CHINA EVERBRIGHT- IHD PACIFIC LTD. v. CH'NG POH

FACV No. 6 of 2002

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 6 OF 2002 (CIVIL)

(ON APPEAL FROM CACV NO. 513 OF 2001)

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J U D G M E N T

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Chief Justice Li :

1. I have had the opportunity of reading in draft the judgment of Mr Justice Chan PJ and Mr Justice Nazareth NPJ and also that of Lord Millett NPJ. On the issue of whether the plaintiff company suffered any loss, I agree with the judgment of Lord Millett. On the other issues, I agree with the judgment of Mr Justice Chan and Mr Justice Nazareth and the judgment of Lord Millett.

Mr Justice Chan PJ and Mr Justice Nazareth NPJ:

INTRODUCTION

2. In 1994, Mr Ch'ng Poh (the appellant) was convicted of 2 offences, namely, conspiracy to defraud and publishing a false statement, in connection with his acquisition of the majority shareholding in the plaintiff company (the Company) in August 1985 through Join Park Ltd (Join Park), in which he was a majority shareholder. The appellant was found to have conspired with others to defraud the Company by dishonestly causing and permitting the Company to improperly give financial assistance to Join Park in acquiring the shares of the Company, in contravention of s.48 of the Companies Ordinance, Cap. 32 and concealing this by means of a circular movement of cashier orders and cash cheques.

3. Following the appellant's conviction, the Company commenced the present action against him for damages for conspiracy, conversion and breach of fiduciary duty, and for an account as a trustee.

4. Yuen J gave judgment for the Company in the sum of HK$127,617,747.88 ($127 million) with credit for $58,574,315 (which the Company had recovered from a third party pursuant to a settlement), together with compound interest from 17 August 1985 calculated at monthly rests at a standard rate of prime plus 1%.

5. Having failed in the Court of Appeal, the appellant now appeals to this Court.

ISSUES IN THIS APPEAL

6. In this appeal, the appellant no longer disputes, as he did in the courts below, the allegation, which the trial judge found as proved, that he was involved in the conspiracy and the defence, which the judge rejected, that the Company's claim was statute-barred. He now seeks to challenge the judgment only on two main grounds:

(1) the Company did not suffer any loss as a result of the wrongful conduct on the part of the appellant and others; and

(2) the award of compound interest at monthly rests was erroneous.

7. On the first ground, the primary issue is whether the implementation of the conspiracy by means of the circular movement of cashier orders and cheques had resulted in any loss to the Company. In support of his contention, the appellant relies on Selangor United Rubber Estates Ltd v. Cradock and Others (No. 3) [1968] 1 WLR 1555, where it was held that the plaintiff company in that case did not suffer any loss as a result of a similar circulation of cheques.

8. Related to and in further support of the argument that the Company did not suffer any loss, the appellant raises another issue, that is, whether title to 3 cashier orders issued by the Ka Wah Bank payable to the Company in the sum of $127 million as part of the conspiracy had passed to the Company. This puts into question the effect of fraud on the passing of title to a bill of exchange and, in the context of the present case, the effect of the conspiracy on the passing of title to the cashier orders.

9. In relation to the second ground, the issues initially raised in the appellant's case are: (1) what are the circumstances under which the court can award compound interest, whether such power is confined to proprietary claims; and (2) whether it was right to calculate interest at monthly rests. The appellant now concedes that the court does have power to award compound interest in the present case, leaving only the issue of monthly rests to be resolved.

FACTS AS FOUND BY TRIAL JUDGE

10. In order to deal with these issues, it is necessary to go into the facts in some detail, although not at such length as in the courts below, in view of the limited grounds of appeal now argued before this Court.

Persons and companies involved

11. The appellant was an architect in Malaysia. Since the 1970's, he has also become a businessman. In 1985, he was the majority shareholder of Join Park with Mr Ngai Shiu Kit (Ngai) as the other shareholder.

12. Mr C H Low (Low) was at the relevant times the Executive Vice President of the Ka Wah Bank. He also owned or controlled a number of companies through his family. These included Seareef Investments Ltd (Seareef), Wanfong Nominees Ltd (Wanfong), Vestall Ltd (Vestall) and Ariffin & Low.

13. Mr Quek Teck-huat (Quek) was at the relevant times a director of the Company which was a public listed company. He also owned a private company, Territorial Development Ltd (Territorial). It was said that he was a nominee for or controlled by Low in relation to these two companies.

14. In 1985, 87 million shares (equivalent to 68%) in the Company were held by Territorial. Another 38 million shares (equivalent to about 30%) were held by Wanfong and Vestall. The remaining 2 to 3 million shares (equivalent to about 2%) were held by members of the public.

15. The Company owned a number of subsidiaries including Dixon Ltd (Dixon). Through 2 of its subsidiaries, it owned substantial parts of a commercial and office building called Intercontinental Plaza in Tsimshatsui. The Company also owned 50% of Seareef which shareholding was subsequently reduced to 33% which the Company later disposed of for $1.

Negotiations for acquisition

16. In 1985, the appellant negotiated with Low for the acquisition of 77 million of the shares in the Company owned by Territorial. He was shown some unaudited accounts of the Company made up to 31 May 1985 which showed that its assets consisted of the Intercontinental Plaza offices to the value of $388 million and a debt owed by Seareef in the sum of $89 million with an overdraft due to the Ka Wah Bank in the sum of $91 million, giving the value of its net assets as $387 million. Based on such information, the purchase price was to be $232,540,000 ($232 million). After the acquisition of the 77 million shares, the appellant had to make an offer to acquire the shares of other shareholders of the Company at the consequential price of $3.02 per share.

17. The appellant did not have sufficient funds to acquire the shares. Initially, Low informed the appellant that the Ka Wah Bank would provide 100% financing for such acquisition. When this became impossible because of the Bank's lending restrictions, it was agreed that the purchase price was to be financed as follows:

(1) $109 million was to be provided by loans (to be secured by a pledge on the shares) to be granted by the Ka Wah Bank to two companies controlled by the appellant and Ngai respectively; and

(2) $123 million was to be raised by an arrangement which ultimately led to the conspiracy complained of.

