LEADER SCREWS MANUFACTURING CO LTD v. HUANG SHUNKUI

HCA 2067/2019

[2021] HKCFI 141

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2067 OF 2019

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BETWEEN

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J U D G M E N T

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A. INTRODUCTION

1.  The Company employed Huang as its senior accounting staff.  On discovering her fraud, the Company obtained a Mareva injunction, freezing her assets up to about HK$8,000,000 and issued the writ for dishonest appropriation of company funds.

2.  Huang filed an acknowledgement of service indicating no intention to defend. 

3.  The Company took out a summons for default judgment (“Default Judgment Application”) and extension of the validity of the Mareva injunction post-judgment (“Post-Judgment Injunction Application”).  But for the general adjournment period of the Court due to the pandemic (“GAP”), the Company’s summons would have been heard as early as March 2020.

4.  On the eve of the adjourned hearing of the Company’s summons in June 2020, Huang made a last minute indication of defence.  Acknowledging the limitations of Huang acting person, DHCJ Paul Lam SC gave Huang a last opportunity to seek retrospective leave to file her defence.

5.  Accordingly, Huang took out a summons for such leave (“Leave Application”) on 17 July 2020, with the draft defence annexed.

6.  It is logical to deal with the Leave Application first because if leave is given to file the defence out of time, the Default Judgment Application and Post-Judgment Injunction Application will fall away.

B. LEAVE APPLICATION

B1. Legal principles for extending time for filing a defence

7.  As in all applications for time, the court should consider the extent of delay, reasons for delay, the realistic time needed to complete the procedural step, and whether the extension of time would have any impact on any hearing date or milestone date: Built Procurement Pty Limited v Sheng Ji Trade Limited, [2020] HKCFI 582, at §29, Anthony Chan J.

8.  The Court should have regard to the draft defence and any affirmation filed in support to see whether the proposed defence is arguable.  If it is, extension of time should be allowed; if not, default judgment should be entered.  See Koo Ming Kown v The Baptist Convention of Hong Kong operating as Pui Ching Primary School, HCA 731/2017, 30 October 2017, (§§35, 50-53), Lisa Wong J.

B2.  Reasons for delay in seeking to file a defence

9.  The writ was issued on 8 November 2019.  The statement of claim was filed on 9 December 2019.  The time to file a defence expired on 6 January 2020.  The Leave Application was taken 5 months out of time. 

10.  Even if Huang could not understand English fully, the writ had one page of endorsement in Chinese which stated that the Company would claim against her for slightly over HK$9 million for sums misappropriated.  She would not have been left in doubt as to the seriousness of the claim.  Her assets were frozen up to the value of HK$8.58 million.  She experienced the inconvenience of having bank accounts frozen and would not have tolerated it if the Company’s claim were bogus. 

11.  Yet Huang initially indicated no intention to defend on 13 November 2019.

12.  On 23 November 2019, Huang even emailed the Company’s directors stating, amongst others, that she did not intend to instruct lawyers and she would not issue any summons (presumably to contest the Mareva injunction).  She would admit liability for what she had signed.  She would not make copies of documents from bank account as she was not sure, amongst others, whether those could be adduced as evidence in a Hong Kong court.

13.  The Company served the statement of claim on 9 December 2019.  It then issued the Default Judgment Application on 22 January 2020.  The hearing was fixed for 19 March 2020 but was adjourned to June 2020 due to GAP.

14.  On learning about the adjournment, Huang again emailed the Company’s directors, stating that she did not particularly pay attention to this action and that she had not engaged lawyers.

15.  It was only on 18 June 2020, 5 days before the restored hearing and almost 5 months after the Default Judgment Application was served that Huang indicated an intention to oppose.  Her only explanation was that she received various adjournment letters due to GAP.

16.  That was not a good explanation because GAP did not exempt a party from serving documents.

17.  Huang further explained that she had hoped that the Company would feel less upset about the incident over time, so they would drop the lawsuit and the parties could reconcile without litigation.  That would avoid revealing her personal and the Company’s information to the public.  In addition, she was not familiar with legal procedures.

18.  Those arguments were untenable.  The Company had pressed on with the lawsuit.  Huang had attended a hearing for the injunction before Keith Yeung J on 15 November 2019.  The learned judge informed her of the need to make an affirmation and submit evidence in support of her defence.  Despite that, she “had not paid much attention to this action” for months.  Plainly she had been procrastinating until she needed to do something to avoid judgment being entered against her.

19.  I find there to be no good explanation for Huang’s delay.  I next consider whether her defence is arguable.

B3. The pleaded case against Huang

20.  The Company was engaged in the business of manufacturing and distribution of screws, nails and other metalwork products. It had operations both in Hong Kong and in Mainland China.

