Cai Group Ltd v. Liu Nan Fei

DCCJ 4333/2021

[2026] HKDC 550

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4333 OF 2021

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JUDGMENT

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A.   INTRODUCTION[1]

1.In this action, the Plaintiff’s employee caused a cheque in the sum of $600,000 (“the Cheque” and “the Sum”), drawn on the Plaintiff’s bank account (“Plaintiff’s Account”), to be paid into the Defendant’s bank account (“Defendant’s Account”) without proper authority.

2.By a writ issued on 10 September 2021 indorsed with a Statement of Claim, the Plaintiff seeks proprietary and personal relief against the Defendant.

3.On 8 February 2022, the Defendant’s then solicitors filed a Defence in Chinese settled by counsel. She admitted that the Sum was paid by the Plaintiff’s cheque into the Defendant’s Account. Nevertheless, she claims that she was a victim of fraud, and hence a bona fide purchaser for value without notice and is entitled to a change of position defence.

4.On 17 January 2023, the Defendant filed a notice to act in person. She has been acting in person since then. Most of her pleaded facts, however, are not supported by the evidence in her one-page hand-written witness statement and documentary evidence disclosed in her list of documents.

B.   THE FACTS

5.In this case, the evidence is assessed, and the following findings of fact are made, in accordance with the principles summarised in Hui Cheung Fai v Daiwa Development Ltd HCA 1734/2009 (unreported, 8 April 2014) §§77-83 (DHCJ Eugene Fung SC, as he then was).

6.Mr Cai is and was at all material times a director and the main shareholder of the Plaintiff and Full Link Garment Factory (HK) Limited (“Full Link”).

7.On 15 June 2020, Full Link employed one Ms LI Po Lai （李寶麗）(“Li”) as an accounting clerk. She was responsible for handling accounting matters in respect of companies owned by Mr Cai. She was entrusted with the custody of various cheque books of those companies, including that of the Plaintiff’s Account. Those cheque books were kept in a locked drawer. Li alone was in possession of the key to the lock.

8.From time to time, Li presented cheques to Mr Cai for signature. On approximately 70% to 80% of such occasions, all particulars had been pre‑completed. On the remaining occasions, the payee’s name was left blank. Mr Cai nevertheless signed all the cheques so presented, believing that all of them were for the proper operation of his companies. The cheques were signed by Mr Cai on the sole basis that they were for proper purposes of his companies.

9.On the afternoon of 2 July 2020, Li absented herself from work and has not returned thereafter. Mr Cai found the key to the locked drawer in the office. Upon inspection of the cheque books therein, he discovered a few pages of their counterfoils recorded several large-amount cheques without payee names. He suspected that some cheques had been issued by Li without proper authority. Upon receipt of copies of those cheques as requested, he discovered that Li caused five crossed cheques of Mr Cai totalling $485,000 to be paid into her account. He made a report to the police on the same day. Due to his busy schedule, he forgot to instruct the relevant banks to suspend the accounts concerned.

10.On 28 July 2020, the Cheque in the Sum drawn on the Plaintiff’s Account was paid into the Defendant’s Account.

11.On 29 July 2020, at about 2 p.m., the Defendant purchased a cashier’s order in the sum of $500,000. The payment was stated to be settled by debiting the Defendant’s Account. The purpose was stated in the application form to be (in English) “for her son buy property in HK”.

12.On 5 August 2020, a staff member of the bank informed Mr Cai that the Cheque had been paid into the Defendant’s Account. Upon receipt of a faxed copy of the Cheque about one week later, he discovered the Cheque for the first time. The Cheque was issued without the Plaintiff’s authority, and the Plaintiff has never had any dealings with the Defendant. The Cheque was procured by the fraudulent act of Li. It has not been suggested that Mr Cai did not sign it, though.

13.On 17 August 2020, Mr Cai made another report to the police in respect of the Cheque and another cheque issued by Li without proper authority.

14.Subsequently, the Defendant’s Account was suspended. A consolidated bank statement dated 21 November 2020 shows a credit balance of $600,839.92 in the Defendant’s Account, and a debit balance of $1,001,541.53 in a mortgage account, which the Defendant attributed to a mortgage loan obtained in October 2020. It is a striking feature of this case that there is no evidence whatsoever as to the fund flow of the Defendant’s Account at the material times.

15.The Defendant is 77 years of age. She gave important evidence as to her knowledge as follows:

15.1  In chief, she said it was unexpected that Li stole her employer’s cheque in the sum of $600,000 and paid it to her, and the next day Li told her the transfer was made by mistake and requested her to transfer $500,000 to Li　（估唔到李寶麗偷他老板的60萬支票比我，第二天李話入錯數要我退回50萬元比佢，入李的賬戶）. She suspected Cheung Hung, Lawyer Leung and Li conspired to cheat her of money.

15.2  Near the close of her evidence, she accepted that, she knew that the Sum was wrongfully deposited into the Defendant’s Account as she was requested by Li to “refund” it on the same day; further, if the Sum had been wrongly paid into the Defendant’s Account, she ought to repay it.

C.   THE PLEADED CASES OF THE PARTIES AND THE ISSUES ARISING THEREFROM

C.1  The Plaintiff’s case

16.On the basis of the above facts, the Plaintiff seeks proprietary and personal relief as follows:

16.1  It says that it is the “beneficial owner” of the sum of $600,000 in the Defendant’s Account and the Defendant holds the same as “constructive trustee” for the Plaintiff.

16.2  Further or alternatively, the Plaintiff says the Defendant is liable to repay $600,000 on the basis of unjust enrichment.

C.2  The Defendant’s case

17.The Defendant says that she is entitled to keep the Sum wrongly transferred to her because, as a victim of fraud, she was a “bona fide purchaser for value without notice” in respect of the Sum; and she relies on the defence of “bona fide change of position”. The circumstances leading to her receipt of the Sum arose as follows.

18.In May 2020, she was contacted via Facebook by a person known as “長虹” (“Cheung Hung”). In late May 2020, she lent $71,000 to Cheung Hung upon his request. He then asked for a further loan of $310,088, promising to repay 200%. Between May to July 2020, the Defendant transferred $40,000 and US$35,000 (equivalent to about $273,000) to him. The total transfer was $384,000 but Cheung Hung ought to repay her $697,000. She then lost contact with him from August 2020.

19.On about 13 July 2020, a person claiming to be “哈里” (“Harry”) informed the Defendant via Facebook, WhatsApp and telephone that she had been deceived by Cheung Hung. Harry recommended a “United Kingdom lawyer” called Mr Leung (“Lawyer Leung”), alleging that $600,000 could be claimed back.

20.Lawyer Leung then called the Defendant via WhatsApp and alleged that he could claim back about $600,000 from Cheung Hung. Upon Lawyer Leung’s requests via WhatsApp, the Defendant transferred on 13 July 2020 two sums to a bank account held in the name of “Li Po Lai”, namely (1) $19,000 as “mobilisation fee”; (2) $38,900 as “case handling fee” and “marketing fee”. 

21.On 16 July 2020, Lawyer Leung then requested via WhatsApp the Defendant to pay a further $41,500 as “transfer fee”. The Defendant said she had no means to pay this sum. She was then requested to pay $4,500 via Bitcoin ATM, and she complied.

22.On about 21 July 2020, Lawyer Leung then promised via WhatsApp message to transfer $70,000 into the Defendant’s Account on the condition that she paid $20,500 “transfer fee” and helped him cash a cheque via Bitcoin ATM.

23.On 22 July 2020, a sum of $70,000 was paid by cheque into the Defendant’s Account. The Defendant did not know this deposit would occur. However, Lawyer Leung told her that this sum did not belong to her and instructed her to send this sum to him via Bitcoin ATM.

24.On 24 July 2020, the Defendant requested Lawyer Leung via WhatsApp to transfer to her the balance of $530,000. He replied that she would receive her due after she transferred $70,000 to him. The Defendant duly bought $70,000 worth of Bitcoin via Bitcoin ATM and transfer the same to a designated account as instructed by Lawyer Leung.

25.From her recollection, the Defendant transferred multiple sums to designated accounts of Lawyer Leung via Bitcoin ATM, totalling not less than $100,000.

26.On 25 July 2020, Lawyer Leung claimed via WhatsApp “我們會向你發送600k到您的賬戶，你需要提取100k […]星期二” (translated as “we will send 600k to your account, you need to withdraw 100k […] Tuesday”). Between about 25 July 2020 and 27 July 2020, Lawyer Leung, by telephone, demanded in an imperative tone that she transfer $500,000 to an account in the name of “Li Po Lai” and he would give her $650,000 one week later.

27.On 27 July 2020, the Defendant received the Sum. She had no idea of the means by which the Sum was paid into the Defendant’s Account. Lawyer Leung told her via WhatsApp “你明天就把錢兌現好吧，保持100,000自我價值” (translated as “You duly exchange the money tomorrow, keep 100,000 self value”).

28.On 29 July 2020, Lawyer Leung, by WhatsApp, requested on three or four occasions that the Defendant transfer $500,000 from the Defendant’s Account to another account held in the name of “Li Po Lai”. On the same day, the Defendant deposited $500,000 by cashier’s order into the said account, albeit the source of this fund for the purchase of the cashier’s order was not pleaded.

29.On 1 August 2020, Lawyer Leung, by WhatsApp, informed the Defendant that $650,000 was given to her. On 4 August 2020, the bank notified the Defendant that the cheque was dishonoured. Since about 7 August 2020, she has lost contact with Lawyer Leung.

30.On the basis of the above, the Defendant alleges that she was a victim of the fraudulent conduct of Cheung Hung, Harry, Lawyer Leung and Li Po Lai, and she has no knowledge, or reason to suspect that the Sum was tainted by any illegality. Specifically:

30.1  She was a “bona fide purchaser without notice” of the Sum. She gave valuable consideration in an amount not less than $546,540 in respect of the money due from Cheung Hung, or the Sum. （她已經在不知情的情況下付出價值購買了長虹應該歸還及／或給予她的款項和／或該款項）

30.2  She raises the defence of “bona fide change of position”. She alleges that, in the expectation and hope of receiving the money due from Cheung Hung or the Sum, and after actual receipt of the Sum, she changed her position by paying not less than $1,046,400 to Cheung Hung, Lawyer Leung and Li Po Lai.（預料或預期會接收長虹應該歸還及／或給予她的款項和／或該款項的情況下，而亦在接收該款項後，不知情地和真誠地改變了自身的情況，因此（而只因此）支付了不少於港幣$1,046,400元給長虹、梁律師和李寶麗）

C.3  The issues

31.Two issues arise from the parties’ pleaded cases.

31.1  Is the Plaintiff entitled to proprietary relief in respect of the credit balance in the Defendant’s Account?

31.2  Is the Defendant liable to repay the Sum to the Plaintiff on the basis of unjust enrichment?

D.  THE PROPRIETARY CLAIM BASED ON TRUST

32.The Plaintiff contends that it is and was the “beneficial owner” of the sum of $600,000 in the Defendant’s Account and that the Defendant holds and held the same as “constructive trustee” for the Plaintiff. Mr Wong, counsel for the Plaintiff, confirmed in his opening that the proprietary claim is based purely on the law of property, but not on unjust enrichment.

33.This claim requires a consideration of the following questions:

33.1  Does the Plaintiff have any continuing beneficial interest in the credit balance in the Defendant’s Account?

33.2  If so, what is the appropriate form of proprietary relief?

34.It is important to distinguish between two categories of cases. The first is where an employee takes his employer’s property without his consent. This may happen in a variety of situations but, for the sake of convenience, this act will be called “misappropriation” and the misappropriated thing will be called “stolen property” (see Section D.1 below).

35.In the second category, the employee causes a consensual transfer of the employer’s property, but his consent is vitiated by recognised factors such as fraud (see Section D.2 below).

36.In this case, the task of the Court is substantially simplified by the following facts:

36.1  The Cheque was paid directly into the Defendant’s Account so that the difficult question involved in payments into intermediate bank accounts does not arise.

36.2  The aforesaid transfer was made by the unauthorised act of the Plaintiff’s employee (Li) so that the question of how a trust could arise against a stranger who has no pre-existing relationship with the true owner does not arise.

D.1  Proprietary claim by asserting continuing beneficial interest in stolen property

37.Traditionally, equity gives effect to a true owner’s beneficial interest in property held in the name of another by decreeing that person a trustee. In Burgh v Francis (1673) Rep t Finch 28; 23 ER 16, a mortgagor borrowed money on the basis of a mortgage which was defective for want of livery of seisin. The heir of the mortgagor by collusion confessed certain judgments for considerable sums of money to defeat the mortgagee’s debt. Lord Keeper Finch (later Earl of Nottingham LC) held:

“Equity, which supplies that Defect, did still charge the Land[…] the Mortgagor had covenanted for him and his Heirs, to make any farther Assurance; so that when the Land descends upon the Heir charged with this Mortgage, he is in Nature of a Trustee for the Mortgagee till the Money is paid, and cannot incumber it […]” (29)

38.Similarly, in the second category where a transaction by which property has purportedly passed is set aside, the Court of Equity decrees the person holding the property a “trustee” and the property held on “trust”.  This is illustrated by the historical method of conveyance known as levy of fine[2], through which parties to a conveyance commenced an artificial action and then reached a settlement (known as a fine), resulting in a public court record used as proof of title[3]. William Cruise stated in An Essay on the Nature and Operation of Fines (1783):

“[I]f any fraud or undue practice appears to have been used in obtaining a fine, the Court of Chancery has then a power of relieving against it, as much as against any other kind of conveyance, …

[…]

The Court of Chancery however does not absolutely set aside a fine so obtained, […] but it considers all those who have taken an estate by such a fine, with notice of the fraud, as trustees for the persons who have been defrauded, and decrees a re-conveyance of the lands, on the general ground of laying hold of the ill conscience of the parties, to make them do that which is necessary, for restoring matters to their former situation.”(229-230 citing Welby v Welby (1595) Tothill 99; 21 ER 135)

39.This proposition was clearly stated by Lord Hardwicke LC in Barnesly v Powel (1749) 1 Ves Sen 284, 289; 27 ER 1034, 1037. In Pickett v Loggon (1807) 14 Ves Jr 215; 33 ER 503, Lord Eldon LC described the same as “long settled” (234).

40.In Marriot v Marriot (1725) Gilb Ch 203; 25 ER 142, Lord Chief Baron Gilbert stated similarly in his “argument” (intended to be a judgment which was not delivered due to compromise):

“The Courts of Equity […] may in notorious Cases declare a Legatee, that has obtained a Legacy by Fraud, to be Trustee for another; as if the Drawer of a Will should insert his own Name, instead of the Name of a Legatee, no Doubt he would be Trustee for the real Legatee. […]

But in all Cases a Court of Equity must consider what was the real Intent of the Testator; and they can't declare a Trust according to their own Fancy, nor accordingto what the Testator should have willed, for then they make the Will, and not the Testator […]” (208-209)

41.However, there was no clear precedent whereby the Court of Chancery gave effect to an owner’s continuing equitable interest in stolen property by imposing a trust under the first category. Jackson v Butler (1742) 2 Atk 306; 26 ER 587 might be an early example. The plaintiff put into the hands of the defendant (Butler) deeds of mortgage and an assignment of a mortgage to receive principal and interest. Butler abused his trust by pawning them to one Spring. Lord Hardwicke LC upheld the plaintiff’s bill for the recovery of his deeds. It was impossible that Butler could impose the deeds upon Spring as his property, “for by the deeds themselves, he must appear to have no property” (307). Spring, not appearing to have acted dishonestly, but indiscreetly, was decreed to deliver the deeds to the plaintiff. It is reasonable to assume that, pending actual delivery, Spring held the deeds as trustee for the plaintiff.

