HONG KONG SAR, CHINA Law and Practice Contributed by: George Lamplough, Vanessa Cheng and Curtis Pak, Holman Fenwick Willan
Gains Made on the Proceeds of Fraud Where the wrongdoer invests the proceeds of fraud successfully, the victim may be entitled to recover profits in addition to the original sum. This is particularly the case where the fraudster owes the victim a fiduciary duty. The victim can recover the funds by applying to court for a disgorgement order, an order that forces the defendant to repay the profit gained from the fraud. Alternatively, the court can order an account of profits, which can then be claimed by the victim. Vesting Orders There are conflicting decisions on whether vic - tims of fraud can obtain vesting orders under Section 52(1)(e) of the Trustee Ordinance (Cap 29) (TO). In the context of fraud cases, vesting orders work as follows: • a defendant who receives property obtained by fraud holds the property as constructive trustee for the victim; • a credit balance in the defendant’s bank account represents a debt owed by the bank to the defendant; • the victim applies under Section 52(1)(e) TO for an order that the defendant’s right to sue for and recover the sums against the bank be vested in the victim, and that the bank should transfer the sums directly to the victim; and • before making the application, the bank must be joined to the proceedings so that any vest - ing order binds the bank. However, in view of the differing approaches tak - en by Hong Kong judges, many victims of fraud opt for the conventional approach, which is to
and favour the victim. This means that where an asset is exchanged for another, the victim can choose whether to follow the original asset into the hands of the new owner, or to trace its value in the hands of the previous owner. The courts have established the following general rules to assist identifying and tracing in equity. • If the funds of two innocent parties are mixed, the “first-in, first-out” rule applies. This rule presumes that the funds first paid into the account are the funds first paid out. • If the wrongdoer mixes HKD10 of their own money with HKD10 received from a victim, and then dissipates HKD10 from the mixed funds, the victim is entitled to presume that the wrongdoer has spent their own money first and kept the victim’s money intact. • When the wrongdoer mixes HKD10 of their own money with HKD10 of a victim’s money, then uses HKD10 to buy a painting and dis - sipates the remaining HKD10, equity deems the wrongdoer to have used the victim’s money to buy the painting, so that the paint - ing becomes the traceable proceeds of the victim’s money. • More recently, equity allows backwards trac - ing. Backwards tracing allows victims to claim funds that have left the bank account of the wrongdoer before their funds were deposited, so long as they can prove that the payment out was in anticipation of their funds being paid in. Using these principles, victims of fraud can pre - serve their proprietary claim over the proceeds of fraud even when mixed with other assets. Trust Claims Where a victim can establish that they are the beneficiary under a trust, they can trace the trust property into substitute assets.
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