21.  Huang had been employed by the Company from 2007.  Prior to her termination on 31 January 2019, she was the senior accounting clerk, directly responsible for the accounting functions of the Company and its Mainland subsidiaries. 

22.  Huang committed (at least) two large-scale frauds on the Company, the “Supplier Fraud” involving one Company’s supplier (“Padico”); and the “Customer Fraud” involving 4 customers.

23.  With regard to the Supplier Fraud, Huang edited the dates of 5 settled invoices to create an impression that the invoices were current and outstanding.  She presented them to the directors of the Company for approval and signing of cheques.  She then changed the names of the payees and diverted the money into her own account.  For unknown reasons, Huang used her own funds to settle the 5^th invoice. The net sum misappropriated or diverted was HK$458,023.80.

24.  On 31 January 2019, after being confronted about the Supplier Fraud, Huang signed a memorandum (“Memorandum”) that contained her admission of the fraud and immediate resignation. The Company expressly reserved the right to take legal action against her in that document.

25.  After Huang’s resignation, the new accounting staff discovered a pile of documents (the “Hidden Cache”) in August 2019. Investigations discovered that Huang had kept 180 transactions relating to 4 customers off the books of the Company and diverted the amounts due to the Company from its customers to her own accounts. The total sum involved was HK$8,579,450.88.  There were 4 categories of transactions:

(1) Category 1 consisted of 23 transactions.  The evidence of fraud was direct.  The proof consists of copies of the cheques cleared in banks (with Huang as payee) and copies of the corresponding fake cheques (found in the Hidden Cache) ostensibly payable to the Company.

(2) Category 2 consisted of 28 transactions. The proof consists of copies of the doctored cheques (with Huang as payee) but the Company cannot locate any corresponding fake cheques in the Hidden Cache for comparison. These doctored cheques can nonetheless be compared against the underlying invoices and statements of account showing a sale to the relevant customer (“Sales Documents”).

(3) Category 3 consisted of 22 transactions.  The Company has located copies of the fake cheques (found in the Hidden Cache) ostensibly payable to the Company but cannot locate doctored copies. (The cheques would have been issued over 7 years ago). Nonetheless, the Company’s accounting records show that these cheques were never cashed into the Company’s accounts.

(4) Category 4 consisted of the remaining 107 transactions. The Company relies on comparison of its accounting records with the relevant Sales Documents for the compelling inference (reinforced by the pattern of conduct in Categories 1 to 3) that significant sales as per the Sales Documents (but not reflected in the Company’s books) were misappropriated by Huang.

B4. Purported defence to the Supplier Fraud

26.  Huang’s defences can be summed up and dealt with as follows.

27.  Firstly, she claimed to be unaware that signing of the Memorandum amounted to an admission of responsibility.  The lighting conditions then were not good.  She thought it was only a loan receipt or for verifying the sums. She was in a hurry to leave as she had an appointment with her mother.

28.  These assertions made no sense.  Huang was a person dealing with figures day in day out in the Company.  The Memorandum was printed in English and Chinese.  It contained not a round figure but an odd figure which would have prompted her to verify what was there before signing.

29.  In any case, her assertions contradicted her emails to the Company directors which stated that she would admit liability for the sums she signed for.  And she has never paid that admitted sum.

30.  Secondly, she claimed that the invoices from Padico were drafts which could be amended.  However, there was not a single document shown in support.

31.  Thirdly, she claimed that the Company would use her personal accounts to pay the suppliers first.  The Company (or its directors) would later reimburse Huang.  Payment of the 5^th invoice was an example of her making payment on behalf of the Company.  This line of defence was incoherent with the 4^th limb of defence.

32.  Fourthly, Huang claimed that the HK$458,023.80 was to be set off against a loan of RMB500,000 to a customer (not supplier) named Au.  In support of her defence, Huang produced documents showing that she had paid Tsoi (one of the directors of the Company) in 2012 and that there was a loan of this amount due to Huang from Au.

33.  With respect, not only was there a substantial difference in amount between RMB500,000 and HK$458,023.80, but Huang’s documents showed a payment of RMB500,000 in 2012, well before the invoices involved in the Supplier Fraud were issued from 2019.

34.  Further, the Company has produced evidence showing that the RMB500,000 payment from Huang to Tsoi was in fact her payment in 2012 for shares in a totally unrelated investment.

35.  How Huang came to lend money to a customer was unclear.  However, if it had been a loan to Au that was to be set off, that had nothing to do with the need to amend Padico’s draft invoices.  Huang’s defence was incoherent.

36.  The defence to the Supplier Fraud was simply not arguable.

B5. Purported defence to the Customer Fraud

37.  Huang claimed that the HK$8,579,450.88 sum was converted, booked, and used as processing fees in the Mainland, and that HK$1,897,206.04 was transferred to her account and wired to Tsoi’s designated account.  She produced attachments 43-52 to the marked up version of her draft defence.