42.Perhaps the paucity of direct authorities was partly due to the availability of a statutory “writ of restitution” under the Restitution of Goods Stolen Act 1529[4]: see Horwood v Smith (1788) 2 Term Rep 750; 100 ER 404. This Act was repealed by the Criminal Statutes (England), Repeal Act 1827 (7 & 8 Geo 4, c 27) and enacted in substance as section 57 of the Larceny Act 1827 (7 & 8 Geo 4, c 29), section 100 of the Larceny Act 1861, and section 45 of the Larceny Act 1916.

43.The complicated provisions on revesting of stolen property on conviction proved problematic, and its injustice was a matter of “regret” expressed in Bentley v Vilmont (1887) 12 App Cas 471. The Criminal Law Revision Committee in its 8th Report: “Theft and Related Offences” (Cmnd 2977, 1966) recommended that “conviction of theft or another offence against property should not in future affect the title to the property but the title should depend entirely on civil law. Therefore no provision is made in the Bill for revesting of property.” (p 77, §163). Thereafter, a conviction no longer affects title to the property[5], although restoration of property remains[6].

44.In the common law courts, judges consistently held that property would not pass upon stealing and an owner could recover stolen property (or its value) by personal claims in actions for trover or money had and received, sometimes on the express basis that it belonged to the owner.

45.In Bloss v Holman (1586) Owen 52; 74 ER 893, the plaintiff mercer put his goods in trust to be sold, and the defendant servant took his goods away. The plaintiff brought an action for trespass. Anderson CJ held in favour of the plaintiff, because the defendant had “neither general nor special property in the goods” (52).

46.In Raven’s case (1662) Kel 24; 84 ER 1065, it was reported that at the sessions in the Old Bailey on 12 October 1664, a servant was indicted for stealing some silk from his master, Hyde CJ, Kelyng and Wylde JJ held that “this was felony, notwithstanding the delivery of it to the party, for it was delivered to him only to work, and so the entire property remained then only in the owner” (35).

47.In Ford v Hopkins (1700) 1 Salk 283; 91 ER 250, the plaintiff gave lottery tickets to a goldsmith to receive money due, but the goldsmith delivered the tickets to the defendant. Holt CJ allowed an action for trover and held that “if bank-notes, Exchequer-notes, or million-tickets, or the like, are stolen or lost, the owner has such an interest or property in them, as to bring an action into whatsoever hands they are come […] the delivery of the plaintiff's tickets to the defendant was no change of the property” (284).

48.In Miller v Race (1758) 1 Burr 452; 97 ER 398, Mr Finney sent a bank note by mail which was subsequently robbed. The bank note came into the possession of the plaintiff for valuable consideration in the usual course of his business without notice and knowledge that it had been stolen. The plaintiff then delivered to the defendant (a clerk in the bank) and applied for its payment. Upon the defendant’s refusal, the plaintiff brought an action for trover (for the value of the note wrongfully converted). The jury found a verdict for the plaintiff but sought the opinion of the court on whether the plaintiff “had a sufficient property in the bank note” (453).

49.Lord Mansfield (with whom the other members of the Court agreed) held for the plaintiff as follows:

“It is a pity that reporters sometimes catch at quaint expressions that may happen to be dropped at the Bar or Bench; and mistake their meaning. It has been quaintly said, “that the reason why money can not be followed is, because it has no ear-mark:” but this is not true. The true reason is, upon account of the currency of it: it can not be recovered after it has passed in currency. So, in case of money stolen, the true owner can not recover it, after it has been paid away fairly and honestly upon a valuable and bonâ fide consideration: but before money has passed in currency, an action may be brought for the money itself.” (457-458)

50.In Clarke v Shee (1774) 1 Cowp 197; 98 ER 1041, Wood was the plaintiff’s clerk who received money from the plaintiff’s customers and negotiable notes for the plaintiff’s use in the ordinary course of business. He paid several sums with the said money and notes to the defendants upon the chances of the coming up of tickets in the State Lottery, contrary to the prohibition of the Lottery Act. The plaintiff brought a common law action for trespass, money laid out and expended and money had and received. Lord Mansfield held that the plaintiff could maintain this “liberal action in the nature of a bill in equity” for the following reasons:

“[T]he plaintiff does not sue as standing in the place of Wood his clerk: for the money and notes which Wood paid to the defendants, are the identical notes and money of the plaintiff. Where money or notes are paid bonâ fide, and upon a valuable consideration, they never shall be brought back by the true owner; but where they come malâ fide into a person's hands, they are in the nature of specific property; and if their identity can be traced and ascertained, the party has a right to recover. It is of public benefit and example that he should: but otherwise, if they cannot be followed and indentified, because there it might be inconvenient and open a door to fraud. […] Here the plaintiff sues for his identified property, which has come to the hands of the defendants iniquitously and illegally, in breach of the Act of Parliament. Therefore they have no right to retain it; and consequently the plaintiff is well entitled to recover.” (200-201)

51.Black v S Freedman & Co (1910) 12 CLR 105[7] appears to be the first modern authority establishing that stolen property transferred to a volunteer is held on trust in favour of the original owner. Mr Black, an accountant employed by the plaintiff, misappropriated £1,394 by understating entries in the cashbook. The last 3 sums he deposited into his wife’s account totalled £754, there being no intervening and subsequent withdrawals; and he purchased £250 in circular notes (traveller’s cheques) in her name. Upon arrest, he was found in possession of £250 in circular notes. When questioned by the police, Mrs Black made no reply. Mr Black was later convicted of theft. The plaintiff sought a declaration that the sums of: (1) £754 (represented by credit balance in Mrs Black’s account); and (2) £250 (represented by circular notes), “are the property of the plaintiff”. The defendants made bare denial in their defence. In her failed attempt to resist an interlocutory injunction, Mrs Black filed an affidavit claiming the sums “are my own separate property and not the property of my said husband”. At trial, she declined to give oral evidence or be cross-examined.

52.In an ex tempore judgment, McMillan J first found that Mr Black “occupied a very responsible position in the firm because [the plaintiff’ owners] have been content to leave themselves very much in Black’s hands”, and he “enjoy this position of confidence” so that he “was able to do very much as he liked in this firm” (§§106-109). He found that Mr Black did steal £1,394 (§117), and £754 in Mrs Black’s account (§123) and the circular notes (§136) represented “proceeds of his thefts”.

53.McMillan J then said that “The only question is whether those employers are entitled to recover from the wife of the thief money which undoubtedly was their money” (§123). Counsel for the plaintiff conceded that the claim would fail if it could be shown that “Mrs Black took the money honestly and for good consideration (§124). Counsel for the defendants argued that “there is no right in law for the plaintiffs to follow this money which undoubtedly was theirs” (§126). Relying on Bramwell B’s judgment in Foster v Green (1862) 7 Hurl & N 881; 158 ER 726, he held:

“I must say it would seem to me a very strange position if the law were to afford no protection to a person who had had monies stolen and who was able to show that it had found its way into the pocket of a person who could not pretend that he had taken it innocently or that he had given any good consideration.” (§127)

[…]

“Under all the circumstances of the case it seems to me that the plaintiffs have shown that she is holding money of theirs which has found its way into her account under very suspicious circumstances.[…] [T]he plaintiffs are entitled to recover this amount from her it being money which I find was the money of the plaintiffs stolen by her husband and placed to her account.” (§134)

54.On appeal, counsel for Mrs Black argued that no evidence was adduced by the plaintiff “to show that the wife took without consideration and that she was affected with knowledge that it had been stolen”, while counsel for the plaintiff argued that the onus was on the wife to show otherwise (106).

55.The High Court of Australia unanimously upheld McMillan J’s judgment on the express basis of “trust”. Griffith CJ (with whom Barton J agreed), citing Re Hallett’s Estate (1880) 13 Ch D 696 regarding persons in “a fiduciary position”, held:

“Then the question is whether it can be claimed from her. It is suggested that in following trust property there is a distinction between real and personal property which gets into the hands of a volunteer. But the rule appears to be the same with respect to all kinds of property. It is so laid down in the old case referred to in Lewin on Trusts, and it is so stated in the last edition of White and Tudor in the notes to Dyer v Dyer. […] Of course it is not sufficient if the money is taken by the other party bonâ fide for valuable consideration. There the money cannot be recovered back. But it has been laid down in cases decided long ago that if the alienee is a volunteer the estate may be followed into his hands whether he had notice of the trust or not. […] I think that where a man pays a large sum of money to his wife, and no more appears, the inference is that it is a present. Therefore the doctrine of equity is applicable. The money is identified; it came into her hands as a volunteer, and she is liable to repay it.” (108-109)

56.O’Connor J held:

“I think the law applicable is that which is laid down in the passage to which Mr Brockman [for Mrs Black] referred in White and Tudor, in the notes to Dyer v Dyer. Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person’s hands. If, of course, that other person shows that it has come to him bonâ fide for valuable consideration, and without notice, it then may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there is notice or not. […] In all the circumstances, I am of opinion that there was a prima facie case, that she was a volunteer, and that this money retains its character as trust money and she cannot be allowed to keep it.” (110-111)

57.Both Griffith CJ and O’Connor J referred to the notes to Dyer v Dyer (1788) 2 Cox Eq Cas 92; 30 ER 42 (a landmark case on resulting trust) in White and Tudor, A Selection of Leading Cases in Equity, Volume 2 (7^th ed, 1897), 803-834. This chapter does not contain any discussion of trusts arising out of theft or fraud. However, the following passages in the chapter suggest that the Court was of the view that a resulting trust was created in these circumstances:

“The foundation of the doctrine [ie resulting trusts upon purchases made in the names of strangers] is the desire of courts of equity to give effect to the intention of the parties […] and a resulting trust only arises when there is no other explanation of the transaction. (810)

On the whole, therefore, it would seem that, at any rate as regards transfer of personal property to a stranger, it stands on the same footing as a purchaser, and a trust will, prima facie, result to the transferor, liable, however, to be rebutted by evidence […]” (817).

58.In Australia, the “trust” analysis in Black v S Freedman & Co (1910) 12 CLR 105 has been treated as well-established and repeatedly applied by the New South Wales Court of Appeal[8], the Western Australia Court of Appeal[9], and the Full Court of the Federal Court of Australia[10]. In Evans v European Bank Ltd [2004] NSWCA 82; (2004) 61 NSWLR 75, Spigelman CJ held that this trust is “better described as a presumed or resulting trust, rather than as a constructive trust.” (§112). This trust “arises immediately upon the acquisition of the property, not when recognised by a court” (§113).

59.In England, judges repeatedly confirmed the proposition that volunteers could not obtain good title to stolen property or its traceable proceeds as against its true owner, both extra-judicially and when deciding personal claims based on money had and received and unjust enrichment.

60.In ‘Tracing the Proceeds of Fraud’ (1991) 107 LQR 71, Lord Millett suggested that resulting trust is the proper basis of proprietary relief for property stolen by a “thief” (who was not a dishonest employee in a fiduciary position):

“The only situation in practice in which it may be impossible to invoke the assistance of equity is where the money has been stolen by a thief. In England, at least, it would be heretical to regard a thief as a fiduciary or a simple theft as giving rise to a constructive trust. It is otherwise in the United States of America and, possibly, in Australia. There should be no need to resort to such heresy. There is no reason in principle why equity should not intervene in such a case on the basis of a resulting trust. Theft does not deprive the true owner of his legal title; and a fortiori it does not deprive him of his equitable title. It has never been a requirement of the equitable tracing claim that the legal and equitable titles should be divided. The requirement that the loss must have arisen from a breach of fiduciary duty is difficult to understand and impossible to defend.” (76, footnotes omitted)

61.In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, Cass was a partner in the appellant firm. He stole money from the firm’s client bank account and gambled in a licensed casino owned by the respondent. The parties agreed that £154,695 won by the club and lost by Cass was derived from the stolen money. The firm’s action for money had and received was dismissed by Alliott J and the Court of Appeal. The Appellate Committee of the House of Lords unanimously allowed the appeal and gave judgment for the sum of £154,695.

62.Having considered the relevant authorities (563D-566E), Lord Templeman (with whom Lord Bridge, Lord Griffiths and Lord Ackner agreed) held that, although “the decision in  [Black v S Freedman & Co (1910) 12 CLR 105] went on the grounds of trust, the reasoning applies equally to a claim for money had and received” (566A).

63.As a matter of logic and consistency, the reasoning in the above cases that a thief cannot obtain or pass good title to stole property, and that he holds the same on trust for the owner, should apply equally to proprietary claims.

64.The judgment of Lord Goff (with whom Lord Bridge, Lord Griffiths and Lord Ackner agreed) provided further support for the proposition that a thief in the position of Cass held the stolen property on “trust” for its original owner, who would be entitled to “trace it in equity” into the hands of volunteers:

“So, in the present case, the solicitors seek to show that the money in question was their property at common law. But their claim in the present case for money had and received is nevertheless a personal claim; it is not a proprietary claim, advanced on the basis that money remaining in the hands of the respondents is their property. Of course there is no doubt that, even if legal title to the money did vest in Cass immediately on receipt, nevertheless he would have held it on trust for his partners, who would accordingly have been entitled to trace it in equity into the hands of the respondents. However, your Lordships are not concerned with an equitable tracing claim in the present case, since no such case is advanced by the solicitors, who have been content to proceed at common law by a personal action, viz. an action for money had and received. […]” (572F-573A)

65.In Foskett v McKeown [2001] 1 AC 102, some purchasers (the plaintiffs) entrusted money to Mr Murphy for a property development scheme under an express trust. The scheme never materialised. In breach of trust, Murphy used some £20,440 of the trust money of the purchasers to pay the fourth and fifth annual premiums (out of a total of five) on a whole life insurance policy. Later, after appointing his three children (the 3^rd to 5^th defendants) as the beneficiaries under the policy, he committed suicide. The insurers paid to the trustees of the policy (the 1^st and 2^nd defendants) £1 million as the death benefit. The plaintiffs brought an action for a proportionate share of the proceeds of the death benefit. The Court of Appeal dismissed their claim.

66.On appeal, the purchasers argued that the policy moneys were “held in trust for the children and themselves pro rata according to their respective contributions to the premiums paid out of the purchasers’ moneys on the one hand and Mr Murphy personally on the other” (108C).

67.The action was not based on unjust enrichment but on “equitable proprietary interest in identified property” (108F, Lord Browne-Wilkinson); “proprietary right” (115G, Lord Hoffmann); and “continuing beneficial interest [by the] transmission of a claimant’s property rights from one asset to its traceable proceeds” (127E, Lord Millett).

