HKSAR v. TING JAMES HENRY

CACC 318/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 318 OF 2005

(ON APPEAL FROM HCCC NO. 156 OF 2004)

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J U D G M E N T

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Hon Tang JA:

1. At all times material to this application, the applicant was the group chairman and chief executive officer of Semi-Tech Global Company Limited (“STG”).

2. 40.3% (778,059,745 shares) of the issued share capital of STG was owned by Semi-Tech Corporation (“STC”), a Canadian company, of which the applicant was also the chairman and chief executive officer.

3. At its peak, the group of companies controlled by the applicant employed over 100,000 staff, operated in over 100 countries, and had an annual turnover of HK$40 billion.

4. STG was put into liquidation in early 2000.

5. STC has also been put into liquidation.

6. The applicant was convicted on 29 June 2005 of two offences of false accounting, contrary to section 19(1)(a) of the Theft Ordinance, Cap. 210.

7. The 1^st offence concerned the annual report and statement of accounts of STG for the year ended 31 January 1999 (“the annual report”), which were published on 26 June 1999, and related to the statement in the annual report, which was signed by the applicant, that STG had “an interest in an associated company namely 50% shareholding in MicroMain Systems Limited”.

8. The 2^nd offence related to a letter of STG dated 26 June 1999, also signed by the applicant, and addressed to Ernst and Young, the auditors of STG (“the letter of representation”), which contained the following information:

“(8)

Winsoft Limited (‘Winsoft’)

The Group purchased certain shares held by Winsoft in MicroMain System Ltd. (‘MicroMain’) at a consideration of US$38.46 million (i.e. HK$300 million).  MicroMain held investment in Resilience Corporation Inc. which engaged in the design, manufacture and marketing of fault tolerant computer systems used for network computer applications

Swedish Svennberg family, an independent third party”

9. The foundation of the prosecution’s case was that no shares in MicroMain had been acquired by STG, directly or indirectly, for $300 million or at all.

10. The main prosecution witness was Charles Sun (“Sun”).  He and his wife owned and controlled MicroMain.

11. According to Sun, he had agreed to sell 50% of MicroMain to the applicant for US$5.5 million.  Pursuant to this agreement, the shares were transferred to the applicant subject to the condition that the applicant paid Sun the price by instalments.  Full payment had not been received by Sun.

12. According to the accounting record and information supplied to the auditors, the 50% shareholding was supposedly acquired pursuant to a Share Purchase and Sale Agreement (the “Share Sale Agreement”) “made and entered as of 18 November 1998”, between Winsoft Limited (“Winsoft”), a BVI company, and Fortune 2000 Limited (“Fortune 2000”), another BVI company.  Fortune 2000 was wholly owned by STG.

13. A copy of the Share Sale Agreement, which had been kept by the auditors, showed the applicant signing on behalf of Fortune 2000.  That document also bore what purported to be a signature by Betty Cheng, on behalf of Winsoft.  Betty Cheng is the sister of Sun.

14. Betty Cheng denied the signature on the Share Sale Agreement was hers.  Expert handwriting evidence supported her evidence.

15. The applicant gave evidence at the trial.

16. Accordingly to him, there was an agreement by STG to acquire the MicroMain shares for HK$300 million.  10% of which would be paid by cash, the remaining 90% would be paid for by debentures to be issued by the Singer Group.  STC controlled the Singer Group.  According to the applicant, the Singer Group owed STC US$38.8 million (Transcript page 1188).  Sun denied that there was ever such an agreement.

17. The applicant also claimed to have signed the letter of representation without noticing its content.  He also denied responsibility for the annual report as well as the Share Sale Agreement.

18. It is unnecessary to examine the evidence relating to the alleged acquisition of the MicroMain shares by STG.  The evidence in support of the prosecution’s case was strong, and from the jury’s verdict, it is quite clear that they were sure that the supposed acquisition of the MicroMain shares by STG was a fiction.

19. However, as the judge had correctly summarized in the aide memoir supplied by her to the jury, in relation to both offences, the prosecution had to prove the following four elements:

“1. The accused made or concurred in making an entry in a document required for an accounting purpose.

2. The entry is false in a material particular, that is to say an important aspect, a thing which mattered and it is known to the accused to be a false entry.

3. The accused did so, or concurred in doing so, DISHONESTLY and with a view to gain for himself or another.

4. Or with intent to cause loss to another.”

20. It is clear from the verdict that the jury was satisfied with the 1^st and 2^nd elements.  This application concerns the 3^rd and 4^th elements.  The 3^rd and 4^th elements are alternatives.

21. Section 19(1)(a) of the Theft Ordinance provides as follows:

“(1) Where a person dishonestly, with a view to gain for himself or another or with intent to cause loss to another-

(a) destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose; or

(b) in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive in a material particular,

he shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 10 years.”

22. “Gain” and “loss” are defined in section 8:

“(2)   For the purposes of this Ordinance-

‘gain’ (獲益) and ‘loss’ (損失) are, except in section 16A, to be construed as extending only to gain or loss in money or other property, but as extending to any such gain or loss whether temporary or permanent; and-

(a) ‘gain’ includes a gain by keeping what one has, as well as a gain by getting what one has not; and

(b) ‘loss’ includes a loss by not getting what one might get, as well as a loss by parting with what one has;”

23. It is necessary to explore further the mechanism involved in the alleged acquisition of the MicroMain shares.

24. It was agreed by way of admitted facts, that according to the accounting records of STG, there were the following cheque movements:-

(1)	Cheque #184689 of Standard Chartered Bank in the sum of $100 million
	Dated:	11 December 1998
	Issued by:	STG
	Signed by:	The applicant and Chuck Cheuk Hung Tam
	Payable to:	Higher International Limited (“Higher”)
(2)	Cheque #586681 of Standard Chartered Bank in the sum of $100 million
	Dated:	14 December 1998
	Issued by:	Higher International Limited
	Payable to:	STG
(3)	Cheque #261063 of Daiwa Bank in the sum of $100 million
	Dated:	15 December 1998
	Issued by:	STG
	Signed by:	The applicant
	Payable to:	Goaltop Limited (“Goaltop”)
(4)	Cheque #269339 of Standard Chartered Bank in the sum of $100 million
	Dated:	16 December 1998
	Issued by:	Goaltop Limited
	Payable to:	STG
(5)	Cheque #184688 of Standard Chartered Bank in the sum of $100 million
	Dated:	17 December 1998
	Issued by:	STG
	Signed by:	The applicant and Chuck Cheuk Hung Tam
	Payable to:	Golfland Limited
(6)	Cheque #598037 of Standard Chartered Bank in the sum of $100 million
	Dated:	18 December 1998
	Issued by:	Golfland Limited
	Payable to:	STG

25. The evidence showed that STG had available $100 million which it used three times for the purported payment of $300 million for the MicroMain shares.  Each time, the $100 million was returned to STG.  And when returned to STG, they were entered into the “BT-Deposit account”.

