Write Carefully – Hong Kong Court Stresses Importance of Proper Pleadings | Hogan Lovells

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Plaintiff in JSP International SRO v Alacrity Ltd [2002] HKCFI 977 is a company registered in the Czech Republic, also a 100% subsidiary of a French company owned by JSP Corporation, a Japanese company.

On October 20, 2020, the Claimant’s then financial controller received a call from a person who claimed to be calling on behalf of Mr. Sakai, the President of JSP Corporation. The caller asked the financial controller to prepare a bank transfer for the purpose of buying a business and asked him to keep the matter confidential from his colleagues. The financial controller inquired and determined that the call was legitimate.

Later the same day, another caller who claimed to be a lawyer appointed by Mr. Sakai emailed the financial controller, attaching a power of attorney purporting to be from Mr. Sakai and giving the financial controller “full authority to act”. . including signing, activation and payment processing.

Wrongly believing that she was acting on Mr. Sakai’s instructions, the financial controller made various transfers from the plaintiff’s bank accounts to the bank accounts held by the first-tier defendants.

It was not until November 5, 2020 that the plaintiff became aware of the fraud. The complainant reported the matter to both the Czech police and the Hong Kong police. The plaintiff also discovered following the granting of a bank books disclosure order that there were various transfers of the first level defendants’ bank accounts to accounts held by other second level defendants. .

Plaintiff applied for default judgment under RHC O.19, r.7 and sought various grounds for relief.

Unjust enrichment

The court awarded damages based on the principles of unjust enrichment against the first and second level defendants, the court being satisfied that the latter had been unjustly enriched by funds originally transferred by the plaintiff to the defendants of the first level.

Constructive trust

Plaintiff also invoked proprietary remedies, in the form of a declaration that the defendants each held sums transferred to their bank accounts by the plaintiff (in the case of the first-tier defendants) or by the first-tier defendants ( in the case of the second-tier defendants) together with the traceable trust proceeds for the plaintiff, as well as the order to pay, release or transfer these sums to the plaintiff.

Fraudulent receipt

The Honorable Madam Justice Yvonne Cheng declined to grant declaratory relief and relief from the payment order, and relied on the requirements set out in the English case of Three Rivers District Council v. Bank of England (No. 3) [2003] 2 AC 1 to determine when a person should be considered a fraudulent recipient.

The first requirement is that one must clearly allege and prove fraud or dishonesty and must plead all facts, issues and circumstances to show that the defendant is dishonest. Mere negligence is insufficient, and there should be no misleading language as it may not be sufficient to say “willfully” or “recklessly” if the litigant actually means “dishonestly” or “fraudulently”.

The second requirement is that the allegation of fraud be sufficiently detailed, both in terms of the presentation and in substance. The court quoted Three Rivers:

“At trial, the court will not normally allow evidence of primary facts which have not been pleaded and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded. “have not been pleaded or of facts which have been pleaded but are consistent with honestly. There must be a fact which tips the scales and justifies an inference of dishonesty, and that fact must be both pleaded and proved.

The court said the six details pleaded in the amended statement “may be consistent with the first-tier defendants being fraudulent recipients, but they may also be consistent with the first-tier defendants being innocent recipients.” “.

Even if the first-ranking defendants “could be considered ‘fraudulent beneficiaries’, that alone was insufficient for the grant of a constructive declaration of trust. It would be “necessary to show that the defendant retained property in which the claimant can identify his proprietary interest.

In the court’s view, there was “therefore no sufficiently pleaded evidence that the first-tier defendants retained any property in which the plaintiff can identify his proprietary interest, so as to warrant the granting of a declaration constructive trust over such property in the hands of the first class defendants”. Merely receiving the funds into the accounts of the first tier defendants was not sufficient. It was necessary “that the defendants have preserved identifiable assets upon which a declaration of constructive trust can take effect”.

The court therefore concluded that there was not sufficiently pleaded evidence that the first-tier defendants retained property in which the plaintiff could identify a proprietary interest.

As for the second-tier defendants, the plaintiff argued that they had “received property in a constructive trust and therefore continued to be indebted.” However, the court did not consider that it had been sufficiently pleaded that the second-tier defendants were “fraudulent recipients”, as the details relied on were also consistent with them being innocent recipients.

Future applications

Hong Kong courts are generally receptive to claims for compensation from victims of cyber fraud. As our recent alert, Three in a Row – victims’ tool to recover cyber fraud funds asserted in Hong Kong, courts have jurisdiction to grant vesting orders to help victims of cyber fraud.

The decision in Hypertec Systems Inc v Yifim Ltd [2022] HKCFI 482, discussed in our previous alert, set out the “mandatory” reasoning followed in prior case law as to why this should be so, concluding in that case that a constructive trust arose under the law of transfer and receipt by way of fraud.

The JSP International judgment shows that, despite the availability of this useful tool, it is of course necessary to demonstrate with particular precision that the patrimonial interest of a victim can be traced in the hands of the possible recipients of the amounts fraudulently transferred.

As the case shows, in order to effectively assist customers in seeking redress, allegations of fraud and dishonesty must be sufficiently detailed and the details intended to illustrate the fraud must be strong enough to demonstrate it.

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