68.The majority (Lord Browne-Wilkinson, Lord Hoffmann and Lord Millett) allowed the appeal and declared that “the policy moneys were held in trust for the children and the purchasers in proportion to the contributions which they respectively made to the five premiums paid.” (111D). The imposition of “trust” seems to be the legal result of assertion of the continuing beneficial interest ― Lord Browne-Wilkinson stressed that the case concerned misappropriation under an express trust so it “does not involve any question of resulting or constructive trusts” (108G).

69.Lord Millett (with whom Lord Browne-Wilkinson and Lord Hoffmann agreed) explained how the claimant may “assert” (127B, 128F, 130A-B, 131D & 131G) beneficial ownership of the trust property or its traceable proceeds by a proprietary claim:

“The beneficiary’s proprietary claims to the trust property or its traceable proceeds can be maintained against the wrongdoer and anyone who derives title from him except a bona fide purchaser for value without notice of the breach of trust. The same rules apply even where there have been numerous successive transactions, so long as the tracing exercise is successful and no bona fide purchaser for value without notice has intervened.” (130D)

70.On three subsequent occasions in Hong Kong, Lord Millett affirmed the above analysis.

71.The first occasion was the final appeal from PBM (Hong Kong) Ltd v Tang Kam Lun Allan HCA 12138/1997 (unreported, 24 May 2002). The 1^st defendant (AT), then assistant financial controller of the plaintiff (PBM), instructed a customer to pay trade debts into his own accounts, misappropriating nearly $50 million. With his girlfriend (Chau), he laundered the proceeds, part of which funded the purchase of a property held through their single-purpose company, Regent Trinity Investment Ltd (RTIL), the shares of which were transferred to Chan Chun Chung, Wyman (Chan) and his wife on 26 June 1997. The property was later sold, and its net sale proceeds were still in RTIL’s accounts at trial, subject to an injunction.

72.PBM claimed against (1) AT’s girlfriend (Chau) for dishonest assistance (but not for knowing receipt) for her involving in using her accounts to launder the proceeds (§§13-15); (2) Chan, his wife and RTIL for the “return” (§32) of the net proceeds of sale of the property together with interest earned as “constructive trustee” (§10) on the basis of “knowing assistance” (§34). AT was later convicted of false accounting.

73.DHCJ Lam (as Lam PJ then was) found that Chau was liable for dishonest assistance (§§11-31); and defined the issue in respect of the claim against RTIL as follows:

“[I]t seems to me irrespective of which causes of action we are concerned with, the first question is whether the monies used by AT and Chau to acquire the shares of RTIL were monies belonging to PBM in the eyes of equity. I do not think one can avoid this issue even if the claim of PBM is considered in the context of knowing assistance. If the source of finance was not monies misappropriated from PBM or profits generated therefrom, it is difficult to categorize the use of such money for the acquisition of RTIL as an act in furtherance of a breach of trust. It might be an attempt by AT to frustrate a foreseeable claim by PBM, but that is not a breach of trust if the monies used were not originated from monies misappropriated. On the other hand, if the monies were originated from misappropriated funds, the fruits of such acquisition would belong to PBM in the eyes of equity. Any attempts to conceal that asset would attract the same consequence as money laundering. AT and his nominee Chau would hold the shares of RTIL on constructive trust for PBM as much as AT originally held the misappropriated funds on constructive trust for PBM. This is based on the principle of equitable tracing. (See Underhill & Hayton’s Law of Trusts and Trustees 15 Edn Article 95 at p 850; Re Hallett’s Estate (1880) 13 Ch D 696; AG for Hong Kong v Reid [1994] 1 AC 324; Paul Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440).” (§37)

74.It was not disputed that no money passed upon the completion of the sale and transfer of RTIL’s shares; and RTIL’s defence was that consideration was provided by Chan’s discharge of debts AT owed him (§41). The Court rejected Chan’s evidence and found the share transaction a “sham” (§§52-81). The Court concluded that PBM owned the RTIL shares as traceable proceeds of misappropriated funds:

“50. […] the sources of finance for the acquisition of the shares of RTIL by AT and Chau were either funds hidden away by AT in the names of others or funds generated from dealings conducted by AT by using the misappropriated funds. Hence, they were monies of PBM in the eyes of equity. It follows that upon the acquisition by AT and Chau, the shares of RTIL became the property of PBM in equity.

[…]

85. As I said earlier, the burden of proof is on PBM to establish that the monies used by AT for acquisition of RTIL were monies of PBM in equity. But once I reject Chan’s evidence about the transfer of US$120,000 being a loan to AT, I have to ask why would Chan make such a transfer. It was unlikely to be a gift. In my judgment, the only possible explanation was that Chan had been holding the money for AT. This could be either because AT had actually hidden funds in Chan’s accounts or because Chan owed AT money in respect of some earlier dealings. Again for reasons given in Paragraph 12(e) above, I infer that the money hidden by AT or used by AT in such earlier dealings were funds misappropriated from PBM or monies derived therefrom. Hence, the money held by Chan for AT was money belonging to PBM in equity.

86. By the same parity of reasoning, I find that the subject matter of the other transfers by Chan to AT or Chau’s accounts were also money belonging to PBM in equity.

Legal consequence in respect of the RTIL transactions

87. Once it is recognized that the transfer on 26 June 1997 was a sham and the monies used for the acquisition of RTIL by AT and Chau were monies of PBM in equity, the net sale proceeds obtained by RTIL in selling the Property in October 1997 must belong to PBM in equity. It does not matter that the acquisition of RTIL was partly funded by mortgage (see cases cited in Paragraph 37 above, in particular Paul Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440). RTIL must be holding the same on trust for PBM on the principle of equitable tracing.” (§§50, 85-87)

75.Based on counsel’s submissions, it was found that Chan was liable for “knowing assistance” (§88). There was, however, no apparent finding as to whether the state of knowledge of RTIL was unconscionable. The reasoning is consistent with the assertion of continuing beneficial interest in stolen property as analysed above, save that the “trust” was labelled as “constructive trust”.

76.The judgment was affirmed on appeal: CACV 274/2002 (unreported, 25 February 2003). On appeal, RTIL’s argument was that there were genuine loans between Chan and AT (§10); and that Chan was not liable for “knowing assistance” (§12). Having rejected the challenge to the findings of fact (§§13-18), Rogers VP (with whom Le Pichon JA and Sakhrani J agreed) held that, in respect of Chan’s transfers of money to AT, that “it was quite legitimate for the judge to infer that these monies were funds misappropriated from the plaintiff or monies derived therefrom.” (§19).

77.The appeal of Chan and RTIL to the Court of Final Appeal was dismissed: Chan Chun Chung & Another v PBM (Hong Kong) Ltd (2004) 7 HKCFAR 178. Litton NPJ (with whom Bokhary, Chan and Ribeiro PJJ and Lord Millett NPJ agreed) considered this a proprietary claim in accordance with assertion of continuing beneficial interest in stolen property as follows:

“9. The purchase [of the property] by Tang and Chau was financed by bank mortgage to the extent of $8,050,000: The balance, as the trial judge found, was financed by the use of misappropriated funds: It followed, as the judge said, that upon completion of the purchase, on 2 June 1997, when Tang and Chau became the sole directors and shareholders of the company, the shares held by them became the property of the plaintiff in equity. Another way of categorizing the same legal result is that Tang and Chau held the shares upon a constructive trust for the plaintiff. There has never been any challenge to this conclusion in the lower courts.

[…]

13. It goes without saying that if the 1st appellant [Chan] and his wife were bona fide purchasers for value of the shares in the company, under the agreement of 26 June, without notice of the underlying equity in favour of the plaintiff, they would have acquired the company free of such equity: When the company sold the flat in October 1997, no equity in favour of the plaintiff could have attached to the proceeds of sale. The converse is, of course, equally true.

14. It is common ground that the shares registered in the hands of the vendors (Tang and Chau) were impressed with a constructive trust in the plaintiff’s favour: Unless the 1st appellant and his wife were bona fide purchasers for value without notice of the plaintiff’s equity, this appeal must fail. As to this, the burden of proof fell on the defendants: There was no onus on the plaintiff to show that the 1st appellant and his wife had acquired the shares with knowledge of the plaintiff’s equity: see Snell’s Equity 13th ed Para 4-09 and G.L. Baker Ltd v Medway Building & Supplies Ltd [1958] 1 WLR 1216.

15. This approach deviates in some respects from that of the lower courts: Those courts considered whether the appellants were liable in equity for dishonest assistance under principles most recently explored in Twinsectra Ltd v Yardley [2002] 2 AC 164: Assistance, that is to say, given by the 1st appellant to Tang, helping him put away money to which Tang was not entitled: Liability founded upon personal wrong-doing by the 1st appellant, giving rise to an obligation to compensate. Conceptually, this is rather different from the issue as formulated in the notice of appeal: Whether the proceeds of sale, derived from sale of the flat by the company, now in the plaintiff’s hands, should be refunded to the 2nd appellant company. Compensation for wrong-doing is not the issue. It is a proprietary claim.

[…]

19. Not only were the 1st appellant and his wife not bona fide purchasers for value without notice: They were not purchasers at all. They remained mere nominees for Tang in respect of the shares. When they caused the company to sell the flat, the proceeds were wholly within their control as such nominees. As mentioned earlier, the net amount of the proceeds was $4,295,069.45 and dealing in those proceeds was frozen by injunction in a bank account in the name of the company: It was then paid out, with accumulated interest, to the plaintiff upon conclusion of the proceedings in the Court of Appeal. Technically, of course, the plaintiff’s equity reposed in the shares which had been bought by Tang and Chau with stolen money and remained in the shares registered in the names of the 1st appellant and his wife. But, as the sole registered shareholders and directors, they had total control of the company: They could therefore have easily caused the company to pay out the net proceeds to themselves: In terms of equitable relief to the plaintiff, it was no great strain of legal principles to treat those proceeds as if they were impressed with the same trust.

[…]

22. But, in one sense, the finding of sham was a surplusage: If the 1st appellant failed to satisfy the judge that he and his wife were purchasers for value without notice of the plaintiff’s equity, they would have lost whether the sham finding was made or not. (italics in original)” (§§9, 13-15, 19 & 22)

78.Litton NPJ’s descriptions of the nature of PBM’s interest as “the underlying equity in favour of the plaintiff” (§13), “the plaintiff’s equity” (§§14, 19 & 22) and “the same trust” (§19) should be understood in the context of three important matters:

78.1  The “legal result” of the assertion of continuing beneficial interest in the proceeds of stolen property was that “the shares [of RTIL] held by them became the property of the plaintiff in equity” (§9).

78.2  “Another way of categorizing the same legal result” was that the shares were held on upon a “constructive trust” for the plaintiff (§9). This was a label which was common ground between the parties (§14), perhaps due to its adoption by the trial judge (§37) with reference to AG for Hong Kong v Reid [1994] 1 AC 324 (which was cited in argument). It has not been suggested that this “constructive trust” requires proof of “unconscionable knowledge” on the part of the recipient.

78.3  The above analysis is entirely consistent with Foskett v McKeown [2001] 1 AC 102 (which was cited in argument).

79.A year later, Lord Millett delivered his lecture “Proprietary Restitution”[11], reaffirming that resulting trust is the proper basis of relief in cases of misappropriation of trust money.

80.He identified the only two situations in which “proprietary restitutionary remedies” are available[12]. “The first is where the claimant can establish a continuing beneficial interest in the asset to which he lays claim. Where the claimant is an absolute beneficial owner such an interest arises under a resulting trust.” (77) This resulting trust, which arises “on the disposition, when the equitable interest became separated from and did not accompany the legal title”, is explained as follows:

“At the other extreme there are those cases where the beneficial interest (or a fortiori the legal title) does not pass. Here the claimant clearly has a proprietary remedy, either to give effect to his legal title or (if this has passed) to his beneficial title under a resulting trust. […] The other, far more common, is the three-party case where a fiduciary, in breach of his fiduciary duty and without the knowledge or authority of his principal, pays away his principal’s money. The rule of equity is that the principal’s beneficial interest is not extinguished by a disposal in breach of trust or fiduciary duty unless the recipient is a bona fide purchaser for value without notice. The legal title will pass but the beneficial interest will not. There is no need for the principal to rescind the transaction in order to revest the property, in the eyes of equity the beneficial interest never left him, for it never accompanies the legal title. The ground of specific restitution is want of title.” (67)

81.Lord Millett’s view is consistent with one of the orthodox categories of resulting trust, namely a gratuitous transfer or “voluntary payment” (in the sense of obtaining nothing in return) to a stranger: Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd (2015) 18 HKCFAR 364 §43-44 (Tang PJ) and §§94-95 (Sir Anthony Mason NPJ), with both judgments the other members of the Court agreed on this point; see also Snell’s Equity (35^th ed, 2024) §25-003; Lewin on Trusts (20^th ed, 2020) §§10-013 to 10-014.

82.In Tang Ying Ip v Tang Ying Loi (2017) 20 HKCFAR 53, the defendant administrators misappropriated money belonging to the estate to finance their purchase of a property. Lord Millett NPJ, delivering his last judgment for the Court, held that the beneficiaries were entitled to affirm the transaction and treat the unauthorised but profitable application of trust money as part of the trust fund (§23) based on two basic principles:

“First, the characterisation of a transaction is a question of law; and secondly, where a trustee or a person in an analogous position has committed a breach of trust by misapplying trust money, the beneficiaries have the right to elect whether to reject or affirm the transaction.” (§18)

83.In Hui Chun Ping v Hui Kau Mo (2024) 27 HKCFAR 634, Lord Hoffmann NPJ (with whom the other members of the Court agreed) recognised this kind of trust as “constructive trust” and the recipient “bare trustee”:

“The constructive trust was an altogether different animal from a trust created by an agreement to hold or exercise control over property in a fiduciary capacity. It was another fiction by which equity provided a remedy against someone who had obtained property by or with knowledge of fraud or breach of fiduciary duty. If a court of equity decided that someone had obtained property in this way, it would declare that he held it on a constructive trust for the plaintiff “as if” he had agreed to be a bare trustee of that property. The court could then order the defendant or anyone claiming under him (other than a purchaser for value in good faith and without notice of the plaintiff’s claim) to transfer to him the legal title. It was in essence a proprietary claim, analogous to a common law action to recover property.” (§16)

D.2  Proprietary claim upon rescission of consensual transactions vitiated by fraud

84.Early cases suggested that a transaction vitiated by fraud would not pass the property in the subject matter.

85.In Noble v Adams (1816) 7 Taunt 59; 129 ER 24, the plaintiff trader purchased goods from vendor Cross and Co by bills he knew to be worthless. The defendant wharfinger indemnified the vendor and sought to retain the goods in their possession. One of the defences was that “the property in the goods never had been changed, the goods having been obtained under such circumstances of fraud as vitiated the sale” (59). Gibbs CJCP held that the plaintiff “had been guilty of a fraud, and that the sale would not change the property” (60). The Court, on motion for a retrial, held that this proposition was correct (62).

