Proprietary relief not to be taken for granted in cyber fraud cases: Hong Kong Court rules the need for Plaintiff to show ownership of the property

In recent years, it seems that plaintiffs in cyber fraud cases are used to the Court rubber-stamping their applications for default judgment seeking declaratory relief. However, the Court in Milestone Electric Inc v. Meihoukang Trading Co Limited [2020] HKCFI 2542 finally sets the position straight. Mr Recorder Eugene Fung SC sets out the applicable tracing principles for obtaining proprietary relief. This article discusses the practical implications for practitioners acting for victims in proprietary claims in cyber fraud cases, going forward.

Background

The Plaintiff in Milestone Electric Inc v. Meihoukang Trading Co Limited was a victim of an email fraud and had remitted a total of US$850,000 in three payments on three separate days to the Defendant’s account.

The Plaintiff issued proceedings and also subsequently obtained an injunction against the Defendant. The Plaintiff claimed in its Statement of Claim the usual relief claimed by victims of cyber fraud i.e. (1) a sum of US$850,000 (or its Hong Kong dollar equivalent) as money had and received by the Defendant and (2) a declaration that the Defendant holds US$850,000 (or its Hong Kong dollar equivalent) or all such assets derived from the sum or any part thereof which rightfully belong to the Plaintiff on constructive or resulting trust for the Plaintiff.

After the Defendant failed to acknowledge service of the Writ or to file its defence, the Plaintiff applied for default judgment. In the Plaintiff’s evidence in support of its application for default judgment, it was mentioned that the Plaintiff’s solicitors had received a letter from the Defendant’s bank that part of the money transferred by the Plaintiff had been debited from the Defendant’s account and that the Plaintiff’s solicitors were told by the Hong Kong Police that only a sum of around US$244,000 remained in the Defendant’s bank account.

Whilst the Court granted the Plaintiff default judgment for monetary relief with interest and costs, Mr Recorder Eugene Fung SC reserved his decision on the Plaintiff’s claim for a declaration that there be a constructive trust and eventually refused to grant the Plaintiff this relief after considering the position.

The proper test for declaration of constructive trust                                         

It is not the normal practice of the court to make a declaration without a trial, particularly where the declaration is that the defendant in default of defence has acted fraudulently. This is, however, only a rule of practice and can be departed from when the plaintiff has a genuine need for the declaratory relief and justice would not be done if such relief were denied. Mr Recorder Eugene Fung SC then qualified this by adding that where declaratory relief is sought, the court will scrutinise the application for default carefully, and will not hastily grant the relief sought. 

In determining the Plaintiff’s application for default judgment, Mr Recorder Eugene Fung SC ruled that in order to obtain proprietary relief in relation to the US$850,000 transferred to the Defendant or assets derived from it, the Plaintiff must establish that the assets claimed can be identified by the tracing process as representing the original trust property. In particular, he cited Federal Republic of Brazil v Durant International Corpn [2016] AC 297, Lord Toulson at §17:

“The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. If it has ceased to exist, it cannot metamorphose into a later property interest. Ex nihilo nihil fit: nothing comes from nothing.”

The Court’s decision 

In coming to his decision, Mr Recorder Eugene Fung SC noted that given that over US$600,000 of the US$850,000 had already been withdrawn from the Defendant’s account, it was no longer possible for the Plaintiff to assert its rights in the US$850,000. He went on to say that whether or not the Plaintiff can assert its rights in the remaining credit balance in the Defendant’s account is not something that the Court is currently in a position to determine. The question depends on a number of considerations including (but not limited to) whether or not there has been any mixing of money in the Defendant’s account, and whether the intermediate balance has fallen to or below zero. Mr Recorder Eugene Fung SC noted that none of this had been pleaded by the Plaintiff in its Statement of Claim. As a result, he declined to make a declaration that the Defendant holds US$850,000 on a constructive trust for the Plaintiff.

Implications

The decision in Milestone Electric Inc v. Meihoukang Trading Co Limited sends a message to practitioners who act for victims to cyber fraud cases that they should no longer expect the court to simply rubber‑stamp uncontested applications for default judgment seeking declaratory relief.

In fact, unless the plaintiff can show in these cases that the remaining balance in the relevant bank account is traceable from the original monies sent by the victim and/or an identifiable part of it, whilst the court may still grant the plaintiff default judgment for monetary relief with interest and costs, the court will now no longer be prepared to grant declaratory relief for claims of proprietary interest. It may be that practitioners need to go the extra step of applying for bankers books records for their client in order to show the court evidence that their client’s funds are traceable, in order to successfully obtain the declaratory relief that they wish to preserve their client’s position.