38.  Attachments 43-52 showed 5 transfers by Huang to Tsoi via money exchangers for a total of HK$1.95 million.  They did not support Huang’s version because:

(1) The numbers and dates of the handwritten records and transfer records did not match.

(2) Those attachments were not evidence of Huang making payment of the HK$1.8 million odd.

(3) The Company has produced documentary evidence to show that the HK$1.95 million was unrelated to the Customer Fraud.  All but HK$50,000 were funds originated from and remitted by the Company to Tsoi, with Huang named as transferee.  The remaining HK$50,000 were personal funds originating from Tsoi, which he asked Huang to remit to his accounts in Mainland China. Such evidence completely refuted Huang’s case that the money had come from customers to her account. 

39.  In my view, attachments 43-52 were put into the draft defence plainly to mislead.  I reject them outright.  If the customer’s money had really been deposited into her account and paid out, she must have been able to produce some bank documents of her own in support.

40.  Consequently, Huang has not produced a shred of evidence to substantiate her defence on the whole of the Customer Fraud.  The defence to the Customer Fraud is unarguable.

B6.  Purported response of Huang

41.  Huang-3^rd in reply raised, for the first time, that

(1) All of the Company’s accounting documentation previously produced was inaccurate and even sham documents;

(2) Au was a nominee of Tsoi;

(3) The Company never had account receivables; and

(4) Her accounts were used simultaneously by herself, the Company and Tsoi in his personal capacity.

42.  Beyond making bare assertions, these matters did not address the Company’s allegations against her.

B7. Conclusion on the Leave Application

43.  There being no good explanation for not filing a defence earlier in time and no arguable defence, it would be prejudicial to the interests of the Company if Huang were allowed to file a defence.  I therefore dismiss the Leave Application.

C. DEFAULT JUDGMENT APPLICATION

C1. Legal principles

44.  This application is made under Order 19, rule 7 of the Rules of the High Court.  It is trite that such an application is decided by reference to the statement of claim alone without reference to evidence.

C2. The causes of action

45.  The Company’s causes of action are in breach of fiduciary duty, deceit, breach of duty of fidelity and/or unjust enrichment.  It prays for (i) payment of the misappropriated sum of HK$9,037,474.68, (ii) compound interest and (iii) Post-Judgment Mareva Injunction. 

46.  With regard to breach of fiduciary duty, an employment relationship, in itself, does not attach fiduciary duties: Nottingham University v Fishel [2000] ICR 1462, at 1491E-H, Elias J.

47.  The concept of fiduciary duty encaptures a situation where one person is in a relationship with another which gives rise to a legitimate expectation, which equity will recognize, that the fiduciary will not utilize his or her personal position in such a way which is adverse to the interests of the principle.  That expectation is assessed objectively, so it is not necessary for the principal subjectively to harbour the expectation, nor for the person alleged to be a fiduciary to subjectively consider himself to be undertaking fiduciary duties.  See Snell’s Equity, 34^th ed, §7-005.

48.  Therefore, much depends on the employee’s role and functions. A senior employee/manager has been held to owe fiduciary duties to his employer in carrying out the specific duties to which he was assigned: TBC International (HK) Ltd v Chan Kwok Sum, HCA 10671/1995, 24 March 1997, at §§6 and 7, Waung J.

49.  An employee entrusted with the company’s money or diverts company money to his own benefit, is likely to owe fiduciary duties in relation to the money, even if he is a junior employee: Paul Goulding QC, Employee Competition, 3^rd ed, at §2.57.

50.  Huang was a senior accounting staff responsible for the Company’s bookkeeping, accounting and financial matters, arrangements for payment of monies from the Company’s accounts, making periodic reports of the Company’s financial performance to the directors and liaison with auditors to prepare the audited financial accounts, there could be no doubt that Huang owed fiduciary duties to the Company. 

51.  The misappropriated money was company’s money in her control.  Huang breached the fiduciary duties when committing the Supplier Fraud and Customer Fraud.  But for those breaches, the Company would not have suffered loss and damage.

52.  With regard to deceit, this is established when a defendant makes a false representation knowing it to be untrue or being reckless as to whether it is true, and intends that the claimant should act in reliance on it, then insofar as the latter does so and suffers loss, the defendant is liable: Clerk & Lindsell on Torts, 22^nd ed, at §18-01.

53.  In respect of the Supplier Fraud, Huang doctored the invoices and misrepresented to the Company that the duplicated cheques were due and owing to the suppliers when they were not.

54.  In respect of the Customer Fraud, Huang misrepresented the scale of the Company’s business and the true picture of the Company’s accounts. 