86.In Abbotts v Barry (1820) 2 Brod & Bing 369; 129 ER 1009, Phillips, to discharge his debt owed to the defendant, obtained wines from the plaintiffs, paying the plaintiffs only half their value and issuing a worthless bill for the remainder. The defendant was the prime mover and financed this fraud, directing that the wines be sold under Phillips’s name to a Bunyan (who did not pay but accepted a bill of exchange drawn by Philips who indorsed it to the defendant). The plaintiffs brought an action for goods sold and delivered and money had and received. Dallas CJCP held in favour of the plaintiffs:

“Here was a sale of wines, the property of the Plaintiffs, brought about by fraud and collusion, in which the Defendant, who was to reap the benefit of such sale, was prime mover. Now, it is admitted, that a sale effected by fraud, works no change of property; the property, then, in this case, remained in the original owner, and therefore I hold the profits of the sale in the hands of the Defendant, to be so much money had and received by him, to the use of the Plaintiffs, who were the original proprietors. […]” (371)

87.Subsequently, Load v Green (1846) 15 M & W 216; 153 ER 828 established that property passes under a contract obtained by fraud unless and until a party elects to rescind it. The bankrupt (Bannister) bought from the plaintiffs certain goods with the fraudulent intention of not paying for them. It was assumed that an act of bankruptcy took place after the purchase. After delivery, they were taken into possession by Bannister’s assignees in bankruptcy (the defendants). The plaintiffs brought an action for trover. The case turned on whether the goods were in the defendants’ “possession, order, or disposition, by the consent and permission of the true owner” within section 72 of the Bankruptcy Act 1825 (c 16). A verdict was entered for the plaintiffs. On a motion for nonsuit, counsel for the defendants argued that:

“[T]he plaintiffs were at liberty to affirm or disaffirm the sale to Bannister, at their option, by reason of the fraud; and it was not until they elected to treat the contract as void, that they could, properly speaking, be said to be the real owners of the goods. There was no true owner and apparent owner within the meaning of the statute until after the bankruptcy, […]” (217)

88.Parke B accepted this argument and held that the bankrupt was the true owner since the plaintiffs failed to rescind the transaction before the act of bankruptcy:

“As the goods were obtained by a fraudulent purchase, the plaintiffs had a right to disaffirm it, to revest the property in them, and recover their value in an action of trover against the bankrupt […] (221)

[A]lthough, in consequence of the bankrupt's fraud upon them, they had a right to annul the contract, and be again the real owners, that right they did not exercise until after the bankruptcy; and consequently at the time of the act of bankruptcy, (upon which the title of assignees depends), the bankrupt was not apparent owner but real owner, and the statute does not apply.” (223)

89.In Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321, a clerk (Hambrouck) fraudulently obtained his employer’s (Pelabon) cheques, drawn on the plaintiff bank, and paid them into his account. He then issued cheques to his mistress Spanoghe, who deposited them into her account. She spent most of the funds, leaving £315. The plaintiffs sued Spanoghe for a declaration that the balance was their “property” (at 332), and an order for payment.  Salter J, treating it as a claim for money had and received, gave judgment for the plaintiffs. His judgment was upheld on appeal.

90.The Court of Appeal rejected the argument that the mistress obtained good title because it was a gift from the clerk. Scrutton LJ treated this as a first category case; while the other members assumed this to be a second category case. Scrutton LJ held:

“If then the money that came to her was the money of the Banque Belge, she got no title to it, as Hambrouck against the Banque Belge had no title.” (329)

91.Bankes LJ, assuming that Hambrouck obtained a voidable title to the proceeds of the cheques (325), held:

“Even if they could be appropriately described as gifts, a gift without valuable consideration would not give the appellant any title as against the plaintiff Bank.

[…]

To accept either of the two contentions with which I have been so far dealing would be to assent to the proposition that a thief who has stolen money, and who from fear of detection hands that money to a beggar whom he happens to pass, gives a title to the money to the beggar as against the true owner ― a proposition which is obviously impossible of acceptance.” (326-327)

92.Atkin LJ assumed this involved a voidable transaction “by which Hambrouck obtained a title to the money until the plaintiffs elected to avoid his title, which they did when they made their claim in this action. The title would then revest in the plaintiffs subject to any title acquired in the meantime by any transferee for value without notice of the fraud” (332). He held that Spanoghe was not entitled to retain possession where the defendants had not given value (335).

93.In El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717[13], Millett J expressed the view that:

“[H]aving been induced to purchase the shares by false and fraudulent misrepresentations, [the victims] are entitled to rescind the transaction and revest the equitable title to the purchase money in themselves, at least to the extent necessary to support an equitable tracing claim: see Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 387–390 per Brennan J. There is thus no distinction between their case and the plaintiff's. They can rescind the purchases for fraud, and he for the bribery of his agent; and each can then invoke the assistance of equity to follow property of which he is the equitable owner. But, if this is correct, as I think it is, then the trust which is operating in these cases is not some new model remedial constructive trust, but an old-fashioned institutional resulting trust.[14]” (734c-f)

94.In Barclays Bank Plc v Boulter [1999] 1 WLR 1919, the bank claimed possession of a property jointly owned by a couple based on a legal charge. The wife alleged that the charge had been vitiated by undue influence and misrepresentation of the husband, of which the bank had constructive notice. The trial judge held that the wife failed to plead constructive notice. The Court of Appeal allowed the appeal on the ground that the bank bore the burden of proving it had no constructive notice. Lord Hoffmann (with whom the other members of the Court agreed) held that this reasoning was wrong:

“In my opinion a better analogy is the case of the purchaser of a chattel whose vendor’s title is vitiated by fraud. In such a case the defrauded owner retains no proprietary interest in the chattel and it is therefore not for the purchaser to establish a defence which would defeat it. Instead, it is for the owner to prove that the purchaser had actual or constructive knowledge of the fraud.” (1925A-D)

95.In Shalson v Russo [2005] Ch 281[15], Rimer J came to a similar view:

“[U]pon rescission of a contract for fraudulent misrepresentation, the beneficial title which passed to the representor under the contract revests in the representee. The representee then enjoys a sufficient proprietary title to enable him to trace, follow and recover what, by virtue of such revesting, can be regarded as having always been in equity his own property.” (§122)

96.In China Cruise Line Ltd v Star Yield Corp Ltd [2021] HKCFI 2970, the above principles were applied (§38, Recorder Victor Dawes SC).

97.In Australia, it has been held that where A issued a cheque to C as a result of fraud by B, C obtains a voidable title which revests in A upon rescission, notwithstanding C’s payment of the cheque into B’s account.

98.Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420 explained the legal consequence of rescission at law of a transfer of funds made by cheques in the context of a personal claim for conversion and money had and received (but not equitable remedy, 433D). Mr Maloney, a director of C G Maloney Pty Ltd, sought finance from Hunter BNZ Finance Ltd (Hunter) to buy furniture and equipment from Indent Imports Pty Ltd (Indent). Relying on two fraudulent invoices of Indent supplied by Mr Maloney, Hunter issued two bearer cheques payable to Indent, crossed “not negotiable a/c payee only”. Mr Maloney persuaded Indent to endorse the cheques into his Westpac account. Hunter sued Westpac for conversion of the cheques or alternatively their proceeds as money had and received.

99.Giles J held that if A transfers goods to C as a result of fraud by B, the property revests in A upon rescission (at least where no formality is required), and A may claim its value or proceeds as money had and received, subject to C’s argument of intervening third party rights (433C-G). On the facts, no injustice arose because Indent was a volunteer who gave nothing in return for the cheques, and it received the cheques only to pass on to Mr Maloney (434E).

100.He concluded that Indent obtained voidable title to the cheques (432C) which had been avoided when Hunter brought the proceedings (437A); and Mr Maloney’s bank (Westpac) obtained no better title than Indent (437C). Since the cheques were indorsed to the director, the bank did not obtain for value any rights which it would lose if there were rescission (438D-F), and it should repay the face value of the cheques to Hunter (440F).

101.The approach of Giles J[16] has been affirmed in Orix Australia Corporation Ltd v M Wright Hotel Refrigeration Pty Ltd [2000] SASC 57; (2000) 155 FLR 267 (§37, Bleby J) and Sanwa Australia Finance Ltd v Finchill Pty Ltd [2001] NSWCA 466 (§§24-26, Davies AJA, with whom Beazley and Heydon JJA agreed).

D.3  Deciding the category into which a case falls

102.The following cases illustrate the court’s analysis of the often difficult question whether a case falls within the first or second category.

103.In White v Garden (1851) 10 CB 919; 138 ER 364, the plaintiff contracted with Parker to buy iron. To fulfil this, Parker purchased the iron from the defendants, paying with a bill accepted by a fictitious person. He instructed the defendants to deliver the iron to the plaintiff, who had already paid him. When the fraud was discovered, the defendants seized the iron. The plaintiff brought an action for trover.

104.The Court unanimously held that the plaintiff obtained property in the iron on the authority of Load v Green (1846) 15 M & W 216; 153 ER 828. Cresswell J held that the plaintiff “by this purchase obtained a property in the iron” (925-926). Williams J held that “the property in the iron in question passed by the sale from the defendants to Parker, and by Parker to the plaintiff.” (926-927). Jervis CJ agreed (928). Talfourd J held:

“There is a very obvious distinction between the cases of goods obtained by felony and fraud or false pretences: in the one case, the owner of the goods has no intention to part with his property; in the other, he has. A contract for the sale of goods, though obtained by fraud, is perfectly good, if the party defrauded thinks fit to ratify it. It appears to me that the defendants here intentionally parted with their property in the iron when they caused it to be delivered to the plaintiff; and it is not competent to them, after a third party has by their act been induced to part with his money, to turn round and say that the contract as between them and Parker was null and void, and that Parker had no property, and therefore could pass none to the plaintiff.” (927)

105.In Cundy v Lindsay (1878) 3 App Cas 459, a fraudster named Blenkarn, posing as a reputable firm Blenkiron & Co, ordered goods by letter from Messrs Lindsay (the plaintiffs) with an address. The plaintiffs replied and sent the goods to Blenkiron & Co at the given address. Blenkarn sold some of them to a bona fide purchaser Cundy (the defendant). The plaintiffs sued the defendant for conversion. The defendant succeeded at first instance, but the Court of Appeal reversed. On further appeal, the issue was whether the property in the goods had passed (461).

106.The Appellate Committee of the House of Lords dismissed the appeal. Lord Cairns LC formulated the issue as whether the property passed under any contract:

“Was there any contract which, with regard to the goods in question in this case, had passed the property in the goods from Messrs Lindsay to Alfred Blenkarn? If there was any contract passing that property, even though, as I have said, that contract might afterwards be open to a process of reduction, upon the ground of fraud, still, in the meantime, Blenkarn might have conveyed a good title for valuable consideration to the present appellants.” (464)

107.Lord Cairns LC concluded there was no contract:

“[H]ow is it possible to imagine that in that state of things any contract could have arisen between the [plaintiffs] and Blenkarn, the dishonest man? Of him they knew nothing, and of him they never thought. With him they never intended to deal. Their minds never, even for an instant of time, rested upon him, and as between him and them there was no consensus of mind which could lead to any agreement, or any contract whatever.” (465)

108.Lord Hatherley (466) and Lord Penzance (471) delivered concurring judgments and Lord Gordon simply concurred.

109.In Twinsectra Ltd v Yardley [1999] Lloyd’s Rep Bank 438[17], Twinsectra lent money to Yardley on the security of a solicitor’s undertaking (Sims). Yardley fraudulently failed to inform Twinsectra that he had withdrawn Sims’ instructions by the time of the loan. Potter LJ (with whom Sir Iain Glidewell and Sir David Hirst agreed) rejected the argument that obtaining monies by false pretences immediately gave rise to a constructive trust:

“It seems to me that, whatever the legal distinctions between “theft” and “fraud” in other areas of the law, the distinction of importance here is that between non-consensual transfers and transfers pursuant to contracts which are voidable for misrepresentation. In the latter case, the transferor may elect whether to avoid or affirm the transaction and, until he elects to avoid it, there is no constructive (resulting) trust; in the former case, the constructive trust arises upon the moment of transfer. The result, so far as third parties are concerned, is that, before rescission, the owner has no proprietary interest in the original property; all he has is the “mere equity” of his right to set aside the voidable contract.” (§99)

110.In Collings v Lee [2001] 2 All ER 332, the claimant (Collings) and her husband were beneficial joint tenants and they engaged the first defendant (Lee) to sell their property. Lee falsely represented that they had found a buyer called Martin Nathen Styles but in fact this was his alias, and he effected a transfer to himself under his alias. The Court of Appeal upheld the judge’s summary determination of a point of law that Collings had an overriding interest in the property. Nourse LJ (with whom Mummery and Rix LJJ agreed) held:

“The rationale of the principle, as it applies to a transfer of property, is that even where the transfer is obtained by fraudulent misrepresentation, the transferor nevertheless intends that the whole legal and beneficial ownership in the property shall pass to the transferee. But that was not this case. Mr and Mrs Collings did not intend to transfer the property to the first defendant and they did not intend to transfer it for no consideration. The first defendant acquired the property without their knowledge and consent and in breach of his fiduciary duty to them. The equitable interest remained vested in Mr and Mrs Collings.” (337g)

111.In Shogun Finance Ltd v Hudson [2004] 1 AC 919, Lord Nicholls and Lord Millett in the minority held that Cundy v Lindsay (1878) 3 App Cas 459 was wrongly decided (§§34, 93 & 110). Nevertheless, it seems that four Law Lords adopted intention as the governing criteria in the analysis of formation of contract: Lord Nicholls (§§6-11), Lord Hobhouse (§§50, 52), Lord Phillips (§§123-124, 127, 129, 133, 170) and Lord Walker (§§180-184); while Lord Millett approached the question slightly differently (§§62, 71, 76, 103).

112.In Byers v Saudi National Bank [2024] AC 1191, a leading case establishing that a claim for knowing receipt requires the claimant’s continuing beneficial interest, Lord Briggs and Lord Burrows JJSC delivered separate judgments with whom Lord Hodge DPSC, Lord Leggatt and Lord Stephens JJSC agreed. Lord Burrows JSC held that, “at the point of [a director] committing the breach of fiduciary duty in relation to the assets” of the company (§182), “the relevant assets of the company are subject to a trust, best viewed as a constructive trust, prior to receipt by the defendant” (§188). Lord Briggs JSC agreed with the submission that “a trust, with a concomitant splitting of legal title from the company's continuing beneficial interest in the misapplied property occurred at the moment of the transfer which constituted the misapplication” (§§60-61). This shows that the misapplication of company assets by a director (or person in a similar fiduciary relationship) falls within the first category.

D.4   Tracing

D.4a  Tracing at law 

113.In Taylor v Plumer (1815) 3 M & S 562; 105 ER 721, Plumer gave his broker Walsh £22,200 to invest in exchequer bills. Walsh cashed the draft into bank notes and bought £6,500 in exchequer bills, lodged them for the defendant as instructed, representing that he would use the balance to do the same. However, without proper authority, (1) he used the balance to buy American securities; and (2) gave one note to his brother-in-law in exchange for a £500 banker’s draft, which he used to buy bullion. He then absconded with the securities and bullion. He was intercepted by the defendant’s attorney, surrendered the property and executed assignment documents.