18. The appellant alleged that the arrangement was to consist of: (a) Territorial obtaining $123 million from Quek and paying it to Join Park to be retained for one year to enable the appellant to satisfy himself with the net asset value of the shares and to sell some of his own assets to the Company; (b) Seareef repaying to the Company the debt of $89 million to enable the Company to buy assets from the appellant; and finally (c) the appellant and Join Park using the proceeds from the sale of assets to the Company to repay the sum of $123 million to Territorial. The arrangement of payment and retention of the $123 million was found by the trial judge as not making commercial sense and not credible: the lawyers were not consulted about this; the subsequent agreement did not contain any provision to that effect; Quek was in financial difficulty at the time; and it was not a reason given by the appellant in an earlier affirmation.

The Share Purchase Agreement

19. The lawyers and auditors who advised the appellant in the acquisition transaction were gravely concerned about the lack of information on the Company and Seareef. Notwithstanding such concern, a Share Purchase Agreement (the Agreement) was signed on 18 July 1985 whereby the appellant through Join Park agreed to acquire 77 million shares in the Company from Territorial at the price of $232 million. The Agreement contained, amongst other provisions, the following:

(1) Clause 3 - the purchase price of $232 million was payable in cash made up of two sums: (a) $123 million as deposit and part payment which was stated as having been paid by Join Park to Territorial, receipt of such payment being acknowledged in the Agreement by Territorial; and (b) $109 million which was to be paid on completion;

(2) Clauses 4(b) and 6(vi) - Territorial would procure repayment of the debt of $89 million due from Seareef to the Company within 30 days of completion and Quek would procure Territorial to deliver to Join Park a banker's draft in that amount to the Company to discharge such debt;

(3) Clause 5 - the sale was to be completed within 30 days (which was originally fixed for 16 August 1985). On completion, Join Park was to pay Territorial the balance of the purchase price, $109 million, subject to any adjustment as provided in Clause 7; and

(4) Clause 7 - Territorial and Quek were to deliver to Join Park the audited accounts of the Company made up to 30 June 1985 within 30 days of completion and further warranted that the net assets of the Company would not be less than $374,945,520 and that if the net assets were to be less than that amount, the price would be reduced by the difference.

Events after the Agreement

20. It is not disputed that the sum of $123 million stated in Clause 3 of the Agreement was never paid. It is also to be noted that although the balance of the purchase price in the sum of $109 million was to be payable upon completion, it was in fact paid one week after the execution of the Agreement and 3 weeks before the date for completion. This was made possible by loans from the Ka Wah Bank to two companies controlled by the appellant and Ngai respectively and $109 million was credited to the account of Wanfong. The trial judge remarked that this payment was made in advance of completion notwithstanding the express provision in the Agreement probably for the reason that there was never any payment of the deposit and part payment of $123 million.

21. On 9 August 1985, the appellant was appointed the Chief Executive of the Company. This enabled him to participate in the affairs of the Company even before completion. There was a dispute at the trial as to when this happened, but on the evidence before the court, the judge came to the conclusion that the appellant's appointment was effective from that date. He was subsequently made a director on 28 August 1985 and remained thereafter until some time in 1993 when he was facing trial for criminal charges.

22. Shortly before the date scheduled for completion (which was postponed by agreement for one day to 17 August 1985), there was an disclosure by Low to the appellant to the effect that in addition to the debt due from Seareef to the Company in the sum of $89 million, the Company also had other assets which consisted of overseas stock in the sum of $26 million and a deposit with Ariffin & Low in the sum of $10 million. It was also said that Seareef was prepared to pay $2 million interest in respect of the debt. The total amount which was to be repayable to the Company on completion was thus $127 million instead of $89 million as provided in Clause 4 of the Agreement.

Circular movement of cashier orders and cheques

23. The repayment of this $127 million was effected, as the trial judge found and it is no longer in dispute, by the circular movement of cashier orders and cheques which started as a payment by Wanfong on behalf of Territorial to the Company in the form of 3 cashier orders issued by the Ka Wah Bank in the total sum of $127 million, which was followed by payment to Dixon of the same amount by means of 8 cash cheques issued by the Company in favour of Dixon, which was followed by payment to Wanfong in the same amount by another 8 cash cheques issued by Dixon in favour of Wanfong.

24. It is necessary to describe the various steps taken by those involved in this circular movement of cashier orders and cheques.

(1) On 16 August 1985, Quek instructed Miss Chiu Chik Shang (Chiu), the manager of Wanfong to go to the Ka Wah Bank at 9 a.m. on the following day, 17 August, to apply for 3 cashier orders in favour of the Company for $127 million and to bring them back to the office.

(2) Quek also gave her 8 cash cheques drawn by Dixon all dated 17 August 1985 and payable to Wanfong. They were to be put into its account with the Ka Wah Bank only after 11 a.m. on 17 August 1985.

(3) On 17 August 1985, Chiu duly applied to the Ka Wah Bank for 3 cashier orders all payable to the Company in the total sum of $127 million.

(4) Since the account of Wanfong with the Ka Wah Bank did not at that stage have sufficient funds for these cashier orders, a Mr Victor Tan, a senior officer of the Ka Wah Bank and one of the conspirators, approved the issue of the cashier orders ahead of debiting the account of Wanfong.

(5) Three cashier orders were issued by the Ka Wah Bank drawn on the Bank's Cashier Order Account before the Wanfong account was debited. This was contrary to the established practice of the Bank for the issue of cashier orders.

(6) The cashier orders were taken to Wanfong's office and subsequently delivered by Ms Doreen Yong (Yong), who was the administrator of the Company, to the meeting place for completion at about 12 noon.

(7) At the meeting, Quek gave these cashier orders to the appellant in purported performance of Clause 4 of the Agreement. They were then taken by Yong to the Ka Wah Bank and credited to the Company's account with the Bank at 12:31 p.m.

(8) Meanwhile, Quek and Mr Chew Kam Meng (Chew), another director of the Company, purportedly on behalf of the Company drew 8 cash cheques in favour of Dixon in the same amount and had them paid into Dixon's account with the Ka Wah Bank. These were used to support the 8 cash cheques which were issued the day before by Dixon in favour of Wanfong.

(9) By 12:48 p.m., Wanfong had paid the 8 cash cheques issued by Dixon into its own account with the Ka Wah Bank. This put Wanfong in funds to cover the cashier orders which were issued earlier that day.

25. Completion of the sale and purchase of the shares took place and in due course, the shares were transferred. As the trial judge found, the scheme in effect amounted to this:

(1) Join Park had not paid but was treated as having paid $123 million as deposit and part payment to Territorial in respect of the Agreement, in consideration for

(2) the appellant and others involved in the conspiracy arranging for the discharge of the indebtedness and liability to the Company from Seareef and Ariffin & Low by the repayment of $127 million through the circular movement of cashier orders and cheques.

