On 10 July 2020, Mr Paul Lam SC, sitting as a Deputy Judge of the Court of First Instance gave his judgment in Wismettac Asian Foods, Inc. v United Top Properties Ltd & Anor [2020] HKCFI 1504.  The Deputy Judge held inter alia that, on a proper construction of section 52 of the Trustee Ordinance (Cap. 29), vesting orders can be made to recover lost funds in cases of fraud.

The Deputy Judge identified as relevant s 52(1)(e) of the Ordinance:

“…

(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…

In this and similar fraud cases, what tends to happen is that the court would make an order in the relevant default judgment application, declaring that the credit balance in the defendant’s bank account, which is a chose in action, is held by the defendant for the benefit of the victim by way of constructive trust.  The question is whether such a scenario falls within the scope of s52(1)(E), supra.

In holding that s52(1)(e) was wide enough to catch bank balances which represent proceeds from this and similar fraud cases, the Deputy Judge had particular regard to the words “trust” and “trustee” in this subsection, which extend to implied and constructive trusts.  He also noted  the breadth of the “or otherwise” provision therein.  It was held that, on a proper analysis, the subsection is broad enough to cover vesting by operation of law, including on constructive trust.

The proper analysis was set out at paragraph 43 of the Judgment,

“…The constructive trust comes into existence the moment the fraudster or the subsequent recipient receives the victim’s money or its traceable proceeds in their bank accounts by operation of law.  When the court grants a declaration in this respect upon the victim’s application for default judgment, it is merely affirming the legal position but is not creating any trust by such order. …”

In coming to this conclusion, the Deputy Judge parted with the conclusion of Mr Recorder Fung SC in 800 Columbia Project Company LLC v Chengfang Trade Ltd [2020] HKCFI 1293.

At paragraphs 52-56, the Deputy Judge considered and set out in detail the suggested procedures for applying for a vesting order in these circumstances.  In gist, this should be done by the lodging of an originating summons, separate from the summons for default judgment.  Both the fraudster/ subsequent recipient and the bank should be named as respondents in the OS.  The hearing should be fixed immediately after that of the default judgment.  Evidence should be given in support of the vesting order application, showing that the bank balance represents the plaintiff’s money or its traceable proceeds and that it has been held on constructive trust.

 

The full text of the judgment can be found here.