114.Lord Ellenborough CJ held that the original money was covered with a trust and no change of that state and form could divest it of such trust (574), and it could be followed and identified:

“It makes no difference in reason or law into what other form, different from the original, the change may have been made, whether it be into that of promissory notes for the security of the money which was produced by the sale of the goods of the principal, […] or into other merchandise, […] for the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description.

The difficulty which arises in such a case is a difficulty of fact and not of law, and the dictum that money has no ear-mark must be understood in the same way; ie, as predicated only of an undivided and undistinguishable mass of current money.” (575)

115.In Banque Belge pour L’Etranger v Hambrouck [1921] 1 KB 321, the Court was unanimous that tracing in equity would be available (328, 330 & 335).

116.Bankes and Atkin LJJ, applying Taylor v Plumer (1815) 3 M & S 562; 105 ER 721, held that the proceeds could be traced at law:

“The money which the Bank seeks to recover is capable of being traced, as the appellant [Spanoghe] never paid any money into the Bank except money which was part of the proceeds of Hambrouck’s frauds, […] (328, Bankes LJ)

The question always was, Had the means of ascertainment failed? […] In the present case less difficulty than usual is experienced in tracing the descent of the money, for substantially no other money has ever been mixed with the proceeds of the fraud.” (333-334, Atkin LJ)

117.While Scrutton LJ was “inclined” to think payment into Hambrouck’s bank and his drawing out other money would be a good answer to tracing at law (329-330), he also followed cases applying Taylor v Plumer (1815) 3 M & S 562; 105 ER 721 (330).

118.In Re CA Pacific Finance Ltd [1999] 2 HKLRD 1, Yuen J applied Taylor v Plumer (1815) 3 M & S 562; 105 ER 721 and held that property (even money) could be “traced, even at common law so long as it is capable of being identified and distinguished, albeit in changed form” (7F).

D.4b  Tracing in equity: pre-existing fiduciary relationship as a prerequisite 

119.In Re Diplock [1948] Ch 465 appears to be the first clear case establishing the proposition that, to invoke tracing in equity, there must be at some stage a “quasi-fiduciary relationship” (520) or “fiduciary relationship of some kind” (540).

120.In Agip (Africa) Ltd v Jackson [1990] Ch 265, the plaintiff’s chief accountant (Zdiri) fraudulently altered the payee of its payment order in favour of a company in control of the defendants. Millett J held that this requirement was satisfied on the facts:

“The requirement is, however, readily satisfied in most cases of commercial fraud, since the embezzlement of a company’s funds almost inevitably involves a breach of fiduciary duty on the part of one of the company’s employees or agents. That was so in present case. There was clearly a fiduciary relationship between Mr Zdiri and the plaintiffs. Mr Zdiri was not a director nor a signatory on the plaintiffs’ bank account, but he was a senior and responsible officer. As such he was entrusted with possession of the signed payment orders to have them taken to the bank and implemented. He took advantage of his possession of them to divert the money and cause the separation between its legal ownership which passed to the payees and its beneficial ownership which remained in the plaintiffs. There is clear authority that there is a receipt of trust property when a company's funds are misapplied by a director and, in my judgment, this is equally the case when a company's funds are misapplied by any person whose fiduciary position gave him control of them or enabled him to misapply them.” (290D-F)

121.Millett J’s judgment was affirmed on appeal: [1991] Ch 547. Fox LJ (with whom Butler-Sloss and Beldam LJJ agreed) held:

“Both common law and equity accepted the right of the true owner to trace his property into the hands of others while it was in an identifiable form. The common law treated property as identified if it had not been mixed with other property. Equity, on the other hand, will follow money into a mixed fund and charge the fund. There is, in the present case, no difficulty about the mechanics of tracing in equity. The money can be traced through the various bank accounts to Baker Oil and onwards. It is, however, a prerequisite to the operation of the remedy in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being. There is no difficulty about that in the present case since Mr Zdiri must have been in a fiduciary relationship with Agip. He was the chief accountant of Agip and was entrusted with the signed drafts or orders upon Banque du Sud.” (566G-567A)

122.Fox LJ’s judgment was accepted by the Court of Appeal to represent the law: Philip Lawrence Choy v Nissei Sangyo America Ltd [1992] 2 HKLR 177, 183.

123.As to the existence of fiduciary relationship in an employment context, guidance can be found in Customer Systems PLC v Ranson [2012] IRLR 769 where Lewison LJ (with whom Lloyd and Pill LJJ agreed) applied the judgment of Elias J in University of Nottingham v Fishel [2000] ICR 1462, 1491E-H:

“… the essence of the employment relationship is not typically fiduciary at all. Its purpose is not to place the employee in a position where he is obliged to pursue his employer's interests at the expense of his own. The relationship is a contractual one and the powers imposed on the employee are conferred by the employer himself. The employee’s freedom of action is regulated by the contract, the scope of his powers is determined by the terms (express or implied) of the contract, and as a consequence the employer can exercise (or at least he can place himself in a position where he has the opportunity to exercise) considerable control over the employee’s decision making powers. This is not to say that fiduciary duties cannot arise out of the employment relationship itself. But they arise not as a result of the mere fact that there is an employment relationship. Rather they result from the fact that within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Where this occurs, the scope of the fiduciary obligations both arises out of, and is circumscribed by, the contractual terms; it is circumscribed because equity cannot alter the terms of the contract validly undertaken.” (§28)

D.4c  Tracing in equity: mixed substitution

124.In Americhip Inc v Zhu Hongling [2021] 4 HKLRD 490, Mimmie Chan J addressed the question of mixed substitution as follows:

“[…] even if the funds stolen from the Plaintiff had indeed been mixed in a bank account with monies which had not been stolen, the Plaintiff as the true owner of the funds is entitled to trace its money in the manner which is most advantageous, and the rules in Clayton’s Case and in Hallett’s Estate are applicable. Funds which have been mixed in a single bank account are treated as being paid out in the order in which they are paid in (Essilor Manufacturing (Thailand) Co Ltd v G Doulatram and Sons (HK) Ltd [[2020] HKCFI 2489]), and a trustee (such as Dean and CJ) making withdrawals from a mixed account is deemed to have withdrawn the trustee’s own funds first, and not the funds belonging beneficially to the Plaintiff. To preserve the value of the victim’s assets which have been paid into a mixed fund, the order of priority in which the various withdrawals and investments have prospectively been made is irrelevant (Re Oatway [1903] 2 Ch 356).” (§19)

D.5  Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669

125.Counsel for the plaintiff relied on the constructive trust analysis in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (“Westdeutsche”).

126.Properly understood, its ratio is simply that the equitable jurisdiction to award compound interest is confined to cases involving trustees or fiduciaries under a personal duty to account for unauthorised profits. In fact, there are dicta in the judgment which positively affirm an owner’s right to assert his continuing beneficial interest as analysed in Section D.1 above.

D.5a  The meaning of “trustee” properly understood in context

127.The plaintiff bank entered into interest rate swap transactions with the defendant council which were later held to be ultra vires and void. The bank sought to recover from the defendant various payments made by the bank pursuant to the transactions.

128.Hobhouse J held that the bank could recover such payments on the basis of money had and received (ie personal claim at common law) or “as money which in equity the bank was entitled to trace into the hands of the council and have repaid out of the council's assets” (at 681C).

129.The Court of Appeal held that compound interest could only be awarded “as against a trustee or other person owing fiduciary duties who is personally accountable and who has made use of the plaintiff's money” (700G).

130.On further appeal, the only issue before the Court was the question of interest (681D). While specifically disavowing any claim based on constructive trust (703B, 707G, 726H), the bank argued that compound interest could be awarded in equity “whenever the defendant is liable to disgorge a benefit received whether or not he is a trustee or a fiduciary” (701B).

131.Lord Browne-Wilkinson observed that the jurisdiction to award compound interest was restricted to the following cases:

“In the absence of fraud courts of equity have never awarded compound interest except against a trustee or other person owing fiduciary duties who is accountable for profits made from his position. Equity awarded simple interest at a time when courts of law had no right under common law or statute to award any interest. The award of compound interest was restricted to cases where the award was in lieu of an account of profits improperly made by the trustee.” (701C-D)

132.After citing the leading authorities, His Lordship rejected the bank’s argument:

“These authorities establish that in the absence of fraud equity only awards compound (as opposed to simple) interest against a defendant who is a trustee or otherwise in a fiduciary position by way of recouping from such a defendant an improper profit made by him.” (702D)

133.Although Lord Goff and Lord Woolf gave dissenting judgments that compound interest should be awarded, the five Law Lords unanimously held that no resulting trust arose because the council could not be viewed as “trustee” owing the aforesaid duty to account.

134.Lord Browne-Wilkinson held that, while an original owner may assert his continuing beneficial interest in trust property against a third party (as explained in Section D.1 above), this would not make him a “trustee” (in the above sense):

“The bank contended that where, under a pre-existing trust, B is entitled to an equitable interest in trust property, if the trust property comes into the hands of a third party, X (not being a purchaser for value of the legal interest without notice), B is entitled to enforce his equitable interest against the property in the hands of X because X is a trustee for B. In my view the third party, X, is not necessarily a trustee for B: B’s equitable right is enforceable against the property in just the same way as any other specifically enforceable equitable right can be enforced against a third party. Even if the third party, X, is not aware that what he has received is trust property B is entitled to assert his title in that property. If X has the necessary degree of knowledge, X may himself become a constructive trustee for B on the basis of knowing receipt. But unless he has the requisite degree of knowledge he is not personally liable to account as trustee […] Therefore, innocent receipt of property by X subject to an existing equitable interest does not by itself make X a trustee despite the severance of the legal and equitable titles. […] This may only be a question of semantics: on either footing, in the present case the local authority could not have become accountable for profits until it knew that the contract was void. (italics in original)” (707B-F)

135.Lord Browne-Wilkinson therefore affirmed an owner’s right to assert continuing beneficial interest or title in trust property or its proceeds against recipients, but held that this right would not by itself make the recipients “trustee … accountable for profits”.

136.The other Law Lords were of the same view.

137.Lord Goff, agreeing with Lord Browne-Wilkinson, held that a resulting trust did not arise in cases where money had been paid under a contract which was ultra vires and void. This would avoid “all the practical problems which would flow from the imposition of a resulting trust in a case such as the present, in particular the imposition upon the recipient of the normal duties of trustee” (690D).

138.Lord Slynn held that the council “was neither a trustee of, nor in a fiduciary position in relation to, the moneys which it had received from the bank, nor had it improperly profited from the use of those moneys” and no resulting trust could arise on the facts (718E).

139.Lord Woolf agreed with Lord Goff and Lord Browne-Wilkinson, that there could not be any equitable proprietary claim and “the recipient of a sum of money paid under an ultra vires contract should not be regarded as owing the duty of a trustee or a fiduciary to the payer of that sum” (720H).

140.Lord Lloyd agreed with Lord Browne-Wilkinson that the bank failed to prove that “it has an equitable cause of action against the local authority for breach of duty as trustee or fiduciary” (738B).

141.As the cases in Sections D.1 and D.2 show, the proprietary claim under the first and second categories does not concern the personal duty of a trustee or fiduciary to account.

D.5b  Constructive trust of stolen coins

142.Lord Browne-Wilkinson’s famous obiter in respect of stolen coin reads:

“The argument for a resulting trust was said to be supported by the case of a thief who steals a bag of coins. At law those coins remain traceable only so long as they are kept separate: as soon as they are mixed with other coins or paid into a mixed bank account they cease to be traceable at law. Can it really be the case, it is asked, that in such circumstances the thief cannot be required to disgorge the property which, in equity, represents the stolen coins? Moneys can only be traced in equity if there has been at some stage a breach of fiduciary duty, ie if either before the theft there was an equitable proprietary interest (e.g. the coins were stolen trust moneys) or such interest arises under a resulting trust at the time of the theft or the mixing of the moneys. Therefore, it is said, a resulting trust must arise either at the time of the theft or when the moneys are subsequently mixed. Unless this is the law, there will be no right to recover the assets representing the stolen moneys once the moneys have become mixed.

I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity.” (715-716)

143.In Hong Kong, the dictum has been assumed to represent the law: Zief Incorporated v Tekchandani Ajai Mohan [2021] HKCFI 38; [2021] 3 HKC 69 §50(4); R Stahl Inc v AJ Development Ltd [2021] HKCA 1093; [2021] 6 HKC 162 at §30; Welly Grace Ltd v Keung Yee Man [2023] HKCFI 3082 §41. Two points arise from the above proposition.

144.First, Lord Browne-Wilkinson positively affirmed that an equitable owner has the right to assert his title in his property against a third party (as explained in Section D.1 above) (707B-F). The above dictum, the restrictive meaning of “trustee” in the ratio as explained above, and the view that “the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience” (705D) should be read in light of that positive affirmation.

145.Second, it is unclear what significance and relevance “fraudulent recipient” has. If a trust arises in respect of the owner’s continuing beneficial interest, the authorities in the first category suggest that it will bind the whole world, including the fraudsters and all subsequent recipients, except a bona fide purchaser for value without notice. As Kwan VP held in ANZ Commodity Trading Pty Ltd v Excellence Raise Overseas Ltd [2025] HKCA 701:

“For a proprietary claim to be maintained against the recipient of property obtained by fraud, what is required to be established is that the recipient has received property traceable to the fraudster. It is not necessary to establish that the recipient must have committed fraud.” (§127)[18]

D.6  A special case in the first category: instrument of fraud?

146.Lewin on Trusts (20^th ed, 2020) §§8-030 to 8-031 says:

“It appears that where a sale is rescinded for fraudulent misrepresentation the buyer will be held to be a trustee for the seller, but not until the representee elects to avoid the contract. […] Nor are the rules relating to rescission requisite where a contract is not merely induced by fraudulent misrepresentation but is itself the instrument of fraud and no more than a vehicle for obtaining money by false pretences; in such a case the court is entitled to disregard the fraudulent contract and hold that the beneficial interest in the money remains with the innocent victim of the fraud in accordance with the principles stated in §9-029.” (footnotes omitted)

147.The source of the above proposition is Halley v Law Society [2003] WTLR 845; [2003] EWCA Civ 97. Halley and Gibbins developed a close business collaboration, involving a high degree of mutual confidence (§6). Halley agreed to introduce applicants to Gibbins and thereby to a funder, in return for the sharing of fees from completed transactions (§7). This turned out to be a complicated fraudulent scheme.

148.In those transactions, the applicants entered into a principal agreement and an escrow agreement with a corporate broker represented by Gibbins (Tidal). Pursuant to the principal agreement, the applicant paid a substantial arrangement fee (US$750,000) in return for Gibbins’ procurement of a commitment to make funds available as required for a period from a third party “funder” or “account holder”. The funds, if exchanged for an instrument, could be retained for its full life. For the funds to be drawn down, their year-end return would be guaranteed by a bank instrument providing the funder 8% per annum (§§14 & 18).

149.The funder’s commitment to provide the funds was in the form of a corporate board resolution, a letter of appointment to the applicant confirming this and other documents (corporate documents) (§14). As part of the scheme, the applicants were provided with a bank statement of the funder showing it had sufficient cleared funds to cover the committed sum (bank advice) (§14).