Appellant as officer of the Company

26. It will be recalled that by then the appellant was already the Chief Executive of the Company. On 28 August 1985, he was appointed director. On 19 September 1985, Ngai was appointed the Chairman and the appellant the Deputy Chairman of the Company. On 27 August 1985, a general offer to minority shareholders to purchase their shares at $3.02 per share was made.

Investment by the Company in Dixon

27. In the ledgers of the Company, it was shown that the 8 cash cheques issued in favour of Dixon on 17 August 1985 totalling $127 million were entered as investment by the Company in Dixon.

28. How Dixon made use of the sum and what happened to it remains a mystery. This is because in September 1985, the appellant purportedly wrote to Quek making enquiry about it. The trial judge considered this enquiry as only a gesture since it was not really followed up. The appellant alleged that he had made a visit to Singapore and was assured by Low and Quek that $127 million were in fact invested in properties in Singapore. However, there were no supporting documents for such investment. Nor were there any other contemporaneous entries to that effect in any of the books of the Company or Dixon or any other company. The trial judge rejected this allegation.

ANY LOSS TO THE COMPANY

Indebtedness to the Company

29. Mr Daniel Fung, SC, for the appellant argues that the Company suffered no loss because the indebtedness from Seareef and Ariffin & Low was not genuine and was not worth anything. The loans to Seareef, the overseas stock and the deposit with Ariffin & Low were all for Low's own benefit. The money paid by the Company went straight to Low through companies controlled by him. The entries in the books were only meant for the accountants. The money had already been siphoned off by Low long before the appellant came into the picture.

30. The trial judge took the view that there were probably no genuine commercial transactions represented by the payment from the Company to Seareef or the overseas stock or the deposit with Ariffin & Low. However, she found that the evidence of the experts and the documents clearly showed that there were genuine payments from the Company to Seareef and Ariffin & Low. They resulted in genuine debts owed to the Company.

31. In our view, this must be right. How Seareef and Ariffin & Low made use of the money they received from the Company was an entirely separate matter. Since these were genuine debts owed to the Company, they formed part of its assets.

32. It is not correct to say that the indebtedness was not worth anything to the Company. Although the money paid by the Company to Seareef was immediately transferred to Low or his companies and Seareef might well have been a company of a dubious nature, there might still have been something one could assess or value in respect of such indebtedness, either against Seareef or against Low and his companies. Moreover, at the time, Low would have been most unlikely to have endangered the support with which the Ka Wah Bank was being provided by the HSBC and the Bank of China, by allowing his companies to default.

Repayment of the indebtedness

33. Under Clause 4(b) of the Agreement, Seareef's debt was to be repaid to the Company. As a result of the late disclosure by Low, the overseas stock and the deposit with Ariffin & Low were also included. Any person, including the professionals, looking at the Agreement in the light of the late disclosure, would expect that the Company would be paid back by Seareef and Ariffin & Low a total sum of $127 million. It was intended that the Company was to recover such sum upon completion. The repayment of such sum was not only a term of the Agreement but might also have had an effect on other shareholders of the Company when they had to decide at a later stage whether to accept the offer from the appellant to purchase their shares.

Loss to the Company

34. It is clear that there was no real investment by the Company in its subsidiary Dixon, represented by the 8 cash cheques paid by the Company to Dixon. Nor was there any investment by Dixon of such funds. It is now known that the 8 cash cheques issued by the Company in favour of Dixon were put into Dixon's bank account in order to enable Dixon to draw the cash cheques payable to Wanfong which Wanfong used to finance the issue of the 3 cashier orders. The explanation that the funds paid to Dixon were used to invest in properties in Singapore was dubious in the extreme and was rightly rejected by the trial judge.

35. As a result of the circular movement of cashier orders and cheques pursuant to the conspiracy, the indebtedness from Seareef was treated as written off and discharged. The same can be said of the overseas stock and the deposit with Ariffin & Low. If there had been a genuine repayment, the Company would have been repaid its debts, realized its overseas stock and recovered its deposit. It would now have $127 million to its own use.

36. The net result of what happened was that (a) Join Park as purchaser paid $123 million less for the 77 million shares; (b) Territorial as vendor obtained $123 million less for the sale of those shares; (c) the indebtedness in the sum of $127 million owed by Low's companies to the Company was written off and discharged; but (d) the Company did not have the benefit of the repayment of this $127 million. Its assets represented by such repayment were used indirectly to finance the purchase of its own shares. To this extent, the Company was defrauded and had suffered a loss. The conspiracy scheme enabled Join Park to comply, on the face of it, with Clause 3 of the Agreement without actually paying $123 million. It also enabled the appellant, through Join Park, to acquire the 77 million shares at less than 50% of the purchase price and that was made possible at the expense of the Company.

Analogy with Selangor

37. Counsel also submits that the circular movement of cashier orders and cheques was not intended to benefit the Company; was never meant to put the Company in funds; was purely a series of paper transactions; there was no money or fund for the appellant and others to misapply and the Company was no better off or worse off before or after the implementation of the scheme. The facts, it is submitted, were on all fours with those in Selangor.

38. The trial judge sought to distinguish Selangor on the basis that there was real money in form of the cashier orders issued by the Ka Wah Bank which were in fact put into the Company's bank account. The Court of Appeal took the same view.

39. In Selangor, by means of certain transactions, the plaintiff company's funds were used to finance the purchase of its own shares by Cradock. As a result of this, a Woodstock Trust Ltd became indebted to the plaintiff company. By a subsequent agreement, this debt was taken over by Cradock. In purported repayment of this debt, Cradock drew a cheque in favour of the plaintiff company. This was followed by another cheque in the same amount drawn by the plaintiff company in favour of Burden who was one of its officers and a signatory of that cheque. This was then followed by a third cheque drawn by Burden in favour of Cradock as payment for the purchase by Burden from Cradock of the shares in the plaintiff company. This circulation of cheques enabled Burden to purchase the shares from Cradock and resulted in replacing Cradock's debt owed to the plaintiff company by a debt from Burden. Ungoed-Thomas J held that the plaintiff company did not suffer any loss.

