PBM (HONG KONG) LTD v. TANG KAM LUN ALLAN AND OTHERS

HCA 12138/1997
HCA 13316/1997
(Consolidated)

HCA 12138/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12138 OF 1997

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J U D G M E N T

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1. The Plaintiff ["PBM"] in this consolidated action was a distributor, wholesaler and retailer of branded watches and jewellery in the Asia Pacific region. It marketed Piaget and Baume Mercier watches. The 1st Defendant Tang Kam Lun, Allan ["AT"] was an employee of PBM from 1 September 1990. He was first employed as an Assistant Financial Controller at a monthly salary of $22,000. He left PBM in July 1997. His last position with PBM was Director of Finance and Administration earning a salary of $59,000 per month. He was promoted to that position in 1995. Although he borne such title, AT was never appointed as a director of the PBM. On top of his salary, AT was also given bonus at the end of each year ranging from one month to a half month of his salary.

2. AT was put in charge of the Department of Finance in PBM. He was responsible for, inter alia, the finance and accounting of PBM. The Department of Finance was responsible, together with the sales manager, to go after customers for payment of outstanding invoices. Since May 1997, the senior management of PBM was alerted to some irregularities in the accounts and the internal auditor conducted investigations into the matter. AT was questioned about the account of a Taiwanese customer, Swiss Time Trading Company Limited ["STT"]. AT therefore knew that PBM was looking into the matter by early May 1997 if not earlier. To deal with the queries raised, AT procured on or about 8 May 1997 a letter signed by the president of STT confirming STT's use of two Hong Kong Bank accounts to settle its indebtedness to PBM.

3. After AT left PBM, PBM discovered that these two accounts were actually accounts of AT. Over the years, STT in fact made payments to PBM by paying to accounts designated by AT. This was not authorized by PBM. AT in turn from time to time paid monies to PBM to settle the indebtedness of STT. After a thorough checking of the accounts and matching the payments by STT with the assistance of PriceWaterhouseCoopers, PBM found out that AT had over the years misappropriated a total sum of $49,594,775.61 from PBM. AT concealed these from PBM by manipulations of PBM's accounting records and production of inaccurate accounting vouchers. Those were monies paid by STT to AT for settlement of its trade debts to PBM which AT did not account to PBM. In the eyes of equity, these were monies belonging to PBM and AT held the same as trustee. In this connection, the partner of PriceWaterhouseCoopers Mr Nicholas Allen gave evidence before me and I am satisfied that the conclusions in his report are well founded. AT pleaded guilty to 8 counts of false accounting and was sentenced to 4 years' imprisonment on 14 September 1999 in High Court Criminal Case No.365 of 1998. In the facts admitted by AT in the criminal trial, he accepted the conclusions of Mr Allen.

4. AT knew that once PBM looked into the matter, it was only a matter of time that his misappropriations would be discovered. Notwithstanding the letter from STT, PBM continued to press for documents from the Hong Kong Bank to verify the identity of the account holders of those accounts. On 18 July 1997 AT gave a letter to the managing director of PBM to terminate his employment immediately. Despite demand by PBM that AT had to stay with the company until the end of one month's notice period to deal with the handover, AT did not come back to his office after 18 July 1997.

5. In this action, PBM sought various relief against several persons regarding the misappropriations by AT. As far as AT is concerned, the action has been disposed of by a default judgment in the sum of $49,594,775.69 entered against him on 30 May 2000. The action was stayed vis-à-vis another defendant, Ho Cam Hong. Chau Sau Lai ["Chau"], the 2nd Defendant in High Court Action No.12138 of 1997, was the girlfriend of AT and cohabited with him at the material time. She did not file any Defence. Although she was initially represented by lawyers, since 15 July 1999 she acted in person. The address given by her in the Notice to Act in Person remained the address for service upon her. However, since about March 2001, she could not be contacted at that address. She did not attend this trial although notice of trial was sent to her address for service. Further, notice of trial has also been given to the solicitors acting for Ho Cam Hong (at that stage the action against him has not yet been stayed). Ho Cam Hong was the brother-in-law of Chau. On the material before me, I conclude that Chau was probably aware of the trial dates but chose not to attend the trial. Her failure to file any Defence in this action showed her lack of concern about the outcome of the trial. PBM has been unable to trace her. Despite that, PBM asked for relief to be granted against her and I shall deal with that later.

6. Chan Chun Chung, Wyman ["Chan"] and his wife Liu Sui Yuk are the other defendants in the consolidated action. Chan was a friend of AT. Regent Trinity Investment Limited ["RTIL"] is a company owned by Chan and his wife. The shares of RTIL was transferred by AT and Chau to Chan and his wife on 26 June 1997. RTIL's only asset was a property at Unit C, 2nd Floor, Hatton Place, Po Shan Road, Hong Kong ["the Property"]. AT and Chau acquired all the shares of RTIL pursuant to an agreement made on 7 March 1997 ["the March Agreement"]. The consideration was $11,500,000. Although the consideration was broken down into two components under Clause 5 of the agreement, one for the value of the shares and one for the shareholder's loan in the sum of $4,022,000, in my view the consideration was basically dictated by the value of the Property. It was only an accounting exercise as to how much was attributable to the shares and how much was attributable to the shareholder's loan. In substance, the only asset acquired by AT and Chau with their control over RTIL was the Property. The shareholder's loan was due from RTIL to the shareholders. RTIL had no other asset apart from the Property, hence it had no independent means to repay the shareholder's loan (even if it was called upon to make repayment) other than resorting to the sale of the Property. I have no evidence as to the market value of the Property in March 1997. But there is nothing before me to suggest that the March Agreement was not made at arm's length. Hence, I shall proceed on the basis that $11,500,000 probably reflected the market value of the Property at that time.

7. Completion under the March Agreement took place on 2 June 1997. On that day, the shares of RTIL were transferred to AT and Chau respectively. They also became the directors of RTIL. Shortly after that, AT and Chau resigned as directors on 18 June 1997 whilst Chan and his wife became directors of RTIL. On 26 June 1997, AT and Chau entered into a Sale and Purchase agreement ["the June Agreement"] with Chan and his wife by which the shares of RTIL were purportedly sold to the latters. The sale was subject to a mortgage over the Property in favour of the Yien Yieh Commercial Bank Limited ["the Bank"] created on 2 June 1997 when AT and Chau acquired the shares of RTIL. The mortgage loan was $8,050,000. The consideration was stated to be $3,146,447.92. Chan's evidence was that this consideration was arrived at on the basis of a valuation of the Property at $11,500,000, viz. the same value as the consideration in the March Agreement. In an affirmation made on 29 December 1997, Chan said in Paragraph 14 that the figure of $3,146,447.92 was calculated as follows,

Value of the Property	$11,500,000.00
Mortgage due to the Bank	($8,050,000.00)
Interest and penalty for early redemption due to change of  shareholders in RTIL	($ 303, 552.08)
Net value	$ 3,146,447.92

This was reaffirmed by Chan when he gave evidence before me.

8. Although clause 3 of the June Agreement provided that completion under the agreement was conditional upon good title to the Property being proved and requisitions were to be delivered on or before 27 June 1997, completion actually took place on 26 June 1997, the same day as the date of the June Agreement. The shares of RTIL was transferred from AT and Chau to Chan and his wife respectively. As explained later, despite the stated consideration in the June Agreement, no money changed hands. Chan said the real nature of that transaction was repayment in kind by AT of loans borrowed from Chan.

9. On 6 October 1997, RTIL sold the Property to one Chan Fu Chuen and Tong Lai Sheung Tom at the price of $14,230,000 ["the October Agreement"]. Again there is nothing before me to suggest that this was other than an arm's length transaction. I am therefore entitled to proceed on the basis that this sale price reflected the fair market value of the Property as at that date.

10. PBM alleged that the June Agreement was a sham and an attempt by AT to conceal asset and put the Property beyond the reach of PBM. It was also alleged that Chan allowed AT to conceal his ill-gotten gains by depositing monies into a US$ margin trading account in the name of Chan and his wife at the Hong Kong Bank. According to their case, Chan and his wife ["Liu"] and RTIL were liable as constructive trustees. Injunction was obtained against Chan and RTIL. By an order dated 8 December 1997, the net sale proceeds of the sale under the October Agreement was frozen. According to a letter dated 8 December 1997 from Messrs. Tang & Lee, a sum of $4,295,069.45 representing the net balance was deposited into two bank accounts of RTIL. Counsel for Chan, Liu and RTIL confirmed at the trial that the monies were still there.

Claim against Chau

11. Although the trial was conducted in the absence of Chau, I have not overlooked her interest. Since she did not file any defence, she did not put forward any positive case. She is still entitled to require PBM to prove their case. For that purpose, PBM called the following witnesses,

(a) Mr Daniel Perel, the managing director of PBM at the material time. He gave evidence about the employment of AT and events leading to the discovery of the fraud.

(b) Mr Godfrey Hung, the export manager of PBM at that time, He gave evidence about AT's instruction to him to prepare the letter of 8 May 1997.

(c) Mr Tse Wai Hung, the senior associate of Jones Lang Lasalle who gave evidence in respect of the Property regarding its fair market value on 26 June 1997.

(d) Mr John Werner, the internal auditor of the group. He gave evidence as to the investigations conducted by PBM and the discovery of the fraud.

(e) Mr Nicholas Allan, the partner of Price Waterhouse Cooper. He gave evidence about how, according to documents obtained by PBM as a result of the investigations, the fraud was perpetuated by AT and the quantification of the loss of PBM.