150.In reality, however, the funder had no obligation to provide any funds because the said board resolution only stated that it “will consider participating in a US$10 million bank guarantee investment programme” subject to acceptable guarantees (§15, Appendix §(xiii)). The funder indicated a willingness to enter into a transaction giving 8% yield per annum. The bank, however, required security by a further deposit amounting to US$2.3 million (§§20-21).

151.As the judge found, the transaction meant that, in return for payment of a substantial arrangement fee, the applicants obtained a mere fund proof from the account holder who was not contractually bound to them (§20).

152.Mr Wilson-Smith signed the escrow agreements concerned and received the arrangement fee (§17). He released the arrangement fee from his stakeholder’s account to his client account, and distributing to various parties (including himself) by making relevant entries therein, resulting in a credit balance of $114,209.72 in his client’s account (§12). The Law Society intervened in his practice. Halley claimed payment of that amount, contending that he was “beneficially entitled” to it under the Solicitors Act 1974 (§1). Lloyd J (in [2002] EWHC 139) found that Halley could establish an interest in some of the sums; but he failed to prove that the credit balance was his on tracing rules (§30).

153.Significantly, Lloyd J found that:

“When an arrangement fee was paid to the escrow agent under one of these contracts, it was held by him on trust to dispose of it in accordance with the terms of the escrow agreement. (Not all stakeholder arrangements involve trusts, but this form of agreement clearly does.) If the conditions were duly satisfied, he held it for Tidal, and if not then he held it for the applicant. Until the time came when it would be determined whether or not the conditions had been satisfied, he could not dispose of it without the agreement of both parties.” (§29)

154.The Court of Appeal refused a late attempt to challenge the above finding (§33) for it was “directly contrary to the basis on which the matter proceeded before the judge, with Mr Tager’s [for Halley] acquiescence”.

155.The Law Society sought to uphold the judgment on the additional ground that the judge was wrong to “hold that, subject to the terms of the agreement being satisfied, the beneficial interest in the arrangement fee passed to Tidal unless and until there was rescission” (§34(i)).

156.Carnwath LJ (with whom Hale and Mummery LJJ agreed) considered the central issue to be “whether, having regard to the nature of the transactions, any beneficial interest could have passed to Tidal” (§39).

157.Counsel for the Law Society accepted the general principle that “the beneficial interest under a contract induced by fraud does not revert to the innocent party unless and until he gives notice of his election to rescind” (§42). However, he contended that this principle had no application as the contract was no more than “a dishonest device to obtain money” (§43(iv)) as follows:

“The submission, as I understand it, is that this is not simply a case of a valid contract being induced by fraud; but that the fraud so infected the whole transaction that it had no legal effect at all. The ‘contracts’ were in reality no more than devices to extract money by fraud; in Mr Dutton’s [for the Law Society] words-

‘The “agreements” were fictitious contracts. They were as the judge found merely part of an elaborate charade (or mechanism) by which the loser was persuaded to part with his money.’

The position, accordingly, is said to be ‘akin to theft’. Where property is stolen, no beneficial interest passes to the thief. Mr Dutton submits that the same applies where money is extracted by fraud, otherwise than under a legally enforceable contract. [citing the “fraud” trust in Westdeutsche [1996] AC 669, 705, 715-716]” (§45)

158.The phrase “akin to theft” (which has been attributed to this case in subsequent authorities) in fact originated from counsel’s submission. Carnwath LJ broadly accepted this submission as follows:

“47. […] In this case, the contract has been held to be the instrument of fraud, and nothing else. The elaborate documentation was, in the words of Lloyd J [in [2002] EWHC 139], ‘no more than a vehicle for obtaining money… by false pretences’ ([at] 119). Furthermore, the legal interest in the money passed to the escrow agent, but the beneficial interest remained with Toro [the paying applicant], unless and until it passed to Tidal under the contract. In my view, the court is entitled to disregard the apparent effect of that fraudulent contract, and hold that the beneficial interest remained throughout with Toro.

48. In such a case, it is meaningless to impose a requirement for the fraudster to be notified of ‘rescission’. From the fraudster’s point of view there is nothing to rescind; for practical purposes, he has parted with nothing of value and incurred no obligations; the victim is left with some documents which, from the outset, were known and intended by the other party to be worthless. The ‘election’ to which Potter LJ [in Twinsectra Ltd v Yardley [1999] Lloyd’s Rep Bank 438 at §99] referred is not a real option. Although the case does not fit neatly into Potter LJ’s binary classification, he was not dealing with these facts. Subject to any direct authority, I see no reason why it should not be regarded as a simple case of ‘property obtained by fraud’, in Lord Browne-Wilkinson’s terms.

[…]

54. […] In this case, the legal interest was intended to pass to the escrow agent, but the passing of the beneficial interest was dependent on the contract. Since the contract itself was the instrument of fraud, the Court is not required to give effect to it.” (§§47-48 & 54)

159.The above passage has been treated as authority for the proposition that property purportedly transferred pursuant to a contract supported only by worthless consideration, and constituting an “instrument of fraud”, is held on constructive trust, ie “Halley trust” as it is sometimes called. In my view, that passage, properly understood, does not support this far-reaching proposition.

160.Carnwath LJ did not elaborate on how the Court may “disregard the apparent effect of that fraudulent contract” (§47) and “not … give effect to it” (§54). The apparent reason is that Tidal “has parted with nothing of value and incurred no obligations” and the documents provided to the applicants “were known and intended by the other party to be worthless” (§48).

161.To read the passage divorced from its context would lead to two problems. First, it apparently contradicted the earlier finding that Tidal’s “elaborate bundle of documents provided in return of the advance payment” constituted “adequate consideration”, albeit expressly subject to the “finding of fraud” (§44).  Second, it is difficult to reconcile with White v Garden (1851) 10 CB 919; 138 ER 364 which involved a conceptually similar case of fraudulent use of worthless bill as consideration.

162.An important context of the above passage is the unchallenged finding that “the beneficial interest remained throughout with Toro” (§47). This was therefore a first category case of assertion of continuing beneficial interest[19]. On this basis, the only issue was whether Tidal could prove that he was a bona fide purchaser for value without notice to defeat the applicants’ continuing beneficial interest. The answer is plain: Tidal could not possibly discharge this burden because the purported consideration was nothing but “the instrument of fraud”.

163.Mummery LJ (with whom Hale LJ agreed) decided the case on the “broader equitable grounds” (§90), “reinforcing the result reached by Carnwath LJ” (§87). Instead of the “contractual approach”, the crucial point was that Halley’s claim was to “an equitable proprietary interest” (§91). He noted the common ground that Wilson-Smith received no beneficial interest in the arrangement fee (§92); and therefore “in equity he was constituted a trustee of the arrangement fees paid to him […] upon an express trust to deal with them in accordance with the terms of the escrow agreement” in favour of the particular paying applicant (§94). His purported disposition of the arrangement fees in his own favour failed because of Tinsley v Milligan [1994] 1 AC 340 (§§101-104). Upon such failure, the fee was held on “resulting trust” for the particular applicant who paid it. Halley’s claim failed.

164.Subject to one qualification, Mummery LJ’s analysis is consistent with the first category authorities; namely, that it seems immaterial whether the disposition in breach of trust involves a fraudulent act or a “sham”: Chan Chun Chung & Another v PBM (Hong Kong) Ltd (2004) 7 HKCFAR 178; Tang Ying Ip v Tang Ying Loi (2017) 20 HKCFAR 53. In any event, Tinsley v Milligan [1994] 1 AC 340 concerned contractual illegality, an issue which does not feature in the cases decided in the first category.

165.Subsequent cases have treated Carnwath LJ’s judgment as standing for the general proposition that property purportedly passed by some “instrument of fraud” is subject to a constructive trust: Campden Hill Ltd v Chakrani [2005] EWHC 911 §74 (Hart J); Global Currency Exchange Network Ltd v Osage 1 Ltd [2019] 1 WLR 5865 §§41-44 (DHCJ Andrew Henshaw QC); Hamblin v World First Ltd [2020] EWHC 2383 §34 (DHCJ Pelling QC); Van Zuylen v Rodney Whiston-Dew [2021] EWHC 2219 §238 (DHCJ Nicholas Thompsell); and D’Aloia v Persons Unknown [2025] 1 WLR 821 §§238-239 (DHCJ Richard Farnhill); see also China Cruise Line Ltd v Star Yield Corp Ltd [2021] HKCFI 2970 §38(2) (Recorder Victor Dawes SC).

166.In ANZ Commodity Trading Pty Ltd v Excellence Raise Overseas Ltd [2023] HKCFI 179, the plaintiff entered into nickel “repo transactions” with ED&F Man Capital Markets Limited (MCM) whereby it agreed to finance MCM’s purchase of deliverable nickel stored in various warehouses under warehouse receipts to be endorsed by MCM, with an option for MCM to repurchase the nickel (§5) at a later time for a higher price, the price difference of which represented the interest accrued for the loan. If MCM did not exercise the option to repurchase, the plaintiff would resell the nickel on the market (§6). Under this arrangement, the plaintiff paid various sums (Funds) to MCM pursuant to 31 purchase contracts, and MCM in turn purchased nickel from the 2^nd defendant (CH) and 3^rd defendant (MW) in reliance upon 84 warehouse receipts which turned out of the forged (§§7 & 10). The Funds were traced to, inter alia, the accounts of the 1^st defendant (ERO), 9^th defendant (JA) and 10^th defendant (HE) which were under de facto effective control of Chui James Jie (JC) (§§21-24 & 29). The plaintiff brought a proprietary tracing claim based on “unjust enrichment and/or constructive trust” (§29).

167.The “constructive trust” claim was based on fraud (§40). Mimmie Chan J held that there was sufficient and proper basis to find that CH, MW, and two associated entities (the 7^th and 8^th defendants) held the Funds on constructive trust for the plaintiff; and if the Funds could be followed and traced to the money received by ERO, JA and HE, the plaintiff could assert its beneficial interest in respect of such money (§§183-184).

168.On appeal ([2025] HKCA 701[20]), counsel for the plaintiff argued for a “Halley trust” (§§78-82); the defendants did not challenge the correctness of this proposition but took a pleading point (§101). Kwan VP (giving the judgment of the Court) accepted this submission and dismissed the appeal:

“On the basis of all the findings mentioned above, we think it is a compelling inference that the co-ordinated transactions are instruments of fraud and an elaborate mechanism to obtain money by false pretences, such that the court is entitled to disregard the apparent effect of the transactions which are fictitious and nothing more than a vehicle for fraud. We agree with Mr Sussex that the judge’s holding can also be supported on the ground that rescission is not required in this situation.” (§105)

D.7  The requirement for unconscionable knowledge?

169.In Guaranty Bank and Trust Company v ZZZIK Inc Ltd HCA 1139/2016 (unreported, 18 July 2016), the plaintiff was a victim of an email fraud. One of its employees acted on an email with malware, allowing the fraudster to access the plaintiff’s online banking system. The fraudster then instructed the plaintiff to transfer money to the defendant’s bank account. The plaintiff duly obtained default judgment against the defendant. After citing Lord Browne-Wilkinson’s constructive trust analysis, DHCJ Cooney SC suggested that a proprietary claim requires proof of the following knowledge:

“Even if the recipient was 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: Commerzbank AG v IMB Morgan plc [2005] 2 All ER (Comm) 564 at para 36.” (§32) (“Akindele knowledge”)

170.There have been 26 judgments of the Court of First Instance in which the above dictum has been assumed, directly or indirectly, to represent the law: see Appendix below. In Tillman v Egon Zehnder Ltd [2020] AC 154, Lord Wilson JSC (with whom the other members of the Court agreed) held:

“When a court makes an assumption about the law, instead of reaching a focussed determination in relation to it, the decision based upon it does not carry binding authority under the doctrine of precedent: National Enterprises Ltd v Racal Communications Ltd [1975] Ch 397, 406 to 408.” (§21)

171.This is a “most obvious case” where the “legal position has been assumed without any, or any real, argument or discussion”; and this “apparently assumed legal position has [not] actually gone beyond mere assumption and should [not] be regarded as binding”: Wong Chi Hung v Lo Wing Pun [2026] HKCFA 14 §§33-37, Cheung CJ (with whom the other members of the Court agreed).

172.The above is fortified by the following. The introduction of Akindele knowledge in an equitable proprietary claim appears to be inconsistent with: (1) the authorities discussed in Section D.1 above which held that the continuing beneficial interest is subject only to the bona fide purchaser for value without notice defence; and (2) the well-established proposition that this is not an ingredient to be proved by the claimant, and defence to be proved by the alleged purchaser: Snell’s Equity (35^th ed, 2024) §4-018; Lewin on Trusts (20^th ed, 1^st Supplement, 2023) §44-119. Two binding authorities illustrate these points. In any event, even if this requirement exists, it is plainly satisfied as analysed below.

D.7a  Hong Kong authorities

173.In Chan Chun Chung & Another v PBM (Hong Kong) Ltd (2004) 7 HKCFAR 178, the issue was whether the 1^st appellant and his wife were bona fide purchasers for value without notice of the plaintiff’s equity. Litton NPJ (giving the reasons for judgment of the Court) held that the burden of proof fell on the defendants; and liability founded on dishonest assistance was conceptually different from a proprietary claim on the facts (§§14-15). Therefore, applying Akindele knowledge for knowing receipt to a proprietary claim would be inconsistent with the above reasoning.

174.In Falcon Private Bank Ltd v Borry Bernard Edouard Charles Ltd HCA 1934/2011 (unreported, 9 July 2012)[21], it was specifically held that Akindele knowledge is legally irrelevant to a proprietary claim based on the assertion of equitable interest.

175.The plaintiff transferred a sum to the 1^st defendant by mistake (§40). It obtained an ex parte proprietary injunction on the basis of a proprietary claim based on the 1^st defendant’s receipt of trust property (§74). The defendant applied to discharge the ex parte order on the basis of failure to disclose its potential defence that it “had no knowledge that the principal payment was made to Bawa by mistake and therefore could not itself be liable as a constructive trustee” (§98).

176.After citing Foskett v McKeown [2001] 1 AC 102, To J rejected the defendant’s argument:

“101. Mr Wright appreciates that the plaintiff was making a proprietary claim. However, when launching his no knowledge defence,he asserts that the plaintiff has no evidence that the 1^st defendant was not a bona fide purchaser for value without notice and failed to draw to the attention of the ex parte judge that knowledge is a necessary ingredient for knowing receipt and to authorities such as BCCI (Overseas) Ltd and Another v Akindele [2001] Ch 437 […]

102. The concept of knowledge in the context of breach of trust for knowing receipt and knowing assistance and the concept of notice in the context of a bona fide purchaser for value without notice are two different concepts relevant for different purposes. Knowledge is a necessary element which a beneficiary has to establish in a personal claim against a constructive trustee for breach of trust. It includes actual knowledge and blind-eye knowledge. On the other hand, notice is an element which the recipient of trust property has to prove in order to raise the defence of bona fide purchaser for value without notice, once such a proprietary claim is prima facie established against him. Constructive notice is sufficient to defeat this defence. […]” (§§101-102)

177.In Welly Grace Ltd v Keung Yee Man [2023] HKCFI 3082, Recorder Eugene Fung SC (as he then was) noted the conceptual difference between a proprietary claim and a personal claim based on knowing receipt (§§38-39), although the latter was not pursued.