26. No attempt was made to ascertain the disposition of $300 million after they were returned to STG and entered as BT-Deposits.

27. Instead, attention was focused on the fact that STG at all material times only had at its disposition $100 million, which enabled the cheques to be honoured.

28. According to the report of John Robert Lees (“Mr Lees”), a forensic accounting expert called on behalf of the prosecution:

“3.46 My brief did not include an investigation into the transactions that were recorded to the BT-Deposit account.  Accordingly, I am not in a position to provide an opinion on the purpose or nature of that account. …

……

 3.48 The scope of my review does not allow me to analyse all the entries made to the BT-Deposit account, but given the inconsistent manner in which those entries were made and the substantial amounts involved (i.e. debit and credit entries of more than US$300 million were recorded through the account in the year ended 31 January 1999), despite potential difficulties in locating adequate audit evidence for all transactions, I believe that any extensive or full-scale investigation into the financial affairs of the Semi-Tech Group would necessitate a detailed analysis of the BT-Deposit account.”

29. However, he did not think that the BT-Deposit account was used by STG as a “suspense account”.

30. I should add that one Ms Lee Yin-yin, Filomina, was at all material times the sole signatory of the bank accounts of Higher, Goaltop, and Golfland.  She had signed the cheques referred in paras. 24(2), (4) and (6) above.  She was, at the material time, the personal secretary of the applicant.  I will refer to these companies as controlled companies.  It is obvious that the applicant controlled them.  However, whether they were in fact controlled by the applicant is not critical to the outcome of the application.

31. On these facts, one would have thought that the prosecution had a straightforward case, so far as gain and loss were concerned.

32. Shortly stated, the gain was enjoyed by Higher, Goaltop and Golfland.  Each of which had the use of $100 million paid to it by STG.  It mattered not that the money was “cycled” back to STG.  Nor that the use was temporary.  In the absence of evidence to the contrary the only possible conclusion is that the payments made by these companies to STG were done for the purpose and/ or for the benefit of each of the three companies, or the person behind them.

33. The loss to STG was also clear.  STG was caused to pay $300 million in return for a fictitious asset.

34. However, in the written prosecution opening, the prosecution’s case on “with a view to gain or intent to cause loss” was put in the following terms:

“29. The purpose of the false investment was to overstate the assets of Semi-Tech … with a view to gain because Semi-Tech … has got what it has not paid for.

30. Alternatively, the Applicant intended to trick the creditors into refraining from taking recovery action of the money lent.”

35. This is what counsel for the prosecution, said in his final address to the jury:

“… It would be a gain within the definition.  This is the first reason.  (The applicant) had created, overstated the assets of (STG) by 38.8, without making a single dollar by way of payment.  That is a gain for another; ‘another’ meaning Semi-Tech (Global).”  (Transcript page 1540E)

36. With respect, this submission turned the matter on its head.  The victim STG had become the beneficiary of the false accounting!  The submission also showed a lack of understanding of basic accounting principles.

37. The court was presented with only three entries:

1) The acquisition of the MicroMain shares for $300 million, a debit entry;

2) Presumably, credit entries crediting the three payments made by STG on behalf of Fortune 2000 in respect of the acquisition;

3)       The payment of $300 million by the three controlled companies into the accounts of STG and entered into and appearing in its books of account under BT-Deposit, these should be debit entries.

38. The accounts could not balance unless the corresponding credit were identified.  It is basic that debits must equal credits.

39. As Mr Lees (the expert accountant called by the prosecution) said at page 983 of the transcript:

“An asset, like an investment in MicroMain, it is an asset, it is a debit entry; somewhere there is a credit around that either reduce another debit or increase another credit.”

At page 993:

“… The credits were going into BT deposit, so there were 300 million dollar’s worth of credit that are charged to that account.  Now, that account at the end of the period had a nil balance.  Now, somehow, that $300 million credit has been offset by $300 million with the debits.  Now, the transactions in that account are very difficult to follow and to understand.”

At page 994:

“… But without a complete reconciliation of that account, which we didn’t have the mandate to do, you can’t explain what happened to that $300 million credit that came into that account.”

40. In Mr Lees’ supplementary expert report, he said:

“2.42 … however, in my opinion, from the information available to me, it is most likely that the corresponding credit entry was recorded as a combination of various items, such as an expense being reduced, income or liability increased, or an asset removed or reduced as a result of this transaction.”

41. The applicant said in his evidence, although in a different context:

“Q. Well, if you had the money, you would need - - not need to vary the agreement into 90 per cent and 10 per cent.  Remember?

A. 1998 was a very difficult year, because the impact given by the financial crisis or turmoil happened in 1997 appeared in 1998.  The business of Singer was receive particular great hit or blow, because that company was engaged in the domestic electrical appliance.  And, in the early of the year, Singer met with the problem of cashflow and it asked for a loan from Semi-Tech (Global).  The loan was not one-off, was not given in one go.  The loans were given from various sources, like Singer (Turku), Singer (Thailand) and Singer (Mexico).  (Witness answers in English) Singer (Turkey).  Okay.  (Interpreted evidence continues)  And the loans accrued up to the end of the year was rather large.  And the debt should be cleared by the end of the year.  Otherwise, qualified opinions and connected transactions would appear in the annual report.  Sorry, I withdraw the word ‘qualified opinions’.  When it came to the end of the year, the payment of 38.8 had to be made.  It’s normal for us to ask repayment from Singer.  Under this circumstances, we asked Singer to make the payment for us.”

42. The applicant was there saying that Singer (50% owned by STC) owed money to STG, which it had to pay at the end of the year but was unable to do so.  It is to be noted that according to STG’s annual report for the year ended 31 January 1999, under Related Party Transactions, it was disclosed that:

“… the balance due from and to the Singer Group amounted to $53.3 (million) and $12.2, respectively, as at January 31, 1999.”  (Appeal bundle p. 1386)

43. As an illustration of a possible explanation, if the $300 million returned by the controlled companies was used to reduce the indebtedness owed to STG by Singer, then the picture would be complete.  More importantly, one can then clearly see the loss and gain.  The gain being to Singer which had had its liability to STG reduced by $300 million.  The loss would have been to STG in that instead of $300 million receivable from Singer, it had made a fictitious acquisition of shares in MicroMain.

44. It is wrong to say that STG had gained an asset which it had not paid for (namely the fictitious shares) which on the prosecution’s case could not possibly have been a gain “in money or other property” in the sense of “by keeping what one has, as well as a gain by getting what one has not” (see section 8 of Theft Ordinance).  It is clear from the accounting records, STG had paid for the acquisition.  The fact that the moneys were returned to STG, did not mean that STG had not paid for the bogus acquisition.  There was no evidence that the money was returned as a refund or as a gift, both highly improbable.  Rather it seemed likely that the bogus acquisition was put through in order to offset a credit in the accounts.

