HKSAR v. SIN LAW YUK LIN, AGNES AND ANOTHER

CACC 17/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 17 OF 2001

(ON APPEAL FROM DCCC 903 OF 2000)

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J U D G M E N T

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Hon Stuart-Moore VP:

1. I have had the advantage of reading the draft judgments of Mayo VP and Stock JA. I agree with the conclusion they have reached. I would also give leave to appeal but, having treated the hearing as the appeal, I would dismiss the appeal, having applied the proviso, for the same reasons as those given by Stock JA, pursuant to section 83(1) of the Criminal Procedure Ordinance, Cap. 221.

Hon Mayo VP:

2. After a trial in the District Court before H.H. Judge Pang the 1st applicant was convicted of the offence of being an agent and using a document with intent to deceive her principal contrary to s. 9(3) and s. 12(1) of the Prevention of Bribery Ordinance, Cap. 201. The 2nd applicant was convicted of aiding, abetting, counselling and procuring this offence.

3. Particulars of the 1st charge were:

"SIN LAW Yuk-lin, Agnes, on or about the 30th day of June 1983, in Hong Kong, being an agent of the Hong Kong Government, namely, a chief assessor of the Inland Revenue Department, with intent to deceive her principal, used a document, namely, the Application for Private Tenancy Allowance in relation to the leased property at Flat A, 11th Floor, Block 7, Provident Centre, Wharf Road, Hong Kong ('the leased property') in respect of which the Hong Kong Government was interested and which contained a statement which was false or erroneous or defective in a material particular, namely that the leased property was not owned by herself, and/or any member of either her or her spouse's families and neither she, nor any member of her or her spouse's families had a financial interest in it and which to her knowledge was intended to mislead the Hong Kong Government."

4. Particulars of the 2nd charge were framed in a similar manner save that the 2nd applicant was charged with aiding, abetting, counselling and procuring the offence.

5. Both applicants seek leave to appeal against their convictions.

6. The applicants are and were at the time of the offences husband and wife. The 1st applicant, the wife, was a Chief Assessor of the Inland Revenue Department at the relevant time. She was subsequently promoted and acted as the Commissioner of the Inland Revenue Department. The 2nd applicant, the husband, is an engineer. At the time of the trial he was a Senior Engineer in the Civil Engineering Department of the Government.

7. This case concerns a Government scheme to pay Government servants of a stated seniority what is described as a Private Tenancy Allowance ("PTA"). Conditions are attached to the payment of PTA. One of them is that the Government servant who is applying to receive PTA has to make a declaration that the property which is being leased is not owned by any member of his or his wife's family and that they have no financial interest in it. If the Government servant or members of his or his wife's family do own the property or have a financial interest in it the PTA is not payable.

8. It is the Declaration that the 1st applicant made when she applied for a PTA in June 1983 which is the document referred to in the particulars of the charges.

9. It is the 2nd applicant's involvement in the scheme which will be referred to which is the subject of the 2nd charge.

10. The admitted facts run to 14 pages and exhibited to them are 82 documents. The prosecution case is largely based upon these facts.

11. The background to the scheme is that the applicants were close friends of another family Mr and Mrs Fan. Mrs Fan also worked in the Inland Revenue Department and was also eligible for a PTA. In the simplest terms possible, the idea was the families would both purchase flats on the same estate and each would let their flat to the other family, thus circumventing the condition that the recipient of a PTA was not permitted to have a financial interest in the property the subject of the allowance. Had the idea been implemented in this way no offence would have been committed.

12. It is the prosecution's case that the scheme was not implemented in this way as the 2nd applicant had a financial interest in the flat in question. The 2nd applicant purchased a shelf company Takestep from Mr Fan who is and was a chartered accountant. Takestep would be the vehicle which would be used to purchase Flat A on the 11th Floor of Block 7 of Provident Centre, Wharf Road, Hong Kong.

13. Takestep was incorporated on 25 March 1983 and on 20 April 1983 the 2nd applicant was appointed a Director together with the 1st applicant's mother Madam Mak Ngor and her sister-in-law Ms Ip Sau Lan. They remained Directors until after Flat A was sold.

14. On 2 June 1983 the 2nd applicant on behalf of Takestep entered into a Sale and Purchase Agreement for the purchase of Flat A for a consideration of $1,126,200.00. On the same day the shares in Takestep were transferred from the nominee shareholders to Mr and Mrs Fan.

15. On 14 July 1983 the 2nd applicant executed the assignment of the flat to Takestep on behalf of the company and simultaneously with this, the 2nd applicant and Madam Mak executed a mortgage in favour of the Bank of East Asia ("BEA") secured on the flat and entered into a guarantee in favour of BEA for $800,000.00.

16. On 22 July the PTA was approved and the allowance was paid to the 1st applicant from August 1983 to August 1986 after which the flat was sold.

17. During this period the total of the allowances received amounted to $335,650.00 less $73,668.75 which was deducted by the Government as rent.

18. The amount of PTA received was insufficient to fund the mortgage in favour of BEA. This being the case the 2nd applicant made up the difference from his funds.

19. It is pertinent to add that the 2nd applicant provided funds for the deposits payable in relation to Flat A and paid items such as stamp duty and legal expenses albeit that it was contended that he did so as a Director of Takestep. The prosecution accepted that the moneys may have been paid by way of cheques drawn on Takestep's account.

20. Takestep let the premises to the applicants. The tenancy was for two years and was renewed in 1985 thus necessitating a renewal of the application for the PTA at that time.

21. The flat was sold in November 1986 for $1,340,000.00 thus generating for Takestep a profit of $213,800.00. In July 1988 the 2nd applicant, Madam Mak and Ms Ip all resigned as Directors of Takestep. Takestep was not engaged in any business other than its involvement with Flat A.

22. The arrangements made by the Fans were the mirror image of those described above. Mr Fan used a company Rocksona to purchase Flat B, 12th Floor, Block 6, Provident Centre. Likewise the shares in Rocksona were transferred to the applicants before the lease was signed in favour of the Fans. Mr Fan and his nominees remained as Directors.

23. The only other observation which needs to be made is that it is apparent from the company accounts that the purchase prices of the two flats were not the same nor was the amount secured by the respective mortgages. In addition to this, various incidental payments were different and the 2nd applicant received payment of some remuneration as a Director of Takestep whereas Mr Fan was not in respect of his Directorship of Rocksona.

24. Statements were agreed pursuant to s. 65B of the Criminal Procedure Ordinance, Cap. 221 in respect of four witnesses. They were Madam Mak, Ms Ip, Mr Chan an accountant and partner of Mr Fan who acted as a nominee Director of Rocksona and Mr Lo, an employee of Mr Fan, who eventually purchased Rocksona from Mr Fan.

25. According to the testimony of the two ladies, they had no idea what the scheme was all about. They simply acted as instructed by the 2nd applicant.

26. Mr Chan had some knowledge of what was involved. He said that he had acted on Mr Fan's instructions. In particular, Mr Fan had asked him to sign the tenancy agreement. The reason which Mr Fan had given for this was that if Mr Fan himself signed the agreement as landlord, there might be some conflict of interest. He had however subsequently recollected being under the impression that he had been told by Mr Fan that the flat he was occupying was owned by the applicants and vice versa in respect of the flat occupied by the applicants and that Rocksona was owned by Mr Fan.

27. Only two live witnesses were called by the prosecution. The first was Ms Connie Fung who at the relevant time was the officer in the Secretary for the Civil Services Office charged with the responsibility of administering the PTA scheme. Her evidence-in-chief took the form of a statement and she was tendered for cross-examination.

28. It was her evidence that CSR 852(5) had to be strictly complied with. It was an agreed fact that this regulation was as follows:

"An officer residing in accommodation owned by a member of either the officer's or his spouse's family or in which they have a financial interest, will not be eligible for a private tenancy allowance."

She said that Civil Servants were generally aware of this. Indeed some had made inquiries concerning their personal circumstances and sought guidance as to whether they were eligible to receive the allowance. She did not remember the 1st applicant or Mrs Fan ever seeking advice from her in this connection.

29. The other witness who gave viva voce evidence was Mr Fan. He testified under an immunity.

30. He gave evidence that his opinion as an outsider had been sought concerning PTA. He had advised his wife on the proposed cross ownership arrangements and he assumed that his wife had passed on his views to the 1st applicant. It was his opinion that there must be monetary gain for there to be any financial interest.

