- The 1st Plaintiff, Music Holdings, is a company beneficially owned by Mr Behringer. In 1999, Music Holdings purchased and at all material times thereafter owned a residential property situated in May Road, Hong Kong (“May Road Property”).
- The 2nd Plaintiff, Coolaudio, is also a company beneficially owned by Mr Behringer, which runs an online business selling audio equipment. It is a member of a group of companies run by Mr Behringer known as the “Music Group”.
- The Defendant, Ms Lau, was an employee of Music Group Philippines and commenced employment in 2001, but her employment was eventually terminated in August 2014.
- The 1st Defendant, Larry Brendon, is a company which acted on behalf of Ms Lau in relation to the monetary dispute between Ms Lau and the Plaintiffs.
Ms Lau and Mr Behringer, on behalf of Music Holdings, agreed that her personal bank account (“No 1 Account”) could be used to collect rents from tenants of the May Road Property. Ms Lau would, from time to time, remit money to Music Holdings’ bank account as directed by Mr Behringer. Music Holdings claims the remaining amount of rent in No 1 Account.
Ms Lau, on the other hand, claims that Mr Behringer, on behalf of Music Holdings, had orally agreed to pay her a monthly service fee (“1st Service Fee”) for her agreement to provide her No 1 Account for Music Holdings’ use. Since Music Holdings never separately paid the fee to her, Ms Lau claims she is entitled to set off the 1st Service Fee from the remaining amount of rent. Music Holdings denies any oral agreement for service fee was reached with Ms Lau for the use of her No 1 Account.
Ms Lau and Mr Behringer, on behalf of Coolaudio, agreed that her other personal bank account (“No 2 Account”) could be used to collect Coolaudio’s sales revenue. Similarly, Ms Lau would, from time to time, remit money to Coolaudio’s bank account as per Mr Behringer’s instructions. Coolaudio claims the remaining sales revenue in No 2 Account.
Ms Lau claims that that Mr Behringer, on behalf of Coolaudio, had orally agreed to pay her a monthly service fee (“2nd Service Fee”) for the arrangement. Since Coolaudio never separately paid the fee to her, Ms Lau claims that she is entitled to set off the 2nd Service Fee from the sales revenue generated by Coolaudio. Coolaudio denies any oral agreement for service fee was reached with Ms Lau for the use of her No 2 Account.
Subsequent to the termination of employment, Ms Lau transferred funds from No 1 and No 2 Accounts to Larry Brendon (“Unauthorized Transfers”). She also transferred money from No 2 Account to another bank account of hers (“Personal Account”). Ms Lau claims this sum comprised of her service fees plus provisions for reimbursements of advances previously made by her.
Ms Lau and Larry Brendon did not comply with the Plaintiffs’ demand for the repayment of funds held in Ms Lau’s No 1 and No 2 Accounts. The Plaintiffs successfully applied for a Mareva injunction which was subsequently discharged when the Defendants agreed to pay into Court the funds that were in the two accounts pending the resolution of this case. The issues to be resolved by the court were set out below.
- Issue 1: Whether Ms Lau held the funds in her No 1 Account on trust for Music Holdings, alternatively, whether Music Holdings has a restitutionary claim against Ms Lau
- Issue 2: Whether Ms Lau held the funds in her No 2 Account on trust for Coolaudio, alternatively, whether Coolaudio has a restitutionary claim against Ms Lau
- Issue 3: Whether there were oral agreements between Ms Lau and Mr Behringer on behalf of the Plaintiffs in respect of the 1st Service Fee and the 2nd Service Fee
- Issue 4: Whether the Plaintiffs can establish a cause of action against Larry Brendon based on the Unauthorised Transfers and Larry Brendon’s refusal to return the monies so transferred, but only paid them into Court after the Mareva Injunction had been granted
Issue 1 and 2
The Court held that Ms Lau held the funds in the two accounts on trust for the Plaintiffs. The Plaintiffs also have a restitutionary claim against Ms Lau for the funds in the two accounts.
In Westdeutsche Landesbank Girozentrale v Islington London Borough Council, Lord Browne-Wilkinson set out some fundamental principles of trust law as follows, “Since 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…until he is aware that he is intended to hold the property for the benefit of others…There are cases where property has been put into the name of X without X’s knowledge but in circumstances where no gift to X was intended. It has been held that such property is recoverable under a resulting trust.”
