The plaintiff in JSP International SRO v Alacrity Ltd [2002] HKCFI 977 is a Czech Republic registered corporation, also a wholly-owned subsidiary of a French corporation which is held by JSP Corporation, a Japanese company.
On 20 October 2020, the plaintiff's then financial controller received a call from someone who claimed to be calling on behalf of Mr Sakai, the president of JSP Corporation. The caller asked the financial controller to prepare a bank transfer for purposes of purchasing a company, and asked her to keep the matter confidential from her colleagues. The financial controller made enquiries and determined that the call was legitimate.
Later the same day, another caller who claimed to be a lawyer appointed by Mr. Sakai sent an email to the financial controller, attaching a power of attorney that purported to be from Mr. Sakai that gave the financial controller "full authority to act" including signing, activation, and processing of payment.
Under the mistaken belief that she was acting on Mr. Sakai's instructions, the financial controller made various transfers from the plaintiff's bank accounts to the bank accounts held by the first tier defendants.
It was only on 5 November 2020 that the plaintiff learned about the fraud. The plaintiff reported the matter to both the Czech and Hong Kong police. The plaintiff also found out following the granting of a bankers' books disclosure order, that there had been various transfers from the first tier defendants' bank accounts to accounts held by other second tier defendants.
The plaintiff made an application for default judgment under RHC O.19, r.7 and sought various grounds of relief.
Unjust enrichment
The court granted restitutionary relief on the principles of unjust enrichment against both the first, as well as the second tier defendants, the court being satisfied that the latter had been unjustly enriched by funds originally transferred by the plaintiff to the first tier defendants.
Constructive trust
The plaintiff also claimed proprietary remedies, in terms of a declaration that the defendants held each of the sums transferred to their bank accounts by the plaintiff (in the case of the first tier defendants) or by the first tier defendants (in the case of the second tier defendants) together with the traceable proceeds on trust for the plaintiff, as well as the payment order to pay, release or transfer these sums to the plaintiff.
Fraudulent receipt
The Honourable Madam Justice Yvonne Cheng refused to grant the declaratory relief and payment order relief, and relied on the requirements set out in the English case Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 for determining when a person should be considered a fraudulent recipient.
The first requirement is that one must distinctly allege and prove fraud or dishonesty and must plead all the facts, matters and circumstances to show that the defendant is dishonest. Mere negligence is insufficient, and there should be no equivocal language as it may not be sufficient to say "wilfully" or "recklessly" if the pleader in fact means "dishonestly" or "fraudulently".
The second requirement is that the allegation of fraud must be sufficiently particularised, both as a matter of pleading and as a matter of substance. The court cited Three Rivers:
"At trial the court will not normally allow proof of primary facts which have not been pleaded and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded or from facts which have been pleaded but are consistent with honestly. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved."
The court said that the six particulars pleaded in the Amended Statement of Claim "may be consistent with the First Tier Defendants being fraudulent recipients, but they may equally be consistent with the First Tier Defendants being innocent recipients".
Even if the First Tier Defendants "could be considered to be "fraudulent recipients", that in itself was insufficient for the grant of a declaration of constructive trust. It would be "necessary to show that the defendant has retained property in which the claimant can identify his or her proprietary interest".
In the court's view, there was "therefore no sufficiently pleaded case that the First Tier Defendants have retained property in which the Plaintiff can identify its proprietary interest, such as to justify the grant of a declaration of constructive trust over such property in the hands of the First Tier Defendants". Mere receipt of the funds in the First Tier Defendants' accounts was not sufficient. It was necessary "for the defendants to have retained identifiable property over which a declaration of constructive trust can take effect."
The court, therefore, found that there was no sufficiently pleaded case that the first tier defendants had retained property in which the plaintiff could identify a proprietary interest.
As for the second tier defendants, the plaintiff pleaded that they had "received property imprinted with a constructive trust and continue therefore to be liable to account". However, the court did not consider that it had been sufficiently pleaded that the second tier defendants were "fraudulent recipients", as the particulars pleaded were equally consistent with their being innocent recipients.
Future applications
The Hong Kong courts are generally receptive to applications for redress from persons who have been the victim of cyber fraud. As seen in our recent alert, Three in a Row – victims' tool to recover cyber fraud funds affirmed in Hong Kong, the courts have jurisdiction to grant vesting orders to assist victims of cyber fraud.
The decision in Hypertec Systems Inc v Yifim Ltd [2022] HKCFI 482, discussed in in our earlier alert, set out the "compelling" reasoning followed in earlier case law as to why this should be so, finding in that case that a constructive trust had arisen by law out of the transfer and receipt by way of the fraud.
The decision in JSP International goes to show that – despite the availability of this useful tool – it is of course necessary to demonstrate with particular precision that a victim's proprietary interest can be traced into the hands of the eventual recipients of the fraudulently transferred amounts.
As the case shows, in order to effectively assist clients in seeking relief, allegations of fraud and dishonesty must be sufficiently particularised and particulars meant to illustrate fraud should be robust enough to demonstrate that.
Authored By Mark Lin, Byron Phillips, Nigel Sharman, and Chloe Wong.