Notwithstanding the challenge levied against Mr Tse by Mr Mayne (which I shall deal with below), I find them to be honest and reliable witnesses and I accept their evidence. I was also referred to documents placed before me, including affirmations filed previously in the action. In his closing submissions, Mr Graham indicated to me that PBM confined its claims against Chau to the specific sums identified by PBM as payments into Chau's accounts by AT with interest thereon and costs. In other words, PBM confined its claim against Chau to the deposits set out in Schedules 4A and 4B of the Consolidated Statement of Claim. The other relief set out in the Consolidated Statement of Claim against Chau was no longer pursued by PBM. Hence, although Chau's involvement in other transactions were referred to in the evidence and taken into account by me in considering her liability for those deposits, PBM did not claim any relief against Chau regarding those transactions.

12. Based on their evidence and the documents put before me, I am satisfied as to the following and I make findings of facts accordingly.

(a) Chau had been an employee of PBM in 1992.

(b) Chau became the cohabitee of AT in 1993 at the latest.

(c) From time to time since September 1993, AT deposited large sums of money which were misappropriated by AT from PBM into the accounts of Chau. Particulars of those deposits were set out in Schedules 4A and 4B of the Consolidated Statement of Claim. These were all deposits in the sum of $100,000 or above. The total amount added up to $5,140,000. In view of the salaries of AT, these deposits by AT must come directly or indirectly from monies misappropriated from PBM. Further, on a number of occasions, withdrawals of the same or similar amounts were made on or around the dates of the deposits of substantial sums by AT. The amount of each deposit was much larger than ordinary cash transfer between cohabitees for domestic purposes. Particulars of these transactions are as follows,

Chau's Account No. 108-106733-833
Deposit from AT's account			Withdrawal from Chau's account
22.11.95	$550,000		22.11.95	$550,000
22.12.95	$300,000		22.12.95	$300,000
9.1.96	$320,000		9.1.96	$318,450
11.3.97	$200,000		11.3.97	$200,000
19.5.97	$1,000,000		17.5.97	$1,000,000
23.5.97	$210,000		23.5.97	$161,397
				$36,750
				$2,557
Chau's Account No. 150-8-011218
Deposit from AT's account			Withdrawal from Chau's account
4.11.96	$1,500,000		6.11.96	$1,500,000

These are indicia of money laundering. Neither AT nor Chau offered any innocent explanation as to these transfers of funds. On the evidence, I could not find any innocent explanation. I infer that these withdrawals were payments by Chau in accordance with the directions of AT for his purposes.

(d) On several occasions, Chau transferred large sums of money from her accounts to the account of AT. Particulars of those transfers were set out in Schedules 4C of the Consolidated Statement of Claim. Again the amount of each transfer shows that it could not be transaction of a domestic nature.

(e) In addition, Chau collaborated with AT in speculation in respect of the following properties,

i. 2/F. Lot No.772 in D.D. 230 Sai Kung under the name of Link Smart Development Limited. Chau and AT were the shareholders and directors of this company;

ii. Unit 1, 9/F., Block 3, Heng Fa Chuen, 100 Shing Tai Road again under the name of Link Smart Development Limited ["Link Smart"];

iii. Flat G, 12/F., Tower 27, South Horizons, No.27 Yi Nam Road in her own name;

iv. Flat A, 25/F., Block 2, Greenway Terrace, Nos.5-7, Link Road in her own name.

Details of these transactions were set out in Paragraph 105 of the witness statement of Mr Werner and were adopted by him in his evidence before me. AT also used a number of companies for his property speculations. These involved quite substantial sums of monies. Given the fact that AT was leading a lavish life style and spending well beyond his normal salaries, I infer that all the monies used for these property speculations came from funds misappropriated by AT from PBM.

(f) Further, Chau also collaborated with AT regarding the RTIL transactions, both as to movement of funds as well as executing the relevant documents as party to the transactions.

(g) Chau made the following payments or drew cheques out of her accounts in 1997,

i. Two cheques dated 28 July 1997 in the sums of $3,348,881.83 and $380,528.19 respectively in favour of PBM. These cheques were dishonoured.

ii. A cheque dated 26 June 1997 in the sum of $303,552.08 in favour of RTIL to settle interest and penalty payable to the Bank by RTIL.

iii. Two cheques dated 7 July 1997 and 25 August 1997 in the respective sums of $7,313.40 and $3,656.70 as payment of management fees of the Property payable by RTIL.

iv. Two cheques dated 28 July 1997 and 29 August 1997 in the sum of $75,036.56 each in favour of RTIL to settle mortgage instalments due to the Bank.

v. On 29 May 1997, she withdrew a sum of $1,734,354 from her account No.108-106733-001 to purchase a cashier order payable to PBM and the cashier order was used by AT to reduce the amount due from STT to PBM in the books of PBM.

(h) The following amounts were deposited by Chan on the instruction of AT into Chau's bank accounts (I shall come back to the nature of these deposits when I deal with the claims against Chan),

i. a sum of $929,400 (the equivalent of US$120,000) on 11 July 1997;

ii. a sum of $928,920 (the equivalent of US$120,000) on 2 June 1997;

iii. a sum of $1,000,000 on 3 June 1997.

13. From these primary facts and in the absence of any evidence from Chau, I infer that Chau was at all material time acting as nominee for AT in conducting the said transactions set out in Paragraph 12(c) above. There is no evidence before me to suggest that at the material time she had independent source of finance apart from monies given to her by AT and monies generated therefrom. She allowed her accounts to be used by AT who deposited monies into the same and thereafter she made payments in accordance with the directions of AT. In short, subject to the question of knowledge (which I shall deal with below), she participated in the process of money laundering. In so doing, she assisted AT in the disposal of his ill-gotten gains and therefore participated in the furtherance of the fraud committed by AT against PBM. She was in the same position as the accountants in Agip (Africa) Ltd. v Jackson [1990] Ch 265; [1991] Ch 547. In Heinl v Jyske Bank [1999] Ll Rep Bank 511, Nourse LJ said at 523,

"In regard to the case based on money laundering it is clear in principle that the concealment of misapplied trust moneys in that way can constitute assistance".

In the recent House of Lords decision in Twinsectra v Yardley [2002] UKHL 12, 25 March 2002, Lord Millett said in Para.107,

"The accessory's liability for having assisted in a breach of trust is quite different. It is fault-based, not receipt-based. The defendant is not charged with having received trust moneys for his own benefit, but with having acted as an accessory to a breach of trust. The action is not restitutionary; the claimant seeks compensation for wrongdoing. The cause of action is concerned with attributing liability for misdirected funds. Liability is not restricted to the person whose breach of trust or fiduciary duty caused their original diversion. His liability is strict. Nor is it limited to those who assist him in the original breach. It extends to everyone who consciously assists in the continuing diversion of the money. Most of the cases have been concerned, not with assisting in the original breach, but in covering it up afterwards by helping to launder the money."

Although Lord Millett dissent from the majority on the question as to dishonesty (which I shall deal with below), that does not diminish the force of his above observations as to the scope of assistance covered by accessory liability. I therefore hold that to the extent she participated in money laundering for AT, Chau did assist in AT's breach of fiduciary duty.

14. The plaintiff in Agip was able to identify a specific sum of money misappropriated from it moving through accounts controlled by the accountants to overseas destination. PBM was unable to do so because AT had mixed up the funds he misappropriated from PBM with other monies before he deposited into the accounts of Chau. However, once I am satisfied that those other monies were derived from monies misappropriated from PBM (as found by me in Paragraph 12(c) and (e) above), there is no material difference. Further, Mr Graham, counsel for PBM confined the Plaintiff's claim against Chau to liability for knowing assistance in the furtherance of fraud. It is a fault-based liability rather than receipt-based (see the discussion as to the distinction of the two heads of liabilities by Millett J, as he then was, in Agip at p.291-3). It is a personal liability to account in equity and to pay equitable compensation in respect of loss incurred by the victim instead of the seeking of proprietary relief. The defendant is liable for equitable wrongdoing rather than for the receipt of trust property. It does not matter whether the defendant has actually received trust property. The jurisprudential basis for the liability was summarized by Lord Nicholls in Royal Brunei Airlines v Tan [1995] 2 AC 378 at p.392F to H,

"Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. ..."Knowingly" is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden scale of knowledge is best forgotten."

Although it is generally known as one limb of constructive trust, I respectfully agree that such description only serve to confuse and it would be clearer if the accessory liability should be simply referred to as a liability to account in equity (see Sir Peter Millett, Restitution and Constructive Trusts in Restitution, Past, Present & Future, p.200; see also Lord Nicholls' observations in Knowing Receipt: The Need for a New Landmark in the same book at p.243-4; Millett LJ in Paragon Finance v DB Thakerar [1999] 1 All ER 400 at p.408-410 endorsed by Lord Woolf in Governor of Bank of Scotland v A [2001] 1 WLR 751 Para.27).

15. However, regarding the other transfers of fund from AT's accounts into the accounts of Chau, the position is not that clear. An examination of the bank statements of Chau's accounts showed that those other deposits were kept in her account for a while and then utilized on different occasions in smaller amounts without any fixed pattern. It has not been shown to me that they were eventually channeled back to AT or withdrawn for his own use. I think I should deal with three transactions specifically. In respect of $500,000 deposited into account No.150-8- 011218 on 16 March 1995, a sum of $230,000 was withdrawn on 20 March 1995 to purchase a cashier order payable to a solicitor's firm, probably for one of the conveyancing transactions mentioned in Paragraph 12(e) above. To this limited extent, I feel able to infer that the sum withdrawn was part of the laundering process. In respect of the $160,000 deposited into the same account on 31 March 1995, a sum of $100,000 was withdrawn on 7 April 1995. It was paid into Chau's other account. In respect of another deposit of $100,000 into account No.150-8-011218, it was withdrawn on 10 August 1995 to be placed on a time deposit until 15 August 1995. On 15 August 1995, the money was put back into the savings account. On the evidence before me, it was possible that Chau have used these monies for her own benefit or other innocuous purposes. I am not satisfied that Chau knew that these deposits were made with a view to conceal their origin or that the mere receipts of these deposits by Chau constituted assistance in furtherance of fraud. The evidence before me is insufficient to establish that the purpose of these deposits were for the concealment of funds. As pointed out by Coleman J in Heinl v Jyske Bank [1999] Ll Rep Bank 511 at p.546 regarding the reasoning of Millett J and Fox LJ in Agip,

"The essence of the reasoning in that judgment and of Fox LJ in the Court of Appeal at [1991] Ch 547 is that participation in an exercise known to be that of concealment for whatever reason in itself gives rise to an inference that the person providing assistance in such an exercise has acted dishonestly in relation to the transfer of the funds in question in breach of trust. It is, however, essential to that reasoning that the person alleged to have provided knowing assistance appreciated that the purpose of the fund transfers was concealment."