31. He said that the reason why he had remained a Director of Rocksona was to prevent the situation becoming too complicated. The shareholders had been swapped but not the directors. He had paid the deposit on Flat B and had taken care of the mortgage and entered into the guarantee in relation to it. The 2nd applicant had done likewise in respect of Flat A. There had been no monetary exchange in relation to the swap.

32. It was the prosecution case that the 2nd applicant had clearly had a financial interest in Flat A and that there was evidence that when the 1st applicant had signed the Declaration in the application form for the PTA she had intended to deceive the Quartering Officer. The Declaration was as follows:

"I hereby declare that the above private tenancy is not owned by any member of my, or my wife's, family and that they have no financial interest in it (C.S.R. 852(5) is relevant). I have also read and fully understand Ch. V of Civil Service Regulations and have noted that sub-letting of a private tenancy is prohibited by C.S.R. 805. I also understand that any false information supplied in respect of this application will make me liable to disciplinary proceedings and disqualify me from getting my housing allowance, (i.e. private tenancy allowance, house allowance, furniture and domestic appliances allowance).

I declare that the above information is correct."

It will be noted that the wording of the Declaration was not followed in the charge which is set out in para. 2. I do not consider the differences to be material.

33. The prosecution placed reliance on various other items of evidence which indicated an intention on the part of the applicants to conceal what they were doing. This will be considered later in this judgment.

34. It is an agreed fact that when the tenancy was granted to the 1st applicant, Madam Mak executed the tenancy agreement notwithstanding the fact that the 2nd applicant was the signatory on behalf of Takestep in relation to other important documents. When this is considered in conjunction with correspondence which was exchanged between the 1st applicant and the Quartering Officer, the Judge inferred that the 1st applicant was attempting to conceal the true position from the Quartering Officer. In this connection, the 1st applicant clearly was attempting to create an impression that she was conducting negotiations relating to the tenancy at arm's length.

35. It was the prosecution case that the 2nd applicant's contributions to Takestep amounted to $554,496.70 by 31 December 1985.

36. Neither applicant went into the witness box. However, the 2nd applicant made four voluntary statements which were admitted as evidence without any contest.

37. It has to be said that the most striking aspect of these statements is the extent to which the contents of the statements are contradicted by the unchallenged evidence of the prosecution.

38. The Judge deals with these conflicts in his Reasons for Verdict. He deals with these conflicts at p. 34 in this way:

"D2's Records of Interview

There are four of these - Exhs P88a, P89a, P90a and P91a. Their voluntariness is not disputed. They are exculpatory statements in that D2 denied throughout that there was anything illegal. There are, however, parts that the prosecution says are questionable. They are Answers 9, 10, 18, 23 and 24 in P88a; Answers 3, 7 and 9 in P89a; Answer 10 in P90a; and Answer 14 in P91a. The point of putting these records in is precisely for them to be shot down. Turning to the defence, its position is that these records may contain inaccuracies. But everything happened 17 years ago so there may well be the element of failed memory, or mistake, or simply different understanding. In fact, a number of the answers are prefaced by such a caveat.

Having read these records, I note that much of what is highlighted does contradict evidence that is unchallenged. For instance, D2 was shown public records of Takestep. They included such details as D1's mother and sister-in-law. Yet, when asked what he knew about the company, D2 said it was Mr Fan who requested him to be a director. He did it only to help a friend. He would read all documents carefully so he was not worried that Mr Fan would use his name to do things. Then he denied ever investing in Takestep. It was Mr and Mrs Fan who financed Takestep's purchase of Flat A throughout. As guarantor, he would be responsible only if Mr Fan defaulted on the mortgage (Answer 21, P88a). He denied ever making a loan to Takestep as director. As for Flat B, it was he and his wife who financed its purchase through Rocksona. He was the one who made up the difference between what Rocksona received from the Fan's as rent and the monthly mortgage repayment. In other words, the complete reverse of what unchallenged evidence suggests."

39. However, the main thrust of the defence case was that the applicants genuinely thought that the scheme which had been devised by Mr Fan was a legitimate scheme which had the effect of circumventing the conditions imposed by CSR 852(5) and that they had had no intention of deceiving the Quartering Officer.

40. For the reasons he gave the Judge was satisfied at the appropriate level that the applicants were guilty as charged.

GROUNDS OF APPEAL

(1) The Judge erred in fact and in law in concluding that the applicants had ownership of and a financial interest in Flat A.

41. According to Mr Zervos who represented the respondent the financial interest at 30 June 1980 referred to in the charges was the 2nd applicant's interest in the sale and purchase agreement relating to Flat A. He contended that it was necessary to have regard to the reality of the situation.

42. Although it was accepted that at the time when the 1st applicant made the Declaration the Fans were the registered shareholders in Takestep the 2nd applicant was a director of the company. The 2nd applicant had paid the requisite deposit and had taken the necessary steps for the purchase to be proceeded with.

43. Mr Zervos also submitted that the fact that the property had not yet been assigned to Takestep at the time the Declaration was made was immaterial.

44. On the conclusion of a sale and purchase agreement the purchaser derives an interest in the property. Mr Zervos' authority for this proposition was a passage on p. 676 of the 6th Edition of Megarry's 'The Law of Real Property' by Charles Harpum, London, Sweet & Maxwell 2000:

"1. The purchaser as owner. If the purchaser is potentially entitled to the equitable remedy of specific performance, he obtains an immediate equitable interest in the property contracted to be sold. He is, or soon will be, in a position to call for it specifically. As equity 'looks upon things agreed to be done as actually performed', the purchaser becomes the owner in the eyes of equity from the date of contract. It is therefore irrelevant that the date for completion (when the purchaser may pay the price and take possession of the land) has not arrived. The purchaser becomes owner in equity through the operation of the doctrine of conversion. However, conversion will operate only if -

(i) the contract between the parties is valid, i.e. one which is 'sufficient in form and in substance, so that there is no ground whatever for setting it aside'; and

(ii) title to the land is made by the vendor or is accepted by the purchaser.

The purchaser's equitable ownership is, as has been seen, a proprietary interest, enforceable against third parties, though it must be registered to protect it against purchasers."

45. If regard was to be had to the reality of the situation the 2nd applicant could validly be said to have had an interest in Flat A at the time when the Declaration was made.

46. In this connection it is germane to add that when Mr Fan gave evidence on this topic he also was of the opinion that at the time when the Declaration was made the 2nd applicant was the beneficial owner of Takestep. This is his testimony at p. 106 of the appeal bundle.

"Q. Do you remember when the decision was made to swap the shares? We've seen the shares were swapped on 6 June. Do you remember when the decision was made between the two families to swap the shares?

A. I don't remember the exact date, but probably it was very near to 6 June.

Q. So the properties were acquired and the mortgages were applied for before the decision was made to swap the shares.

A. Yes.

Q. At the time the decision to swap was made of course, Takestep was beneficially owned by Mr Sin, and Rocksona was owned by you.

A. Yes.

Q. Do you remember now why it was decided that your family would move into Flat B and Mr Sin's family into Flat A?

A. Now I don't remember clearly, maybe my wife liked Flat B.

Q. Anyway, it was a mutual arrangement.

A. Yes."

47. Mr McCoy SC for the applicants was faced with some difficulty on this ground of appeal.

48. He made a number of submissions on this subject but recognised that having regard to the recent Determination of the Court of Final Appeal in Hau Kam-chor v HKSAR (unreported) being FAMC 15/2001, he faced some difficulty in making them good.

49. He had argued that a director of a company which owns a flat does not have a financial interest in the flat. He also argued that such a director who loans money to the company or who guarantees a mortgage secured on a flat owned by the company does not have a financial interest in the flat. He produced authorities for these propositions. However, these authorities could not be reconciled with Chan PJ's analysis of the law at p. 4 of the Determination in Hau Kam Chor:

"We have carefully considered the oral and written submissions of the applicant. From the evidence adduced in this case, we do not think that these conclusions of the Court of Appeal can be said to be wrong.

The term 'financial interest' was contained in the applications which were written both in English and Chinese, languages with which the applicant was conversant. There can therefore be no question of any wrong translation or misinterpretation. The issue the court had to decide was whether the declaration that he or his relation had no financial interest in the flat was false or not. In deciding this question the court had to look at the reality of the matter. It is not necessary to have an exhaustive definition of the term 'financial interest' which as the courts below rightly held should be given an ordinary meaning. Suffice it to say that for the present purpose, where a company is used to own property, as it was in this case, a shareholder of the company can be regarded as having a share of and hence a financial interest in the property."