40. On paper, the circulation of cheques in Selangor merely consisted of a credit entry followed by a corresponding debit entry in the books of the plaintiff company, a credit entry followed by a corresponding debit entry in the bank account of Cradock and similar entries in Burden's bank account. In the present case, again on paper, the same happened as a result of the circular movement of cashier orders and cheques: there was a credit entry followed by a corresponding debit entry in each of the bank accounts of the Company, Dixon and Wanfong. But is the situation here the same as in Selangor? More importantly, is the result the same?

41. In our view, whether or not the facts in Selangor were distinguishable from those in the present case is, in the result, immaterial. The question is whether as a result of what happened, the Company had suffered any loss.

42. Looking at the situation in the present case objectively, the fact that the cashier orders were issued by the Ka Wah Bank contrary to established practice simply means that, in effect, Wanfong was given credit by the Bank for the issue of the cashier orders for a couple of hours. The 3 cashier orders were issued and paid into the Company's account with the Ka Wah Bank in compliance with the Agreement, representing the repayment of the Seareef debt, the realization of the overseas stock and the recovery of its deposit with Ariffin & Low. It was money which was contemplated under the Agreement (though not intended under the conspiracy) for the Company to have and which it would have had but for the conspiracy. It was the arrangement pursuant to the conspiracy which caused the drawing out from the Company's bank account of the same amount of money in the form of 8 cash cheques payable to Dixon.

43. In Selangor, the parties involved were receiving one cheque with one hand and giving out another cheque in the same amount with the other. None of the cheques involved in the circular movement could be honoured without the other cheques. Each of the cheques was dependent on the others. In the present case, while Wanfong did not have sufficient money in its bank account to fund the 3 cashier orders without the Dixon cheques and the Dixon cheques could not be honoured without the Company's cheques, the 3 cashier orders could be honoured even if Wanfong had no sufficient funds in its bank account. This is because the Ka Wah Bank had to honour the cashier orders and it was up to the Bank to go after Wanfong. But the money received by the Company, had there been no conspiracy, could have been kept in its bank account and could have been used for its own benefit. It was the drawing out of the same amount of money to Dixon in fraud of the Company which prevented the Company from keeping and using it. By immediately withdrawing the money from the Company, the appellant and the others made sure that the Company was not able to keep and use the money.

44. In Selangor, the court held that at the end of the day, there was no satisfaction of the plaintiff company's liability and no money was there capable of being misapplied. This is because the circular cheques had the effect of substituting Cradock's liability to the plaintiff company by the liability of Burden. It was accepted in that case that neither Cradock nor Burden was good for the money. It was not intended by those involved that the plaintiff company would receive satisfaction, that is, would be repaid its debt, after the circulation of cheques. The plaintiff company suffered no loss as a result of this substitution of debtors. In the present case, the Agreement contemplated that the Company was to receive satisfaction by way of repayment of the debts from Seareef and Ariffin & Low. According to the Company's books, it did receive repayment in the form of the proceeds of the cashier orders. It was the withdrawal of the same amount from the Company's bank account payable to Dixon pursuant to the conspiracy that had deprived the Company of the benefit of such proceeds.

45. If one whistled at half time when the money was in the Company's hands, it was inescapably and immediately to be diverted out of the Company which diversion was covered up by the circulation of cashier orders and cheques. When the whistle was blown at full time, the Company which was treated as having received satisfaction of its debts did not have the benefit of the repayment. This is because as far as the Company was concerned, the indebtedness due from Seareef and Ariffin & Low was treated as discharged but at the same time, money was withdrawn from the Company to finance the purchase of its own shares and to enable the appellant to pay less for the shares. Hence, whether the whistle was blown at half time or full time, it is evident that the Company had lost the money representing the repayment of the debts. The money was misapplied by the appellant and his fellow conspirators.

46. In Selangor, the result was a substitution of debtors. Here, one of the intentions of the conspirators was to misapply the proceeds, while also to have the Company's debts written off. They succeeded to the detriment of the Company. As we have said, whether or not these factual differences are material does not have to be decided in this case, it being quite clear that the Company did suffer a loss as a result of the conspiracy of the appellant and the others.

THE CASHIER ORDERS : WHETHER GOOD TITLE OBTAINED

Background

47. Yuen J held that the cashier orders were delivered with the authority of the Bank. Although that authority was induced by fraud, it was voidable, not void; it remained actual authority until it was avoided: Citibank NA v. Brown Shipley & Co. Ltd [1991] 2 All ER 690. The handing over to Wanfong of the cashier orders made out to the Company was sufficient to authorise Wanfong to deliver the cashier orders to the Company : Yan v. Post Office Bank Ltd [1994] 1 NZLR 154, 160.

48. The appellant does not question the validity of the Citibank case; but he submits that it is inapplicable to the present case. There was fraud on the part of the payee of the cashier orders i.e. the Company. This was, the submission continues, the fraud of Quek and Chew (directors of the Company) and Yong (the administrator of the Company). While there is no actual issue between the Ka Wah Bank and the Company, in any notional issue between them as to whether the Company obtained title to the cashier orders, the Company's claim would be defeated by its own fraud : Chalmers & Guest on Bills of Exchange, 15 ed, para. 1042.

49. However Yuen J held that the fraud of the Company's directors would not be imputed to the Company because the Company was itself the victim of the conspiracy, Belmont Finance Corporation Ltd v. Williams Furniture Ltd & Others [1979] 1 Ch 250. The appellant does not challenge the validity of Belmont and acknowledges that it is that authority that makes it impossible for him to contend in the present case that the fraud of the directors upon the Company is to be imputed to the Company so as to defeat the Company's claim founded on conspiracy.

The notional issue

50. To overcome that hurdle the appellant seeks to have the question whether the Company obtained a good title to the cashier orders determined upon the basis of a similar though notional issue between the Ka Wah Bank and the Company, arising out of a fraud upon the Ka Wah Bank.

51. There is no such issue. In fact the cashier orders were honoured. The proceeds were paid into the Company's account. Moreover we do not think there was a fraud upon the Ka Wah Bank. In fact the Bank was used to further the fraud upon the Company, and was not itself defrauded. Upon completion of the cashier orders and cheques circle the Bank's funds remained the same as before.

52. In any case the appellant's submissions upon the notional issue, seeking to impute the directors' fraud to the Company, would not have succeeded. True there is a rule that the knowledge of a director may be imputed to the company on whose behalf he is acting in the transaction concerned. But there is also the well established exception to the rule relied upon by Yuen J, i.e. where the director is acting in fraud of the company, see In re Hampshire Land Co. [1896] 2 Ch 743 at 749; J C Houghton & Co. v. Nothard, Lowe & Wills, Ltd [1928] AC 1 at 18-19; Belmont at 261-2; Beach Petroleum NL & another v. Johnson & Others (1993) 115 ALR 411 at 574. The exception would preclude the imputation to the Company of knowledge of and therefore participation in the conspiracy of its directors.