D.7b  The English authorities

178.In Commerzbank AG v IMB Morgan plc [2005] 2 All ER (Comm) 564, Lawrence Collins J introduced Akindele knowledge (which is applicable to a personal claim for knowing receipt) in the discussion of a proprietary claim as follows:

“In order to establish a claim to a share in the fund, claimants must show that they have a proprietary right, ie a right in property and not simply a debt due from IMB. There are three relevant bases for such a claim, and most of the claimants have a claim (if any) under the first basis, which is that a person who has been defrauded may trace property into the hands of the recipient. “… [W]hen property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity”: Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996] AC 669, 716. The victims of fraud can follow their money in equity through bank accounts where it has been mixed with other money because equity treats the money in such accounts as charged with the repayment of their money: El Ajou v Dollar Land Holdings plc (No. 1) [1993] 3 All ER 717 (reversed on other grounds [1994] 1 All ER 685). See also Bristol and West Building Society v Mothew [1998] Ch 1; Bankers Trust Co v Shapira [1980] 1 WLR 1274, 1282. In Bank of Credit and Commerce International (Overseas) Ltd (in liquidation) and another v Akindele [2001] Ch 437 it was held that the recipient's state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt. Consequently, even if IMB Morgan was not a party to the frauds, the defrauded claimants have a tracing remedy.” (§36)

179.It appears that Lawrence Collins J had in mind a proprietary claim (as opposed to a personal claim based on knowing receipt), with Akindele knowledge as an essential ingredient.

180.However, this proposition is inconsistent with a number of English authorities decided both before and after that case. When reading those authorities, it should be noted that the expressions “constructive trust” or “constructive trustee” are “misleading” because there is no “trust” and they merely meant a personal claim based on knowing receipt (as opposed to a proprietary trust): Welly Grace Ltd v Keung Yee Man [2023] HKCFI 3082 §38 (Recorder Eugene Fung SC) citing Paragon Finance plc v DB Thakerar and Co [1999] 1 All ER 400, 409f (Millett LJ).

181.In Re Montagu’s Settlement Trusts [1987] Ch 264, Sir Robert Megarry VC held:

“It seems to me that one must be very careful about applying to constructive trusts either the accepted concepts of notice or any analogy to them. In determining whether a constructive trust has been created, the fundamental question is whether the conscience of the recipient is bound in such a way as to justify equity in imposing a trust on him. The rules concerning a purchaser without notice seem to me to provide little guidance on this and to be liable to be misleading. […]

Third, there seems to me to be a fundamental difference between the questions that arise in respect of the doctrine of purchaser without notice and constructive trusts. As I said in my previous judgment, ante, pp 272H―273B:

“The former is concerned with the question whether a person takes property subject to or free from some equity. The latter is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship. I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a man. The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a man's conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee.”” (277G-278E)

182.In Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, Nourse LJ (with whom Ward and Sedley LJJ agreed) cited with approval the above “seminal judgment” which “emphasised the fundamental difference between the questions which arise in respect of the doctrine of purchaser without notice on the one hand and the doctrine of constructive trusts on the other” (452C-E).

183.In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2010] EWHC 1614, when considering a proprietary claim, Lewison J (as he then was) held:

“Akindele case was concerned with liability for knowing receipt of trust property; and that liability is a personal liability which extends to a liability to account for property or its value which the knowing recipient no longer has. In those circumstances, as Megarry V-C pointed out [in Re Montagu’s Settlement Trusts [1987] Ch 264, 272-273], a more stringent test is appropriate. In my judgment, therefore, Akindele case is not in point. This is, to my mind, borne out by what Lord Millett subsequently said in Foskett v McKeown [127G & 130D]” (§86)

184.Lewison J’s judgment was affirmed on appeal: [2012] Ch 453 §§94-109 (Lord Neuberger MR with whom Richards and Hughes LJJ agreed).

185.In Arthur v Attorney General of the Turks and Caicos Islands [2012] UKPC 30, Sir Terence Etherton (with whom the other members of the Judicial Committee of the Privy Council agreed) cited Re Montagu’s Settlement Trusts [1987] Ch 264, 272-3 and held:

“The difference between notice (actual, constructive or imputed) of an equitable interest, on the one hand, and knowledge such as to give rise to personal liability for knowing receipt, on the other hand, is important and reflects the difference between a proprietary remedy and the imposition of personal duties as a constructive trustee. Notice is relevant to priority as between competing property interests. Knowledge, in the knowing receipt sense, means not merely notice, but, in accordance with Akindele, such knowledge as to make the recipient’s conduct unconscionable and to give rise to equitable fraud.” (§36)

186.In Byers v Saudi National Bank [2024] AC 1191, Lord Briggs (with whom Lord Hodge DPSC, Lord Leggatt and Lord Stephens JJSC agreed) cited Re Montagu's Settlement Trusts [1987] Ch 264, 272-3 and held that:

“These dicta certainly impose a higher mental element (knowledge rather than mere notice) as the criterion for imposing personal trustee-like liabilities on the recipient of trust property, by comparison with liability to answer a purely proprietary claim to the return of the property.” (§65)

187.The authorities show that it would be logically incoherent to say that a plaintiff’s proof of Akindele knowledge (“a higher mental element”) is necessary to establish a proprietary claim, while his proof of “notice” (a lower mental element) on the part of a purchaser could defeat the latter’s assertion of beneficial interest.

D.8  A summary of the principles

188.In this context, there are two categories of proprietary claims. The first is based on misappropriation of property by an employee:

188.1  The employer has a continuing beneficial interest in the stolen property which is held on a trust. As to the timing when it arises, it depends on the nature of the personal property concerned and whether the stolen property is transferred directly to a third party recipient or to the employee herself. Generally speaking, the timing may refer to the disposition of the stolen property, when the equitable interest becomes separated from and does not accompany the legal title, or the acquisition of the relevant traceable proceeds[22].

188.2  If the employee causes a transfer of the employer’s property to a third party, the recipient obtains no title. Even if legal title did vest in the recipient, he holds the same as trustee for the employer, who may assert his continuing beneficial interest in the stolen property and its traceable proceeds[23].

188.3  This trust has been labelled as constructive trust by the Court of Final Appeal, and treated as resulting trust by Australian authorities and, extra-judicially by Lord Millett. Irrespective of its label, it is clear that the establishment of this trust does not require the proof of unconscionable knowledge on the part of the recipient[24].

188.4  If the recipient discharges the burden of proving that he is a bona fide purchaser for value without notice, the stolen property would lose its character as trust money and cannot be recovered by the employer[25].

188.5  Westdeutsche [1996] AC 669 is not directly relevant to proprietary claims under the first and second category[26].

188.6  It has been assumed in Hong Kong that, where property is transferred pursuant to a contract which is nothing but “an instrument of fraud” and the recipient only provides worthless documentation and incurs no obligation, this reflects a case under the first category[27]. In any event, the “instrument of fraud” most likely negates the defence of bona fide purchaser for value without notice.

189.The second category is based on transfer of employer’s property vitiated by recognised factors[28].

189.1  If an employee causes the employer to transfer his property in a transaction vitiated by recognised factors, the title to the property passes to the recipient upon transfer.

189.2  If the employer elects to rescind (or disaffirm) the transaction, the title of the property concerned revests in the employer.

189.3  Where an employer issues a cheque in favour of a third party as a result of fraud by his employee, the third party obtains a voidable title which revests in the employer upon rescission, notwithstanding the recipient’s payment of the cheque into the account of himself or the employee.

189.4  The employer has the burden of proving that the recipient is not a bona fide purchaser for value without notice.

190.As to the issue of deciding into which category a case falls[29]:

190.1  The characterisation of a transaction is a question of law.

190.2  Cases do not fall within the second category solely because they involve fraud.

190.3  The crucial question is whether the original owner intends to pass the whole property to the transferee.

191.On the question of tracing[30]:

191.1  The difficulty that arises in a case of tracing at common law is a difficulty of fact, not law. The tracing exercise continues as long as it is capable of being identified and distinguished, albeit in changed forms; and it ceases when the means of ascertainment fails.

191.2  For tracing in equity, there must be at some stage a quasi-fiduciary relationship or fiduciary relationship of some kind. In the employment context, fiduciary duties arise from an employee’s specific contractual obligations which have placed him in a situation where equity imposes these rigorous duties. This requirement is readily satisfied in most cases of commercial fraud involving embezzlement of a company’s funds by employees or agents who were in possession of company property. For money mixed with that of the employee or the volunteer, the owner is entitled to trace its proceeds in the manner most advantageous to him.

D.9  Application to the facts of the instant case

192.In my view, the Plaintiff establishes continuing beneficial interest in the credit balance of the Defendant’s Account, subject to the question of whether the Defendant is a bona fide purchaser for value without notice.

D.9a  Tracing

193.There is some difficulty of fact for tracing at law. The Cheque was paid into the Defendant’s Account, but then $500,000 had been debited for the purchaser of the cashier’s order, leading a current balance slightly exceeding $600,000.

194.As to tracing in equity, on the assumption that the aforesaid prerequisite represents the law in Hong Kong, and insofar as necessary, I would find that there were specific contractual obligations on the part of Li not to cause the cheques to be paid to third parties, whether by falsely inserting the names of the payees or otherwise, in light of the trust imposed on her and her exclusive possession of the Plaintiff’s cheque books. This is sufficient to enable tracing in equity. On the facts, the $500,000 debited from the Defendant’s Account for the cashier’s order is deemed to be the Defendant’s own funds, leaving the current balance of $600,000 belonging beneficially to the Plaintiff.

D.9b  The first or second category?

195.There is no clear evidence of how the Sum was transferred to the Defendant’s Account. It was by cheque, but the Plaintiff could not confirm whether Li forged his signature. It seems probable that Li presented the Cheque (amongst others) for Mr Cai’s signature without the name of the payee and she filled in the Defendant’s name without authority.

196.In light of her aforesaid fiduciary duties, if Li caused her name to be inserted as the payee and received proceeds of the Cheque, there could be no doubt this would be a first category case. The fact that Li caused the proceeds to be transferred to a designated account held by a volunteer makes no difference. The Plaintiff is therefore entitled to assert continuing beneficial interest in the proceeds of the Cheque represented by the credit balance in the Defendant’s Account on the basis of her fiduciary or quasi-fiduciary duty in respect of the Cheque which was in her exclusive possession and control at the material times.

197.Alternatively, the transaction constituted by the Cheque in this case was an “instrument of fraud, and nothing else”, thus falling within the first category.

198.If the above were wrong, the transaction still falls within the second category, and the Plaintiff could assert beneficial interest based on rescission for fraud. The consolidated bank statement of 21 November 2020 recorded a debit balance of $1 million in a mortgage account, though not described as an overdraft. Mr Wong confirmed in closing that there is no evidence whether the debit balance affects the credit balance in the Defendant’s Account. It remains possible that the usual contractual right of combination will give the bank priority over the credit balance.

199.Mr Cai’s making of the report to the police on 17 August 2020 in respect of the Cheque evinced a clear intention to rescind this transaction and communication to the police was sufficient: Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525, 550-551 (Sellers LJ), 555-556 (Upjohn LJ), 559 (Davies LJ). In any event, the Plaintiff communicated its decision to rescind when it commenced this action on 10 September 2021: Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321, 332 (Atkin LJ).

200.Upon rescission, the value represented by the credit balance in the Defendant’s Account revested in the Plaintiff and the Defendant has been holding the same in trust for the Plaintiff.

D.10  The defence of bona fide purchaser for value without notice fails

201.In considering the defence, it is important to note that the Defendant’s evidence suffers from various limitations.

202.First, the Defendant’s evidence-in-chief consists of only a one-page witness statement prepared in person. Most of the evidence relevant to her defences in this action was only elicited under cross-examination.

203.Second, all the pleaded facts based on alleged WhatsApp communications of the parties concerned are not supported by any documentary evidence. Under cross-examination, the Defendant said her mobile phone was seized by the police, and her former solicitors had visited the police station and taken pictures of the WhatsApp communications shown on her mobile phone. The list of documents filed by herself only disclosed WhatsApp screenshots which bore no obvious relevance to her pleaded case. She cannot explain why all the material WhatsApp communications allegedly between the Defendant and Cheung Hung, Harry, Lawyer Leung and Li were not produced.

204.Third, under cross-examination, the Defendant confirmed that the two important WhatsApp messages of Lawyer Leung in her pleading were in fact not made, namely: (1) “我們會向你發送600k到您的賬戶，你需要提取100k […] 星期二” on 25 July 2020; and (2) “你明天就把錢兌現好吧，保持100,000自我價值” (You duly exchange the money tomorrow, keep 100,000 self value) on 27 July 2020.

205.Having regard to the above limitations, the entirety of her evidence and counsel for the Plaintiff’s submissions, it is not proved to the requisite standard that the facts alleged by the Defendant in the pleaded defence in fact happened.

206.For completeness, even if her pleaded facts happened, the Defendant fails to discharge the burden of proving that (1) she was a purchaser; and (2) she acted bona fide without notice; and the same result would be reached even if this were a second category case so that the Plaintiff bears the burden to negate the Defendant’s plea that she is a bona fide purchaser for value without notice.

D.10a Defendant was not a purchaser

207.In Zief Incorporated v Tekchandani Ajai Mohan [2021] HKCFI 38; [2021] 3 HKC 69, it was held that “to be valuable consideration for the purposes of the defence of bona fide purchase for value without notice, the value must be given under a valid contract” (§32(2)).

208.The pleaded defence appears to suggest that the Sum represents the valuable consideration given by the Defendant in respect of the purported loans to Cheung Hung. This is, however, contrary to the Defendant’s own pleaded case and evidence that the Sum was received by the Defendant in the course of a fraudulent scheme by Cheung Hung, Harry, Lawyer Leung and Li.

209.Even assuming that she did in fact pay the various sums of money pursuant to the requests of Lawyer Leung, these transfers made in the course of a fraudulent scheme cannot constitute valuable consideration given under a valid contract. In any event, the evidence does not show any connection between her receipt of the Sum and the previous sums she paid. Based on the Plaintiff’s evidence, it has no connection whatsoever with the Defendant.

D.10b Defendant was not without notice

210.In Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd [2023] HKCFI 1292 Au-Yeung J, applying Papadimitriou v Crédit Agricole Corpn and Investment Bank [2015] 1 WLR 4265 §§14, 15 & 20, held that three types of notice would defeat the defence of good faith and/or without notice (§40):

210.1  Where the recipient appreciates that a proprietary right in the property probably exists, the recipient would have actual notice of the right.

210.2  Where a reasonable person with the attributes of the recipient should have appreciated, based on facts already available to him, that the right probably existed, the recipient has constructive notice of the existence of the right.

210.3  If the facts known to the recipient would give a reasonable recipient in the position of the particular recipient serious cause to question the propriety of the transaction, the recipient should have made inquiries or sought advice, which would have revealed the probable existence of a proprietary right.

