Donald Henry Case v. Profitling International Ltd and Another

DCMP 2531/2020

[2021] HKDC 172

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 2531 OF 2020

________________________

________________________

BETWEEN

________________________

Before:  Deputy District Judge Queenie Ng in Chambers

Date of Hearing:  31 December 2020

Date of Judgment:  25 February 2021

________________________

J U D G M E N T

________________________

1.This is the hearing of the plaintiff’s application by way of Originating Summons (the “OS”) for various reliefs arising from a fraud perpetrated on him by telephone calls and emails for investment of bitcoin trading.

Relevant factual background

2.The plaintiff is a 74 years old Australian national and a retiree living in the suburbs of Melbourne, Australia.

3.In or about May 2018, the plaintiff received an unsolicited telephone call from a person who represented himself as Mr Daniel J Fox, Senior Chief Analyst and Retirement Department Director of Cryptotag Financial (“Mr Fox”). Cryptotag Financial was, according to Mr Fox, an international company that purportedly operated an online bitcoin trading platform (“Purported Trading Site”).

4.Mr Fox continued to contact the plaintiff through telephone calls and emails persuading him to trade on the Purported Trading Site.  The plaintiff was finally induced to purchase AU$400,000 worth of bitcoins to trade on the Purported Trading Site.

5.As instructed by Mr Fox, on 24 May 2018, the plaintiff remitted a sum of AU$400,000 (the “Fund”) from his bank account at the Commonwealth Bank of Australia (the “Plaintiff’s Account”) to a bank account in Hong Kong held by the 1^st defendant (the “1^st Defendant’s Account”) with the 2^nd defendant.  The plaintiff was charged a remittance fee of AU$30.  The Fund was eventually transferred out of the Plaintiff’s Account and correspondingly AU$399,989.01 was deposited to the 1^st Defendant’s Account on 25 May 2018.  The difference in the sum of AU$10.99 was charged as bank fee.

6.Despite the said payment of the Fund on 24 May 2018 and contrary to the representations by Mr Fox, no funds or bitcoins were credited to the Plaintiff’s Account on the Purported Trading Site.  Feeling suspicious, the plaintiff applied to Commonwealth Bank of Australia for a recall of the Fund transferred.  Thereafter, the plaintiff received various calls from a person who claimed himself to be the owner of the 1^st defendant requesting the plaintiff to lift the recall of the Fund transferred.  The plaintiff was subsequently informed by the Commonwealth Bank of Australia that his application to recall was unsuccessful.

7.The plaintiff believed that he had been deceived.  His son helped to make reports with the Hong Kong Police Force and the 2^nd defendant.  The plaintiff confirmed by way of affidavit filed in support of his OS that up to the date hereof, there has been no consideration or return in any form or value given to the plaintiff for his remittance of the Fund and there has never been any legitimate reason for the 1^st defendant to receive the Fund from the plaintiff.  The plaintiff also confirmed that he would not have transferred any money to the 1^st defendant but for the above deception.

The OS

8.The OS was taken out by the plaintiff on 11 August 2020 against the 1^st and 2^nd defendants.  On 4 September 2020, a true copy of the OS was served on the 1^st and 2^nd defendants by leaving the same at their respective registered addresses.  On 7 October 2020, a notice of appointment to hear the OS and the plaintiff’s affidavit were also served on them in the same way.  The 1^st defendant has never responded to the present proceedings and the 2^nd defendant has indicated its neutral position.

9.As a matter of background, the 1^st defendant had previously been dissolved and struck off the Companies Register on 18 January 2019.  The 1^st defendant was only restored to the Companies Register upon the plaintiff’s application and pursuant to the Order of Deputy High Court Judge Rachel Lam SC on 22 July 2020 in HCMP 22/2020.

10.Having considered all the affirmations of service filed by the plaintiff, I was satisfied that the OS, the supporting affidavit and the Notice of the hearing of the OS had been properly served on the 1^st and 2^nd defendants.  I therefore allowed the hearing of the OS to be proceeded with in the absence of the 1^st and 2^nd defendants pursuant to Order 32 Rule 5 of the Rules of District Court, Cap 336H (“RDC”).

11.Both the 1^st and 2^nd defendants were absent in the hearing.  The plaintiff asked this court to disposal of the OS summarily pursuant to Order 28 Rule 4 of the RDC on the basis that there was no triable issues.

