Introduction
What happens when a trusted employee betrays his employer's trust and orchestrates a complex and long-term fraud within the employer's group of companies? How may remedies such as unjust enrichment and constructive trust assist in tracing misappropriated funds, especially when routed through companies controlled by the wrongdoer? In its reasons for decision in JB Management Ltd & Ors v Lau Lik Wah David & Ors [2025] HKCFI 2702, the Court of First Instance ("CFI") discussed these issues, exploring the scope and application of equitable remedies applicable in this scenario.
Background
The plaintiffs, JB Management Limited and several affiliated companies ("Ps"), belong to the Lane Crawford Joyce group of companies ("Group"), which is in the business of fashion, retail and brand management. The 1st defendant ("D1") was an employee of various companies within the Group, initially as a Senior Accounting Manager and ultimately as the Financial Controller (until his summary dismissal). The 2nd defendant ("D2") is a company solely owned and controlled by D1, while the 3rd defendant ("D3") is a Seychelles company also wholly owned by D1 and it has been struck off from the company registry.
Ps' claims arose from a decade-long fraudulent scheme whereby D1 systematically misappropriated funds of over HK$81 million from Ps by abusing his position in the Group. D1 had extensive knowledge of Ps' payment procedures and took advantage of his knowledge to misappropriate Ps' funds using the two main methods, namely:
1. Forged Invoice Method
D1 forged and issued invoices from various purported payees (including D2 and D3) and procured Ps to make payments by issuing cheques in accordance with their payment procedures. By splitting payments into smaller amounts (i.e., payments not more than HK$500,000), D1 knew no approval from a separate list of signatories involving corporate officers would be required.
2. Unknown Cheque Method
D1 directly requested finance team members to prepare blank cheques on the excuse that these would be used for employees' bonus or incentive payments such that the names of payees had to be confidential when in fact the cheques would be deposited into D1 or his companies' accounts.
The scheme was exposed in November 2020 following a report by the Hong Kong Jockey Club that seven corporate cheques totalling approximately HK$1.7 million had been deposited into D1's personal betting account. Subsequent investigations uncovered the extensive scale of misappropriation involving at least 212 fraudulent transactions between 2010 and 2020.
In June 2021, Ps successfully obtained a worldwide Mareva injunction restraining D1 and his companies from disposing of the misappropriated funds. Later in February 2024, an order was granted by Master YH Hew for partial summary judgment against D1 and D2 ("Ds") in respect of the direct receipts of funds from Ps based on claims of unjust enrichment and constructive trust ("Order"). An appeal against the Order was subsequently filed by Ds.
Court's findings and decisions
Ds advanced several defences before the Master and on appeal, arguing, among others, that (1) the claims were brought in fragmentation, and (2) D1 was authorised by Ps to transfer the various sums.
1. The Fragmentation Defence
Ds argued that it was undesirable for Ps to fragment their claims by seeking summary judgment on only part of their case, resulting in a "partial judgment". They relied on the remarks of Anthony Chan J in Skillsoft Asia Pacific Pty Ltd v Ambow Education Holding Ltd (No. 2) [2016] 1 HKLRD 1052 that it was generally undesirable for litigants to fragment their cases into parts and to advance them as they pleased, as this was not conducive to proper deployment of the scarce resources of the Court.
However, the CFI rejected this argument, noting that there was no fixed rule against parties proceeding to judgment on parts of their claim. The CFI emphasized that the underlying objectives of the Civil Justice Reform would be achieved by promoting procedural economy and expedition resolutions of the clearer claims, particularly, when Ds had no arguable defence. Allowing judgment on distinct issues facilitated crystallisation of the remaining matters, thereby saving the Court's time in due course.
2. The Authorisation Defence
D1 asserted that he had been (a) instructed and authorised by Ps' senior management to help the Group to spend money each year to defray surplus amounts, in a way which could sidestep audit enquiries, and (b) given discretion to decide how to spend this provision, given that "the benefit [of D1 spending] the surplus amount far outweighs the detriment of paying these surplus amount to [D1 and/or his companies]".
The CFI found this defence to be wholly incredible and unworthy of belief. It highlighted the absurdity of the notion that a reputable organization would, in order to "get money off the books", defray its surplus by asking one single employee to spend over HK$81 million at his own discretion through, among other things, creating forged invoices and signatures, lying to other staff about the purpose of various payments, and even financially supporting that employee's gambling habits.
While the defence raised by Ds were held to be lack of substance and merits, Ps' causes of action on unjust enrichment and constructive trust were firmly established on compelling evidence of fraudulent misappropriation and the absence of legitimate justification for the funds transferred.
1. Unjust Enrichment
The CFI outlined four essential criteria for establishing unjust enrichment, as set out in the case of Shanghai Tongji Science and Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 :
- Was the defendant enriched?
- Was the enrichment at the plaintiff's expense?
- Was the enrichment unjust?
- Are any of the defences applicable?
The CFI found that the first two questions were easily satisfied as D1 and D2 received funds at the expense of the relevant Ps. Considering that the enrichments were made due to mistake by way of either the Forged Invoice Method or the Unknown Cheque Method, the enrichment was unjust. Despite the legal proceedings initiated by Ps, neither D1 nor D2 had pleaded or advanced any viable defence in reply to the claim in unjust enrichment.
2. Constructive Trust
Ps' claim against D1 and D2 based on constructive trust relied on the well-established principles that where property has been obtained by fraud, equity imposes a constructive trust on the fraudster recipient so that the money is recoverable and traceable in equity. A detailed fund flow analysis demonstrated that over HK$24 million were transferred from D2 and D3 to D1 personally. Given that both D2 and D3 are wholly owned and controlled by D1, and the lacking of any credible explanation or evidence for these transfers, the CFI held that Ps had clearly made out a case against D1 and D2 on constructive trust.
Whilst the CFI accepted that it might not have full clarity on the fund flow, the CFI took the view that the "irresistible inference" was that D1 was the ultimate beneficiary of the funds. CFI found D1 to be the "sole mastermind" behind the fraud on the basis that (1) Ds had not produced contrary evidence; and (2) D1 had control over D2 and D3 was found. Accordingly, the CFI affirmed the Master's decision in entering judgment against D1 and D2.
Takeaways
The JB Management case serves as a reminder that employers have to be vigilante against dishonest employees. The complicated and pervasive nature of Ds' scheme, which went on for years, based on D1's understanding and abuse of Ps' payment systems and controls as an insider enabled D1 to manipulate and exploit loopholes (including presenting false invoices for approval, having payment amounts capped so corporate signatories were not required to sign off on cheques, and claiming confidentiality reasons for leaving out payees for cheques to be issued) for his own benefit. It is apparent from the reasons for decision and Ds' arguments that Ds intended to drag the case on until trial, which can be years had they successfully appealed against the Master's decision. Whilst remedies against the fraudster and accomplices are available, they are not straightforward. As always, if in doubt, it is advisable to seek legal advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