Accordingly, regarding deposits made by AT to the accounts of Chau, I am only satisfied that assistance was provided by Chau in respect of the transactions set out in Paragraph 12 (c) above plus the sum of $230,000 ["the money laundering transactions"]. Hence, the maximum that PBM could successfully claim against Chau is $4,310,000 plus interest. I am not concerned with Chau's liability for knowing receipt since this is not pleaded nor relied upon by Mr Graham.

16. The next question is whether Chau was dishonest when she gave such assistance to AT. By reason of her intimate relationship with AT and her previous employment in PBM, she must have been aware that AT could not have so much monies from his proper income as employee of PBM. She must also have been aware of the fact that AT led an extravagant lifestyle which could not possibly be supported by his salary. She must therefore be aware that AT was spending and giving her money derived from illicit source. But there is no evidence before me that Chau played any parts in terms of the actual misappropriation by AT. Whilst there was reference to Link Smart being used by STT as an intermediary for transmission of funds, PBM has not adduced any evidence as to the detail mechanism employed and the role played by Chau in those transactions. I am not prepared to infer in the absence of such evidence that Chau actually participated in the transmission of funds from STT to Link Smart. Mr Graham also relied on the issue of two cheques by Chau in favour of PBM on 28 July 1997. However, the relevant state of mind must be the state of mind at the time when assistance was given. The money laundering activities were carried out between 22 November 1995 and 23 May 1997. Whilst the cashier order of 29 May 1997 and the two cheques in July in favour of PBM probably demonstrated knowledge of Chau as to the misappropriation by AT by 29 May 1997, they could not prove that Chau had such specific knowledge at an earlier stage. On the other hand, I accept that the cashier order and the two cheques could be evidence of guilty consciousness on the part of Chau.

17. The law as to dishonesty can be found in the judgment in Royal Brunei Airline. Lord Nicholls said at p 389,

"In the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misappropriation of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know and then proceed regardless."

Further at p.390-1,

"Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct."

18. In Twinsectra v Yardley [2002] UKHL 12, 25 March 2002, the majority in the House of Lords emphasized a dimension of the subjective element in the requirement of dishonesty. The leading speech was delivered by Lord Hutton. Lord Slynn, Lord Steyn and Lord Hoffmann expressed agreement to the views of Lord Hutton. His Lordship formulated a combined test in Paras.36 of the judgment,

"[36]... Therefore I consider that the courts should continue to apply that test and that your Lordships should state that dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct."

His Lordship approved in Para.37 the test applied by Steel J in Abbey National PLC v Solicitors Indemnity Fund Ltd [1997] PNLR 306. In that case, at p 310, Steel J referred to the test set out in R v Ghosh [1982] QB 1053, and to Lord Nicholl's judgment in Royal Brunei [1995] 2 AC 378 and she continued:

"Lord Nicholls particularly refers to a conscious impropriety. The test there, it seems, does embrace a subjective approach, and I have to look at the circumstances to see whether they were such that Mr Fallon must have known that what he did was by the standards of ordinary decent people dishonest. I accept totally that individuals should not be free to set their own standards, but there is in my view a subjective element both in civil and in criminal cases."

On the facts of that case, Lord Hutton inferred that the trial judge applied the combined test in finding that the appellant Mr Leach was not dishonest. The Court of Appeal reversed the judge's finding on the ground that the trial judge failed to have regard to Nelsonian dishonesty. Lord Hutton took the view that the judge did not fail in that regard. Lord Hutton also held that the test applied by Potter LJ in the Court of Appeal was too strict as it did not address the vital question, viz. whether Mr Leach realised that his action was dishonest by the standards of responsible and honest solicitors. This was the subjective element required under the combined test.

19. Lord Hoffmann said in Paras.[19] and [20],

"[19] My noble and learned friend Lord Millett considers that the Court of Appeal was justified in taking this view because liability as an accessory to a breach of trust does not depend upon dishonesty in the normal sense of that expression. It is sufficient that the defendant knew all the facts which made it wrongful for him to participate in the way in which he did. In this case, Mr Leach knew the terms of the undertaking. He therefore knew all the facts which made it wrongful for him to deal with the money to the order of Mr Yardley without satisfying himself that it was for the acquisition of property.

[20] I do not think that it is fairly open to your Lordships to take this view of the law without departing from the principles laid down by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. For the reasons given by my noble and learned friend Lord Hutton, I consider that those principles require more than knowledge of the facts which make the conduct wrongful. They require a dishonest state of mind, that is to say, consciousness that one is transgressing ordinary standards of honest behaviour."

20. It is also significant to note what was said by Lord Hoffmann in Para.[24].

"[24] I do not suggest that one cannot be dishonest without a full appreciation of the legal analysis of the transaction. A person may dishonestly assist in the commission of a breach of trust without any idea of what a trust means. The necessary dishonest state of mind may be found to exist simply on the fact that he knew perfectly well that he was helping to pay away money to which the recipient was not entitled."

21. There was a powerful dissent by Lord Millett. After a thorough analysis of the speech of Lord Nicholls in Royal Brunei Airlines, His Lordship concluded that it was sufficient that the course of conduct was dishonest by objective standard. Lord Millett said in Para.[121],

"[121] In my opinion Lord Nicholls was adopting an objective standard of dishonesty by which the defendant is expected to attain the standard which would be observed by an honest person placed in similar circumstances. Account must be taken of subjective considerations such as the defendant's experience and intelligence and his actual state of knowledge at the relevant time. But it is not necessary that he should actually have appreciated that he was acting dishonestly; it is sufficient that he was."

22. In Paras.[126] and [127], Lord Millett gave reasons why an objective standard was appropriate.

"[126] The question for your Lordships is not whether Lord Nicholls was using the word dishonesty in a subjective or objective sense in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. The question is whether a plaintiff should be required to establish that an accessory to a breach of trust had a dishonest state of mind (so that he was subjectively dishonest in the R v Ghosh sense); or whether it should be sufficient to establish that he acted with the requisite knowledge (so that his conduct was objectively dishonest). This question is at large for us, and we are free to resolve it either way.

[127] I would resolve it by adopting the objective approach. I would do so because:

(1) consciousness of wrongdoing is an aspect of mens rea and an appropriate condition of criminal liability: it is not an appropriate condition of civil liability. This generally results from negligent or intentional conduct. For the purpose of civil liability, it should not be necessary that the defendant realised that his conduct was dishonest; it should be sufficient that it constituted intentional wrongdoing.

(2) The objective test is in accordance with Lord Selborne's statement in Barnes v Addy LR 9 Ch App 244 and traditional doctrine. This taught that a person who knowingly participates in the misdirection of money is liable to compensate the injured party. While negligence is not a sufficient condition of liability, intentional wrongdoing is. Such conduct is culpable and falls below the objective standards of honesty adopted by ordinary people.

(3) The claim for "knowing assistance" is the equitable counterpart of the economic torts. These are intentional torts; negligence is not sufficient and dishonesty is not necessary. Liability depends on knowledge. A requirement of subjective dishonesty introduces an unnecessary and unjustified distinction between the elements of the equitable claim and those of the tort of wrongful interference with the performance of a contract."

23. After making a comparison with the tort of unlawful interference with contract, Lord Millett said in Para.[132],

"[132] It would be most undesirable if we were to introduce a distinction between the equitable claim and the tort, thereby inducing the claimant to attempt to spell a contractual obligation out of a fiduciary relationship in order to avoid the need to establish that the defendant had a dishonest state of mind. It would, moreover, be strange if equity made liability depend on subjective dishonesty when in a comparable situation the common law did not. This would be a reversal of the general rule that equity demands higher standards of behaviour than the common law."

24. These are, if I may respectfully say so, very cogent reasoning. However, as a first instance judge, it would not be appropriate for me to adopt the view of Lord Millett when the point has not been fully argued before me. I would adopt the approach of the majority in resolving the question as to the required state of mind and apply the combined test.

25. In Heinl v Jyske Bank [1999] Ll Rep Bank 511, the English Court of Appeal held that although shutting one's eyes to what was going on could constitute dishonesty for accessory liability, suspicion by the defendant was not enough for that purpose. Sedley LJ said at p.532,

"The line between guilt and innocence in this region of activity, as the judgments of Nourse LJ and Colman J demonstrate, is a fine one: it runs between suspecting what was going on (and I have no difficulty in agreeing that Mr Heinl, who is no fool, must have suspected it) and either knowing or shutting one's eyes to it."