45. As an alternative to “gain” the prosecution relied on loss.

46. I will deal first with the loss which the prosecution relied on in its opening.  See para. 34 above.

47. Mr Iu put it in these terms in his final address:

“Why did they create this fictitious asset?  To paint a rosy picture, perhaps, that the company was not doing so bad; to create extensive trading activities or investing activities; to mislead the readers of the published accounts or reports.

……

… and the second reason is more important, and that is to trick the bankers into believing that the company was doing well, because the bankers were entitled to sue for the money that they had lent.  That is a right of action – a chose in action in legal terms – that they had.  They were tricked into believing, reading that report, reading the account, the company was not doing so bad.  But it was all very bad.  It was destitute for money.

And that gives you the reason for the creation of this fictitious asset; to ward off the bankers, the creditors, to trick the creditors into believing that the company was not doing so bad.”  (Transcript page 1272)

48. This aspect of the case has been subject to severe criticism by Mr Jones QC who appeared for the applicant in the application but not at the trial.

49. Several bankers were called as witnesses by the prosecution.  It is clear that STG enjoyed substantial banking facilities and that the continuation of such banking facilities depended on the financial standing of STG.

50. This is what the judge said in relation to their evidence in her summing-up:

“I would remind you that in this case the bankers did not know about the alleged overstatement of the investment that we have been looking at.  That suspicion did not arise until the liquidators had taken over.  They did not suspect anything wrong with the accounts at the time they looked at them, and they say they relied on them.  They all agreed that if they had known or suspected such a thing they would have taken immediate steps to recover their loans, particularly because the loans were unsecured.

The audited accounts of a company purport to give a snapshot of the company’s position at a certain date, and from the figures a banker can assess the health of the company.  It would not be the only factor in deciding whether to grant the loan, but as one of the bankers – I think it was Mr Ishwerwood – said, the cornerstone of their analysis is the company accounts.

So this bankers’ evidence is relevant when you consider the question ‘with a view to gain or intent to cause loss’.  If you decide that the investment was non-existent and that the defendant knew the investment was bogus, but despite knowing that arranged for or allowed the accounts to be overstated in an effort to convince the banks not to call in the money they have lent, you would probably have little difficulty in deciding that such behaviour was dishonest and you could infer intention to cause loss to another.

So what is important in relation to the bankers is that, to them, it is not a question of the size of the investment, or whether it is overstated.  The question is the accuracy of the accounts.”

51. Mr Jones QC submitted that the judge erred in admitting the evidence of the bankers, because their evidence was highly prejudicial and of no probative value.  Specifically, Mr Jones submitted that the bankers were called:

“a. to say they would not have dealt with a company, had they known it had recorded a ‘bogus’ acquisition; and

b. to indicate, simply for the purpose of causing prejudice to the applicant, the losses their bankers had suffered when the company went into liquidation for wholly extraneous reasons.”

52. I do not agree that the evidence was prejudicial.  The spectacular collapse of STG, a listed company, was common knowledge.  The jury would have been aware that banks and shareholders had suffered great loss. Indeed the applicant, in his evidence, spoke openly of the collapse of this $40 billion group.

53. I am of the opinion that the evidence was not irrelevant.  What was critical to the prosecution in this context was that the false accounting was made “with intent to cause loss to another …”.  If the falsification of the account resulted in a better but false picture, and that was done “dishonestly, … with intent to cause loss”, the offence was committed.

54. The bankers’ evidence was that had they known that the accounts had been deliberately falsely stated that would have so undermined their confidence in STG that they would have taken steps to discontinue the banking facilities.  The bankers’ evidence was that the size of the overstatement would not have mattered; it was the fact that a dishonest overstatement had been made which would have caused them to call in their loans.

55. That is plain common sense.  Such evidence might not have been necessary, but I do not agree that it is irrelevant or inadmissible.

56. However, as noted, what was critical to this aspect of the offence was the intent to cause loss to the banks.

57. The judge has correctly directed the jury on the meaning of “false or deceptive in a material particular,” in section 19(1)(a).  She did so by contrasting what might be material in this sense from what might or might not be material in terms of the accounts.  This is what she said at page 47 of the transcript:

“There is one point I just wish to raise in relation to the reports of all of the experts. They refer to the question of materiality. When they are talking about materiality in terms of the accounts, they are talking about the proportion of the particular transaction to the total amount of the consolidated accounts. They are not talking about a material particular in the way that it is referred to in the definition or the charges. Materiality in the way that they are discussing it is as an accounting concept and it relates to the necessity, or otherwise, of having to deal with it and if it was found to be a misstated investment or a misstated entry, whether that would actually affect the content of the final accounts. It would be a matter then for the auditors as to how they would deal with it.

So materiality is only in relation to how the auditors deal with a particular entry in relation to this matter, and they would point out that it would not affect the accounts very much because it is only a small proportion of the total amount of the accounts. But leave that aside. That is a matter that the accountants can talk about. You do not have to worry about materiality in that sense. What you have to worry about is whether or not the documents that are the subject of the charges were false in a material particular. In other words, that the particular was something that was important and intrinsic to the nature of the document. It is different from materiality and I just do not want you to get muddled and think there was some connection between them.”

58. However, the judge also told the jury that they did not have to worry about materiality in the accounting sense.  It is perfectly correct that when the jury considered whether the accounts were false in a material way, materiality in the accounting sense is irrelevant.  However, materiality in the accounting sense is highly relevant to whether the applicant falsified the accounts with intent to cause loss to the banks.  Nowhere in the summing-up has the judge mentioned the relevance of materiality in the accounting sense to this important question.

59. One might falsify accounts for different reasons.  Perhaps, the most common is falsification to hide embezzlement, for example, a clerk stole some money and tried to hide it by falsifying the accounts.  In most such cases, that would not have been done with a view to cause loss to the creditors of the company, because the amount stolen was immaterial to the financial health of the company.  That, of course, would depend on the amount of the money embezzled and the impact on the particular company.  Here, all the accounting experts seemed to have agreed, that the “overstatement of assets” by $300 million was immaterial in the accounting sense.  That is, however, highly relevant to the question whether the applicant falsified the accounts with intent to cause the bankers not to take action.

60. According to Mr Lees’ first report he said:

“3.33 In the present case, the purported investment in MicroMain was recorded (overstated) in the audited financial statements of Semi-Tech under ‘Interests in Associated Companies’ for US$38.8 million.  This represented approximately 28.3% of total ‘Interests in Associated Companies’ of the Semi-Tech Group [i.e. 38.8M ¸ 136.8M], but only 1.6% of the total assets of the Group [i.e. 38.8M ¸ 2,324.8M].  In my opinion, this would not represent a material misstatement of the financial statements of Semi-Tech.

