The Hong Kong court has reaffirmed its jurisdiction to grant vesting orders to assist victims of cyber fraud. In Hypertec Systems Inc v Yifim Ltd [2022] HKCFI 482, deputy judge Simon Leung adopted the "compelling" reasoning adopted in Wismettac Asian Foods, Inc v. United Top Properties Limited [2020] 3 HKLRD 732and affirmed the line of authority that vesting orders may be granted by the court pursuant to section 52(1)(e) Trustee Ordinance (Cap. 29) and summarised in our previous note Vesting orders are back in vogue – Hong Kong Court of First Instance confirms ability to help victims of cyber fraud.
Default judgment
Hypertec was deceived into making payments of US$1,360,500 and US$250,000 into the bank accounts of the two defendants in Hong Kong through an email fraud. Hypertec had no prior or existing business dealings with the defendants. Hypertec commenced proceedings and sought default judgment. Hypertec also applied for orders that the sums standing in the bank accounts should be vested in Hypertec.
The court found that a constructive trust had arisen by law out of the transfer and receipt by way of the fraud so that the money in the defendants' accounts became recoverable and traceable in law. As recipients of the funds, the defendants' state of knowledge that they were not entitled to the funds made it unconscionable for them to receive or keep the money. The defendants would have acquired such knowledge by the service of the injunction and the proceedings yet continued to retain the sums.
Whilst the court acknowledged that declaratory relief would normally not be granted by default without a trial, Deputy Judge Simon Leung reiterated that that was only a "rule of practice" and the court retained the discretion to do justice to the plaintiff where declaratory relief was appropriate. The court, therefore, entered monetary judgment in favor of Hypertec against the defendants respectively.
Vesting orders
A vesting order is a straightforward remedy which, in circumstances where the victim is able to trace or identify the funds, directs the party holding the stolen monies (usually a bank) to pay the money back to the victim.
Deputy Judge Simon Leung reaffirmed the Court of First Instance's jurisdiction to grant vesting orders under section 52(1)(e) by adopting the "compelling" reasoning advanced in Wismettac. The court would only grant a vesting order if (i) it is proven that the balance in the bank account in question represents the victim's monies or traceable proceeds, and (ii) the court finds it expedient to grant such an order, meaning that without such an order, it would be impossible or difficult to deal with those monies or proceeds.
A welcome decision
In so doing, the court declined to follow the alternative line of reasoning in 800 Columbia Project Company LLC v Chengfang Trade [2020] HKCFI 1293 and Tokić DOO v Hongkong Shui Fat Trading Ltd [2020] HKCFI 1822 which had held that the court's jurisdiction under section 52(1)(e) was not engaged to justify the making of a vesting order of the right to recover the plaintiff's money similarly transferred to the defendant recipients due to fraud, a decision which the court said had been carefully considered in Wismettac.
The court said that in these types of cases, on a "broad and natural" reading of the section, a "constructive trust came into existence by operation of law at the very moment the fraudster or the subsequent recipient received the victim's money or its traceable proceeds in their bank accounts. The grant of judgment, including the declaration in respect of such already arisen state of affairs by way of court process merely affirms the existing legal position instead of creating the trust only then".
There would therefore be no good reason for excluding constructive trustee from the meaning of "trustee" in the subsection. The section should apply "so that a vesting order may be made upon proof that a constructive trust arose by operation of law in respect of the money extracted from the plaintiff by fraud or mistake which ended up in the recipient's bank account now subject to the trust." The court also cited other instances in which Wismettac was cited in support of the same conclusion.
The decision in Hypertec, which is consistent with our recent success obtaining vesting orders for clients and two other 2021 Court of First Instance decisions in Star Therapeutics Inc v. Leabon Technology (HK) Ltd [2021] HKCFI 1715 and Lexcom Informationssysteme GmbH v Hongkong Joyee Holdings Co Ltd [2021] HKCFI 3389 will be welcomed by victims of cyber fraud, and further vindicates the vesting order regime as a powerful tool for combating fraud.
Authored by Byron Phillips and Nigel Sharman.