26. Most of the cases on knowing assistance deal with the matter in a commercial context where the alleged wrongdoer provided assistance in the course of his professional service to his client who turned out to be a fraudster. This was what happened in Agip, Heinl and Twinsectra. The question of the requisite state of mind for liability under knowing assistance was examined by Rimer J in a non-commercial setting in Brinks v Abu-Saleh (1996) CLC 133. That case concerns with the dissipation of the proceeds of the stolen gold obtained from the Brink's Mat robbery. The plaintiff sought to recover its loss by suing a number of defendants. One of the defendants was Mrs.Elcombe. It was alleged that she assisted her husband in the part he played in the laundering some of the proceeds by couriering the same from England to Switzerland. A number of trips were made in which she accompanied her husband. At the end of the day, the judge found that mere accompany in those trips did not constitute assistance. Rimer J however also considered the question as to the requisite state of mind and he found she knew that the purpose of these trips was to courier money but she did not know that the money was proceeds of the stolen gold. He found that Mrs Elcombe believed the money derived from a tax evasion exercise. His Lordship summarized the debate on this point as follows,

"is it (as Mr Tugendhat contends) sufficient to fix Mrs Elcombe with liability as an accessory to the breach of trust merely to prove that she had provided her assistance to the furtherance of a dishonest transaction, regardless of whether she knew that it involved a breach of trust; or (as Mr Sisley contends) must Brinks still also prove that she had knowledge of the trust which was being breached?"

After making reference to the judgment in Royal Brunei Airlines and the submission of counsel, Rimer J answered the question as follows,

"I agree that the passage I have quoted from the judgment may, read in isolation, be said to lend support to Mr Tugendhat's submission. However, I do not consider that the Board intended to suggest that an accessory can be made accountable to the beneficiaries as a constructive trustee regardless of whether he had any knowledge of the existence of the trust. In the Royal Brunei Airlines case itself the claim was one against the director of the trustee company which had committed the breach, and he had conceded that there had been a breach of trust in which he had assisted with actual knowledge. Thus the case was one where the accessory did have the relevant knowledge. Further, in the Board's analysis of the basis on which accessories have in the past been held liable for assisting in breaches of trust, the judgment made it clear, at page 387D to G, that the law had never gone so far as to give a beneficiary a remedy against an accessory who dealt with a trustee in ignorance that he was a trustee, or who knew that he was a trustee but had no reason to know or suspect that the transaction in which he was assisting was in breach of trust. The Board makes no suggestion that in this respect the earlier authorities were wrong. In my view the judgment proceeds on the basis that a claim based on accessory liability can only be brought against someone who knows of the existence of the trust, or at least of the facts giving rise to the trust; and all that the judgment is directed at clarifying is what further is also needed to be shown in order to make the accessory liable. The only further ingredient is dishonesty on the part of the accessory, and that is a sufficient ingredient. It is unnecessary that there should also be any dishonesty on the part of the trustee. In my view this is all that the Board is saying in the passage at page 392F which I have earlier cited."

Hence, Rimer J did not accept the submission of Mr Tugendhat.

27. In the later case of Grupo Torras v Al Sabah [2001] Ll Rep PN 117 Para. [106], the English Court of Appeal was disposed to agree with Rimer J although it was not necessary for the court to express a final view. On the facts of Grupo Torras, the defendant lawyer in that case was aware that the money concerned came from the plaintiff. The court held in Para.[107] that even if he was not aware of the precise legal position, that could not assist him if he gave assistance in dubious arrangements suggestive of misappropriation.

28. The approach of Rimer J is to be contrasted with the approach of Millett J in Agip. Regarding the accountants' belief in that case that the principal wrongdoer was only engaging in evading Tunisian foreign exchange control, His Lordship said at p.1391D to E,

"In my judgment, however, it is no answer for a man charged with having knowingly assisted in a fraudulent and dishonest scheme to say that he thought that it was "only" a breach of exchange control or "only" a case of tax evasion. It is not necessary that he should have been aware of the precise nature of the fraud or even of the identity of its victim. A man who consciously assists others by making arrangements which he knows are calculated to conceal what is happening from a third party, takes the risk that they are part of a fraud practiced on that party."

In the Court of Appeal, Fox LJ said at p.569C,

"I do not think that persons who needed to demonstrate that they had acted honestly could shelter behind transactions or objects which were themselves disreputable."

Further down at p.569E to F,

"The question is whether Mr Jackson and Mr Griffin acted honestly. ... They knew that something was concealed. The fact that the concealing was labeled as a "circumvention" does not alter that; it suggests some sort of impropriety. It would be an evasion of the local law on a matter of importance to the Tunisian State. If the known facts indicate a lack of frankness, the person assisting in effecting the transaction in question must take the risk in the absence of further explanation that it is fraudulent."

29. It has to be remembered that the central question is whether the defendant acted dishonestly in rendering assistance to the breach of trust. This is basically a jury question. Assistance could be rendered in different circumstances and could be provided in many forms. More often than not, those participate in money laundering do not have a full picture as to how the illicit monies were obtained. It would be dangerous to require dogmatically that before a person could be held liable as accessory, he must have knowledge of the existence of the trust, or knowledge of the facts giving rise to the trust. That would be against the tenor of the judgment of Lord Nicholls in Royal Brunei Airlines. At p.391C to D, His Lordship explained why dishonesty should replace knowledge as the criterion for the accessory liability. To superimpose a requirement of knowledge on the test of Lord Nicholls would defeat the purpose. Lord Nicholls emphasized at p.392F that dishonesty is the necessary and sufficient ingredient of accessory liability. The dicta of Lord Hoffmann cited in Paragraph 20 above also supports the view that dishonesty could derive from knowledge that the defendant did not have proper authority from the rightful owner to dispose of the money.

30. On the facts of the present case, when Chau assisted AT in the money laundering transactions, for the reasons given in Paragraph 16 above, she must have appreciated that AT could not have obtained such large sums of money by legal means. She must also have realized that she was asked to participate in money laundering, an operation which was only necessary for concealment of ill-gotten gains. An honest person in her position would have serious questions as to the probity of the activities and would refrain from taking part in them. At the very least, she shut her eyes to the obvious and deliberately chose not to ask AT as to the source of these monies. Applying the test of Lord Nicholls, she was dishonest. I am also satisfied that she was conscious that what she did transgressed ordinary standards of honest behaviour. Although I do not have much information about her background, from the activities she was involved in (viz. property and shares speculations), I form the impression that she was fairly intelligent and she had some commercial experience. It could not have escaped her mind that money laundering was illegal. Her consciousness for her guilt was evidenced, albeit at a later stage, by the cashier order of 29 May 1997 and the two July cheques in favour of PBM and her involvement in the sham transaction as to the sale of RTIL (which I shall discuss in greater details later).

31. I therefore hold that Chau was liable as an accessory to the breach of fiduciary duties of AT by participating the money laundering of $4,310,000. She is liable in equity to compensate PBM for that amount.

The claim against RTIL, Chan and Liu

32. I have set out the background to PBM's claim against RTIL, Chan and Liu in Paragraphs 6 to 10 above. In his closing submissions, Mr Graham indicated that PBM sought an order against RTIL and Chan for the return of the net proceeds of sale of the Property together with interest earned thereon. Apart from costs, PBM did not seek other remedies. As against RTIL and/or Liu, PBM sought an order that the injunction granted by Findlay J in respect of the sale proceeds be continued until Chan discharged his obligation for the return of those monies

33. At the request of Mr Graham and with the consent of Mr Mayne, I extended the injunction until the lapse of 3 working days after the handing down of my judgment. Since the proceeds are held in the bank accounts of RTIL, strictly speaking an injunction against RTIL would suffice. Likewise, an order against RTIL for the return of the said $5,355,490.40 would be sufficient to secure the same for PBM. Yet, PBM also sought relief against the personal defendants as indicated.

34. The first issue concerns the nature of the claim of PBM against these defendants. Mr Graham maintained that it was a claim for knowing assistance whilst Mr Mayne said it was a claim for knowing receipt. The case as pleaded in the Amended Consolidated Statement of Claim is one of knowing assistance. As the cases on money laundering like Agip, Heinl and Twinsectra illustrated, the fact that a defendant had received the money in question does not mean that it must be a case of knowing receipt rather than knowing assistance. It is also possible that on a given set of facts, both causes of action could be established. But it is important to bear in mind that the ingredients of the two causes of action are different. I have already identified the elements of a cause of action based on knowing assistance by reference to the judgment of Lord Nicholls in Royal Brunei Airlines and the judgment of Lord Hutton in Twinsectra.

35. In respect of a cause of action based on knowing receipt, the English Court of Appeal in BCCI v Akindele [2001] Ch 432 held that dishonesty was not a prerequisite. Reference was made to the requirements of this cause of action set out by Hoffmann LJ (as he then was) in El Ajou v Dollar Land Holdings [1994] 2 All ER 685 at 700,

"For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty."

In respect of the sale proceeds of the Property, since it has always been kept by RTIL in its bank account, it has never been received by Chan or Liu beneficially. Hence, as far as the claim advanced by PBM against Chan is concerned, it cannot be a claim for knowing receipt. RTIL is in a different position.

36. In Akindele, Nourse LJ discussed at length the third requirement, viz. the recipient's state of knowledge. His conclusions can be found at p. 455D to G,

"What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 405, the recipient can "conscientiously retain [the] funds against the company" or, in the words of Sir Robert Megarry V-C in In re Montagu's Settlement Trusts [1987] Ch 264, 273, "[the recipient's] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee". But, if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient's state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led."

37. Coming back to the facts of the present case, it seems to me irrespective of which causes of action we are concerned with, the first question is whether the monies used by AT and Chau to acquire the shares of RTIL were monies belonging to PBM in the eyes of equity. I do not think one can avoid this issue even if the claim of PBM is considered in the context of knowing assistance. If the source of finance was not monies misappropriated from PBM or profits generated therefrom, it is difficult to categorize the use of such money for the acquisition of RTIL as an act in furtherance of a breach of trust. It might be an attempt by AT to frustrate a foreseeable claim by PBM, but that is not a breach of trust if the monies used were not originated from monies misappropriated. On the other hand, if the monies were originated from misappropriated funds, the fruits of such acquisition would belong to PBM in the eyes of equity. Any attempts to conceal that asset would attract the same consequence as money laundering. AT and his nominee Chau would hold the shares of RTIL on constructive trust for PBM as much as AT originally held the misappropriated funds on constructive trust for PBM. This is based on the principle of equitable tracing. (See Underhill & Hayton's Law of Trusts and Trustees 15 Edn. Article 95 at p.850; Re Hallett's Estate (1880) 13 Ch D 696; AG for Hong Kong v Reid [1994] 1 AC 324; Paul Davies (Australia) Pty. Ltd. v Davies [1983] 1 NSWLR 440).