50. It is appreciated that at the time when the Declaration was made A2's interest in Flat A was confined to any interest he may have by virtue of payments he himself had made in relation to the sale and purchase agreement or any payments made by Takestep where it could be established that he had a beneficial interest in the company. There was also of course the evidence of what subsequently transpired in relation to the guarantee and the mortgage which are dealt with later in this judgment.

51. Mr McCoy attempted to surmount this difficulty by arguing that the views expressed by Chan PJ were obiter dicta.

52. If the Determination is read as a whole this argument cannot be sustained. It is apparent both from the final paragraph on p. 3 of the Determination and from the conclusion drawn on p. 5 that the Judge's analysis of the law was not obiter dicta. This being the case this Court is bound by the law as stated. It is accordingly necessary to consider this ground on the basis of the Court of Final Appeal's view of the law.

53. There was ample evidence upon which the Judge was fully entitled to conclude that the reality of the matter was that the 2nd applicant had a financial interest in Flat A.

54. Subsequent to the Declaration made by the 1st applicant the 2nd applicant on behalf of Takestep executed the assignment for the purchase of the flat. He also arranged for a mortgage to be secured on the flat and personally together with Madam Mak guaranteed the due performance of the terms of the mortgage.

55. It is submitted by Mr McCoy that the Judge should have confined himself to considering the position as it obtained on 30 June 1983, the date of the charge.

56. At that date Flat A had not yet been assigned to Takestep nor had the mortgage been entered into or the guarantee executed by the 2nd applicant and Madam Mak.

57. All of this is true. However, prior to 30 June 1983 the 2nd applicant had paid the deposit and entered into the Sale and Purchase Agreement for the purchase of Flat A. Adopting the test of the reality of the matter the 2nd applicant undoubtedly had a financial interest in Flat A on 30 June 1983.

58. It also has to be borne in mind that when the Court is considering what inferences can validly be drawn, it is always open to it to have regard to the subsequent conduct of the parties and in this respect it was entirely open to the Judge to have regard to the additional commitments engaged by the 2nd applicant.

59. This ground cannot succeed.

(2) Failure to prove all elements in the offence

60. The complaint which is made is that it was never proved that the applicants did both own and have a financial interest in Flat A. It is argued that proof of a financial interest only is not proof of ownership and since ownership was not proved the offence was not made out.

61. This ground is misconceived. Ownership of the flat was not a necessary element of the offence. What the prosecution was required to prove was that the 1st applicant had used a document with intent to deceive her Principal. It was not incumbent on the prosecution to prove that every statement contained in the document was false or untrue. All that had to be proved in this connection was that the document contained a statement which was false and was calculated to deceive the Quartering Officer. The statement which was relied upon by the prosecution was that no member of her family had a financial interest in Flat A.

(3) That the Judge failed to properly analyse and apply the evidence of Ms Connie Fung.

62. The first complaint is that the Judge did not consider her evidence that there were no guidelines as to what constituted a "financial interest".

63. This is what the Judge said at p. 35 of the appeal bundle:

"The defence had advanced two arguments. The first was that there was no financial interest. The Government did not define the term and the cases (there being no direct authority) all suggested that, for one to be so interested, one must be able to derive a benefit, which was Mr Fan's view as an accountant. Repaying a mortgage loan and/or being its guarantor gave rise to no such interest.

I cannot and did not accept such propositions. Short of a stated definition, the term must be given its ordinary meaning. If so, 'financial' simply means money-related. 'Interest' is to have a concern in something or be involved as regards potential advantage or detriment. The whole phrase would mean a stake in monetary terms. If that is correct then D2's guarantee would certainly qualify as financial interest. It arose from the risk of being called on to meet Flat A's mortgage. In that sense, D2 clearly had a stake in Flat A. The question of the mortgage repayment is more complicated. If they were genuine loans to Takestep then D2's financial interest was in Takestep, not Flat A; not directly. But if the whole thing was a sham as alleged then D2 was really paying for his own flat and he would no doubt be caught by the prohibition."

64. The second complaint which is made is that the Judge did not consider her evidence that cross leasing was permissible.

65. The answer to this complaint is that it all depends upon what is meant by "cross leasing". As is clear from the passage above cited from the Reasons for Verdict the Judge did not accept that this was a genuine case of cross leasing.

66. The third complaint is that the Judge overlooked her evidence that a company was permitted to own a flat.

67. The answer to this is that he did nothing of the sort. There is nothing in the Reasons for Verdict taken in its proper context to suggest that the Judge was saying that a company was not permitted to own a flat under the scheme.

68. The fourth complaint is that the Judge failed to consider Ms Fung's evidence to the effect that the subsequent amendments to the Regulations were for the purpose of removing ambiguities in the 1983 Regulations.

69. Ms Fung's evidence was that she had no direct knowledge concerning the amendments. There is no merit in this ground.

(4) Piercing the corporate veil - a sham

70. It is the applicants' contention that this was not permissible. Mr McCoy makes the point that other than in the case of HKSAR v Leung Yat Ming [1999] 2 HKLRD 402 no other criminal case could be found where this had been permitted. In Leung Yat Ming this Court gave its reasons why if the Court was satisfied that the veil was a cloak for deception it could be lifted.

71. Mr McCoy contended that the test which had been laid down in this case was incorrectly stated. It was far too wide.

72. In the recent case of Trustor AB v Smallbone and Others (No. 2) [2001] 1 WLR 1177, Sir Andrew Morritt VC considered the circumstances when it was permissible to lift the corporate veil. He had this to say at p. 1184:

"20 I should also refer to some of the cases relied on by counsel for Trustor. In Gilford Motor Co Ltd v Horne [1933] Ch 935 an individual bound by a non-solicitation covenant after the termination of his employment set up in business through a limited company. The individual was held to be in breach of covenant, notwithstanding the interposition of the company, because the company was formed as the device, stratagem or mask to 'the effective carrying on of a business of' the individual: see pp 956, 965 and 969. In each of the passages to which I have referred it was made plain that the conclusion was one of fact. In Jones v Lipman [1962] 1 WLR 832 an individual had contracted to sell land. Wishing to avoid his liability he transferred the land to a company he had acquired for the purpose. A decree of specific performance was made against both the individual and the company on two grounds. The first was that the individual had sufficient control of the company to compel it to perform the contract. The second, following the principle applied in Gilford Motor Co Ltd v Horne, was that the company was the creature of the first defendant, 'a device and a sham, a mask which he holds before his face in an attempt to avoid recognition in the eye of equity': see [1962] 1 WLR 832, 836. In Woolfson v Strathclyde Regional Council 1978 SC (HL) 90, 96 Lord Keith of Kinkel pointed out that it was appropriate to pierce the corporate veil 'only where special circumstances exist indicating that [the company] is a mere façade concealing the true facts'. This principle was applied by the Court of Appeal in Adams v Cape Industries plc [1990] Ch 433, 542A-B. Adams's case was followed by the Court of Appeal in In re H (Restraint Order: Realisable Property) [1996] 2 All ER 391, which was applied by Rimer J in Gencor ACP Ltd v Dalby [2000] 2 BCLC 734. These authorities plainly establish the first proposition of counsel for Trustor I referred to in paragraph 14 above."

However, these observations need to be considered in the context of the passage appearing at the end of p. 1185:

"23 In my judgment the court is entitled to 'pierce the corporate veil' and recognise the receipt of the company as that of the individual(s) in control of it if the company was used as a device or facade to conceal the true facts thereby avoiding or concealing any liability of those individuals(s)."

73. For what it is worth it would appear that in the circumstances of the present case the Judge was entitled to pierce the corporate veil.

74. The reason for qualifying this in this manner is that it would not appear to be a matter of critical importance whether the corporate veil is pierced.

75. It would be if it was necessary for the prosecution to prove that the applicants were in fact the owners of Flat A. For the reasons given earlier in this judgment, it would not appear to be necessary as all that was required of the prosecution was to establish that the Declaration made by the 1st applicant was deceptive in one material way. This was the statement that no member of her family had a financial interest in the flat. Once this is established there is no longer any need to pierce the veil because once the evidence becomes available it is admissible to prove the offence.