3.34  As discussed in paragraph 3.15 above, it is not possible to identify which corresponding asset or expense account was understated and/ or which liability or income account was overstated, apart from ‘Interests in Associated Companies’.  In any event, any such asset account would only represent 1.6% of the total assets of the Semi-Tech Group, while any such liability account would only represent 3.7% of the total liabilities of the Semi-Tech Group [i.e. 38.8M ¸ 1,044.5M].  In either case, in my opinion, it would not represent a material misstatement of the financial statements of Semi-Tech, which would justify a qualified audit opinion.  Nonetheless, the Auditors should include a paragraph or reference in the auditors’ report to draw attention to or emphasise the matter as it would be relevant to the readers of the auditors’ report (such as shareholders and creditors of the company) but is not of such a nature that it would affect the audit opinion (as per paragraph 36 of SAS 600).

3.35  However, if an expense or income account was affected, it would represent a material misstatement of the financial statements of Semi-Tech as the net loss of the Group would have been understated by 35%.  The ‘Net Loss Attributable to Shareholders’ disclosed in the Annual Report of Semi-Tech was US$71.8 million.  Accordingly, the understatement of the net loss would be 35% [i.e. 38.8M ¸ (71.8M + 38.8M)].  In this case, if the management of Semi-Tech refuses to make the necessary adjustments to correct the relevant account balances, the Auditors should issue a qualified (except for disagreement) audit opinion, indicating that it was expressed except for the effects of the matter giving rise to the disagreement (as per paragraph 45(c) of SAS 600).  In other words, the Auditors would indicate that, except for the understated net loss, the financial statements give a true and fair view of the state of affairs of Semi-Tech.”

61. So his evidence was that depending on whether the asset account or the expense or income account was understated or overstated, it might or might not have been material in the accounting sense.  Since the necessary work had not been done there was no way to tell.  I will not pause to analyse the matter further.  Suffice to say that I have grave doubt about the underlying concept that the assets of STG might have been overstated since the bogus acquisition of the shares must have been offset by credit entries in order to balance the books.

62. Mr Dick, an expert accountant for the applicant, said in his report dated 3 May 2005:

“3.3.5   My view (which is shared by Mr Lees) is that the debit entries apparently associated with the disclosed investment in MicroMain are not material in the interest of the Semi-Tech 1999 accounts.”

63. But he disagreed with Mr Lees that “the disclosed investment in MicroMain is a matter which would be expected to lead the auditors to include an explanatory paragraph in this audit report”.

64. The matter was left unexplored because no effort had been made to trace the treatment or disposition of the $300 million after their return to STG.

65. On the state of the evidence, it is not surprising that the judge referred to materiality in the accounting sense in general terms only.

66. I am, however, of the view, that this matter is important to the question of “intent to cause loss” to the bank.

67. Returning to the passage in the summing-up quoted in para. 50 above, was the falsification done “in an effort to convince the banks not to call in the money they have lent”?  Whether that was so would at least to a certain degree be dependant on the materiality of the falsity in the accounting sense.  If the truth would have not made any material difference to the accounts, it is less likely that the false accounting was done “in an effort to convince the banks not to call in the money”.

68. In this context, it was unhelpful and possibly misleading to draw attention to the fact that:

“… what is important in relation to the bankers is that, to them, it is not a question of the size of the investment, or whether it is overstated.  The question is the accuracy of the accounts”.

69. Mr Jones submitted that the summing-up “deals with the consequences rather than intentions”.

70. I am of the view that insufficient attention was paid to “intent to cause loss”. The focus of attention was on the consequence to the bankers of knowledge of dishonest falsity.  The correct focus should have been on the intention of the applicant.  Whether he intended to cause loss to the banks by hiding the truth would be affected by the materiality of the truth or falsehood in the accounting sense.

71. Mr Jones also submitted that obtaining a bank’s forbearance to sue could not properly be described as being done with intent to cause loss within the terms of section 19(1)(a).

72. Mr Jones relied on R v Golechha and Choraria [1990] 90 Cr App R 241, a decision of the English Court of Appeal on section 17 of the Theft Act 1968 which is identical to section 19 of the Theft Ordinance.  Golechha is authority that a forbearance to sue does not constitute a “gain” under section 19.  Golechha is concerned with discounting of bills and the use of fictitious trade transactions for the purpose.  There, the Crown did not contend that the bills were falsified to cause loss.

73. Here we are concerned not with a view to gain, but with intent to cause loss.

74. Golechha was distinguished in R v Siu Yin King [1994] 1 HKC 254, a decision of this court.  There, Power VP, in delivering the judgment of the court said at 261:

“We make no comment as to the correctness of the reasoning in Golecha’s (sic) case as to what constitutes ‘gain’. Suffice to say that we are satisfied that the decision did not involve any consideration as to whether the bank had suffered ‘loss’ in accordance with the terms of the Theft Act.

Section 8 of the Ordinance states that the loss must be in money or other property and that it includes a loss by not getting what one might get. We are satisfied that where a person falsified an account with the intention that another will be tricked into refraining from suing on his chose-in-action to recover money to which he is entitled the person charged can properly be held to have done so with an intent to cause loss under s 19 of the Theft Ordinance. It is clearly a loss to a person not to be able to sue for money to which he is entitled.”

75. On the authority of R v Siu Yin King, with which I respectfully agree, if the prosecution had succeeded in showing that the applicant had dishonestly falsified the account in “an effort to convince the banks not to call in the money”, I believe the applicant could be said to have intended to cause loss to the banks within the meaning of section 19(1)(a).

76. It is unnecessary for me to consider Golechha.  For Hong Kong, anyway, Golechha has no application to loss.  Whether Golechha should be followed in Hong Kong on the question of gain must await a suitable occasion.  However, since gain and loss are often two sides of the same coin, it is difficult to imagine a case where it might make a practical difference.

77. My conclusion on this part of the case is that in the absence of evidence of materiality in the accounting sense, and the lack of direction by the judge that materiality in this sense is relevant to the question whether the applicant intended to cause loss, the verdict could not be maintained on this basis.

78. Another gain relied on by the prosecution was not mentioned in the opening.  This supposed gain related to the sale by STC of its entire shareholding in STG between 15 July 2005 and 8 September 1999, which realised HK$224,832,188.25.

79. This became part of the prosecution’s case after Mr Frank Holmes had given evidence on 24 May 2005 in Canada, the trial proper having begun on 9 May 2005.  Mr Holmes was a director of STG as well as STC and was resident in Canada.  His evidence related principally to the question whether he was party to a purported meeting of the Board of STG held on 18 November 1998 authorising the purchase of the MicroMain shares.