38. In the context of the RTIL transactions, the position is more complicated than the money laundering activities in Chau's accounts. Whilst there is ample evidence of direct transfer of funds from AT to Chau, it is not that straightforward regarding the funds used for the acquisition of RTIL. According to the March Agreement, AT and Chau paid $500,000 before the signing of the agreement. According to Paragraph 3 of the First Affirmation of AT filed on 11 December 1997 in compliance with the order of Findlay J, this sum was paid by two cheques dated 22 February 1997 drawn by AT from his own account. On 7 March 1997, another sum of $1,225,000 was paid. This was paid by a transfer from AT's account on that date to the account of the firm of solicitors handling the purchase for AT and Chau. For reasons given in Paragraphs 12(e) and 16 above, I have no difficulty in drawing the obvious inference that these monies originated from funds misappropriated from PBM. On completion on 2 June 1997, the balance of $9,775,000 was paid. In respect of that balance, a sum of $8,050,000 was financed by a mortgage from the Bank. Hence, on 2 June 1997, AT and Chau had to pay a sum of $1,725,000. For some reason, AT referred to this as a payment for $1,800,000 in his First Affirmation. He said as follows,

"For the remaining balance of HK$3,450,000 [he was referring to the amount not financed by mortgage], ... part of them came from depositing cash in the account of Tang & Lee (HK$1,800,000). For the said amount of HK$1,800,000, I remember that it was from the account of my girl friend, Chau Sau Lai."

A pay-in slip was produced to evidence such deposit. It was a cash deposit made at 12:33 on 2 June 1997 at the Hong Kong Bank branch reference No.062.

39. Cross-checking that with the bank statements and records regarding the accounts of Chau, I found that on 2 June 1997, Chau made 2 cash withdrawals on 2 June 1997. The first one was a cash withdrawal in the sum of $1,000,000 from her account No.150-8-011218. The withdrawal was made at Branch No.062 of the Hong Kong Bank. The second was a cash withdrawal made by a cash cheque No.801003 in the sum of $1,672,000 drawn by her from her account No.108-106733-001. According the records printed at the back of the cheque, withdrawal was made at Branch No.062 at 12:16 on 2 June 1997. As evidenced by the record of her identity card at the back of the cheque, Chau herself made the withdrawal. Hence, it is probable and I find as a fact that Chau made the cash deposit of $1,800,000 on 2 June 1997 with the cash withdrawn from her two accounts. As to the balance of the cash (viz.$1,672,000 + $1,000,000 - $1,800,000 = $872,000), I have no information as to how Chau disposed of the same.

40. In respect of the various payments made in respect of the acquisition of RTIL by AT and Chau, only a sum of $928,920 was traceable to the account of Chan and Liu. That was the equivalent of US$120,000 transferred from a Hong Kong Bank US$ margin trading account held jointly by Chan and Liu ["the US$ Account"] on 2 June 1997 into Chau's account No.108-106733-001, out of which a cash withdrawal in the sum of $1,672,000 was made on the same date.

41. It is admitted by RTIL, Chan and Liu that for the subsequent transfer of shares of RTIL by AT and Chau to them on 26 June 1997, no money changed hands at the time of the transaction. They said that the transfer was actually partial repayment of several loans advanced by Chan to AT between April and June 1997. There have been different versions in Chan's account about these loans. The final version, as he testified in the witness box, was that the total amount of these loans was $4,300,000 made up as follows,

(a) a loan of $1 million by cheque issued by Chan in favour of AT on 8 April 1997;

(b) a loan of $500,000 by cheque issued by Chan in favour of AT on 16 April 1997;

(c) a loan of US$120,000 (which Chan taken to be $1,000,000) advanced in the manner set out in Paragraph 41 above;

(d) a loan of $1 million by transfer of funds from Chan's account with Yamaichi International (H.K.) Ltd.

(e) the balance of $800,000 was undocumented payments made by Chan for AT for racing, entertainment and nightclubbing in 1996 and 1997.

42. It is obvious that apart from the US$120,000, the alleged loans by Chan to AT did not contribute to the purchase price paid by Chau and AT for the acquisition of the shares of RTIL. Regarding the earlier payments for the acquisition, they were made in February and March 1997 by AT before these loans were allegedly made. As I said in Paragraph 38 above, I am satisfied that these monies belonged to PBM in equity. Regarding the payment on 2 June 1997 by cash, apart from the said sum of $928,920, the sources of the funds in the accounts of Chau varied and were not identified specifically as linked with AT.

43. A close examination of the account statements of Chau's accounts will show that for the withdrawals on 2 June 1997, although monies were drawn from 2 accounts, the source could be traceable to one account, viz. 108-106733-833. On 27 May 1997, $1 million was transferred by cheque from this account to the other account, viz. 150-8-011218 to enable a cash withdrawal of the same amount to be made on 2 June 1997. The balance of account 108-106733-833 as at 23 May 1997 was $11,429.79. Starting from 26 May 1997, substantial amounts were deposited into this account to facilitate both the cash withdrawals on 2 June 1997 and the purchase of the cashier order on 29 May 1997. The particulars of such deposits, as far as identifiable on the evidence before me are as follows,

Date	Amount and mode of payment		Depositor
26.5.97	$800,000 cash		Wong Tak Chi
	$2,000,000 cheque		Tai Fook Futures
	$ 95,000 cheque		unknown
27.5.97	$250,000 cheque		illegible
29.5.97	$40,000 ETC transfer		unknown
	$210,000 cash		unknown
30.5.97	$118,000 cheque		Exacttime Ltd.
2.6.97	$928,920 from the US$ Account		Chan and Liu
	$500,000 cheque		Lik Sun Printing

44. The deposit of $2,000,000 on 26 May 1997 from Tai Fook Futures was in fact derived from AT. On 6 May 1997, AT withdrew a sum of $2 million from his account No.174-038059-001 by cheque No.892995 in favour of Tai Fook Futures. As to the other deposits, there is no direct evidence to link them with AT. However, there is some evidence to suggest that at least some of them were either nominees or persons having dealings with AT. It seems that Wong Tak Chi also made a cash deposit in the sum of $1,000,000 into AT's account No.174-4-000900 on 8 May 1997 and Lik Sun Printing deposited a sum of $100,000 into that account on 13 September 1997. There is no evidence that these depositors had ever pursued against Chau or AT for repayment or that AT or Chau had provided any consideration for these deposits. In the case of Wong Tak Chi, it is to say the least unusual that cash deposits in such large amounts were made for ordinary personal transactions.

45. I have also examined the bank records of the accounts of AT. Bearing in mind the monies he misappropriated from PBM (which is in fact much larger than the final net balance of $49 million odd: according to the report of Nicholas Allen, from April 1992 to July 1997, STT paid to AT the total sum of $321.8 million as payment to PBM), I am sure that AT kept some of these monies in accounts other than those of himself or Chau. It is likely that there were a number of people acting as his nominees holding monies or assets for him or allow their accounts to be used for the channeling of funds by AT.

46. Further, two substantial cash withdrawals were made from AT's account No.174-4-000900 during this period, a sum of $180,000 on 29 May 1997 and another sum of $312,000 on 31 May 1997. In fact, a few days before, AT transferred two substantial amounts from this account to the account of Chau, viz. a sum of $1,000,000 on 19 May 1997 and a sum of $210,000 on 23 May 1997. Hence, at least in respect of the cash deposit of $210,000 on 29 May 1997 into the account of Chau, the ultimate source was likely to be AT.

47. Although I am mindful that the burden of proof is on PBM to establish these monies ultimately came from PBM's monies misappropriated by AT, I can draw inference even though there is no direct evidence of such linkage. Mr Mayne submitted that inference could not be drawn from mere suspicions. I agree. However, inference can be drawn from primary facts proved by evidence.

48. Casting one into the position of AT and Chau at the end of May, it is quite clear from the evidence that they knew AT was likely to be pursued by PBM in the near future and the RTIL transaction had to be completed on 2 June 1997. If payment was made directly by AT, it would be easier for PBM to trace. Moreover, since AT had made earlier payments in the total sum of $1,725,000, payment of the same amount should be made from Chau's account regarding her acquisition of 50% shareholding of RTIL. Hence, there was every incentive on the part of AT to channeled funds to the account of Chau for completion of the purchase. Regarding the sources of funds, I am sure that they were not Chau's own money. As I said, there is nothing to suggest that Chau was capable of making so much money on her own resources and there is ample evidence showing that AT constantly put money into her accounts. There is also evidence that AT was transferring funds into that account around that period of time (see Paragraphs 44 and 46 above). I find on the balance of probabilities that the monies deposited into her account in end of May were procured by AT.

49. On 8 December 1997, AT was ordered by Findlay J to disclose the source of finance for the acquisition of the shares of RTIL. In compliance with that order, AT filed his First Affirmation and gave the evidence as set out in Paragraph 38 above. He did not mention about borrowing monies from third parties to finance the acquisition. Had these deposits into Chau's accounts at the end of May and early June been truly loans from third parties, I believe AT would have said so in his First Affirmation because that would enhance AT's case (and that of the other defendants who were represented by the same team of lawyers at that stage) in defending against the claim of the Plaintiff over the shares of RTIL and the proceeds of sale of the Property. In my judgment, the evidence in that affirmation of AT as to the source of finance is most illuminating. Further, in his Second Affirmation of 30 December 1997, AT referred to the source of the $1,800,000 in Paragraph 3. He said,

"Part of the said HK$1,800,000 were derived from the loan I borrowed from [Chan]. Part was derived from savings of my girlfriend and I."

