of law in a constructive trust scenario.  He took the view that in a constructive trust scenario, 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 (para. 43 of the Decision). 

The Deputy Judge considered that the constructive trust came into existence at the moment the fraudster or subsequent recipient receives the victim’s money or its traceable proceeds in their bank accounts by operation of law and when the court grants a declaration, it is merely affirming the legal position but is not creating any trust by such order (para. 43 of the Decision).

The Deputy Judge considered that the phrase “in any such person as the court may appoint” is wide enough to include the beneficiary of a constructive trust.  If the court vests the thing in action in the beneficiary, since no new trustee is appointed, the proviso in s.52(1) (“Provided that (i)…; and (ii)”) is not engaged or applicable.

Commentary

In view of these two recent conflicting authorities, it is clear that the debate about the court’s power to make a vesting order remains unsettled and it seems unlikely that there will be an appellate authority to decide the issue authoritatively.

While it is probably right for the Deputy Judge in Wismettac to take the view that the phrase “where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise”in s.52(1)(e) of the Trustee Ordinance (Cap. 29) is wide enough to capture the constructive trust scenario, i.e., the declaration of the prior existence of a constructive trust has the effect of making the fraudster defendant a constructive trustee for the plaintiff beneficiary in respect of the money in the bank account, however it is not apt to describe the  plaintiff beneficiary in whose favour a vesting order is made as a person “appointed” by the court.

By using the words “the court may appoint” in the concluding paragraph and in particular the word “appoint” in s. 52(1), it appears that the section itself contemplates that the recipient in whose favour the vesting order is made would perform some sort of duties / functions for another person, hence the section uses the word “appoint”.  Reading s.52(1) as a whole, the duties / functions that are envisaged to be performed by the incoming person “appointed” by the court are duties / functions normally performed by a trustee for a beneficiary.

It would be straining the language of s.52(1) to say that “in any such person as the court may appoint” would include the victim, being the beneficiary.  By vesting the right to call for the transfer of the money to the beneficiary, the court is unwinding the “constructive trust” but not appointing someone to perform the trustee duties / functions, and this interpretation renders the word “appoint” in the concluding paragraph of s.52(1) otiose.

If the beneficiary is absolutely entitled to the property (as in the case of a constructive trust), the beneficiary should invoke the rule in Saunders v Vautier to terminate the trust and obtain from the court an order directing the trustee to transfer the property to him, failing which, such transfer may be carried out by another person in place of the trustee.

The recent cases may make it confusing as to whether a vesting order should be sought.  However, the Judges in both cases remarked that the victim may seek relief by commencing garnishee proceedings under Order 49 of the Rules of the High Court.  Until the matter is clarified, it is more sensible for the victim to achieve the same objective by applying for a garnishee order, which is clearly uncontroversial.