211.Under cross-examination, the Defendant admitted that she was in fact informed by Li right after she received the Sum that it was transferred by mistake. She was told to repay $500,000 in cash. As a result, she visited three branches of her bank, and managed to obtain a cashier’s order in the said sum. Good faith would require her to make a simple inquiry to any staff member of the bank as to what happened to the Defendant’s Account. There is no evidence that she did so. Her state of knowledge would satisfy any one of the above types of notice.

D.10c Does the defence apply to two-party situation?

212.Counsel for the Plaintiff argued that the defence does not apply in this case because this is a “two-party” situation. He relies on Zief Incorporated v Tekchandani Ajai Mohan [2021] HKCFI 38; [2021] 3 HKC 69 §34. As the defence fails on the facts, it is not strictly necessary to decide this issue.

213.In that case, the plaintiff (Zief) remitted $3 million to the 4^th defendant as a result of an email fraud. The 4^th defendant’s defence to Zeif’s claim in unjust enrichment was that the sum represented payment for Zeif’s purchase of diamonds pursuant to a contract entered into through a purported agent of Zeif. There was no suggestion that any third party was involved. As the learned judge rejected the existence of the alleged contract (§19(4)), there could be no viable defence to the claim. This was an ordinary case in which a party’s consent in a two-party transaction was vitiated by recognised factors. There could be no basis for invoking the defence of bona fide purchaser for value.

214.It is unclear whether the case could stand for the proposition that the defence is inapplicable whenever the defendant directly received money from the plaintiff. In R v Hoang Hai Viet [1996] 1 HKC 461[31], Bokhary JA (as he then was) applied the oft-quoted dicta of Lord Halsbury LC in Quinn v Leathem [1901] AC 495, 506:

“[E]very judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found.” (464G-H)

215.In Deines-Pollan Services LLC v Tongzhou Industrial Co Ltd [2024] HKCFI 2196, DHCJ Phoebe Man held that “as D2 is the direct recipient of the enrichment from P, based on [Zief Incorporated v Tekchandani Ajai Mohan [2021] HKCFI 38], there is no scope for applying the bona fide purchaser defence. It is irrelevant that D2 thought that the D2 Funds were for discharging the Customer’s indebtedness, even if such assertion were believable.” (§28)

216.If necessary, on the assumption that the above authorities support the said proposition, it is held that the defence is inapplicable.

E.  THE PERSONAL CLAIM BASED ON UNJUST ENRICHMENT

217.In Shanghai Tongji Science and Technology Industrial Co Ltd v Casil Cleaning Ltd (2004) 7 HKCFAR 79 §67, Ribeiro PJ (with whom the other members of the Court agreed) held that a useful framework for approaching a claim for restitution based on unjust enrichment involves asking four questions, namely: (1) Was the defendant enriched? (2) Was the enrichment at the plaintiff’s expense? (3) Was the enrichment unjust? (4) Are any of the defences applicable?

218.In my view, subject to the defences raised, the Plaintiff’s claim is proved. The Defendant was plainly enriched by the transfer of the Sum into the Default’s Account. It is not in dispute that such transfer came from the Plaintiff’s cheque and hence the Defendant’s enrichment is at the Plaintiff’s expenses. The enrichment is unjust because, as accepted by the Defendant under cross-examination, she ought to repay the Sum if it was transferred by mistake.

219.The Defendant raises two defences. Although the defence of bona fide purchaser for value without notice applies to a personal claim in unjust enrichment: AXHT Co Ltd v Wing Wo Lung Co Ltd [2024] HKCFI 3678 §78, this has been rejected in Section D.10 above.

220.For the same reasons, the defence of change of position fails on the facts. There are additional reasons why this defence must fail.

221.To establish the change of position defence, the defendant must prove (1) that there was a causative link between the receipt of the benefit and its change of position, so that but for the receipt of the benefit, her position would not have changed; and (2) her position has changed in circumstances which make it inequitable for it to be required to make restitution to the plaintiff. But the defence is not available to someone who has changed her position in bad faith: Zhang Kan v SPH (Hong Kong) International Trading Co Ltd [2023] 4 HKLRD 544 §28.

222.In Niru Battery Manufacturing Co v Milestone Trading Ltd (No1) [2004] QB 985 §164, Clarke LJ (with whom the other members of the Court agreed) approved Moore-Bick J’s analysis of good faith in the context of the defence of change of position as follows.

222.1  Dishonesty in the sense identified in Twinsectra Ltd v Yardley [2002] 2 AC 164 is not the sole criterion.

222.2  It is not desirable to define the limits of good faith; it is a broad concept, the definition of which, insofar as it is capable of definition at all, will have to be worked out through the cases.

222.3  Bad faith is capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself.

222.4  The factors which will determine whether it is inequitable to allow the claimant to obtain restitution in a case of mistaken payment will vary from case to case.

222.5  Where the payee has voluntarily parted with the money much is likely to depend on the circumstances in which he did so and the extent of his knowledge about how the payment came to be made.

222.6  Where he knows that the payment he has received was made by mistake, the position is quite straightforward: he must return it. This applies as much to a banker who receives a payment for the account of his customer as to any other person.

222.7  Greater difficulty may arise, however, in cases where the payee has grounds for believing that the payment may have been made by mistake, but cannot be sure. In such cases good faith may well dictate that an enquiry be made of the payer. The nature and extent of the enquiry called for will depend on the circumstances of the case.

222.8  A person who has, or thinks he has, good reason to believe that the payment was made by mistake will not often be found to have acted in good faith if he pays the money away without first making enquiries of the person from whom he received it.

223.The Defence pleaded that, in the hope of receiving money due from Cheung Hung or the Sum, after actual receipt of the Sum, she changed her position by paying not less than $1,046,400 to Cheung Hung, Lawyer Leung and Li Po Lai. This case must fail for four reasons.

224.First, she merely pleaded that she paid $1,046,400 to Cheung Hung, Lawyer Leung and Li Po Lai because of her receipt of the Sum. No causal connection is pleaded.

225.Second, even if the above plea suggested certain causative link between her receipt of the Sum and payment of various sums to Cheung Hung, Lawyer Leung and Li Po Lai, this is inconsistent with her earlier pleas: (1) her loans to Cheung Hung predated and were irrelevant to the Sum; (2) there is no plea of payment to Lawyer Leung after receipt of the Sum; (3) after receipt of the Sum, she only paid $500,000 to Li by cashier’s order ― this is inconsistent with her alleged payment of “not less than $1,046,400 to Cheung Hung, Lawyer Leung and Li Po Lai”.

226.Third, her alleged payment of “not less than $1,046,400 to Cheung Hung, Lawyer Leung and Li Po Lai” was not borne out by the evidence. Under cross-examination, the Defendant merely said she gave a cashier’s order in the sum of $500,000 to Li. The only reason for that payment was that Li informed her that a sum of money (amount not disclosed) was mistakenly transferred to her. Li instructed her to repay $500,000 in cash. She found from the bank passbook that $600,000 was paid into her account. Yet, she did not know why Li only asked for repayment of $500,000. She did not even ask Lawyer Leung what happened.

227.Fourth, as analysed in Section D.10 above, the Defendant cannot explain why she failed to make even a simple inquiry with any staff member of the three branches of the bank she visited regarding Li’s alleged mistaken transfer.

F.  ORDER FOR EXECUTION OF DOCUMENTS

228.Section 38A of the District Court Ordinance, Cap 336 provides:

“(1) Subsection (2) applies where—

(a) the Court has given or made a judgment or order directing a person to—

(i) execute any conveyance, contract or other document; or

(ii)  endorse any negotiable instrument; and

(b)  that person—

(i)  neglects or refuses to comply with the judgment or order; or

(ii)  cannot, after reasonable inquiry, be found.

(2)  The Court may, on such terms and conditions, if any, as may be just, order that the conveyance, contract or other document is to be executed, or that the negotiable instrument is to be endorsed, by such person as the Court may nominate for that purpose.”

229.In reliance on Tokić DOO v Hongkong Shui Fat Trading Ltd [2020] 4 HKLRD 189 §§21-22 (DHCJ Douglas Lam SC), the Plaintiff sought an order that the Defendant “do […] execute such document(s) as may reasonably be required to instruct HSBC to transfer to the Plaintiff the [Sum] […] failing which any such document(s) are to be executed by the Registrar of the District Court”.

230.This request must be refused for the following reasons.

231.The order made in the above case seems to be premised on the assessment that “the defendants are unlikely to respond or comply with any order of the Court” (§21). In the instant case, there is no basis for suggesting this.

232.On the face of it, the Court’s discretion to make such an order is only engaged upon proof that: (1) there is a judgment directing a person to execute any document; and (2) that person “neglects or refuses to comply with the judgment”. None of these is satisfied.

233.The above construction is supported by Savage v Norton [1908] 1 Ch 290, where Parker J interpreted the equivalent provision as follows:

“My own opinion is that, on the true construction of s. 14 [of the Judicature Act 1884], the circumstance which gives rise to the jurisdiction is the neglect or refusal, and that the Court, before making the order, ought to satisfy itself that there has been a neglect or refusal and also as to the circumstances in which that neglect or refusal has taken place, because the order is only to be made “on such terms and conditions (if any) as may be just.” Therefore, in making the order, the Court ought to know the circumstances of the refusal or neglect as well as the fact that there has been a refusal or neglect. The refusal may, for instance, have been due to some unforeseen cause, and the party all along may have been willing, and may still be willing, to comply, but may have been prevented by some accident—in which case I doubt whether the Court would, after considering the circumstances of the case, make any order.” (297)

234.Parker J, however, observed obiter:

“I do not decide that there is no case in which the Court may make an anticipatory order, because it may be that the person ordered to transfer has in fact by his conduct already shewn the Court that he does and will refuse to do the act which is ordered to be done, in which case the Court may, shewing on the face of the order that there was that refusal, make an order at once in very much the same terms as those of the order in the present case.” (297)

235.Although not considered in Hong Kong, this obiter been treated as good law in England: Bank of Scotland Plc v Waugh (No 2) [2014] EWHC 2835 §29; Juul Labs, Inc v Quick Juul Ltd [2018] EWHC 3335 §17; Beveridge v Quinlan [2019] EWHC 424 §39; Century Property (Leeds) Ltd v Eville & Jones (Group) Ltd [2025] Pens LR 12; [2025] EWHC 1348 §35. Even assuming that this obiter represents the law in Hong Kong, there is no evidence that the Defendant has in fact by her conduct shown that she does and will refuse to do any act to be ordered to be done.

236.Lastly, the reasoning of DHCJ Jonathan Chang SC in Kuo Benjamin Yung-Hsiang v Xi Meiyi [2022] 5 HKLRD 111 §12, a similar case of internet fraud, is compelling:

“In the present context, whilst the defendant is holding the Sums and their traceable proceeds that may still remain in the defendant’s hands on trust for the plaintiff and is liable to repay the same to the plaintiff, this could not be translated into (and the plaintiff has not pleaded that there is) an obligation of the defendant to specifically execute bank documents to effect any transfer out of the Account.  It is insufficient for the plaintiff to assert that an order that the defendant do pay the Sums to the plaintiff “would necessitate” the defendant’s execution of payment transfer documents or to endorse a negotiable instrument to effect the transfer.” (italics in original)

237.In the absence of pleaded facts and evidence as to the basis of the asserted “obligation” to execute document(s) (which are not identified) for the said transfer, no such order should be made even if such jurisdiction existed.

G.  DISPOSITION

238.For the foregoing reasons, I enter judgment in favour of the Plaintiff in the following terms:

238.1  There be a declaration that the Defendant held and still holds the sum of $600,000 and any and all interest accrued thereon or any part thereof in the Defendant’s Account on trust for the Plaintiff and that the Plaintiff is and was the beneficial owner of the same, and the Defendant do transfer the aforesaid to the Plaintiff within 7 days from the date of service of this judgment;

238.2  Alternatively, the Defendant do pay the Plaintiff $600,000 together with interest at HSBC prime rate plus 1% from date of the writ until the date of judgment, and thereafter at judgment rate until full payment.

239.As to costs, I make a costs order nisi that the Defendant shall pay the Plaintiff the costs of this action (including all costs reserved) with certificate for counsel, to be taxed if not agreed.

240.As the Defendant appears in person, I direct that this Judgment be handed down with the aid of interpretation in accordance with a Chinese translation (for reference only).

Mr Wong Cho Lik, instructed by Tsang, Chan & Wong, for the Plaintiff

The Defendant appeared in person

Appendix

1.  Heitkamp & Thumann Kg v Living Profit Trading Develop Ltd [2018] HKCFI 1006 §69

2.  Wells Fargo Securities, Llc v Tian Ruida Industrial Co Ltd [2018] HKCFI 2495 §§6-7

3.  Skandinaviska Enskilda Banken SA v Hongkong Liling Trading Ltd [2018] HKCFI 2676 §§13-15

4.  Seridom Servicios Integrados Idom SAU v Heng Wen Trade Co Ltd [2019] HKCFI 85 §88

5.  Tai Ching Ling v Cai Huo Chuan [2019] HKCFI 2251 at §15 fn1

6.  Comtel Solutions PTE Ltd v Yi Li Trade (HK) Co Limited [2019] HKCFI 2407 §8

7.  SBM Bank (Mauritius) Ltd v Warner Trading Ltd [2019] HKCFI 2956 §12

8.  Akbank TAS v Mainford Ltd [2020] HKCFI 396 §§44-46

9.  Essilor Manufacturing (Thailand) Co Ltd v G Doulatram and Sons (HK) Ltd [2020] HKCFI 2489 §§62-68

10.  Predicine Holdings Ltd v Bianchi (Hong Kong) Ltd [2021] HKCFI 123 §§89-92

11.  Kot See For v Lam Man Cheung [2021] HKCFI 1029 §45

12.  Fan Yuxi v Linbiao Tang [2021] HKCFI 2652 §§26-27

13.  Hypertec Systems Inc v Yifim Ltd [2022] HKCFI 482; [2022] 1 HKLRD 1141 §§19-21

14.  Minebea Cambodia Co Ltd v Zhao Jin Fang [2022] HKCFI 3325 §§32-33

15.  John Joseph MC Gee v Nold (HK) Ltd [2022] HKCFI 3598 §§10 & 14

16.  Elysium Ltd v Sum Ka Kuen Dominic [2023] HKCFI 612 §43(3)

17.  Chan Ting Ting v Zhang Qingrun [2023] HKCFI 1010 §42

18.  JP Morgan SE v LV Guangxin Trade Co Ltd [2023] 2 HKLRD 893 §18

19.  Barco Investments Ltd v Wong Yan Ho [2023] HKCFI 1648 §53

20.  Feng Bo v Dela Cruz Anabelle-Gamoso [2024] HKCFI 1819 §12

21.  AXHT Co Ltd v Wing Wo Lung Co Ltd [2024] HKCFI 3678 §§57 & 72

22.  Kot See For v Kung Ho Yin [2025] HKCFI 483 §53(a)

23.  Leung Choi Fai v Wong Yee Fai [2025] HKCFI 3163 §155

24.  Tan Cheng Gay v Tan Choo Suan [2025] HKCFI 4788 §126

25.  Fremery Resources Ltd v Chan Kam Ping [2025] HKCFI 5899 §77

26.  Goldjet Development Ltd v Whitecotton [2025] HKCFI 5268 §182