It is significant to note that although AT belatedly referred to the loan from Chan (the credibility of this assertion I shall deal with later), he did not mention that there were other lenders apart from Chan. On the contrary, he said that the balance were their savings.

50. On the balance of probabilities, I infer that the sources of finance for the acquisition of the shares of RTIL by AT and Chau were either funds hidden away by AT in the names of others or funds generated from dealings conducted by AT by using the misappropriated funds. Hence, they were monies of PBM in the eyes of equity. It follows that upon the acquisition by AT and Chau, the shares of RTIL became the property of PBM in equity.

51. In coming to the aforesaid conclusion, I have not overlooked the evidence of Chan about his loans to AT, including the sum of $928,920 deposited into Chau's account on 2 June 1997. For reasons given below, I do not believe Chan's story and I reject his evidence. As I said, Chan has given several versions about his dealings with AT. Although the evidence he gave in the witness box was largely what he said in his witness statement dated 20 July 2000, there were still some material discrepancies.

Chan's evidence

52. Chan was and still is a director and shareholder of a company called Advanced Communication Equipment (International) Company Limited. That company engaged in the business of selling broadcasting and professional audio equipment and it was a profitable business with substantial turnover every year. It supplied equipment to television stations in Hong Kong and mainland China. On the evidence of Chan, which has not been challenged by PBM, Chan was a man of substantial means.

53. Chan came to know AT at a social occasion in 1992. Since then, he became a friend of AT and they often had drinks and entertainment together. Their relationship was so good that AT had lent his Mercedes to Chan unconditionally for about 3 months in 1993. Horse racing and nightclubbing were their usual pastime activities. Chan was given the impression that AT was very successful in his investment in term of property and foreign exchange speculations. AT was also a big spender and led a lavish lifestyle. AT had invited Chan to his house at Clear Water Bay. Chan was told that AT spent more than $10 million for the purchase of the house and more than $3 million in decoration. AT asked Chan to set up a karaoke room in the house at the cost of $800,000. At the invitation of AT, Chan had joined in a property speculation transaction in respect of a unit in Hong Lok Yuen in 1994. The venture was undertaken through a corporate vehicle called Charming Nice Development Limited and Chan made a profit of about $100,000.

54. Chan expressed surprise at the trial at the levels of wage earned by Tang and agreed that AT was living in a manner which could not possibly be supported by his wages. Although Chan knew that AT was an employee of PBM, Chan however did not think of that at the material time. He thought AT made a lot of money from speculation.

55. From time to time, Chan paid on behalf of AT in nightclubs and horse races. AT would repay him later. However, since April 1997, AT did not make repayment.

56. AT first borrowed a loan from Chan in October 1996. The amount was US$90,000. It was repaid by AT in November 1996. Chan did not ask AT about the purpose of the loan. He thought AT used it for speculation. Chan did not consider it necessary to pry into AT's use of the money. He was not worried about AT's ability to repay because of AT's apparent wealth.

57. In April 1997, AT again borrowed from Chan. On 8 April 1997, Chan issued a cheque from his account with the Bank in the sum of $1 million in favour of AT. On 16 April 1997, Chan issued another cheque from the same account in the sum of $500,000 in favour of AT. Chan said these were loans by him to AT. AT asked for $2 million and Chan did not ask AT as to the purpose of the loans. He did not explain why he lent $1,500,000 instead of $2,000,000. However, he said that AT also owed him another $500,000 by way of dinner and nightclub expenses and that made up $2,000,000 recorded in two written acknowledgments given by AT to him on 30 May 1997.

58. AT asked for a further loan at the end of May. Chan's evidence was confusing as to the loan amount. At one stage, he said $2 million¹; later on he said $2.3 million². In response, Chan gave instructions on 30 May 1997 for the transfer of a sum of US$120,000 from the US$ Account to the account of Chau (which was effected on 2 June 1997). On the same date he further instructed his broker Yamaichi International to transfer a sum of $1,000,000 to the account of Chau (which was effected on 3 June 1997). He said that the US$120,000 was treated as the equivalent of $1 million. Also, AT owed him another $300,000 by way of gambling debts paid by Chan on behalf of AT. Hence, the total made up to $2.3 million. He said this was evidenced by a note signed by AT. That note also borne the signature of Chan. Chan put down the date of 15 June 1997 next to his signature. Chan said in the witness box that the note was in fact given to him on 2 or 3 June 1997 when the monies were advanced. The note also purported to record that AT charged the Property to Chan. According to that note, AT would repay all monies he owed to Chan within 3 months.

59. In respect of the US$ Account, Chan said it was opened through the introduction of AT. Chan used it for his own foreign exchange speculation. However, he suffered losses. At the same time, AT seemed to be doing well in his foreign exchange speculation. Chan therefore asked AT to place orders for him along with AT's orders for his own account, hoping that AT could help him to make profits. For that purpose, Chan and Liu signed a power of attorney in favour of AT in respect of the account on 15 May 1997. Since then, AT conducted two transactions on behalf of Chan. In the witness box, Chan said the transactions broke even. In his witness statement, Chan said a profit not more than $10,000 was made.

60. On 15 June 1997, AT told Chan that he could not repay the loans. AT offered to transfer the shares of RTIL to Chan as repayment. Based on a valuation of the Property at $11.5 million, it was worked out that the net equity of the Property was $3,146,447.92 (see Paragraph 7 above). Once it was agreed, Chan instructed solicitors to handle the transfer. Change of directors were effected on 18 June 1997 whilst the sale and purchase agreement and the transfer of shares were executed later on 26 June 1997. Chan agreed that the market price of the Property on 15 June 1997 could be higher than $11.5 million and he was hoping to make a profit out of the transaction.

61. After the transaction, Chan considered AT still owed him about $1 million. He did not explain why it was $1 million. If one took the total loan amount to be $4.3 million, the balance should be $1,153,552.08. On 2 July 1997, AT unexpectedly repaid him by depositing US$120,000 into the US$ Account. A few days afterwards, on 10 July 1997, at the request of AT, Chan again lent the same amount of US$120,000 to him by depositing that amount into Chau's account. The instruction to the bank for such transfer was drafted by AT because Chan did not have time to draft the same.

Reasons for disbelieving Chan and the case of loans

62. As I said, Chan did not impress me as a truthful witness. His evidence in the witness box is materially inconsistent with what he said in his affirmations. Regarding the loans made by him to AT, the first version was contained in his First Affirmation filed in HCA No.12138 of 1997 on 21 November 1997. Notwithstanding that he purported to give the court a full picture, he did not mention about the loans in April 1997. In that affirmation, he told a story about the events on 30 May 1997 which was markedly different from his evidence in the witness box. Instead of saying that the two notes of 30 May 1997 were given to him to evidence some loans previously advanced, he said AT asked for $2 million and he only agreed to lend $1 million. AT still came with 2 notes, each evidencing a loan of $1 million. Chan said he kept both although he only agreed to lend a sum of US$120,000 and he therefore only signed on one note. Chan said he was still considering whether to lend the other $1 million. Hence, Chan's evidence in that affirmation was that the US$120,000 advanced on 30 May 1997 was evidenced by one of the note dated 30 May 1997.

63. Then Chan referred to the transfer of $1million on 3 June 1997. He said that was the result of a further request by AT on 3 June 1997. However, that was demonstrably false because Chan actually gave the instruction to Yamaichi for the transfer on 30 May 1997. What is more significant is the reference in Paragraph 11 of his said affirmation that a further loan of $2.3 million was made on 15 June 1997. On this occasion, the note of 15 June 1997 was given to him. This was a direct contradiction with his evidence in the witness box.

64. In his Second Affirmation filed in HCA No.13316 of 1997 on 30 December 1997, he corrected himself about the $2.3 million loan and said that loan was made up partly of the two April cheques. With regard to the balance of $800,000, he said it was the total of various cash loans lent to AT at race meetings during the 1996 to 1997 racing season. Hence, he changed his case about the $2.3 million note of 15 June 1997. His story became that the note was referable to the two cheques in April plus $800,000 undocumented loans. The two earlier notes of 30 May 1997 were referable to the US$120,000 and $1,000,000 transferred into the accounts of Chau in early June.

65. In his witness statement filed on 20 July 2000, Chan said in Paragraph 9 that the two notes of 30 May 1997 related to the loans in April plus a sum of $500,000 paid by Chan on behalf of AT for dinners and nightclubbing. Then reference was made to the transfers to Chau's account in early June 1997. He did not relate those to any note. In paragraph 11, Chan talked about another loan of $1 million on or about 15 June 1997. It was on that occasion that the 15 June 1997 note was given. Hence, even according to his witness statement, the note of 15 June 1997 was given to him on or about 15 June 1997.

66. Granted that on each version Chan referred to the total amount of the loan as $4.3 million, I cannot disregard the conflicting versions as to how these loans were made up and by what documents they were evidenced. Chan tried to explain about these discrepancies by saying that at the time when the First Affirmation was prepared, he was under immense pressure and without benefit of considering all the documents. I do not find that to be an acceptable excuse. Even without documents, bearing in mind the fact that the incidents happened within 6 to 7 months from the date when the affirmation was prepared and the number of transactions and loan amounts, Chan should be able to remember at least that there were loans in April and no sum had been advanced on 15 June 1997. Further, the absence of documents cannot be an excuse for giving a false account as to the reason why he signed only one of the two notes dated 30 May 1997 and the loans in respect of which these notes were recording. That also cannot be an excuse for giving false evidence in the affirmations as to the date when the note of 15 June 1997 was given to Chan by AT. In any event, by the time when he prepared his witness statement, Chan should have access to all documents he needed for verification as to the details about these loans.