80. This is what the judge said in the summing-up:

“In respect of the question of gain, it is suggested that the gain comes from his having included in the accounts an investment which gives the impression that the company was in a much healthier state than it was.  In other words, if the company could afford to invest in this MicroMain transaction it gave the impression to people looking at the accounts that there was spare cash available for such an investment.  That in turn could have an effect on the share price so that when the shares were sold, the shares were stabilised, or at least were not dropping, so that they could get the best price for them.  So that is the kind of gain that is suggested occurred, or could have occurred, in respect of this transaction.

……

… You have the evidence of Mr Tang and Mr Shek who talked about the shares.  This relates to the disposal of the shares and also the value and the fluctuations of the shares.”

81. There was little evidence on this point.  The prosecution relied on the minutes of meeting of STC dated 23 September 1998 produced by the defence, in particular, the following passages:

“1     The Board continued their discussion on re-financing activities related to the zero coupon bond.  The Board discussed the Merrill Lynch proposal, which involved exchanging the bond for the Singer pledged shares and selling the shares as a control block.  It was noted that this would require 100% approval of the bondholders to release the Singer shares from the pledge, something that was unlikely to be realized.  The Board noted that no feedback had been received from the bondholders indicating what they would prefer in a re-financing package.  The board recommended inviting a bondholder to join the Board and provide such insight into its re-financing discussions.  The Board then discussed the following re-financing strategies.

(a)   Selling the Company’s ownership in Semi-Tech Global and buying more Singer shares.  This was based on the premise that the bondholders would prefer holding additional Singer security rather than Semi-Tech Global, and that although both companies are currently undervalued in the market, that Singer was more likely to appreciate over the next two years as it was just completing a year of restructuring which was intended to produce improved performance over the next two years.

(b)  Exchanging the bond for PIK preferred shares.  This would avoid the accrual of interest on the debt and allow time for the Singer share price to increase to collateralize the bond value.  A conversion option into shares was not considered as it would put short selling pressure on the shares.”

82. And the minutes of the STG Board held on 15 July 1999 which recorded:

“ Singer Update

1. The Chairman informed the Board that Singer intended to file its year-end financial results next Monday.  The Singer auditors were proposing to give a ‘qualified opinion’, implying that Singer was not a ‘going concern’.  Mr. Goodman had informed the Company that Singer would require US$31 million through to the end of the year.  US$7.5 million was expected from income in the last quarter, leaving a shortfall of US$23.5 million.  Singer expected to raise cash through asset sales (real estate), taking Singer Portugal public and issuing a Pfaff bond (the ‘Special Projects’).  Mr. Goodman had informed the Company that all these Special Projects were hopelessly behind schedule, and the latter two may no longer be possible because of the delay.  The auditors viewed the Special Projects now as highly speculative, hence the going concern qualification.  Mr. Goodman requested that Semi-Tech help Singer by injecting the necessary cash.  He assured the Company that if he received the necessary US$23.5 million by September 15 when a major pension fund payment was due, that Singer would not require any more cash until the spring of 2000, by which time he expected to have realized some cash from the Special Projects.  Without the US$23.5 million, he said that Singer would have to file for bankruptcy before the pension obligation became due as the banks would put Singer into bankruptcy rather than have the pension authorities move ahead of the banks in a secured position.  Mr. Ting explained that the only way the Company could raise the cash in that time frame was to sell its Akai shares.  The Board expressed its displeasure at being faced with such a request at the last moment by Mr. Goodman and was disappointed with his inability to carry through as promised on the Special Projects during his two years at Singer.  The Board felt strongly that, with the current situation with the Company’s Bondholders, it was important to preserve the Singer share value and avoid a default on the Company’s Bond.  Mr. Holmes reminded the Board that a bankruptcy filing by Singer was an immediate default on the Bond, but that the Bond did permit a sale of the Akai shares provided the proceeds were used within a year to invest in a business similar to Singer’s business.  A sale of Akai shares, with the proceeds invested in Singer, would not violate any Bond covenants.  The Board felt that it was faced with no other viable alternative.  Upon motion duly made, seconded and unanimously approved, it was RESOLVED THAT the Company sell sufficient of its Akai shares to assist Singer to meet its cash flow deficiency.  Mr. Ting was authorized to engage a Hong Kong broker and oversee the disposal of the shares.  All sales were to be in the public market with no insider purchases.  Sales were to be made in a manner so as not to disrupt the market or drive the price down in an effort to maximize the sale proceeds, yet recognizing Singer’s urgency.”

83. A graph was produced showing the share price and trading volume of STC from 2 January 1998 to 31 August 2000.  From the graph one could roughly gather that the share price picked up from about March 1999 from less than 25 cents to under 50 cents in April/ May.

84. There was no other meaningful evidence from the prosecution.

85. I do not know whether the STC shares moved in line with the general market.  More importantly, there was no evidence on what influence the publication of STG’s annual accounts in June had on the share price.  Nor why, if, as seemed to have been accepted by the prosecution, the false accounting was not material in the accounting sense, it should have any impact on the share price.  Nor why the applicant could have said to have done so with the view to gain in the sale of the shares.

86. Mr Iu’s cross-examination of the applicant on the subject was brief.

“Q.    We have already heard from the bankers. Final matter is you knew, as early as September 1998, that Semi-Tech Corporation in Canada would be minded to sell all its shares in Semi-Tech (Global). And I suggest one of the purposes of the overstating is to create a misleading and rosy picture about the financial well-being of Semi-Tech (Global) so that - so that - from July 15 to September 7, 1999, a week or so after the -- two weeks after the publication of the report, in the space of seven weeks, Semi-Tech Corporation sold all its shareholdings in Semi-Tech (Global) for a meagre $240 million.

INTERPRETER: ‘Two weeks’ or ‘seven weeks’?

MR IU:  Within two weeks, the selling started, and it’s all done within seven weeks.

Q.     That is a fact. Do you agree or disagree? That was one of the purposes.

A.      Disagree.

Q.     Right.

A.      I would like to finish my answer. Well, as to the date you mention, that’s 23 September 1998, it was a board meeting merely talking about the different methods of raising money, without any resolution arrived at.

Q.     But you knew -- sorry. You knew perfectly well ...

A.      Sorry, let me finish. And when it came to the annual report, the one dated 28 June 1999, please refer to the documents you showed me this morning. A press release was made on 28 July 1999. Semi-Tech Corporation in Canada start reducing its shareholding of Semi-Tech (Global). Why do I emphasise the details, the minor details? Because I’m now sitting here being blackened. I have -- I can’t, I’m unable to defend myself.

Q.     You see, you knew perfectly well that the entire Group …”

87. There was no other meaningful cross-examination.

88. As for Mr Holmes, this is what he said in chief.

“Q.  Okay.  Thank you.  And I think you said you had, and I’m a bit tired as you may know so correct me if I’m repeating myself, you had no knowledge of any disposal of shares by Mr. Ting or Tam or indeed Semi-Tech Corporation, that is the North American entity, of a shareholding in Semi-Tech Global, latterly known as Akai Holdings?