53. The appellant's submissions on title therefore fail.

CONVERSION

54. The appellant takes only one point before this Court upon this cause of action which is that his no loss submission applies equally to conversion which could only succeed if loss was established. In the light of our conclusion that the Company did suffer loss, the point taken fails.

55. We would add that the $127 million in the form of the 3 cashier orders was to be a repayment of the debts owed to the Company. This money should, under the Agreement, and could, had it not been for the conspiracy, have been kept by the Company for its own use. The withdrawal of this money from the Company's bank account by means of the 8 cash cheques payable to Dixon for the purpose of financing the cashier orders instead of being a genuine investment amounted to divesting the Company of its assets. This constituted a wrongful deprivation and thus a conversion of the Company's property to the benefit of the appellant. This was effected by the appellant who was its Chief Executive, Quek and Chew who were its directors and signatories and Yong who was its administrator at the relevant time. They are all liable to the Company for conversion.

BREACH OF FIDUCIARY DUTY

56. Yuen J held that as Chief Executive, the appellant had a fiduciary duty to the Company and that he breached that duty in passing on the cashier orders knowing that the Company was to be deprived of these proceeds. Counsel does not challenge those findings. He relies only upon the general submission which we have already rejected, that there had been no loss to the Company.

57. It may be added that the appellant himself instructed Yong to take the cashier orders to the Bank knowing that they would be used not for the benefit of the Company but to fund the cheques issued to Dixon. At the same time, he knowingly assisted his fellow conspirators, Quek and Chew, who were directors of the Company, in misappropriating the proceeds of the cashier orders in breach of their statutory duties. It follows that the appellant's appeal in respect of breach of fiduciary duty must also fail.

COMPOUND INTEREST

58. Adopting the standard rate of prime +1% laid down in Komala Deccof & Co. S.A. & Others v. Pertamina [1984] HKLR 219, Yuen J ordered that it should be compound interest because of the appellant's breach of fiduciary duty in benefiting himself at the expense of the Company: Wallersteiner v. Moir (No. 2) [1975] 1 QB 373. She also ordered that such interest should be on monthly rests, as being the norm in Hong Kong as agreed by the experts, and in the absence of any good grounds for any longer rests. The Court of Appeal upheld the award.

59. The appellant rightly does not question the order for compound interest and accepts that the court had jurisdiction to make it. The claim was in equity and the money was obtained and retained by fraud, upon which basis, the court clearly had jurisdiction to award compound interest. As Lord Brandon said in President of India v. La Pintada Compania Navigacion S.A. [1985] AC 104 at 116:

"The Chancery courts, again differing from the common law courts, had regularly awarded simple interest as ancillary relief in respect of equitable remedies, such as specific performance, rescission and the taking of an account. Chancery courts had further regularly awarded interest, including not only simple interest but also compound interest, when they thought that justice so demanded, that is to say in cases where money had been obtained and retained by fraud, or where it had been withheld or misapplied by a trustee or anyone else in a fiduciary position."

MONTHLY RESTS

60. In challenging the order for monthly rests, counsel contends that the judge erred in not ordering yearly rests as it is conventional to do so. Plainly yearly rests are the more usually encountered in the mainly English authorities relied upon, but we are not persuaded that that is the conventional interest rest, at any rate in Hong Kong. Nor are we persuaded that if conventional, it would leave no room for more frequent rests where justice in particular circumstances required, given that the unquestioned discretionary nature of the court's power plainly permits monthly rests. No authority to that restrictive effect contended for has been cited, and merely individual instances of the adoption of yearly rests are relied on.

61. Counsel also submits that the experts were referring to the way banks in Hong Kong levy interest on borrowings, whereas compound interest is awarded in order to deprive the fiduciary of the gain he has made from the use, or presumed use of the money : Wallersteiner at 388, 398 and 406; Kleinwort Benson at 990-5. Thus it is argued that what should have been addressed was the profit the appellant had made from the use or presumed use of the money, and not what he would have paid by way of interest on the loan he would otherwise have to raise.

62. In any award of compound interest, the power to fix the rests is simply part of the power to make such an award, and is equally discretionary. In this case, the purpose to which the money was put is far from clear. To the extent that it went to the purchase of the Company's shares, there is no evidence of what profits, if any, were made. If the appellant was not able to make use of the diverted money to purchase the shares, he would have had to borrow a similar amount. That would have involved interest charges and rests of the very nature deposed to by the experts, which upon that basis the appellant "may be fairly presumed to have made": see Burdick v. Garrick (1870) LR 5 Ch App 233; 243.

63. There is authority for the judge's approach in Southern Cross Commodities Pty Ltd v. Ewing 14 ACLR 39; and in the following passage, which was not the subject of dissent by the majority, in Lord Goff's speech in the Westdeutsche Bank case at p.691 C-E :

"... Hobhouse J was in no doubt that, if he had jurisdiction to do so, he should award compound interest in this case. He said [1994] 4 All ER 890, 955 :

'Anyone who lends or borrows money on a commercial basis receives or pays interest periodically and if that interest is not paid it is compounded. ... I see no reason why I should deny the plaintiff a complete remedy or allow the defendant arbitrarily to retain part of the enrichment which it has unjustly enjoyed.'

With that reasoning I find myself to be in entire agreement. The council has had the use of the bank's money over a period of years. It is plain on the evidence that, if it had not had the use of the bank's money, it would (if free to do so) have borrowed the money elsewhere at compound interest. It has to that extent profited from the use of the bank's money. Moreover, if the bank had not advanced the money to the council, it would itself have employed the money on similar terms in its business. Full restitution requires that, on the facts of the present case, compound interest should be awarded, having regard to the commercial realities of the case. As the judge said, there is no reason why the bank should be denied a complete remedy."

With respect, this is plainly right.

64. There is accordingly no good reason to interfere with the judge's discretionary order made upon the unanimous views of the experts.

CONCLUSION

65. For the reasons set out above, we would dismiss this appeal. We would also make an order nisi that the appellant should pay the costs of this appeal. Any party challenging this order nisi should send in written submissions (copied to the other party) within 21 days from today. The Court will decide on the basis of the written submissions received. If no written submissions are received by the expiry of this period, the order nisi will become absolute.