55.  The Company has relied on Huang’s misrepresentations and suffered loss and damage as a result.

56.  In respect of the breach of duty of fidelity, the test is whether an act by an employee is one “which saps the confidence of the employer in [the employee] and strikes at the very root of the relationship between them”: Employment Law and Practice in Hong Kong, 2^nd ed, at §3.028,

57.  Huang, in her position, owed the Company a duty to serve with fidelity and good faith. The Frauds were flagrant breaches of that duty, which plainly met the test in the preceding paragraph.

58.  In respect of unjust enrichment, it has to be shown that the defendant was enriched at the expense of the claimant and that such enrichment at the expense of the claimant was unjust: Goff & Jones, The Law of Unjust Enrichment, 9^th ed, at §1.09.

59.  Huang was enriched as the funds meant to be for the Company were misappropriated by her.  Her enrichment was caused by unjust factors, including (i) the mistaken belief generated by her that money was due and owing to the supplier; and (ii) lack of consent of the Company when she misappropriated the money.

60.  In summary, I am satisfied from the 4 pleaded causes of action that the Plaintiff is entitled to recovery of the amount claimed.

C3. Claim for compound interest

61.  Compound interest may be appropriate where (i) the breaches of fiduciary duty are by way of fraud or misconduct, (ii) the breaches benefit the defaulting fiduciary personally; or (iii) the fiduciary has misappropriated funds: Lewin on Trusts, Vol II, 20^th ed, at §41-062; Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, Ribeiro PJ, at §142.

62.  The Court assumes that the misappropriated funds would have been used by the fiduciary to earn profits and, instead of ordering an account of those profits, orders him to pay compound interest on the sums extracted: Libertarian Investments Ltd, at §142.

63.  These principles apply squarely to this case.  I award compound interest at the usual rate of P + 1%, currently 6%, compounded yearly.

64.  The compound rate should apply to the pre-judgment period from the date of the relevant invoice and continue to accrue by way of post-judgment interest: Akai Holdings Ltd (in liquidation) v Thanakharn Thai Chamkat (Mahachon) also known as Kasikornbank Public Co Ltd (2010) 13 HKCFAR 479, at §§40, 164, per Ma CJ and Lord Neuberger NPJ.

D. POST-JUDGMENT INJUNCTION APPLICATION

65.  Huang has not sought to discharge or vary the Mareva injunction. Her comments about the inconvenience that the Mareva injunction brought to her were induced by her own dishonest conduct.  Those comments have no bearing on the orders that the Court will make in this case.

66.  Huang has breached the disclosure order in §3 of the Mareva injunction.  She cannot be relied on to cooperate in handing over assets to meet a judgment debt.

67.  It is appropriate to continue the Mareva injunction post-judgment to aid the Company in execution.  The only change is the amount to be frozen and the duration must be specified.

68.  There is jurisdiction to include interest and costs in the amount to be frozen under the Mareva injunction: Gee, Commercial Injunctions, 6^th ed, at §12-006.

69.  Accordingly, the Mareva injunction should be varied:

(1) To increase the frozen amount (as the extent of the Frauds had become clearer since issue of the writ), to reflect the amount of damages awarded, ie HK$9,037,474.68;

(2) To include pre-judgment compound interests up to 9 October 2020 (date of this hearing), ie HK$5,645,350.40; and

(3) The Post-Judgment Mareva Injunction is to continue only for 6 months post-judgment.  The Company shall continue to give the undertaking as to damages for the Mareva injunction.

E. CONCLUSION

70.  There was no valid explanation for Huang’s delay in seeking extension of time to file a defence.  The defence raised by Huang is unarguable, such that the Court would not have set aside a regular default judgment on the merits. In the premises, I dismiss the Leave Application.

71.  I give judgment on the Default Judgment Application as follows:

(1) The Defendant’s summons for leave to extend time for filing the defence be dismissed;

(2) Judgment be entered in favour of the Plaintiff against the Defendant for the sum of HK$9,037,474.68 (“the Sum”);

(3) There be interest on the Sum at the rate of prime + 1% compounded yearly, pre- and post- judgment.  The pre-judgment accrued interest up to 9 October 2020 is HK$5,645,350.40;

(4) The Mareva injunction be varied to increase the Sum frozen up to HK$9,037,474.68 plus HK$5,645,350.40; and

(5) The Defendant do pay the Plaintiff’s costs of this action, including the costs of the Plaintiff’s application for Mareva injunction, the Defendant’s Leave Application and the Plaintiff’s Default Judgment Application and Post-Judgment Injunction Application.  Such costs are to be taxed if not agreed.

72.  I thank Mr Suen SC and Mr Kevin Lau for their able assistance.