A.   Well, I am aware of the disposal by Semi-Tech Corporation of its shareholding in Akai.

Q.   When did you come to know of that?

A.   That would have been again in the summer of 1999.

Q.   Mm-hmm.  And who made the decision to dispose of the shares?

A.   That was a decision made by the board of Semi-Tech.

Q.   And who was on that board?

A.   It was myself, James Ting, Chuck Tam, Doug Davis and K.C., initials, Smith.

Q.   So, if I can put it in simple terms, the North American entity Semi-Tech was disposing of its shareholding in the Hong Kong company?

A.   That’s correct.

Q.   And do you know why that decision was taken?

A.   This was done to provide funds.  The funds were to be advanced to Akai Holdings in exchange for a promissory note and the funds from Akai then were to be used to fund Singer which needed cash for operations.

Q.   And, to your knowledge, did the sale of shares take place?

A.   Yes.”

89. Mr Jones submitted that the judge should not have allowed evidence in relation to the disposal of shares in STG by STC to be adduced to prove this element of “gain”.

90. This issue was introduced late in the trial.  On 26 May 2005, during the evidence of Mr Kim Duch Neilsen of the Danska Bank, when Mr Iu was about to lead evidence from Mr Neilsen about his knowledge in September 1999, of the sale by STC of STG’s shares in the summer of 1999, Mr Lok SC objected to the evidence.  Mr Iu informed the judge that:

“Now, the investigation has almost come to its conclusion.  And I’ve been given to understand that there was, in fact, a wholesale disposal of Semi-Tech Corporation shares by the summer of 1999.  Now, there has been one or two reasons given in the evidence, in the disposition of one of these five witnesses, because there was a meeting.  Following-up on the meeting that this witness was talking about, there was some mention of a reason for that.

Now, Mr Turnbull has been briefed about this.  Now, he was expected – I don’t know whether he would do it – he was expected to put those questions to Mr Holmes, because Mr Holmes was one of the beneficiaries.  As of now, I cannot – – I cannot know – – I do not know whether he did, he had done so; and, whether if he had done so, what the replies were.  But those are matters which are relevant to the question ultimately, if the prosecution decides, as to whether this would be – – would qualify under the – – with a view to gain.  40 per cent of Semi-Tech (Global) shares is a lot of money.  As I said, I briefly mentioned that to Mr Lok before we started this morning.  And we, sort of, hang in the balance, as it were, because we do not know what Mr Holmes is going to say or has said.  But we are both in difficulty on this particular point.  But, we – – both of us are aware this may turn out to be a very material issue.  And that’s why I only, as it were, proceed to put those questions.”

91. I have quoted the evidence of Mr Holmes on the subject.  The judge referred to his evidence as confirmation that:

“… the decision was taken in September 1998 to assist Singer by selling the Semi-Tech Corporation Holding in Akai …”

92. The sale by STC of the STG shares would have been a matter of public knowledge and was the subject of public announcement.  The sale of a controlling interest in a listed company could not have been otherwise.

93. I doubt whether the prosecution should have been allowed to introduce a further case on gain so late in the trial.

94. But it does not matter.  As I have said there was no evidence what influence the publication of the annual report in June had or might have had on the share price.  In the absence of evidence that the falsity in the account was material in the accounting sense and the absence of a proper direction on its materiality, I do not believe any conviction based on this allegation could be maintained.

95. It will be noted from the passage in para. 80 above the judge mentioned giving “the impression that the company was in a much healthier state than it was”.

96. Also at page 54 of the summing-up the judge reminded the jury that Mr Iu put to the applicant “that he had been trying to create an impression of intensive investment, …”.

97. I must say I have difficulty with this argument.

98. According to the annual report, for the year ended 31 January 1999 there were nine relevant transactions, five disposals and four acquisitions.  MicroMain was one of the four acquisitions.  There was no evidence that any of the other eight transactions was bogus.  There was no evidence, expert or otherwise, on why it was necessary to invent the MicroMain transaction, to give “the impression of intensive investment”.  Nor why such an impression should help with the disposal of the STG shares.  This is sheer speculation and an ill conceived one at that.

99. Mr Jones further submitted that, the judge ought to have directed the jury that they, or a sufficient majority, ought to be unanimous as to which “gain” or “loss” they had found, according to the principle in R v Brown [1984] 79 Cr App R 115.

100. Mr McWalters SC, who appeared before us but not at the trial, fairly acknowledged that although in cases where the loss and the gain are two sides of the same coin, a R v Brown direction was unnecessary, in a case, as here, where one is concerned with two different coins, an appropriate direction should have been made.

101. R v Mitchell [1994] Crim LR 66, a decision of the English Court of Appeal is directly in point.  Mitchell was convicted of unlawful harassment of an occupier contrary to section 1(3)(a) of the Protection from Eviction Act 1977.  In that count, a number of separate and different acts (both as to time and as to their nature) were alleged, against him each amounting to unlawful harassment.  The judge declined to give a R v Brown direction, even though the jury, during their retirement, asked for confirmation that they did not have to be satisfied that all the particular in the court had been proved.  The head note reads:

“Held, allowing the appeal and quashing the conviction, the principles to be derived from the cases of Brown, More and Price (supra) were as follows:

(i) where a number of different matters were set out in a single count, the judge should consider whether he should give the jury a direction that they must all be agreed on the particular ingredient which they rely on to find the defendant guilty and the offence charged (Brown):

(ii) that such a direction will be necessary only in comparatively rare cases. In the great majority of cases, particularly cases alleging dishonesty and cases where the allegations stand or fall together, such a direction will not be necessary. It is of first importance that directions to the jury should not be overburdened with unnecessary warnings and directions which serve only to confuse them. (Price and More);

(iii) however, in an appropriate case where there was a realistic danger that the jury might not appreciate that they must all be agreed on the particular ingredient on which they rely to find their verdict of guilty on the count, and might return a verdict of guilty as charged on the basis that some of them found one ingredient proved and others found another ingredient proved, so that they were not unanimous as to the ingredient which proved the offence, a direction should be given that they must be unanimous as to the proof of that ingredient (per Lord Ackner in More).

102. Here, the jury should have been directed that in relation to each of the alleged gain or loss, they must be satisfied, to the requisite majority, of the applicant’s guilt.

103. For the above reasons, I would grant leave to appeal and treat the hearing of the application for leave as the hearing of the appeal, I would allow the appeal and quash the convictions.

104. It is unnecessary for me to deal with Mr Jones’ other submissions.

105. For completeness sake, I should mention that the 1^st ground of appeal relied on was apparent bias on the part of the judge.

106. That ground of appeal was by agreement of the parties deferred since its resolution might have required the admission of evidence which would have required an adjournment.

107. It is now unnecessary to deal with that ground of appeal.

Hon Woo VP:

108. I have had the advantage of reading Tang JA’s judgment in draft.  I agree that the application for leave to appeal against conviction must be granted and the appeal allowed on the basis as alluded to in paras 56 to 77 of Tang JA’s judgment. 