Mr Justice Silke NPJ:

66. I have had the opportunity to read in draft the judgment of Mr Justice Chan PJ and Mr Justice Nazareth NPJ and also that of Lord Millett NPJ.

67. In the issue of the loss, if any, to the plaintiff company - "the Company" - I gratefully adopt the analysis, and the conclusions arising from it, of Lord Millett NPJ. The second transaction in Selangor United Rubber Estates Ltd v. Cradock (No. 3) [1968] 1 WLR 1555, which Ungoed-Thomas J held caused no loss to the plaintiff, is startlingly similar to the particular transactions here. As Lord Millett says of that second transaction in Selangor : "It was not the absence of underlying funds which made the payments mutually interdependent, but their pre-arranged and circular character which deprived the plaintiff of the opportunity of applying the payment for any legitimate purpose of its own."

68. So too here. The Company, whether or not there was the appearance of real money in the circular transaction, was rendered unable to make use of the proceeds except for their misapplication. The Company was denied the opportunity - by the fraudulent scheme in which the appellant in his capacity as its Chief Executive - a little later as its Director - was, on the evidence, a full participant - of using the proceeds for legitimate company business.

69. The Company was the victim of the fraud. As such the Company has, as Lord Millett pointed out, the option of either rejecting the fraudulent transaction or affirming it and claiming damages on the basis that it was effective and caused it loss - which it manifestly did.

70. The issues of breach of fiduciary duty and of conversion have been fully dealt with in the judgments of my Lords. There is nothing I can usefully add to what is contained in them.

71. That compound interest was awarded is no longer in issue here. The rests period is. Compound interest bites on the enrichment of the fraudster resulting from the fraudulent scheme. Those riches must be disgorged. It was the evidence that, had a legitimate transaction been carried out with the assistance of borrowed money, any such loan would have attracted interest at monthly rests. Had it been legitimate a prudent businessman would have either reduced the loan, or fully paid it off, at the earliest possible moment.

72. For that reason I am a little hesitant in agreeing that monthly rests extending over a period as long as exists in this case, rather than the English conventional yearly rests, is appropriate. But the trial judge fully considered the evidence placed before her. It lay within her discretion to make the order she did. In the event I am not persuaded that the exercise of that discretion should be interfered with.

73. I agree that the appeal should be dismissed.

Lord Millett NPJ:

74. This appeal arises out of the successful acquisition in August 1985 by the appellant Ch'ng Poh of a majority of the issued shares in the respondent China Everbright-IHD Ltd ("the Company"). The full facts can be found in the judgments of the trial judge Yuen J and the Court of Appeal and in the joint judgment of Chan PJ and Nazareth NPJ. There is no need for me to rehearse them again. For convenience I shall use the same abbreviations for the names of the various companies involved and state all sums in round figures.

75. The Company claims that in breach of s.48 of the Companies Ordinance the appellant used its assets, to wit the proceeds of three bank cashier orders, towards payment of the purchase price for its shares. The total value of the cashier orders was $127 million. The Company claims damages for (i) conspiracy (ii) conversion and (iii) breach of fiduciary duty. It has been awarded damages of $127 million together with compound interest with monthly rests. I agree with the judgment of Chan PJ and Nazareth NPJ that all three claims succeed. I propose to state in my own words my reasons for dismissing the appeal, but I shall confine my remarks to three issues:

(i) the appellant's principal defence, which is that the Company suffered no loss as a result of the transaction;

(ii) the causes of action; and

(iii) compound interest.

NO LOSS

The transaction

76. The Company was a listed company. It had an overdraft with the Bank of $91 million. On the basis of its unaudited accounts its net assets exceeded $387 million. The agreed purchase price for the shares was $232 million. The Company's assets included an item which was shown in its unaudited accounts as an interest-free loan of $89 million due to the Company from Seareef and two other items worth $10 million and $26 million respectively which did not appear in its unaudited accounts but which represented assets held by associates for the benefit of the Company. It was a term of the contract for the sale and purchase of the shares that on completion the vendor would deliver to the appellant a banker's draft of $89 million in favour of the Company in discharge of the Seareef loan. The parties later agreed that further sums of $10 million and $36 million representing the other two items together with $2 million by way of interest on the Seareef loan, making a total of $127 million, should be treated in the same way and be paid to the Company on completion by bankers' drafts.

77. Had the transaction been carried through normally the appellant would have paid the balance of the $232 million due to the vendor on completion and would have received bankers' drafts in favour of the Company for $127 million for payment into the Company's bank account. The appellant, however, was unable to raise the whole of the necessary finance. Accordingly he made arrangements to use the $127 million towards the payment of the purchase money due to the vendor on completion. This was possible because, apart from the appellant's own corporate vehicle which he was using to buy the shares, all the companies involved in the circulation of funds, i.e. the Company, the vendor, Seareef, Dixon, and Wanfong were customers of the Bank and together with the Bank were ultimately owned and controlled by the same individuals, namely C H Low and his associates.

78. Payment was effected as follows:

(i) On the morning of the day of completion Wanfong obtained three cashier orders drawn on the Bank's cashier order account in favour of the Company for a total of $127 million. In its application form Wanfong authorised the Bank to debit its account with the cost of the orders. There were at that stage insufficient funds in its account, and the Bank did not debit the account until later that same day.

(ii) Wanfong took the cashier orders to the completion meeting and handed them to the appellant, who had previously been appointed chief executive of the Company. They were then taken back to the Bank in order to be credited to the Company's account.

(iii) The Bank had previously been provided with eight cheques for a total of $127 million drawn on the Company's account in favour of Dixon, a subsidiary of the Company, together with a further eight cheques for the same total drawn on Dixon's account in favour of Wanfong.

(iv) Without the proceeds of the Company's cheques in its favour there would have been insufficient funds in Dixon's account to support its cheques in favour of Wanfong; and without the proceeds of Dixon's cheques in its favour there would have been insufficient funds in Wanfong's account to pay for the cashier orders. But once the cashier orders had been returned to the Bank the circle was complete, and the necessary entries were duly made in the various companies' bank accounts. The value of the cashier orders viz. $127 million was credited to the Company's bank account, and a like sum was immediately debited to the Company's account, credited and debited to Dixon's account, credited to Wanfong's account, and finally debited to Wanfong's account in payment for the cashier orders.