67. Regarding the latest version of Chan's case, I find it strange that the April loans were said to be evidenced by the two notes dated 30 May 1997. On the face of these notes, they referred to loans advanced on the date of the notes, viz. 30 May 1997. They were probably drafted by reference to the transfer of funds to Chau's account in early June. But if that was so, it would be even more difficult to make sense out of the note of 15 June 1997. Since no money had been transferred from Chan's account to AT or Chau's account after the 2 transfers of early June and 15 June 1997, he was forced to refer to the cheques in April (as he did in his said Second Affirmation). But that could not be reconciled with the wordings on the note. On the face of the note of 15 June 1997, another sum of $2.3 million was advanced on the day when the note was made.

68. These conflicting versions of event given by Chan himself showed that his account was at least unreliable. If these were genuine loan transactions, one would expect that he would have a good idea about the particulars of the loans. After all, they were not loans of small amounts. Chan tried to give the court a picture that he was a generous man who advanced these loans just to help a friend and it would be petty for him to pay too much attention to details. Yet, he also gave evidence that by end of May 1997, he was concerned enough to demand some proof be given by AT as to these loans. Hence, on his evidence, Chan was not that causal about these loans after all. If he was concerned, he should at least have some records about these loans and he should not make all these mistakes in his affirmations and witness statement.

69. If these were genuine loans, even though they were loans to a friend, Chan should not be so careless about the details. I therefore have grave doubts as to whether these transfer of funds were loans. I turn to consider the inherent probabilities of the matter. Chan said he was willing to lend so much money to AT because AT appeared always to have money and wealthy. Chan said he did not even bother to ask AT about the purpose of these loans. But even on Chan's account, AT had been relying on Chan financially for his expenses for some time (the total amount ran up to $800,000 by June 1997). Further, whilst one may perhaps accept that no question was asked for the purpose of loan if it involved only a small amount, I have great difficulty in accepting that such would be the case for loans in terms of million, especially when one loan was borrowed after another without repayment of the previous loan.

70. Moreover, it also seems to me to be inherently unlikely for AT to borrow money from Chan at the end of May with a 3 months' repayment period and then told Chan half a month later that he could not make repayment and proposed to transfer the Property as repayment in kind. It has to be remembered that in the middle of 1997, the property market in Hong Kong was still blooming. According to the evidence of Mr Tse of Jones Lang Lasalle, the fair market price of the Property as at 26 June 1997 was $15,000,000. Mr Mayne criticized his evidence on the basis that Mr Tse did not conduct any internal inspection and no comparable has been set out in the report of Mr Tse. Whilst I agree that it would be better if comparables were included in the report, Mr Tse testified that they had made reference to comparables when the report was prepared. In the present case, the defendants did not file any valuation report to contest the valuation given by Mr Tse and have not asked for particulars as to comparables relied upon by Mr Tse either before trial or during cross-examination. With regard to the internal condition of the Property, Mr Tse told the court that the valuation was based on the assumption of a reasonable internal condition. Again, the defendants did not adduce any evidence as to the internal condition of the Property and there was no suggestion that the Property was in a poor condition. Mr Tse said in his evidence that the property market in Hong Kong peaked in about June or July 1997 and after that, the market dipped a little bit until it crashed in mid October. By cross-checking with the prices in March 1997 ($11,500,000) and in early October 1997 ($14,230,000), I find Mr Tse's valuation reasonable and reliable and I accept his evidence. Hence, AT could have easily made a profit of $3.5 million if he chose to resell the Property instead of transferring the shares of RTIL to Chan as repayment.

71. Mr Mayne argued that AT was in a desperate position in June 1997. But in what respect could it be said that he was desperate? He might be desperate vis-à-vis the impending investigation by PBM. But he could not be desperate vis-à-vis Chan. Under the purported loan agreements evidenced by the notes, he had at least 3 months from June 1997. Chan's evidence was that he had not pressed AT for repayment between end of May and 15 June 1997. Hence, there was no sensible reason as to why AT would suddenly accelerate his obligation to repay Chan. If he urgently needed some more cash, the RTIL transaction was even more inexplicable. The transfer of RTIL to Chan and Liu did not generate any cash for AT. On the other hand, given the state of the property market, it would not be too difficult for AT to sell it at a profit, albeit perhaps at a price less than $15 million. AT could at least reap back some cash.

72. Not only did AT lose every possible benefit from the RTIL transactions by transferring the shares to Chan and Liu, he even made payment for the mortgage instalments and maintenance fees regarding the Property in July and August 1997 through Chau. Chan explained that AT only did that because AT was living nearer to the bank and the Property and it was not that convenient for Chan to make those payments himself as he was very busy. Chan said that he had subsequently repaid AT for these payments by means of cash. I do not accept this explanation. I am sure that Chan had employees who could run such errands for him. Further, there is no reason why his wife Liu could not make the payments, as she did with regard to the mortgage of Chan's own home. The mortgage instalment was $75,000 odd per month. If AT were so desperate financially, why would he agree to take up such a burden?

73. Moreover, due to the change of shareholders in RTIL, there was a new arrangement for the mortgage. The old facility granted to RTIL with AT and Chau as directors and shareholders was taken as repaid with a new facility granted under a facility letter of 26 June 1997. As a result, penalty for early repayment of the old facility was extracted by the Bank. The penalty plus interest was in the sum of $303,552.08. According to Chan's evidence in his affirmation (as set out in Paragraph 7 above), this sum was taken into account in the calculation of the consideration for the transfer of RTIL shares to Chan and Liu and therefore should be borne by Chan and Liu. Yet surprisingly, this sum was actually paid by Chau by a cheque No.251704 dated 26 June 1997. When he was cross-examined about this, Chan's answer was that when he agreed to take up the shares of RTIL, he said he would not pay out any money. He agreed that Chau should not be liable for that sum. Chan did not give any explanation why AT (and Chau as his nominee) would pay for that sum when he was in dire need financially and was not obliged in any way to pay for the same. Chan did not suggest that he had repaid AT or Chau for this sum. Nor was this sum being taken into account, according to the evidence of Chan, in the overall accounting between Chan and AT.

74. In my view, the making of these payments (viz. the redemption penalty, the mortgage instalments and management fees in July and August) by Chau are strong indicia that the share transfer on 26 June 1997 was a sham. There are other indicia. According to the terms of the June Agreement, apart from the transfer of shares, AT and Chau should also execute an assignment of shareholder's loan in favour of Chan and Liu. Although as explained in Paragraph 6 above, I can understand why the purchase price was fixed without any reference to this loan, it does not mean that no assignment was necessary. The assignment was rather important because if there was no assignment, RTIL would remain indebted to AT and Chau for the shareholder's loan, the amount of which was $4,022,000. This could not have been overlooked if this was a genuine transaction. Although Chan gave evidence in the witness box that such assignment existed, he has not produced the same to the court. In his closing submission, Mr Mayne conceded that Chan made a mistake and no assignment had been signed.

75. Another remarkable feature of the June Agreement was the rush by which the transaction was completed. It was completed on the same date, with share transferred on 26 June 1997. This was so notwithstanding that under Clause 3 of the agreement, the purchasers had up to 27 June 1997 to raise requisition concerning the Property. Apparently, no requisition has been raised and there is no evidence to indicate that Chan and Liu or their legal advisers had undertaken any investigation as to the title of the Property. Likewise, there is no evidence to suggest that any steps had been taken by a solicitor or accountant engaged by Chan and Liu to check the accounts of RTIL. According to the evidence of Chan, he only took the words of AT about the outstanding liabilities owed to the Bank and the value of the Property. If the agreement really came into being under the circumstances as stated by Chan, I cannot understand why these investigations were not undertaken. I cannot understand why there was such a need for hurry and why completion had to take place on the same date as the agreement. In fact, the rush was such that Chan and Liu was appointed as directors of RTIL in place of AT and Chau even before the agreement was signed. I find this hard to reconcile with the fact that under the note of 15 June 1997, AT had three months to repay and Chan was not pressing for repayment at that time.

76. Further, if the June Agreement was actually an agreement to repay the loans previously advanced by Chan to AT, why was this not set out in the recitals and why was an ordinary sale and purchase agreement adopted by the parties? After all, according to the account of Chan, he had nothing to hide about these loans. I have no satisfactory answer to these from the evidence of Chan.

77. The "sudden repayment" by AT of US$120,000 on 2 July 1997 was again inexplicable. If Chan's account is to be believed, it would seem that despite the financial pressure, AT was able to make this payment voluntarily. Then shortly afterwards, on 10 July 1997, the same amount was borrowed by AT from Chan. Why AT would make a repayment when a loan of the same amount was needed shortly afterwards has not been explained to me.

78. In respect of the transfer of 26 June 1997, the payment of penalty to the Bank, the payment of the mortgage instalment and this repayment of 2 July 1997, it is noteworthy that none of these generated any real benefit to AT and cost him substantially in terms of financial implications. Why would he do it? I find it irresistible to come to the conclusion that these transactions were not what they seemed to be. Considering the position of AT around that period of time as mentioned in Paragraphs 4 and 48 above, AT was obviously taking further steps to guard against his assets being traced by PBM once his fraud was discovered.