Convictions unsafe and unsatisfactory

109. I would briefly state my own reasons for coming to the conclusion that the convictions on the two counts were unsafe and unsatisfactory.

110. In her summing up, the judge said:

“The banker witnesses were all in agreement on the following matters: they would not have granted the loan if they had known the assets were bogus or overstated.  The banks would not have lent money if they had known or suspected there was false information in the Annual Report.  The banks relied on the audited accounts as a key factor in deciding whether or not to agree to lend the money.  The size of any overstatement in the accounts was immaterial because if any figures were wrong, the accuracy of the report could not be relied on.

… They [the banks] all said that if the banks had suspected the accuracy of the information in the accounts, they would have taken steps to call in the loan as soon as they learned about it.  That is something that you have to consider when you are looking at the question of loss in relation to ‘causing loss to another’.” (Transcript p 50D-M) (Emphasis added.)

111. Shortly after, the judge continued:

“… They [the bankers] did not suspect anything wrong with the accounts at the time they looked at them, and they say they relied on them.  They all agreed that if they had known or suspected such a thing they would have taken immediate steps to recover their loans, particularly because the loans were unsecured.

… It would not be the only factor in deciding whether to grant the loan, but as one of the bakers – I think it was Mr Ishwerwood – said, the cornerstone of their analysis is the company accounts.

So this bankers’ evidence is relevant when you consider the question ‘with a view to gain or intent to cause loss’.  If you decide that the investment was non-existent and that the defendant knew the investment was bogus, but despite knowing that arranged for or allowed the accounts to be overstated in an effort to convince the banks not to call in the money they have lent, you would probably have little difficulty in deciding that such behaviour was dishonest and you could infer intention to cause loss to another.

So what is important in relation to the bankers is that, to them, it is not a question of the size of the investment, or whether it is overstated.  The question is the accuracy of the accounts.” (Transcript pp 50R-51L) (Emphasis added.)

112. I consider that the judge’s reference to the bankers’ evidence that had they suspected the accuracy of the information in the accounts they would have taken steps to call in the loan (Transcript p 50K) in connection with her direction that the jury should consider this in relation to “causing loss to another” (Transcript p 50L) amounted to a misdirection.

113. The bankers’ reaction to the falsehood in STG’s accounts (which falsehood can safely be assumed as part of the jury’s findings when they returned a verdict of guilty) would be a consequence if the falsehood had been discovered.  It is beyond imagination that the applicant could have created the falsehood with a view that the bankers would discover the falsehood, leading them to call in the loans that had been extended to STG.  In any event, that would not amount to a view “to gain” for STG or an intent “to cause loss” to the bankers.  Thus, the consequence of discovering the falsehood and the bankers’ reaction to it were quite irrelevant to the jury’s consideration of the element of “with a view to gain or with intent to cause loss”, save perhaps as a risk that the applicant was willing to take.  It follows that it was wrong for the judge to have directed the jury to consider this aspect of the bankers’ evidence in relation to “causing loss to another”, other than as a risk that the applicant would face.

114. Moreover, in an earlier part of her summing up, the judge told the jury:

“So materiality is only in relation to how the auditors deal with a particular entry in relation to this matter, and they would point out that it would not affect the accounts very much because it is only a small proportion of the total amount of the accounts.  But leave that aside.  That is a matter that the accountants can talk about.  You do not have to worry about materiality in that sense.  What you have to worry about is whether or not the documents that are the subject of the charges were false in a material particular.  In other words, that the particular was something that was important and intrinsic to the nature of the document.  It is different from materiality and I just do not want you to get muddled and think there was some connection between them.

So if you just stick to those purposes and you can ignore what the experts say about the materiality.” (Transcript pp 47R-48F) (Emphasis added.)

115. The judge’s direction that the materiality of the misstatement in the context of the accuracy of the accounts was not a matter that the jury had to worry about (Transcript p 48A), and her emphasis that what was important to the bankers was the accuracy of the accounts, and not a question of the size of the inaccuracy (Transcript p 51K) also constitute a serious misdirection.

116. The prosecution’s case on “loss” was that the falsehood was created to project a healthy or healthier financial position of STG so that the bankers would forbear to take steps to call in their loans.  On the other hand, apart from his denial of his participation in creating the falsehood, the appellant’s evidence was to the effect that the falsehood had at the most overstated STG’s assets by 1.6% (a figure agreed by the expert accountant witnesses for both the prosecution and defence), and would not have any material effect on the reading of the accounts.  The accountants agreed that the amount involved in the falsehood was not material to the vast asset base of STG.  Although the judge was correct in pointing out to the jury (Transcript pp 47R-48A) that that immateriality had no bearing on the materiality of the falsehood in the context of the two counts, the immateriality by way of comparison between the size of the inaccuracy and the asset base of STG should be considered by the jury in view of the defence case, since the immateriality might have a bearing on the applicant’s view to gain forbearance or his intent to cause loss to the bankers in obtaining their forbearance: the greater the amount overstated, the more likely the bankers would forbear to call in the loans.

117. By directing the jury in effect to ignore the immateriality of the amount involved in the falsehood, the judge had taken away from the jury’s proper consideration the applicant’s case and evidence of the relatively small size of the alleged overstatement, which was undisputed amongst the accountant witnesses for both the prosecution and the defence. 

118. The jury might have used the bankers’ reaction to find the ingredient of “with intent to cause loss to another” under the charges as having been proved beyond a reasonable doubt.  This possible risk is not fanciful but extremely real because (i) the bankers’ evidence was very clear in this respect, and (ii) it was a common theme of the bankers’ evidence.  Moreover, the bankers’ attachment of significance to the accuracy of STG’s accounts, instead of to the size of the inaccuracy (as emphasised by the judge at Transcript p 51K) could have made it much easier for the jury to accept it as making them sure of the applicant’s intent to cause loss to the bankers.  As compared with the other forms of gain or loss suggested by the prosecution, namely, (i) creating a healthy financial picture of STG’s accounts to obtain a gain or to cause a loss to the bankers, and/or (ii) obtaining a gain by enabling STC to sell its entire shareholding in STG at a stable market price, this wrong consideration of the bankers’ reaction as directed by the judge could well have been taken by the jury as the most easily realisable and readily acceptable form of causing loss.  The likelihood of the jury in accepting this as the ingredient of causing loss having been proved beyond reasonable doubt is, to say the least, considerable.

119. In the circumstances, I consider that the convictions were unsafe and unsatisfactory and they must be quashed.

Hon Lunn J:

120. I have had the advantage of reading in draft the judgments of Woo VP and Tang JA.  I agree with them that the application for leave to appeal against conviction on the two counts on the indictment must be granted and that it is appropriate to treat the hearing of the application as the hearing of the appeal, to allow the appeal and quash those convictions.  I agree with the analysis and reasoning of Tang JA at paragraphs 56 to 77 that leads him to the conclusion that the convictions must be quashed.