12.It is well-established that in a summary disposal, the burden is on the plaintiff to justify its entitlement to judgment. Once the plaintiff’s entitlement to summary judgment is demonstrated prima facie on the evidence, the burden falls on the defendant to show that he has a defence to the claim.  If the defendant files no evidence or his evidence discloses no triable issue, the court may enter final judgment under Order 28 Rule 4(1) of the RDC: Bank of China (Hong Kong) Ltd v Twin Profit Ltd [2010] 2 HKLRD 1065 at [5] to [8] and Hong Kong Civil Procedure 2021 Vol 1 at [28/4/2].

The plaintiff’s claim and the reliefs sought

13.The plaintiff claimed for:-

(1)  a declaration that the 1^st defendant is liable to account to the plaintiff for the sum of AU$400,000 as constructive trustee;

(2)  an order that the equivalent of AU$400,000 in the 1^st Defendant’s Account (together with any interest thereon since 25 May 2018) be vested in the plaintiff and forthwith released and returned by the 2^nd defendant to the plaintiff in the following manner:-

(a)  all sums in the 1^st Defendant’s Account’s AUD currency savings account be paid to the plaintiff; and

(b)  the outstanding balance be paid to the plaintiff in AUD by converting an equivalent sum from the said account’s HKD, EUR and USD currency savings, in the order of priority;

(3)  damages in the sum of AUD$30 to the plaintiff.

Relief 1: Declaration

14.In Guaranty Bank and Trust Company v Zzzik Inc Ltd, HCA 1139/2016, 18 July 2016, a case of email fraud, Deputy High Court Judge Nicholas Cooney SC summarised the legal principle for a proprietary constructive trust claim as follows:-

(i)  When property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient, so that the money is recoverable and traceable in equity [28] (See also: Lord Browne-Wilkinson’s speech in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 716C).

(ii)  Even if the recipient is not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the money, the defrauded claimant has a tracing remedy [32].

(iii)  Knowledge does not have to be acquired at the time of receipt, it can be acquired subsequently while the money is in the recipient’s hands [33].

15.I found on the undisputed facts stated in the plaintiff’s affidavit that the plaintiff transferred the Fund into the 1^st Defendant’s Account as a result of a scheme of fraud perpetrated against him.  The plaintiff was the victim of the said fraud.  There were no dealings between the plaintiff and the 1^st defendant.  It is pertinent to note that immediately after the Fund was transferred, the said AU$399,989.01 was converted to EUR€256,989.02 on the same day.  This shows that the 1^st defendant was aware of the receipt of the Fund to which the 1^st defendant had no legitimate reason to receive.  In the circumstances, knowledge and participation of the 1^st defendant of the said fraud can readily be inferred and it is unconscionable for the 1^st defendant to retain the money.

16.The next and more complicated question is whether the credit balances in the 1^st Defendant’s Account as at 6 August 2019 (the date of the last available bank statement of the 1^st Defendant’s Account), namely, (i) HK$44,120.88 in HKD savings; and (ii) US$5,691.64, GBP£8.04, AU$8.04 and EUR€247,259.26 respectively in foreign currency savings (the “Credit Balances”), can be established as the traceable proceeds of the Fund.

17.The plaintiff submitted that the Credit Balances in the 1^st Defendant’s Account were originated from the plaintiff’s remittance of AU$400,000.  I was shown a set of bank statements of the 1^st Defendant’s Account for the period from 6 June 2018 to 6 August 2019.  It can be seen that after the said AU$399,989.01 was deposited into the 1^st Defendant’s Account on 24 May 2018, it was converted into different currencies, namely:-

(i)  On 25 May 2018, all of the said AU$399,989.01 was converted into EUR€256,820.94;

(ii)  On the same day, part of the said EUR€256,820.94 was converted back into AUD, in that:-

(a)  EUR€650 was converted into AU$998.89;

(b)  EUR€537 was converted into AU$825.20;

(c)  EUR€50 was converted into AU$76.81.

(iii)  On the same day, part of the said EUR€256,820.94 was converted into HKD, in that:-

(a)  EUR€8,096.26 was converted into HK$74,050.63;

(b)  EUR€60 was converted into HK$5,122.10.

(iv)  On the same day, part of the HKD originating from the said EUR€256,820.94 was converted back into EUR, namely, HK$425 to EUR€46.11.

(v)  A few days later, on 30 May 2018, part of the HKD originating from the said EUR€256,820.94 was converted back into USD, namely, HK$32,300 to US$4,107.90.

18.It is noted that apart from the above conversions of money into different currencies, there were other deposits and withdrawals within the 1^st Defendant’s Account in May and June 2018.  From July 2018 onwards, there appeared to be no further transactions in the 1^st Defendant’s Account.