When Ms Lau agreed that her two bank accounts could be used by the Plaintiffs for the specified purpose and that funds in them would be dealt with in accordance with Mr Behringer’s instructions, she was aware that it was intended for her to hold the funds for the benefit of the Plaintiffs and that her conscience was so affected. Therefore, the Court held that it must be correct to regard Ms Lau as a trustee of the funds in the two accounts. Further, if a resulting trust can arise in cases where property has been put into the name of X without X’s knowledge but in circumstances where no gift to X was intended, a fortiori a resulting trust can arise when the rent and the online sales revenue were put into Ms Lau’s No 1 and No 2 Accounts with her knowledge and express consent in circumstances where no gift to her was intended.
In Angove’s Pty Ltd v Bailey and Anor, Lord Sumption JSC explained the circumstances under which money in an agent’s hands will be regarded as being held on trust for his principal, “An agent has a duty to account to his principal for money received on his behalf…As a broad generalisation, the relations between principal and agent which give rise to a trust must be such that the agent was not at liberty to treat as part of his general assets money for which he was accountable to his principal.”
The Court held that Ms Lau was clearly an agent for the Plaintiffs. As an agent, Ms Lau had a duty to account to her principals for all monies received on their behalf. But their relationship went further than that – she was not at liberty to treat and had not treated as part of her general assets monies so received in her two accounts for the Plaintiffs. Further, the two accounts were used solely for the purpose of receiving funds on behalf of the Plaintiffs and there is no question of Ms Lau mixing the Plaintiffs’ money with her own. This fits well into the circumstances which would normally give rise to a trust of the money in an agent’s hands mentioned above.
The Court made a factual finding that there were no oral agreements between Ms Lau and Mr Behringer on behalf of the Plaintiffs in respect of the 1st Service Fee and the 2nd Service Fee. Ms Lau’s defence of set off fails and her counterclaim was dismissed.
The resolution of this issue depends primarily on this court’s assessment of the credibility of Mr Behringer and Ms Lau as there is a direct conflict of their testimonies regarding the existence of the oral agreements. The court rejects Ms Lau’s testimony and accepts Mr Behringer’s testimony for a few reasons, including (1) the fact that there were no contemporaneous documents which record or in any way acknowledge the existence and terms of the alleged oral agreement about service fees, (2) there were several occasions when one would reasonably expect Ms Lau to mention the service fees in her communications with Mr Behringer but the opportunity was not taken up by her and (3) if the alleged oral agreements for the monthly services fees did exist, there is no reason why she did not transfer them into the Personal Account monthly, yearly or as and when she decided to spend some of the service fees which, after all, were hers.
The Court also agreed that the Plaintiffs had established a cause of action against Larry Brendon on the basis of the Unauthorised Transfers and Larry Brendon’s refusal to return the monies so transferred.
Larry Brendon disclaims any entitlement to the funds transferred by Ms Lau to it – it was simply holding the funds for Ms Lau.
Further, according to the legal principles laid out in Westdeutsche Landesbank Girozentrale v Islington London Borough Council, “Once a trust is established, as from the date of its establishment, the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property…other than a purchaser for value of the legal interest without notice.”
Larry Brendon is not a purchaser for value of the legal interest in the funds in Ms Lau’s two bank accounts – it is a mere volunteer who held the funds for Ms Lau. Since Ms Lau has no entitlement to any part of the funds in her two bank accounts and thus all the monies transferred by her to Larry Brendon belonged beneficially to the Plaintiffs, the Plaintiffs would be entitled to trace the funds to Larry Brendon.
Companies should take all practical steps to reduce the risk of employees committing fraud. Such measures may include
- Background checks – Employers should conduct background checks on candidates at the outset when starting your hiring process. This includes verifying the individual’s credentials and education. Carrying out background checks can also provide important and valuable insight into the individual’s past employment and behaviour (e.g. obtaining references from a former employer).
- Internal company controls and monitoring – Employers no matter how big or small their business are should have clear internal company controls and internal monitoring systems in place. This includes restricting financial account data, having more than one signature to approve transactions for significant amounts, and performing regular audits on their books.
- Segregating account duties – there should be a delegation of duties where there should be different people keeping accounting tasks and the handling of cash. Control should not be entrusted to one person.
- Training – Employees should be trained to spot any red flags of fraud, how to prevent fraud and how to report suspicious activity or behaviour whether it is by a colleague or customers. Employers should have a policy in place setting out the various forms of fraud and theft, as well as making clear that unethical behaviour will not be tolerated.
Catherine Leung, partner, Lewis Silkin