79. I therefore find the story of Chan inherently implausible. Further, apart from the conflicts between his evidence in the witness box with his previous statements outlined above, there is also a lack of credibility regarding his evidence as to the dating of the note of 15 June 1997. As I have already pointed out, he had never mentioned in his previous statements that the note was actually made and given by AT to him earlier than 15 June 1997. In fact, in his examination in chief, he adopted what he said in his witness statement. It was only in the course of cross-examination that Chan disclosed that this note was actually given to him earlier. At first he was rather unspecific. He said it was given to him at the end of May or early June³. Later on, when he was pressed about it, he told the court that the document was given to him on 2 or 3 June 1997⁴. He said he himself signed and dated it on 15 June 1997 when Chan proposed to transfer the Property to him as repayment. After he did so, he said he gave the document to his solicitor to handle the transfer. He also gave a photocopy to AT. That seems to me to be a strange reason for signing and dating the document. The document did not purport to record the agreement for the transfer of shares of RTIL as repayment. It only purported to record the loans advanced by Chan to AT and that the Property would be used for security. It also purported to record that AT could have the money for 3 months. Hence, prima facie, the loan would not be repayable until 3 months after the date of the note. A date should have been put on the note when it was created. Chan agreed that the note did give rise to a false impression that the loans were advanced on 15 June 1997. On the other hand, if Chan is to be believed, by 15 June 1997, there was an agreement for repayment by means of transfer of shares. There was no need to put down any date on this note. If Chan or AT wanted to have written evidence about the agreement for transfer of shares, I fail to see why that could not be done by recording the terms thereof either on this note or a separate piece of paper. The signing and dating of the note in the manner as Chan did simply afford no proof as to the alleged agreement for transfer.

80. I bear in mind the points made by Mr Mayne in assessing the credibility of Chan. I was also reminded that a high level of probability is required regarding the proof of dishonesty even in a civil context (see Colman J in Heinl v Jyske Bank at p.547). It was said that Chan was a man of wealth and substance and there was no reason why he should participate in such illicit activities of AT. It was also said that Chan has given full authority to solicitor for PBM to investigate into the accounts of Chan and PBM could not find evidence of injection of funds from AT to Chan. I agree that these are matters which I should take into account. However, I do not think these factors conclusively point to the innocence of Chan. One cannot say that a man of considerable wealth would not commit the kind of wrong as alleged by PBM against Chan. After all, money may not be the only motive for such wrongdoing. As to the absence of evidence of direct transfer of funds, it might be explained by the use of some further intermediaries in the process. Tracing is notoriously difficult in relation to people like AT who obviously had been mindful about covering his tracks.

81. On the whole, bearing all the relevant circumstances in mind, I come to the conclusion that Chan is not a credible witness and I cannot rely on his evidence. I find on the balance of probabilities that the 26 June 1997 transaction was a sham. It was an exercise by AT, with the collaboration of Chan, to conceal AT's assets from PBM. I reject the various handwritten notes as evidence of loans made by Chan to AT. On the balance of probabilities, I find that they were given by AT to Chan with a view to give credit to the sham transaction instead of reflecting the truth.

The transfer of funds and the US$ Account

82. Although I reject the evidence of Chan about these loans, I have to consider the nature of the transfer of funds from Chan's accounts to AT and Chau. In the present context, the most important transfer was the US$120,000 transferred on 2 June 1997. As mentioned, this was the only sum coming from the accounts of Chan traceable to the funds used by AT and Chau for acquisition of the shares of RTIL. This sum came from the US$ Account. I have referred to Chan's evidence regarding this account in Paragraphs 59 and 61 above. PBM challenged the beneficial ownership about the monies in this account. PBM referred to the Power of Attorney dated 15 May 1997 and the draft letter prepared by AT for the transfer of funds as evidence showing that AT was operating the account. In addition to the letter of 10 July 1997, Mr Werner testified that a draft of the letter dated 30 May 1997 to the Hong Kong Bank giving instruction for the transfer of US$120,000 (which was the transfer effected on 2 June 1997) was also found in the computer used by AT. On the other hand, Chan testified that the letter of 30 May 1997 was prepared by his secretary, not by AT. He did not explain why a draft of that letter would appear in the computer of AT. Neither did he call his secretary to give evidence. Since I do not believe Chan, I have no hesitation in preferring Mr Werner's evidence. As I said, I find Mr Werner to be an honest and reliable witness. I find as a fact that a draft of the letter of 30 May 1997 was found in the computer of AT at PBM.

83. I reject Chan's explanation about the Power of Attorney. Chan said that the purpose was to enable AT to place order for him when AT placed order for himself. However, if one examine the account statements of the US$ Account together with the account statements of the foreign exchange account of AT, it could be seen that AT closed his account shortly afterwards on 2 June 1997. In fact after 15 May 1997, AT only made two withdrawals from his account and apparently did not carry out any trading (the reference to "margin trading" in the statement is misleading as it seemed to be referring to withdrawal or transfer of funds, as in the case of transfer of US$120,000 from Chan's account to Chau's account on 2 June and 11 July 1997). Further, by 15 May1997, on Chan's own evidence, AT was indebted to him for $2 million. How could Chan entrust his account to AT in such circumstances? Chan said he asked the bank to keep an eye on the account to guard against AT taking money out. If the Power of Attorney was simply to facilitate AT placing order for him, I see no reason why Chan did not cancel it after end of May when AT closed his account (hence AT would not place any order himself in the future) or mid June when AT told Chan he could not repay his loans.

84. Further, the origin of the US$120,000 was doubtful. A sum of US$127,795 was transmitted by telegraphic transfer into the US$ Account on 27 May 1997. Whilst PBM did not have evidence to trace it back to AT, neither did Chan provide any evidence about this deposit. Similarly, US$120,000 was deposited into the account on 3 July 1997 and the same amount was withdrawn on 11 July 1997. Chan had told us his story about these transactions in July and for reasons given above, I reject the same.

85. As I said earlier, the burden of proof is on PBM to establish that the monies used by AT for acquisition of RTIL were monies of PBM in equity. But once I reject Chan's evidence about the transfer of US$120,000 being a loan to AT, I have to ask why would Chan make such a transfer. It was unlikely to be a gift. In my judgment, the only possible explanation was that Chan had been holding the money for AT. This could be either because AT had actually hidden funds in Chan's accounts or because Chan owed AT money in respect of some earlier dealings. Again for reasons given in Paragraph 12(e) above, I infer that the money hidden by AT or used by AT in such earlier dealings were funds misappropriated from PBM or monies derived therefrom. Hence, the money held by Chan for AT was money belonging to PBM in equity.

86. By the same parity of reasoning, I find that the subject matter of the other transfers by Chan to AT or Chau's accounts were also money belonging to PBM in equity.

Legal consequence in respect of the RTIL transactions

87. Once it is recognized that the transfer on 26 June 1997 was a sham and the monies used for the acquisition of RTIL by AT and Chau were monies of PBM in equity, the net sale proceeds obtained by RTIL in selling the Property in October 1997 must belong to PBM in equity. It does not matter that the acquisition of RTIL was partly funded by mortgage (see cases cited in Paragraph 37 above, in particular Paul Davies (Australia) Pty. Ltd. v Davies [1983] 1 NSWLR 440). RTIL must be holding the same on trust for PBM on the principle of equitable tracing.

88. RTIL was just a corporate vehicle. Since the transfer of 26 June 1997 was a sham, I infer that RTIL was actually controlled by AT up to the time when the Property was sold in October 1997. AT tried to conceal his interest in the Property by these sham loans and share transfers. RTIL was used in the process. Chan willingly gave his assistance to the same. Once I have decided that the RTIL transaction was a sham, the case of dishonesty against Chan is obvious. I would not repeat what I have said on the law as to the requisite state of mind in the context of the claim against Chau. Given the level of co-operation given by Chan, he must have known that he was participating in the process of money laundering. Not only did he allow his accounts to be used for channeling of funds, he actively assisted AT by subscribing to transactions to give outsider a false impression of what happened. In the process, he signed documents including borrowing notes, sale and purchase agreement and share transfers to create a façade. Given his commercial background, he could not have missed the illicit nature of these sham transactions. As I have explained in Paragraphs 26 to 29 above, PBM was not required to prove that Chan knew that the monies came from funds misappropriated from PBM. It is sufficient that Chan knew that he was assisting AT in concealing properties from their rightful owner. On my finding of facts, Chan must have had such knowledge when he gave his assistance to AT regarding these transactions. Notwithstanding the high level of probability required, I conclude that he was plainly dishonest under the combined test of Lord Hutton. Chan was therefore liable on the ground of knowing assistance for loss occasioned to PBM arising from the RTIL transaction.

89. However, since the net proceeds were still retained by RTIL in its bank accounts by reason of the injunction, PBM would not suffer any loss if the sum were returned to it. I will order RTIL to pay the net proceeds together with interest thereon to PBM. Hence, there is no need for the court to grant any equitable compensation to PBM vis-à-vis Chan in respect of the RTIL transactions.

90. It follows from what I said that the injunction in respect of the sale proceeds should continue until RTIL pays the same back to PBM. I do not see any need for any order being made against Liu for that purpose.

Relief

91. I order judgment in the sum of $4,310,000 be entered against Chau. I further order that RTIL do forthwith pay all the monies in its bank account representing the net proceeds of sale of the Property and interest thereon to PBM. Pending such return, the injunction granted by Findlay J shall continue. Although I do not grant any substantive relief against Chan, that is only because PBM proceeded promptly and was able to secure the proceeds by way of injunction. Further, it is clear that RTIL was only a corporate vehicle and it had no independent means. RTIL has been defending the action at the instigation of Chan and for his benefit. Further, an order for costs against RTIL would probably be futile because the only asset of RTIL seems to be the sale proceeds which I have held to be PBM's money in equity. In those circumstances, I think justice demands that an order for costs be made against Chan as well. I will make an order nisi that Chau, Chan and RTIL pay PBM's costs of the actions. Although Mr Graham asked for costs on an indemnity basis, I do not consider that to be appropriate. The costs will be taxed on the usual party-to-party basis if not agreed. In respect of Liu, I order that she bears her own costs although I would not order her to bear the costs of PBM.

1 His evidence on 17.4.02 at 3:48:12 to 3:48:35

2 His evidence on 17.4.02 at 4:26:35 to 4:27:54

3 His evidence on 18.4.02 at 10:10:30 to 10:10:42

4 His evidence on 18.4.02 at 10:55:45 to 10:56:11