19.The following passage of Lord Millett in Foskett v McKeown [2001] 1 AC 102 explained the nature of tracing:-

At p.128D

“Tracing is … neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. … He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset. … But his claim may also be exposed to potential defences as a result of intervening transactions … We … speak of tracing one asset into another, but this …. is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new assets because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it.”

At p.132C

“… the interests of the wrongdoer who was responsible for the mixing and those who derive title under him otherwise than for value are subordinated to those of innocent contributors. As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied …”

20.Lord Neuberger MR said in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] Ch 453 at [138] that:-

“ … I do not doubt the general principle, reiterated by Lord Millet in Foskett v McKeown [2001] 1 AC 102, that if a proprietary claim is to be made good by tracing, there must be a clear link between the claimant’s funds and the asset or money into which he seeks to trace. However, I do not see why this should mean that a proprietary claim is lost simply because the defaulting fiduciary, while still holding much of the money, has acted particularly dishonestly or cunningly by creating a maelstrom. Where he has mixed the funds held on trust with his own funds, the onus should be on the fiduciary to establish that part, and what part, of the mixed fund is his property …”

21.Hence, in order to establish a claim of tracing, the plaintiff has to show a clear link between the Funds and the Credit Balances now stand in the 1^st Defendant’s Account.  In the present case, there was mixing of funds.  The burden is on the 1^st defendant to establish which part of the mixed fund is its property.  As against the 1^st defendant, the plaintiff is entitled to locate his contribution in any part of the mixture and to subordinate the 1^st defendant’s claim to share in the mixture until the plaintiff’s own contribution has been satisfied.

22.Having reviewed the bank statements carefully, it is noted that the various deposits and withdrawals within the 1^st Defendant’s Account in May and June 2018 were of relatively smaller amounts.  There was money in the 1^st Defendant’s Account prior to the receipt of the Fund from the plaintiff.  There is no evidence from the 1^st defendant as to which part of the Credit Balances belonged to it.  The Credit Balances are more than the amount of the Funds.  I am satisfied on balance of probabilities that the Credit Balances are originated from the Fund or their identifiable substitutes.  The Credit Balances represent the traceable proceeds of the Fund.

23.In the light of the above, I grant the declaration that the 1^st defendant is liable to account to the plaintiff for the sum of AU$400,000 as constructive trustee.

Relief 2: Vesting Order

24.The plaintiff in the OS sought an order that the equivalent of AU$400,000 in the 1^st Defendant’s Account (together with any interest thereon since 25 May 2018) be vested in the plaintiff pursuant to Section 52(1) of the Trustee Ordinance, Cap 29 and forthwith released and returned by the 2^nd defendant to the plaintiff in the following manner:-

(a)  all sums in the 1^st Defendant’s Account’s AUD currency savings account be paid to the plaintiff; and

(b)  the outstanding balance be paid to the plaintiff in AUD by converting an equivalent sum from the said account’s HKD, EUR and USD currency savings, in the order of priority.

25.Miss Li, Counsel for the plaintiff, fairly submitted that recent first instance decisions have differed in how this remedy is to be approached in similar email or internet fraud cases.

26.Section 52(1) of the Trustee Ordinance provides, inter alia, that:-

“(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:

Provided that —

(i)  where the order is consequential on the appointment of a trustee, the right shall be vested in the persons who, on the appointment, are the trustees; and

(ii)  where the person whose right is dealt with by the order was entitled jointly with another person, the right shall be vested in that last-mentioned person either alone or jointly with any other person whom the court may appoint.

(2)  In all cases where a vesting order can be made under this section, the court may, if it is more convenient, appoint some proper person to make or join in making the transfer:

Provided that the person appointed to make or join in making a transfer of stock shall be some proper officer of the bank, or the company or society whose stock is to be transferred.

(3)  The person in whom the right to transfer or call for the transfer of any stock is vested by an order of the court under this Ordinance may transfer the stock to himself or any other person, according to the order, and all companies, banks and societies shall obey every order under this section according to its tenor.

(4)  After notice in writing of an order under this section it shall not be lawful for any company, bank or society to transfer any stock to which the order relates or to pay any dividends thereon except in accordance with the order.

(5)  The court may make declarations and give directions concerning the manner in which the right to transfer any stock or thing in action vested under the provisions of this Ordinance is to be exercised.