76. This may be the reason why there does not appear to be an abundance of authorities relating to the lifting of the corporate veil in criminal cases. What is of importance in the present case is that the Judge after considering all of the relevant evidence was satisfied at the appropriate level that the scheme which had been devised constituted a sham. There was sufficient evidence available for the Judge to make this finding.

77. In my view this ground of appeal cannot succeed.

(5) The Judge failed to deal with all available defences.

78. What needs to be borne in mind in relation to this ground is that neither applicant gave evidence at their trial. Although the 2nd applicant made four cautioned statements the Judge gave his reasons why he rejected much of the evidence contained in the statements.

79. It was however clear that the defence which was being run was that the scheme which had been devised permissibly circumvented the conditions which were imposed in CSR 852(5). Over and above this it had never been the intention of the applicants to mislead anyone concerning what they had done. These were the only defences which the Judge had to consider. This is subject to the observations which are made later in this judgment in relation to Mr McCoy's submissions on the applicability of a claim of right.

80. The Judge gave reasons why he was satisfied on essentially uncontested evidence that the 2nd applicant had a financial interest in Flat A. He also gave reasons why he came to the conclusion that the arrangement was a sham. In the circumstances of this case in my view that was sufficient.

(6) Mens rea: Claim of right

81. Mr McCoy submitted that the scope for a claim of right was broader than appears to have been contemplated by the Judge. There was a useful passage on this at p. 55 of the judgment of White J in the South Australian case of Kastratovic (1985) 19 A Crim R 28:

"In answering question 3, it should be borne in mind that it was assumed for the purposes of the appeal that the Crown had failed to exclude the appellant's honest belief in his claim of right. The cases of Lopatta, Langham, Smith, Salvo, Brow and Bonollo and many others constitute clear authority for the proposition that honest belief in a claim of right is a complete defence and entitles the accused to an acquittal, if that claim is accepted as a reasonable possibility by the jury, no matter how extravagant or unreasonable or dishonest the means used. The verdict of acquittal in itself shows that the jury accepts the reasonable possibility of the honest belief in spite of other manifest dishonesty of the appellant in other respects. I would answer question 3 in the affirmative."

82. This Court also considered the law on this subject in HKSAR v Chung Chun-lit [2001] 3 HKC 699 and held that there were situations where a claim of right could properly be advanced and be maintained.

83. The contention advanced by Mr McCoy was that the Judge had failed to take cognisance of the low threshold referred to by White J and confined himself to the issue as to whether the conduct of the applicants had been deceptive. The Judge had not gone on to consider whether the applicants had had an honest belief in the scheme however unreasonable this may have been.

84. The first point which has to be made is that there was no credible evidence from the applicants that they had had a belief that the scheme as described by Mr Fan would have circumvented the prohibition contained in CSR 852(5) or that it had been properly implemented.

85. It needs to be borne in mind that the 1st applicant has qualifications in the field of Accountancy and it is reasonable to assume from the senior position she was holding in the Inland Revenue Department that she would herself be able to exercise a measure of judgment concerning the efficacy of the scheme.

86. It is then necessary to have regard to the surrounding circumstances when the Declaration was made.

87. Almost exactly contemporaneously her husband had paid a deposit and entered into a sale and purchase agreement for the purchase of the very flat which was to be the subject of the PTA. There was also the evidence of Mr Fan to the effect that in his opinion the 2nd applicant was the beneficial owner of Takestep.

88. In addition to this Mr Fan gave evidence to the effect that the applicants were aware that if they were in fact the owners of Flat A the scheme would not be a valid one. At p. 62 of the appeal bundle Mr Fan gives this evidence:

"Q. Why did you make changes to your company, Rocksona?

A. You mean the change in respect of the shareholder of Rocksona?

Q. The shareholder, yes.

A. Just now I have already said that after I have a discussion with my wife, I knew that if we had interest in the company of Rocksona, of course we, that is my wife, could not apply for housing allowance from the government. If my wife acted in the way which was agreed by Mrs Sin and if we did not have any shares of the company and if we were not the owner, then my wife could apply for housing allowance in accordance with the law at that time.

Q. So the arrangement that you entered into was done for the purpose of obtaining the benefit that the government was giving at the time of private tenancy allowance.

A. Yes. If we swapped the property lawfully, then we could obtain that benefit. If one was the owner of the property, then of course one cannot make the application for the housing allowance. The transfer of share enabled me and my wife to become the shareholder of Takestep.

Q. Mr Fan, I take it that had you proceeded with the purchase whereby - through Rocksona as you originally had, your wife would not be eligible and could not make a claim for private tenancy allowance.

A. Correct. When I bought the property through Rocksona, I had not decided yet as to how I use the property.

Q. That was something that you and your wife at the time appreciated, that if you proceeded that way you couldn't claim PTA.

A. I knew that. If you had an interest in it, then of course we cannot get.

Q. Listen to my question. I'm asking you that the way that the arrangement had been entered into, you purchasing through Rocksona the property of Flat B, you and your wife appreciated that if it continued that way, you couldn't claim private tenancy allowance.

A. One cannot get it.

Court: The emphasis is whether you and your wife appreciated that fact.

A. Yes.

Q. And was that also the case, as far as you know, of Mr and Mrs Sin, if their purchase of Flat A through Takestep proceeded that way, they also understood that they wouldn't be entitled to PTA?

A. Correct.

Court: You mean you knew that they knew? I think that's the question.

Mr Zervos: Yes.

Court: You knew that they knew.

A. She probably knew that."

89. There was also the evidence relating to the funding of the respective mortgages which had been obtained to finance the purchases of the respective flats at p. 66 of the bundle:

"Q. Well, we'll come back to that. Mr Fan, can I ask you to look at some documents now in relation to the various companies? But before I do, in relation to Rocksona, you, upon the transfer of shares of Rocksona to Mr and Mrs Sin, remained as a director together with your two other nominee directors.

A. Yes.

Q. Prior to transferring the shares to Mr and Mrs Sin, you had to commit Rocksona financially for the purchase of Flat B .

A. Correct. Before the share transfer, I had signed as a guarantor.

Q. And in relation to the initial deposits that had to be paid, who provided the funds to Rocksona for that to be done?

A. Paid by me.

Q. And after the transfer of the shares, when the mortgage repayments had to be made, there was a difference between the rental that you were receiving and the amount of mortgage repayment that had to be paid on a monthly basis.

A. Yes, there was a difference.

Q. The difference required a top-up; you had to pay additional or the company required additional funds to pay the mortgage repayments.

A. The difference required that. The difference needs to be paid.

Q. And who paid the difference? Who put the money into the company to pay the difference?

A. Which company are you referring to?

Q. Rocksona.

A. Well, I lent the money.

Q. So you put the money into the company.

A. Yes.

Q. And did you do that for the entire time that the mortgage was outstanding, until the property was sold?

A. I did lend money to Rocksona, yes.

Q. Could you answer my question? For the entire time until the property was sold - Flat B, that is.

A. Yes.

Q. And was the same arrangement in existence in relation to Takestep?

A. Yes.

Q. And do you know who was the person making the financial contributions to Takestep?

A. I guessed it was Mr Sin.

Q. Well, what did you know?

A. One can read from the account of Takestep that the director lent money to Takestep.

Q. At this stage you were holding shares in Takestep. Did you make enquiries?

A. I knew the reason.

Q. No, did you make enquiries?

A. I don't understand. To make what enquiries?

Q. Well, did you speak to Mr or Mrs Sin about who was making the mortgage repayments?

A. At that time the situation was that I lent money to Rocksona and Mr Sin lent money to Takestep. Because after the transfer of shares, the guarantee document of the bank had all been signed. Under those circumstances, I could not refrain from knowing that the mortgage repayment was made to the bank according to schedule."

90. Having regard to the fact that this was one composite scheme it would appear to be unlikely that either of the applicants could have had honest belief that the scheme as it was implemented could have been a valid one such as to circumvent the provisions contained in CSB 852(5).

91. It is accepted that no submissions were made to the Judge on the question of a claim of right. Even if they had been they would have had no prospect whatever of success.

92. In my opinion this ground must fail.

Ground 7 Breach of the rule in Browne v Dunn

Ground 7A Judge's own theory - non disclosure to parties

Ground 8 Chan's evidence - Judge misuses and misunderstands

93. Grounds 7, 7A and 8 all concern the way in which the Judge dealt with the evidence of Mr Chan and Mr Fan and the conclusions which he drew from this evidence.