(v) The paying in slips were then taken to the completion meeting as evidence that the Company had received the $127 million in discharge of the debts due to it and that Wanfong (presumably by the vendor's direction) had received the balance of the purchase price for the shares. The sale and purchase of the shares was then completed by the delivery of executed share transfers to the appellant.

79. Thus the $127 million went round in a circle: from the Bank (by means of cashier orders) to the Company; from the Company (by means of ordinary cheques) to its subsidiary Dixon; from Dixon (by means of ordinary cheques) to Wanfong; and from Wanfong (pursuant to the authority contained in its application for the cashier orders) back to the Bank. The whole process cannot have taken more than a few moments and took place before completion of the sale and purchase of the shares, that is to say while the Company was still under the control of C H Low's associates.

The apparent loss

80. Since the money movements were circular, they did not affect the cash position of any of the participants. Each of them paid out the identical sum that it received. But it does not follow that their net asset position remained unchanged. The payment of $127 million to the Company was tendered and treated as made in discharge of the Seareef loan and the other indebtedness to the Company; while the payment of $127 million by Dixon to Wanfong was tendered and treated as made in discharge of the purchase price payable by the appellant for shares in the Company. It is beyond dispute that the appellant used the Company's funds to pay for shares in the Company contrary to s.48 of the Companies Ordinance. Yet it is contended on his behalf that the payment caused the Company no loss.

81. The contention is, to say the least, counter-intuitive. Before the money movements the Company had assets of $127 million consisting of liabilities due to it; after the completion of the money movements those liabilities had been discharged and not replaced. The money paid to the Company in discharge of liabilities due to it had been spent in acquiring shares in the Company, but these belonged to the appellant's corporate vehicle and not to the Company. The value of the Company's net assets had been reduced by $127 million. How can it be said that it had not suffered a loss of this amount?

The value of the Seareef loan

82. Counsel for the appellant submitted first that the so-called Seareef loan was not an asset of the Company because it was irrecoverable. It did not represent a genuine loan to Seareef, but a book entry which concealed an unlawful withdrawal of funds by CH Low and his associates using Seareef as a front. The trial judge found that there probably was no genuine commercial basis for the transfer of funds, and that the same suspicion attached to the other two items totalling $36 million. But, as the Judge rightly observed, that did not mean that there was no liability to repay. The moneys had been extracted from the Company, and whether they had been lawfully borrowed or unlawfully taken they represented liabilities due to the Company and therefore assets of the Company.

83. Counsel next submitted that the loss suffered by the Company was the value of the Seareef loan, and that this was worthless, since Seareef could not have met a judgment against it. There are several difficulties with this argument. In the first place, there is no evidence of Seareef's value beyond the fact that the appellant agreed that it should be sold for a nominal $1; but this was after its indebtedness to the Company had been repaid. In the second place, on the appellant's own case the indebtedness was not that of Seareef alone but of C H Low and his associates, and there is no reason to suppose that they would not have been in a position to repay the full $127 million out of the $232 million sale proceeds of the shares. In the third place, and most tellingly, that is what they did. While it is, of course, unlawful for a purchaser to use a company's money to pay for its shares, there is nothing improper in the vendor using the sale proceeds to repay his indebtedness to the company.

The Company's knowledge of the fraud

84. Counsel next argued that the Company could not recover because it was fixed with knowledge of the fraud through the complicity of its own directors. He accepted that, insofar as the Company was the victim of the fraud, it was not fixed with such knowledge: see Re Hampshire Land Co. [1896] 2 Ch 743; J C Houghton & Co. v. Nothard, Lowe and Wills [1928] AC 1 esp. at p.19 per Viscount Sumner; Belmont Finance Corporation Ltd v. Williams Furniture Ltd [1979] Ch 250 esp. at p.261 per Buckley LJ. Accordingly he did not rely on the fraud practised on the Company which deprived it of the $127 million, but on what he alleged was a separate fraud practised on the Bank and of which the Company was the beneficiary. This consisted in the fact that the Bank was prevailed upon to issue the cashier orders without (at that stage) debiting Wanfong's account with the cost.

85. The submission is misconceived. No fraud was practised on the Bank. The failure to debit Wanfong's account with the cost of the cashier orders immediately they were issued was unusual, but it did not affect the parties' financial position. Wanfong had authorised the Bank to debit its account with the cost, and whether the entry was made then and there or later made no difference to Wanfong's liability to the Bank. Wanfong's account was not sufficiently in credit to support the cost of the cashier orders, and even if their cost had been debited to the account straight away they would still have been issued on credit. Moreover, in the circumstances in which Wanfong obtained such credit, as I shall explain later, the transaction was incapable of causing loss to the Bank and it did not do so.

86. I think that the reason why Wanfong's account was not debited with the cost of the cashier cheques before the money movements had been completed has been misunderstood. If for any reason the circle had broken down, the appellant would have been unable to complete his purchase of the shares and the share transfers would not have been handed over. Mr C H Low and his associates would have remained in control of the Company. Repayment of their indebtedness to the Company was a term of the contract for the sale of the shares and was conditional on the completion of the sale. If completion had not taken place it would have been necessary to reverse the repayment of the Seareef loan and the other indebtedness by unwinding the money movements. In these circumstances I infer that the reason for not entering the debits and credits in the various bank accounts until after completion of the sale of the shares was to avoid the need to reverse entries already made. This is, of course, further evidence (if such were needed) of the Bank's knowledge of the source of the moneys paid for the shares and therefore of its complicity in the fraud practised on the Company, but that is another matter.

No "real" money

87. The main argument advanced on behalf of the appellant, both here and below, was that the circular movement of cheques was merely a paper transaction when in reality no funds ever existed and that it was accordingly ineffective to discharge any indebtedness to the Company. If correct, it would of course follow that the Company suffered no loss.

Selangor

88. The appellant relied on the way in which Ungoed-Thomas J dealt with the second transaction in Selangor United Rubber Estates Ltd v. Cradock (No. 3) [1968] 1 WLR 1555. By the first transaction, Woodstock had acquired the plaintiff company's shares by the use of its own money. In consequence, Woodstock was liable to the plaintiff in a substantial sum. By the second transaction, Woodstock sold its shareholding to Sinclair and Burden and used the proceeds of sale to discharge its liability to the plaintiff. So far, as I have said, there was nothing improper. The payment was effected, however, in the course of a circular movement of cheques. These were for identical sums which passed from Woodstock to the plaintiff (in discharge of its liability to the plaintiff); from the plaintiff to Sinclair and Burden; and from Sinclair and Burden to Woodstock for the purchase of the plaintiff's shares. Thus Sinclair and Burden used the plaintiff's money to pay for its shares. The question was whether, in these circumstances, the transaction caused any loss to the plaintiff. Ungoed-Thomas J held that it did not, because it failed to discharge Woodstock's liability in respect of the first transaction.