121. I wish to add briefly some of my own reasons for reaching the same conclusion.  I agree with Tang JA (see paragraphs 49 to 54) that the evidence of the witnesses who were bankers of Semi-Tech Global Company Limited (“STG”) was relevant and admissible.  The evidence of the bankers was relevant to establish the broad picture of the basis upon which monies had been loaned to STG and, in particular, the circumstances in which it could be inferred that the defendant knew or had reasons to believe that those loans would be called in and other steps taken by the banks to recover their monies.  It may be that the ambit of that evidence, extending as it did to include the subsequent consequences to STG and the fact that STG was put into liquidation in 2000, served to distract attention from the critical issue in the case, namely the intention of the appellant at the time of the commission of the alleged offences on 26 June 1999.

122. If the jury was satisfied that:

(i)      the accused made or concurred in making an entry in a document required for an accounting purpose;

(ii)      the entry is false in a material particular, that is to say an important aspect, a thing which mattered and is known to the accused to be a false entry; and

(iii)     the accused did so or concurred in doing so dishonestly;

one of the remaining alternative ingredients of the offence that the jury had to consider was whether it was proved that the accused had done so “with intent to cause loss to another”.

123. Of the relevance of the bankers’ evidence the judge directed the jury in her summing-up (page 51F-L of the Appeal Bundle):

“So this bankers’ evidence is relevant when you consider the question ‘with a view to gain or intent to cause loss’.  If you decide that the investment was non-existent and the defendant knew the investment was bogus, but despite knowing that arranged or allowed the accounts to be overstated in an effort to convince the banks not to call in the money they have lent, you would probably have little difficulty in deciding that such behaviour was dishonest and you could infer intent to cause loss to another.

So what is important in relation to the bankers is that, to them, it is not a question of the size of the investment or whether it is overstated.  The question is the accuracy of the accounts.”

124. Earlier in her summing-up the judge had directed the jury correctly, with respect, that one of the ingredients of the offence averred in the two separate counts was that the respective documents required for an accounting purpose be false in a ‘material particular’.  Of that issue, she said the jury had to be satisfied that the false material particular be in respect of “an important aspect, a thing which mattered” (page 31K of the Appeal Bundle).  Later, no doubt in light of the fact that the expert accountant witnesses had used the term ‘materiality’, as it is used in accountancy and in particular in respect of the accounts of STG, the judge gave the jury directions in which she distinguished the ingredient of the offence, namely false in a material particular, from the term ‘materiality’, as used in respect of the accounts of the company.  The judge directed the jury thus (pages 47R-50C):

“So materiality is only in relation to how the auditors deal with a particular entry in relation to this matter, and they would point out that it will not affect the accounts very much because it is only a small proportion of the total amount of the accounts.  But leave that aside.  That is a matter that the accountants can talk about.  You do not have to worry about materiality in that sense. What you do have to worry about is whether or not the documents that are the subject of the charges were false in a material particular.”

125. However, a little later in her summing-up the judge returned to deal with the issue of the ingredient in the offences of ‘with a view to gain or intent to cause loss’ and she directed the jury as to the relevance of the bankers’ evidence, in the terms quoted at paragraph 123, concluding with the reminder of the evidence of the bankers that it was the accuracy or inaccuracy of the accounts that was of significance to them, not the size of an inaccuracy:

“So what is important in relation to the bankers is that, to them, it is not a question of the size of the investment, or whether it is overstated.  The question is the accuracy of the accounts.”

126. In light of these directions to the jury it was important that they be directed that in considering whether or not the appellant intended to cause loss to the banks that they should have regard to the size of the alleged overstatement of assets, namely US$38.8 million, in relation to the total assets of the group, namely US$2,324 million.  In fairness to the judge, it is appropriate to note that in her description to the jury of the defendant’s evidence she reminded the jury of an aspect of his cross-examination relevant to this matter (see page 77J-L):

“It was put to him that Semi-Tech was in trouble financially and he wanted to overstate the position, which is why he arranged for the matter to be done.  He said he disagreed.  If he intended to do that, why would he only make such a small alteration.”

127. In light of that evidence the issue of the size of the false statement of the assets held by STG, namely the 50% shareholding MicroMain Systems Ltd, relative to the total assets of that company was highly relevant to the jury in its consideration of the appellant’s intention with respect to causing a loss to the bankers.  Of course, on another view of the evidence the size of the falsely stated asset was not critical, rather the relevant issue to consider was whether the purpose in falsely stating that the company owned the asset was to conceal the fact of the failure of the Singer Group to repay monies owed to STG at the end of the financial year.  Of that, the appellant had testified (pages 954U-955G of the Appeal Bundle):

“1998 was a very difficult year, because the impact given by the financial crisis or financial turmoil happened in 1997 appeared in 1998.  The business of Singer was receive [sic] particular great hit or blow, because the company was engaged in the domestic electrical appliance.  And, in the early of the year, Singer made with the problem of cash flow and it asked for a loan from Semi-Tech (Global).  The loan was not one off, was not given in one go.  The loans were given from various sources, like Singer (Turku), Singer (Thailand ), and Singer (Mexico).  (Witness answers in English.) Singer (Turkey).  Okay.  (Interpretive evidence continues.)  And the loans accrued up to the end of the year was rather large.  Otherwise, qualified opinions and connected transactions will appear in the annual report.  Sorry, I withdraw the word ‘qualified opinions’.  When it came to the end of the year, the payment of 38.8 had to be made.  It’s normal for us to ask repayment from Singer.  Under the circumstances, we asked Singer to make the payment for us.”

128. However, the relevance of the size of the falsely stated asset in relation to the total assets of STG and the appellant’s evidence on that subject quoted earlier, and a consideration of the issue in any event, in respect of the appellant’s intention to cause a loss to the banks was not the subject of any direction to the jury.  In my judgment, such a direction was required and in its absence I consider the appellant’s convictions on the two counts to be unsafe and unsatisfactory.

Hon Woo VP:

129. For the reasons given, we grant leave to appeal, and treating the hearing of the application as the hearing of the appeal, we allow the appeal, quash the convictions and set aside the sentences as well as the order made by the judge for disqualifying the applicant from holding directorship.

130. Mr McWalters had indicated to us that if we allowed the appeal, the respondent would seek an order for a retrial.  Mr Jones, on behalf of the applicant, had addressed us on the issue.

131. There is ample evidence in this case to sustain a conviction on both charges.  The basis for allowing this application is the wrong way that the prosecution had put part of its case and that had led to the judge’s incorrect directions to the jury.  In all the circumstances, we consider that justice demands that there be a retrial on a fresh indictment, and we so order.

132. The applicant is to be remanded in jail custody pending any application for bail.