94. What has to be said immediately is that Mr Chan's evidence was admitted in accordance with an agreement struck between the parties pursuant to the provisions contained in s. 65B of the Criminal Procedure Ordinance Cap. 221. It is common ground that this evidence was admitted prior to Mr Fan giving evidence and that no objections were raised in connection with the statement and no request was made to cross-examine Mr Chan.

95. The problem which is complained of is that the Judge preferred the evidence of Mr Chan to that of Mr Fan in some respects. In particular he accepted Mr Chan's evidence that Mr Fan had requested him to sign the lease on behalf of Rocksona to the Fans and that the reason for him doing so was to avoid any "conflict of interest".

96. Question 6 in Mr Chan's statement was:

"Q. Under what circumstances would you sign the tenancy agreement CWK-5 on behalf of Rocksona?

A. Fan Sai-yee once mentioned that if the tenancy agreement was signed by a husband and a wife as the two parties of the agreement, then there would be association between the two parties of the agreement, which would result in a conflict of interest. In order to avoid this conflict of interest, Fan Sai-yee requested me to sign this tenancy agreement, i.e. CWK-5, on behalf of Rocksona."

97. Earlier in the statement question 4 and its answer had been as follows:

"Q. Do you know who the shareholders of Rocksona were?

A. Under my impression, probably it was Fan Sai-yee alone and there was no other shareholder. Yet, after reading annex CWK-1 to CWK-1(25), particularly CWK-1(9), I recalled that Fan Sai-yee once told me that the Provident Centre flat where he lived was owned by Sin Kam-chuen and his wife whereas the Provident Centre flat where Sin Kam-chuen and his wife lived was owned by Fan Sai-yee. I do not recall the exact addresses of these two Provident Centre flats."

98. In his Reasons for Verdict the Judge had referred to question 6 but not to question 4.

99. He had then gone on to surmise that Mr Fan's evidence had been called in question by Mr Chan's and that he had preferred the evidence of Mr Chan.

100. It will be appreciated that Mr Fan's position was somewhat equivocal. As stated earlier he was testifying under an immunity. The importance of his evidence to the prosecution was that he was able to give evidence which provided a background to the voluminous documents which had been agreed and in relation to the numerous agreed facts.

101. This was how the Judge dealt with the matter in his Reasons for Verdict at p. 35 of the appeal bundle:

"The defence had advanced two arguments. The first was that there was no financial interest. The Government did not define the term and the cases (there being no direct authority) all suggested that, for one to be so interested, one must be able to derive a benefit, which was Mr Fan's view as an accountant. Repaying a mortgage loan and/or being its guarantor gave rise to no such interest.

I cannot and did not accept such propositions. Short of a stated definition, the term must be given its ordinary meaning. If so, 'financial' simply means money-related. 'Interest' is to have a concern in something or be involved as regards potential advantage or detriment. The whole phrase would mean a stake in monetary terms. If that is correct then D2's guarantee would certainly qualify as financial interest. It arose from the risk of being called on to meet Flat A's mortgage. In that sense, D2 clearly had a stake in Flat A. The question of the mortgage repayment is more complicated. If they were genuine loans to Takestep then D2's financial interest was in Takestep, not Flat A; not directly. But if the whole thing was a sham as alleged then D2 was really paying for his own flat and he would no doubt be caught by the prohibition. .........

Second, the defence said there was no evidence from which to infer the necessary intention. It adopted in entirety the testimony of Mr Fan who said the scheme was devised with a clear conscience. If the prosecution wished to refer me to other evidence and thus reject parts of Mr Fan's testimony, the prosecution was not entitled to do so because that would amount to impeaching its own witness. In any event, nothing in the other evidence could achieve that purpose.

In dealing with the impeachment point, the prosecution had relied on Bruce and McCoy, 'Criminal Evidence in Hong Kong, X [504 -550] and some of the authorities cited therein. Without going into any detail, I think the law is clear that while a party may not call general evidence of bad character to discredit his own witness, the prosecution is not bound by the testimony of a witness if it is inconsistent with its case. On the contrary, the prosecution is entitled to ask a court to disbelieve aspects of the witness' testimony. This is because the prosecution does not necessarily put forward all witnesses as witnesses of truth. If need be, the prosecution may call other evidence to contradict that witness: Oscar Lai Cr App 229 of 1992.

What then is the other evidence in this case? During submissions, my attention was drawn to a number of things. There were others that I noted. What stood out most prominently must, however, be Mr Fan's partner Chan whose statement was read out under section 65B and was unchallenged. His account of how Mr Fan asked him to sign the lease for Flat B because the tenant was Mrs Fan is on head on collision with what Mr Fan now claims to be a conscionable scheme. This alone would have brought the case past half-time. Other matters included such circumstantial evidence as D1's mother being the signatory of the lease for Flat A and some of D1's memos suggesting an arm's length relationship with the landlord. As against D2, there were his records of interview.

FINAL ANALYSIS

This is really to pick up on the considerations at half-time and to bring the matter to a close. (The parties themselves adopted this attitude.) To be more precise, with the question of financial interest out of the way (see above) the point of the exercise is really to determine whether the defendants had the intention to deceive. In approaching this question, I have first and foremost in my mind the defendants' unblemished past. Even at the time of the alleged offence, they were people of mature years who held responsible positions. As they did not give evidence, the issue is one of propensity.

To continue, I will again pick up on Chan, Mr Fan's partner. His statement is important. He said Mr Fan asked him to sign the lease lest there might be a conflict of interest between husband and wife. I have tried to understand this in the best possible light for Mr Fan but, in the end, cannot. By that stage, the shares had been swapped. If he believed as he now says that everything was kosher then it was all right for he himself to sign. After all, Rocksona was the landlord, he just a director. Of course, the incident took place 17 years ago. Questions can be raised about Chan's memory. But his statement went in unchallenged, and nobody had suggested that what he said was inadmissible. Moreover, the incident must, by common sense, have appeared somewhat unusual with the talk of conflict of interest, so it is not surprising that he should remember. I should mention I have not forgotten that Mr Fan had once told Chan that his flat was the defendants', and the defendants' his. I am not, however, troubled by it. In terms of shareholdings that was correct. But it is what he said to get Chan to sign the lease that is most telling.

The effect of Chan's statement is this. Whether one calls it an admission or something to show Mr Fan's state of mind (both of which is admissible hearsay) it shows one thing - Mr Fan did not, in 1983, believe what he did was aboveboard. Alternatively, it can be regarded as just a previous inconsistent statement, but which provides the court with cogent evidence to reject his present claim of a clear conscience, which I do. Either way, the common effect is as follows. Given his evidence that the parties had fully discussed the legality of their plan and that the others all wanted the comfort of his opinion, the rejection of any innocent belief on his part must mean the rejection of the same as to the others. There is no room for such suggestions like, despite Mr Fan, the defendants thought everything was legal. This is not how the defence was run. It is an 'either . . . or . . .' situation. It is certainly not for me to dream up defences that were not raised."

102. The complaint which is made in Ground 7 is that there was a breach of the rule in Browne v Dunn.

103. The rule in this case can simply be put that it is incumbent upon a counsel who is cross-examining a witness to put to him his client's case.

104. The complaint which is being made in this ground is that the prosecutor should have put to Mr Fan any discrepancies which arose out of the evidence of Mr Chan his partner, who assumed the role of a nominee Director of Rocksona.

105. This ground is misconceived. The prosecutor was not cross-examining Mr Fan. He was examining him in-chief. There was no obligation imposed upon him to put any contrary case to him.

106. It is often the case that prosecution witnesses will give conflicting evidence in a criminal trial. It is then for the jury or in this case the Judge, to make what they can of the conflicting evidence R v Oscar Lai Kar-to and Anor CACC 229/1992.

107. Ground 7A which is an alternative to Ground 7 and Ground 8 are as follows:

"7 A) Further and/or in the alternative to Ground 7, there was a breach of natural justice (an error of law and/or a material irregularity) as the Learned Judge, without notice to the parties and therefore without ever inviting submissions from them and without questioning of Mr Fan by either party or the Judge in relation to Mr Chan's statement, and without it every being any part of the prosecution case as pleaded, concluded, by devising his own theory, that Mr Chan's statement was in itself a decisive basis for rejecting in part the evidence of Mr Fan.