…”

27.In one line of authorities, the court saw fit to grant vesting orders under Section 52(1)(e) of the Trustee Ordinance. Reference can be made to Wismettac Asian Foods, Inc v United Top Properties Limited & Ors [2020] 3 HKLRD 732 which Deputy High Court Judge Paul Lam SC made an extensive review of all relevant authorities (including 800 Columbia Project Company LLC below) on applications for vesting orders under Section 52(1) and came to the conclusion that Section 52(1) applied in the email fraud case before him.  The analysis in Wismettac Asian Foods Inc. was agreed or preferred in a number of subsequent cases: Jenson Power Systems PTE Ltd v Lishan Zhi Trading Co., Limited [2020] HKDC 629; En World Japan K.K. v Baoyou Trading Co., Ltd and Another [2020] HKDC 661; and Concrete Waterproofing Manufacturing Pty Ltd v Changxuan Co Ltd [2020] 4 HKLRD 166 (obiter).

28.In another line of authorities, the court refused to make the vesting order: see Mr Recorder Eugene Fung SC’s decision in 800 Columbia Project Co LLC v Chengfang Trade Ltd [2020] 3 HKLRD 674 whereby it was held that the court’s jurisdiction under Section 52(1)(e) is not engaged upon the making of a declaration that a defendant holds certain sums of money in a bank account on a constructive trust for a plaintiff.  The learned Recorder took the view that where a person becomes a constructive trustee pursuant to a declaration made by the court, that person cannot be said to have been “appointed” by the court to be a trustee for the purpose of Section 52 of the Trustee Ordinance.  Furthermore, before the declarations were granted, the defendants were the absolute owners of the right to call upon the beneficiary to repay.  After granting the declarations, they continued to hold the legal title in the said right, but the equitable title therein would have been divested from the defendants who would hold the same on trust for the plaintiff.  Therefore, the learned Recorder did not consider that the said right to call to call for repayment from the bank was vested in the defendants by virtue of the granting of the declarations.

29.This view was agreed and adopted by Deputy High Court Judge Douglas Lam SC in Tokic DOO v Hongkong Shui Fat Trading Ltd [2020] 4 HKLRD 189.  The learned Deputy High Court Judge added that the defendants in these types of cases were no more than recipients of proceeds of fraud and not “true” trustees, whether constructive or otherwise.  They are merely required by equity to account as if they were trustees or fiduciaries which they in fact are not.  These defendants did not fall within the definition of trustees or constructive trustees in Section 2 of the Trustee Ordinance.  The use of the phrase “or otherwise” in Section 52(1)(e) cannot have the effect of expanding the meaning of “trustee” or “constructive trustee” beyond the scope of the Trustee Ordinance.

30.Miss Li invited me to follow the approach in Wismettac Asian Foods Inc.

31.The following passages of Deputy High Court Judge Paul Lam SC in Wismettac Asian Foods Inc are relevant:-

“40. What is left is s.52(1)(e) [of the Trustee Ordinance]. This is indeed the sub-sub-sub-section used by the court in the precedents where vesting orders were granted. It covers the situation “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”. This statutory provision may be invoked if two conditions are satisfied:

(a)  First, a thing in action is vested in a trustee whether by way of mortgage or otherwise; and

(b)  Second, it appears to the court to be expedient.

41.  As to the first condition, the credit balance in a bank account represents a debt owed by the bank to the account holder.  Such debt is plainly a chose in action.  The real question is whether such debt “is vested by way of mortgage or otherwise” because of the order made by the court as a result of the default judgment application that the defendant in this sort of cases shall hold the victim’s money that it has received or its traceable proceeds on constructive trust …

42.  To construe the phrase “a thing in action is vested in a trustee whether by way of mortgage or otherwise”, it is essential to note an important point.  As to the meaning of the word “trustee”, s.2 of the TO [Trustee Ordinance] provides that, unless the context otherwise requires, the expression “trust and trustee” extend to implied and constructive trusts.  Section 68(17) of the Trustee Act contains the same definition.  In Orwin v Attorney General [1998] 2 BCLC 693, 699e, commenting on the court’s jurisdiction to make a vesting order under s.51 of the Trustee Act 1925, Mummery LJ held that:

In most cases this jurisdiction is invoked in the case of an express trust, but it is clear from the definition that, in cases where as a matter of fact and law an implied or constructive trust is established, a vesting order can be made.

43.  Therefore, it seems clear that the word “trustee” in s.52(1)(e) would extend to a constructive trustee unless the context otherwise requires.  In considering whether the context requires the exclusion of constructive trustee, one must note that the statutory provision prescribe the mode of vesting in the following way ie “by way of mortgage or otherwise”.  The phrase “or otherwise” is extremely broad.  In general, it means “in any other way” (Packwood v Union-Castle Mail Steamship Co Ltd (1920) 20 TLR 59 at 60).  This is precisely what the Chinese version (which is equally authentic) says i.e. “其他方式”. There is no reason why, in this context, the word “otherwise” should not be given its natural and ordinary meaning.  In particular, it seems to me that “otherwise”, meaning “any other way”, is capable of including vesting by way of operation of law.  In a constructive trust arising in this sort of cases, 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.  The principle is what Lord Browne-Wilkinson held in Westdeutsche Bank v Islington London Borough Council [1996] AC 669 at 716C-D:

“…when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity.”

In respect of constructive trust which is imposed by law, it is permissible to say that the legal title to the property is vested in the constructive trustee.  Mr Chiu drew my attention to Nanus Asia Co Inc v Standard Chartered Bank [1988] HKC 377 at 399E where Deputy High Court Judge Cruden held that:

“Where a constructive trust exists, the legal title to property vests in one person and the equitable title in another.”

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.  As Lord Browne-Wilkinson held in Westdeutsche Bank v Islington London Borough Council at p.714G:

“Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past.”

44.  For these reasons, I take the view that the context does not require excluding constructive trustee from the meaning of “trustee” in s.52(1)(e).  In these circumstances, the current balance in the defendant’s bank account, insofar that it represents the victim’s money or its traceable proceeds, is vested in the defendant as a constructive trustee by operation of law.  Most importantly, I am satisfied that, looking at the matter in this way, it falls within the case of “a thing in action is vested in a trustee by way of mortgage or otherwise”.  In other words, the first condition in s.52(1)(e) has been satisfied.  On this crucial point, with the greatest respect, I beg to differ with the conclusion of Mr Recorder Fung SC in 800 Columbia Project Company LLC.”

32.Having considered both lines of authorities, I agree with the above reasoning of Deputy High Court Judge Paul Lam SC in Wismettac Asian Foods Inc. and adopt the same in the determination of this case, in particular, I agree that:-

(i)  Constructive trust comes into existence at the moment the fraudster or the subsequent recipient receives the victim’s money or its traceable proceeds 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.

(ii)  The phrase “or otherwise” in Section 52(1)(e) is wide enough to include this type of vesting of thing in action in a constructive trustee by operation of law.

33.By reason of the aforesaid and my analysis of Relief 1 above, I am satisfied that the first condition is met.

34.As to the second condition, I am also satisfied that this condition is met.  The 1^st defendant was dissolved and struck off the Companies Register on 18 January 2019.  It took the plaintiff time and effort to apply for restoration of the 1^st defendant in order to commence the present OS.  The order for restoration was granted on 22 July 2020.  It is unrealistic to expect the 1^st defendant to comply with any order to return the trust property to the plaintiff.  I find it expedient to make a vesting order in the present case.

35.During the hearing, I expressed concern as to Miss Li’s proposed form of vesting order requiring the 2^nd defendant to release money by, inter alia, converting HKD, EUR and USD in the 1^st Defendant’s Account to AUD in order of priority.  Such arrangement is in my view far too complicated and may entail exchange rate issue.  I adjourned the case for Miss Li to reconsider the matter.  By a further written skeleton submissions filed on 31 December 2020, Miss Li confirmed that the plaintiff would only seek the return of AU$400,000 and waive any claims on interests and/or profits from the 1^st defendant’s unauthorised currency exchanges.  Miss Li also stated that the 2^nd defendant confirmed that it does not require specific instructions on how to convert funds from other currencies within the 1^st Defendant’s Account in order to meet the sum in the intended order.  I was shown a letter dated 31 December 2020 issued by the 2^nd defendant confirming its willingness to release the sum in AUD if the court so ordered.

36.In the light of the aforesaid, I order that the sum equivalent to AU$400,000 remaining in the 1^st Defendant’s Account held at the 2^nd defendant be vested in the plaintiff and forthwith released and returned by the 2^nd defendant to the plaintiff in AUD.

Relief 3: Damages in the sum of AU$30

37.By reason of my analysis in Relief 1, I have no hesitation to allow the plaintiff’s damage claim in the sum of AU$30.  But for this scheme of fraud, the plaintiff would not have to incur this bank charge.

Conclusion

38.In the premises, I enter judgment in favour of the plaintiff.  I make an order in terms of the draft order submitted by Miss Li together with her further written skeleton submissions.  I make an order that the 1^st defendant, being the fraudster, should pay the plaintiff its costs of the OS on an indemnity basis with certificate for counsel to be taxed if not agreed and there be no order as to costs as between the plaintiff and the 2^nd defendant.

Miss Cindy Li, instructed by Yap & Lam, for the plaintiff

The 1^st and 2^nd defendants were not represented and did not appear