CHAN'S EVIDENCE: JUDGE MISUSES AND MISUNDERSTANDS

8. The Learned Judge erred in fact and law and therefore wrongly relied upon the evidence of the prosecution witness Mr Chan, (contained in a s 65B Cap 221 statement), as the basis for rejecting the testimony of Mr Fan that the Applicants and the Fans had at all times believed that they were entitled to act as they did, without contravening the terms of R852(5) Civil Service Regulation 1983."

108. In my view, these grounds cannot be made good for a number of reasons.

109. The first is that at the conclusion of his Reasons for Verdict the Judge makes it abundantly clear that he would have found the case proven against the applicants notwithstanding Mr Chan's evidence.

110. The Judge also gave a number of compelling reasons why he found that the applicants' conduct had been deceptive and that they had not had an honest belief that the scheme was a valid one.

111. There were a number of indications that it was not. For example, the Judge considered that it was significant that the correspondence exchanged with the Quartering Officer when renewing the lease had deliberately been designed to deceive him. It gave the impression that the applicant was conducting negotiations at arm's length with an independent landlord.

112. Then there is the question of the signing of the original leases. It was significant that when the respective companies were signing the leases as landlords in both cases the signatories for the companies were people with different names. The Judge was entitled to conclude that this was a deliberate ploy to deceive the Quartering Officer.

113. There is then the evidence concerning the respective company accounts and the differing amounts of the purchase price of the flats and the different amounts secured by the mortgages.

114. In this connection it will be appreciated that there was a significant difference in the amount which was receivable by the respective parties. This was mainly on account of the fact that it had been necessary for the Fans to borrow a larger amount by way of mortgage and this in turn meant that the monthly instalments payable were different. There were also other factors which were referred to in the evidence.

115. Mr McCoy placed reliance upon the independently audited accounts of the companies which referred to the payments out which had been made to the respective parties to support Mr Fan's evidence that the parties had accepted the different amounts. This of course was by no means conclusive of the matter as there would have been nothing to prevent the parties from making the necessary adjustments after the payments had been received. Clearly it would be contrary to human nature to simply accept these differences.

116. The Judge was fully entitled to be sceptical of the evidence given to the effect that the parties agreed to overlook these differences.

117. All of this called in question the bona fides of the applicants and their contention that it was their honest belief that the scheme was a valid one.

118. None of these grounds can in my opinion succeed.

Ground 9

119. This is in general terms and complaint is made that the Judge erred in law and in fact. There is no justification in any of the complaints which are made. The Judge gave the most careful attention to all of the evidence and correctly applied the law.

120. I have formed the view that leave should be granted for the appeal to proceed. I have had the advantage of reading in draft Stock JA's judgment and I agree that this is a case where it is appropriate for the proviso to be applied. In my view the appeal should be dismissed.

Hon Stock JA:

121. There were two questions for the judge to ask and answer in this case:

(1) On or about 30 June 1983, did either applicant have a financial interest in flat A?

(2) If so, when the 1st applicant made her application for a private tenancy allowance on 30 June 1983, did she believe or may she have believed, rightly or wrongly, that neither she nor her husband had a financial interest in flat A (the burden of course being on the prosecution to show she had no such belief)?

122. Before addressing this central issue, I wish to say something on the question of lifting the corporate veil. This in my judgment is a non-issue. There was no question in this case of seeking to place liability in contract or tort on the shareholders of a company; no question of denying the corporate personality of Takestep. The very issue in the case was: who were the true shareholders? The charge might, in its true effect, be said to allege a representation by the Sins that they were not the shareholders whereas in fact they were. If there was evidence that they were the true shareholders, the only question then was whether that evidence was admissible. If the evidence was relevant, it was admissible, and that, so far as this argument is concerned, is that.

123. As to the first question, little attention seems to have been accorded in the District Court judgment to the question of the interest of the parties in the property as at 30 June. It was an important question. The prosecution had chosen to frame the charge as they did and, as that charge was framed, it seems to me that what the prosecution was asserting was that the application for a tenancy allowance was submitted on or about 30 June and that at the date of that submission the representations in it were false. That is what they had to prove.

124. It seems to me doubtful that a guarantee is a financial interest in the property itself, no matter how widely one draws the boundaries of the term "financial interest in the property". In any event, the guarantee was not executed by 30 June. As for the mortgage repayments, assuming that the contributions were made not as loans to the company but directly, in circumstances giving rise to a resulting trust, they too did not begin until after mid-July. So, it seems to me that the only basis upon which it could properly be said that, on the date the representation was made, the applicants had a financial interest in flat A would be if it were shown that the Fans held the shares in Takestep on behalf of the Sins. If that were so, then, given that by 30 June Takestep had an equitable interest in the property by reason of the sale and purchase agreements already concluded, the shareholders had, at that date, a financial interest in that property. This is, in essence, what the judge found (see 31F: "It rather suggests that the tenants were the genuine owners"; at page 35L "... if the whole thing was a sham as alleged then D2 was really paying for his own flat ...."; and his ultimate conclusion that the whole thing was a sham.). The judge decided that by April 1983 there was in place a scheme by which it was accepted by all four parties that the proceeds would be disposed of according to the occupancy of the respective flats (see page 39P-S). I am satisfied that if this was properly proved to be the case, namely, that the tenants were the shareholders in reality, and that it was understood that the registered shareholders were holding the shares on behalf of the tenants, then financial interest in the property was established.

125. That would not be the end of the matter. It had still, in that event, to be proved that the applicants believed in June 1983, that they had a financial interest in the flat A.

126. So, was the judge entitled to find that the whole thing was a sham; that the Fans were holding the shares for the Sins; and that the Sins did not believe it to be true when they said to the authorities that neither applicant had a financial interest in flat A?

127. The defence case was clear enough from the evidence of Mr Fan, and from the statements made by the second applicant. It was this: that, whether correctly or not, they had a belief in the entitlement in the circumstances arranged by them on paper - that is, where the company owns the property and they hold, on paper, no shares in the company - to the private tenancy allowance. It is clear enough that a number of the parties involved were professionally attuned, or thought themselves to be attuned, to matters financial and, in the case of Mr Fan specifically, to accountancy. Accountants, like lawyers, regularly engage in advice, whether for their clients or themselves, by which they seek to devise entirely lawful schemes to avoid, rather than evade, liabilities, or by which they seek to gain advantages which, but for a scheme, would not be available. Accountants, like lawyers, may sometimes advise incorrectly in relation to such a scheme; but incorrect advice, without more, is not dishonest. Moreover, to the extent that a client relies on the advice given to him by a professional person, whether that professional person is or is not a friend, the client might more readily be heard to say that he, the client, has not acted dishonestly - unless of course it be shown that he and the professional adviser were acting in dishonest collusion; or unless the client has misled the adviser; or unless the client is aware that the advice must be faulty. All this is relevant to the present case, because the 1st applicant was herself a tax expert and therefore might be expected to be versed in financial and accounting matters, and Mr Fan was himself a professional and practicing accountant.

128. So the question which the court had to address was this: Did the applicants (and each had to be addressed separately) believe, or may they have believed, that - whatever ultimate personal inter-reckoning there might be if and when the properties were sold - nonetheless, as a matter of law, the properties belonged only to the companies and, possibly, through the companies to the registered shareholders; that as a matter of law or right the financial interest therefore reposed only in the companies and, perhaps, in the registered shareholders; and that accordingly they could properly say that they had no financial interest in Flat A. Was it possible that their minds were concentrated for the purpose of entitlement upon what we understand to be a legal interest (as opposed to some equitable interest - a concept of which they may or may not have been aware)?

129. If they genuinely believed that, by virtue of this arrangement, they had no "financial interest", as they thought, rightly or wrongly, that that term was understood or defined, there could have been no intent to deceive as to their entitlement to the allowance. Before taking the important step or attaching criminality to conduct, the courts recognize that there are those who might engage in schemes that they think are clever, legitimately to avoid a liability and that, although the scheme may not in the event be clever at all, and might not in fact be effective to avoid the liability, the originator of the scheme, and those who have accepted his advice and acted upon it, might nonetheless not have acted with criminal intent. This was the key question which the judge had to and did address.

130. What concerns me in this case is that this was one of the routes by which he came to his conclusion, albeit as we shall see, not the only route.

131. The prosecution called Mr Fan to testify. It is true that the court was not obliged to accept or reject his evidence as a whole. It could accept some of his evidence and reject other parts. That is trite. But his evidence was very important for the applicants, for they relied heavily on the fact that he was an accountant to whom they had turned for advice; and who had advised them that if they organized the acquisition of flat A in a particular way, then no breach of the regulations would be effected. Mr Fan explained that there was devised a scheme - deliberately so; and he explained that he genuinely thought it to be acceptable. Neither he nor the Sins would have dreamt of effecting a dishonest plan. Cross-leasing was well recognized as legitimate, and was a common practice. The scheme he devised was, he thought, a form of cross-leasing.

132. The matter was decided in this way: not only was the judge not prepared to accept his evidence in so far as it may have assisted the applicants, but he made a positive finding that Mr Fan did not believe the scheme to be a legitimate one. He held that there was cogent evidence that Mr Fan did not have a clear conscience. He then transposed that finding to the applicants. In other words, because he found as a fact, based on a specific piece of evidence to which I shall shortly turn, that Mr Fan did not have a clear conscience about the scheme, it followed that the applicants also could not have had a clear conscience about it. He said so in terms: "... the rejection of any innocent belief on his part must mean the rejection of the same to the others." (page 37H-I). Therefore, when the application for the allowance was submitted, they, the applicants, knowingly made a false representation.

133. It therefore becomes important to examine the evidence which the judge said (see page 36I; page 36R; and 36F, in particular) showed that Mr Fan did not have a clear conscience.

134. Evidence heavily relied upon by the judge was a written statement made by a Mr Chan on 26 July 2000, that is, 17 years after the events to which the statement speaks. It was made by Mr Chan, who was at all material times the accountant partner of Mr Fan. The statement came before the trial court as evidence under section 65B of the Criminal Evidence Ordinance, Cap 221. The statement traversed a number of matters. He said, for example (and each emphasis is mine), that "as far as I remember Rocksona was owned by Mr Fan..." He spoke of Fan's intention to buy a flat. "As to who the shareholder of Rocksona was, I am under the impression that Fan Sai Yee wholly owned it." He spoke of the invitation to him to become a director. As for the purchase of Flat B "I am under the impression that Fan Sai Yee purchased the ... flat in the name of Rocksona for personal occupation. In respect of the details of the process and mortgage for the purchase ... my impression is very vague and I cannot recall the details." He then addressed the question of the tenancy agreement and that Mrs Fan was the tenant and that he, Chan, signed the agreement on behalf of Rocksona. After Mr Chan had completed the narrative, the investigating officer asked him a number of questions each of which is recorded. In question 3 he was asked about the accounts of Rocksona and again he spoke of impressions. Two questions and their answers are of particular significance:

"Q4: Do you know who the shareholders of Rocksona were?

A: Under my impression, probably it was FAN Sai-yee alone and there was no other shareholder. Yet, after reading annex CWK-1 to CWK-1(25), particularly CWK-1(9), I recalled that FAN Sai-yee once told me that the Provident Centre flat where he lived was owned by SIN Kam-chuen and his wife whereas the Provident Centre flat where SIN Kam-chuen and his wife lived was owned by FAN Sai-yee. I do not recall the exact addresses of these two Provident Centre flats."

It is here important to pause and note that had it not been for Chan at that point in the interview seeing the documents, his answer that Fan alone was the shareholder would have stood unchallenged save by documents available to the court, which documents showed his memory to be faulty.

"Q6: Under what circumstances would you sign the tenancy agreement CWK-5 on behalf of Rocksona?

A: FAN Sai-yee once mentioned that if the tenancy agreement was signed by a husband and a wife as the two parties of the agreement, then there would be association between the two parties of the agreement, which would result in a conflict of interest. In order to avoid this conflict of interest, FAN Sai-yee requested me to sign this tenancy agreement, i.e. CWK-5, on behalf of Rocksona."

135. It is the answer to question 6 to which the judge has given great prominence. What he has done is to use that answer as signifying an admission by Fan that he, Fan, knew full well that what he was doing in relation to Flat B was unconscionable. What the judge said in this regard should here be rehearsed in full.

"What then is the other evidence in this case? During submissions, my attention was drawn to a number of things. There were others that I noted. What stood out most prominently must, however, be Mr FAN's partner CHAN whose statement was read out under section 65B and was unchallenged. His account of how Mr FAN asked him to sign the lease for Flat B because the tenant was Mrs FAN is on head on collision with what Mr FAN now claims to be a conscionable scheme. This alone would have brought the case past half-time. Other matters included such circumstantial evidence as D1's mother being the signatory of the lease for Flat A and some of D1's memos suggesting an arm's length relationship with the landlord. As against D2, there were his records of interview.

This is really to pick on the considerations at half-time and to bring the matter to a close. (The parties themselves adopted this attitude.) To be more precise, with the question of financial interest out of the way (see above) the point of the exercise is really to determine whether the defendants had the intention to deceive. In approaching this question, I have first and foremost in my mind the defendants' unblemished past. Even at the time of the alleged offence, they were people of mature years who held responsible positions. As they did not give evidence, the issue is one of propensity.

To continue, I will again pick up on CHAN, Mr FAN's partner. His statement is important. He said Mr FAN asked him to sign the lease lest there might be a conflict of interest between husband and wife. I have tried to understand this in the best possible light for Mr FAN but, in the end, cannot. By that stage, the shares had been swapped. If he believed as he now says that everything was kosher then it was all right for he himself to sign. After all, Rocksona was the landlord, he just a director. Of course, the incident took place 17 years ago. Questions can be raised about CHAN's memory. But his statement went in unchallenged, and nobody had suggested that what he said was inadmissible. Moreover, the incident must, by common sense, have appeared somewhat unusual with the talk of conflict of interest, so it is not surprising that he should remember. I should mention I have not forgotten that Mr FAN had once told CHAN that his flat was the defendants', and the defendants' his. I am not, however, troubled by it. In terms of shareholdings that was correct. But it is what he said to get CHAN to sign the lease that is most telling.

The effect of CHAN's statement is this. Whether one calls it an admission or something to show Mr FAN's state of mind (both of which is admissible hearsay) it shows one thing - Mr FAN did not, in 1983, believe what he did was aboveboard. Alternatively, it can be regarded as just a previous inconsistent statement, but which provides the court with cogent evidence to reject his present claim of a clear conscience, which I do. Either way, the common effect is as follows. Given his evidence that the parties had fully discussed the legality of their plan and that the others all wanted the comfort of his opinion, the rejection of any innocent belief on his part must mean the rejection of the same as to the others. There is no room for such suggestions like, despite Mr FAN, the defendants thought everything was legal. This is not how the defence was run. It is an "either ... or..." situation. It is certainly not for me to dream up defences that were not raised." (Emphasis added).

136. It is my opinion that the judge's approach to Mr Chan's Answers 4 and 6 was flawed, and materially so.

(1) The judge has admitted Answer 6 to show that when the tenancy agreement for Flat B was signed by Rocksona and Mrs Fan, Mr Fan believed that what he was doing was unconscionable. The question of admissibility of this evidence, as against Mr Fan, or as against the applicants, was never argued. I shall assume, for present purposes, that the evidence was admissible not as to the suggestion that there was in fact a conflict of interest, but as to Mr Fan's state of mind.

(2) The conclusion that the comment showed an awareness of unconscionable conduct supposes the words themselves to be an accurate recollection of a statement; supposes also that they allow of but one interpretation; and supposes still further that the statement is unqualified by anything else reported in the witness statement of Mr Chan.

(3) The statement, produced under section 65B of the Criminal Procedure Ordinance, was made in July 2000, that is, 17 years after the events to which it speaks. It is also a statement peppered, as we have seen, with references to the statement maker's impressions.

(4) It must follow that if such weight was to be placed on Answer 6, the accuracy of the statement and its possible meaning should have been the subject of specific scrutiny and questions. As far as I am aware, Answer 6 was never the subject of comment throughout the trial. The judge did not tell counsel that he considered it to be of significance, let alone of central importance. Counsel, so far as I am aware, did not seek to make capital of it. Most importantly, no one asked Mr Fan about it, even though the witness statement was produced before he, Mr Fan, gave evidence. One knows not what his answer might have been. He might have denied making the comment. He might have admitted a comment in similar but not the same terms. Most particularly, he might have had an explanation for saying what he did; an explanation, for example, based upon the possible perceptions, albeit misplaced, of others which he thought it unnecessary to arouse, whilst himself nonetheless believing in the propriety of the scheme. It is, I think, inconceivable that if Mr Fan had himself been the defendant in a trial, a conviction could properly have been founded on a written statement of this kind allegedly made 17 years ago, not tested as to its accuracy or context by examination of the witness Chan but, more importantly, never put to the defendant, Mr Fan, for his comment; and never put by the judge to counsel as a factor of great importance in his mind, so as to enable counsel to address him or to recall Mr Fan, or to ask to cross-examine Mr Chan. If that proposition is correct, that following such a path to convicting Mr Fan would be flawed, then it follows, I believe, that the approach to the conviction of these applicants in so far as it rests upon the statement of Mr Chan, is similarly flawed because the condemnation, the effective conviction, of Mr Fan was, in the judge's reasoning, a condition precedent to the conviction of the applicants. Whether a judge should himself ask a particular question of a witness (and I notice that in this case the judge did put questions to Mr Fan), and whether a judge should put counsel on notice of a matter which carries in his mind significant weight, depends on the circumstances. I am satisfied that in the circumstances which I have described, the judge should have provided an opportunity for the accuracy and purport of Answer 6 to be addressed, either by himself asking Mr Fan what he had to say about it, or by alerting counsel to the force which Answer 6, thus far unanswered, was carrying in his mind.

(5) I note that the judge treated Answer 6 as all important and unqualified in its impact by Answer 4. Yet if Answer 6 was taken by the court as strong evidence that Fan was confessing to his partner that he was hiding a conflict of interest, what, in his mind, must have been the conflict which he was seeking to hide? The answer must be that he was seeking to hide the fact that he, the husband, was the true landlord of a property of which his wife was the tenant; in other words that he himself had an interest in Flat B. Yet Answer 6 reveals Fan telling Chan that Flat B is in fact owned by the Sins. It is on its face, as is Answer 6 on its face, an unqualified assertion. It does not on its face purport to restrict itself to strictly legal interests in the property. Why, on its face, is it any less indicative of Mr Fan's belief in the reality of the situation, than is Answer 6? And if Answer 4 might have reflected Mr Fan's assertion that in truth Mrs Fan was occupying property that was accepted by all concerned to be the Sins', might that not have placed a different gloss on Answer 6?

137. It may well be that had these matters been explored, the judge would have arrived at the same conclusion. But they were not, and in my judgment, in so far as the conviction rests upon the approach to Mr Chan's statement and its impact upon Mr Fan's credibility, the conviction ought not to be supported.

138. The question then is whether there is provided good reason for the conviction, which stands apart from the Chan evidence and the judge's approach to it; and whether the rejection of Fan's credibility is dependent upon the effect, as seen by the judge, of Chan's evidence. I have come to the conclusion that, despite the error in the judge's approach to Chan's evidence, the verdict can safely be supported, and is indeed supported by logical analysis in the reasons for verdict themselves.

139. Towards the close of his reasons for verdict the judge states that: "I have no doubt whatsoever that the whole thing was a sham. This conclusion is independent of the statement of Mr Fan's partner CHAN. In other words, the circumstantial evidence alone is sufficient to prove the offence." This is not a mere sweep-up formula which the judge has tagged on the tail end of the judgment. It is a statement which concludes a lengthy analysis which begins some pages earlier with the words: "I move to the other evidence."

140. The 'other evidence' which the judge rehearses, and the inferences which he draws from it, tells cogently against the applicants, as well as against Mr Fan's credibility. I do not intend to repeat it here. He rejects, and in my judgment for good reason, the suggestion by Mr Fan that the share swap in June was something decided upon a matter of days before the swap's execution. He rejects the explanation of Mr Fan as to why the mortgage arrangements were never in due course varied so as to reflect the beneficial ownership of the properties. The judge refers at some length to the correspondence between the 1st applicant and the Quartering Office which on its face is damning in the 1st applicant's lack of candour. A day after the memorandum for sale for Flat A had been signed by her husband, the 1st applicant was writing to say that she 'may make appropriate arrangements regarding finding a new tenancy'; and the judge categorises the whole memorandum as 'completely artificial', which indeed it is. In the reasons she gave for the proposed but non-located move, there is no hint that she has decided to buy a flat, and has in fact located one, and intends (if her account were true) to enter upon a cross-leasing arrangement. The same approach was maintained in 1985 when she wrote to the same Office seeking renewal of the allowance at a revised rate, and stating that whilst the Commissioner for Rating and Valuation recommended a market rent of $9000 per month she could only reach agreement with the landlord for a rent of $9200. Given that the landlord was a company of which the directors were her husband, her mother and her sister-in-law, this was nonsense. There was a similar memorandum in July 1986 which suggested arms-length negotiation with the landlord about notice to quit. The judge notes the oddity which attaches to the directorships of both companies, namely, that the directors of the companies owning the properties were not the shareholders but close family of the tenants - in the case of the Sins, the husband, the mother and the sister in law of the 1st applicant, a fact, furthermore never disclosed to the Quartering Officer; and that there was self evidently taken a deliberate decision to ensure that the tenancy agreements were not signed by the respective director husbands. The judge goes to the provision by the landlord of personalized items of furniture to the tenants, in other words of the type of furniture which one would expect to be imported not by a landlord but by a tenant. He adds to this growing body of indicia the fact that the Sins funded the mortgage for Flat A in which they were living; and that the balance of the proceeds of sale, once the properties were sold in 1986, were substantially different, noting the inherent unlikelihood of the assertion that the proceeds went to the registered shareholders. And, finally, there is not to be forgotten, as against the 2nd applicant, a significant body of material lies, which his statements quite clearly contain. In this regard the judge has concluded, as he was bound to conclude, that the lies were not told for some innocent reason and could therefore be used in support of the prosecution case.

141. The judge's conclusion from all this is that that no later than mid-April there was a scheme in place by which each family was to treat the flat which they occupied as their own; meaning that the shares in Takestep were held effectively by the Fans for the applicants. That being so, the applicants had a financial interest in flat A. It is clear from the judgment that the judge has addressed the question of a possible belief that they had no such interest because of the way the registered shareholding was arranged, but has rejected it. His finding, independently of those which attach themselves to the statement of Mr Chan, is that the whole scheme was a sham; and implicit in that label is the finding that the applicants had the intent to deceive which is the gravamen of the charges which they faced. I am satisfied that there was a sufficient basis for that finding. In saying this, I should, in passing, state that :

(1) Unlike Mayo VP at para [45] of his judgment, I do not read Mr Fan as conceding that, at the time of the declaration which is the subject of the charge, he was of the opinion that the second applicant was the beneficial owner of Takestep. That would, I think, be contrary to thrust of the case Mr Fan was making. The evidence recited at para [45] refers expressly to the time of the share swap, and in context it must be that Mr Fan was saying that immediately before the swap Takestep was beneficially owned by the second applicant.

(2) As for the suggested bona fide claim of right, the charge asserted that there was on the part of the applicants an intention to deceive by the use of a document which falsely stated that neither applicant had a financial interest in flat A. The suggested claim of right is, one assumes, a belief in entitlement to the allowance. There can however be no question in the circumstances of this case but that the applicants knew full well that if they had a financial interest in flat A, there was no such right. The judge found that they had such a financial interest, and knew that they had a financial interest; and it is clearly implicit in the judge's findings and in his rehearsal of the 'other evidence' (see [139] above) that the applicants were seeking to disguise the truth precisely because they knew that the truth disentitled them from the allowance. In so far as those findings were justified, any question of claim of right was covered. To suggest, as has been suggested in the written submissions advanced by Mr McCoy, that the judge did not consider the issue of honest belief, no matter how unreasonable such belief might have been, is, in my opinion, to misread the effect of the judge's findings, and his reasons for them.

142. In the result, I would give leave to appeal against the convictions but, treating the hearing of the applications as the appeals, I would dismiss the appeals. In so far as it might be said that the error in the judge's approach to the witness statement of Mr Chan, and its impact on the credibility of Mr Fan, was an error of law, thereby bringing into play section 83(1) of the Criminal Procedure Ordinance, I would, for the reasons stated in paragraphs [137] to [140] above, apply the proviso to that section.

Hon Stuart-Moore VP:

143. Leave is granted, but by the application of the proviso, the appeal is unanimously dismissed.