89. By a parity of reasoning, it was submitted on the appellant's behalf that the circular movement of money in the present case was ineffective to discharge the Seareef loan or the other indebtedness to the Company, which accordingly suffered no loss.

90. The circular money movements in the present case bear a striking similarity to the second transaction in Selangor. The trial judge and the Court of Appeal distinguished that case on the ground that it involved the circulation of ordinary cheques, whereas the present case involved the use of cashier orders, i.e. "real money". The trial judge said:

"In Selangor, there was a true circle of cheques where the same funds were being circulated. In the present case, however, there was an interposition of cashier orders, and cashier orders are drafts drawn by a bank upon its own funds. (Indeed, it is for precisely this reason that cashier orders are treated in the commercial world as being equivalent to cash)."

91. With respect, Selangor cannot be distinguished so easily. Ungoed-Thomas J expressly held that the second transaction was not a sham or mere paper transaction. All the cheques were genuine and were intended to effect the payments for which they were tendered and they were all honoured. In particular the cheque in favour of the company was intended to discharge Woodstock's indebtedness to the company. It was duly honoured, and Ungoed-Thomas J held that it was effective as a payment. The absence of any underlying funds did not affect this conclusion. The question was whether the payment was capable of satisfying the liability. He held that it was not. He said:

"......But it does not follow that because the payments are effective as payments, therefore they operate in satisfaction of the debt. So I return to the question asked earlier: were these payments of ￡207,500 and ￡42,000 satisfaction?

Such payments, if treated in isolation, would constitute satisfaction. But do they constitute satisfaction in the circumstances in which they were made? If these payments, amounting to ￡249,500, were only made as part of the three cheque circular movements, by which the payments to the plaintiff were dependent upon corresponding payments out by the plaintiff's directors from the plaintiff's account to the payer, by a scheme in which the payer participates and without advantage to the plaintiff, then the payer is giving with one hand what he at the same time takes away with the other. The plaintiff has the satisfaction of a conduit pipe. Even if one whistles half time when the money is in the plaintiff's hands, yet it must be the final result that matters in this as in other little games, the more so if the game is fraudulent and dishonest and fixed from the start. Satisfaction must be true and real satisfaction and not part of what makes satisfaction a mockery. I do not find it surprising that there is no authority for such a conclusion: and it is my conclusion." (emphasis added)

92. Since Woodstock's liability was not discharged, the company suffered no loss. Ungoed-Thomas J explained:

"Did the plaintiff suffer any loss by reason of the second transaction?

I have concluded that no satisfaction was established by the second transaction, because the payment to the plaintiff under its three cheque circular movement was not, in reality, a payment for the plaintiff to have at all. But as the payment to the plaintiff did not provide any money for the plaintiff, the plaintiff received no money under the second transaction capable of being misapplied....." (emphasis added)

For my part, I do not think that it is correct to say that the plaintiff received no money capable of being misapplied. It would be more accurate, as well as more consistent with the judge's previous finding that the cheques were effective to make payment (as well as with the intention of the parties), to say that the plaintiff received no money which was not bound to be misapplied.

93. Like the trial judge the Court of Appeal distinguished Selangor on the ground that in the present case the cashier orders were backed by real funds whereas the cheques in the earlier case were not. They said:

"It is clear that it was crucial to the judge's conclusion that the payment, if indeed there was one other than a simple book entry, was only made by the bank because of the presence of the two other cheques. Hence, the use of the word 'dependent'. In the present case, as the judge correctly pointed out, the Ka Wah Bank had funds with which the cashier orders were backed. The honouring of the cashier orders was, therefore, not dependent upon the existence or presentation of the cheques drawn by Doreen Yong on Dixon's account in favour of Wanfong."

94. I think that this misunderstands what Ungoed-Thomas J was saying. It was not the absence of any underlying funds which made the cheques dependent on each other. That went to the question whether there was payment at all, and despite the interdependence of the cheques Ungoed-Thomas J held that they did effect payment. The reason that the payment to the plaintiff did not constitute satisfaction of the debt due to it is that it was effected as part of a scheme in which the payer participated and which was structured in such a way that it "was not in reality a payment for the [plaintiff] to have at all". It was not the absence of underlying funds which made the payments mutually interdependent, but their pre-arranged and circular character which deprived the plaintiff of the opportunity of applying the payment for any legitimate purpose of its own.

95. The search for "real money" in a circular transaction is a mirage. Such a scheme depends on credit, not money. The Court of Appeal's approach would yield no solution where the participating companies had substantial funds of their own but still insufficient for the fraudsters' purpose. It draws a distinction between the case where the debts are discharged by the circulation of bankers' drafts or suitcases full of banknotes temporarily borrowed for the occasion and the case where they are discharged by ordinary cheques; yet the vice of the scheme does not lie in the absence of underlying funds but in the victim's inability to make use of the proceeds except for the purpose for which they are to be misapplied. In my opinion the result in Selangor should have been the same even if one or more of the parties had possessed the necessary funds or overdraft facilities.

The present case

96. The same vice is present in the instant case. The Company had no opportunity to apply the proceeds of the cashier orders for any legitimate purpose of its own. They only briefly left the possession of the Bank when they were taken to the completion meeting, and they were returned to the Bank before the sale of the shares was completed, that is to say while C H Low and his associates were still in control of the Company. In accordance with the pre-arranged scheme to which the appellant (the Company's chief executive) was a party) the Bank was already in possession of the cheques drawn on the Company's account to effect the payment to Dixon and the other cheques drawn by Dixon and Wanfong by which it would itself obtain payment for the cashier orders. The Bank was party to the scheme and was fully in control of the process. The proceeds of the cashier orders were credited momentarily to the Company's account but only for the like sum to be immediately debited with the payment of cheques already in the Bank's possession.

97. In these circumstances the proceeds of the cashier cheques were "not in reality a payment for the Company to have at all"; their receipt by the Company was dependent on the corresponding payments out by which means alone the Bank was to be repaid; and the Company was just as much a conduit pipe for the passage of the money as the plaintiff in Selangor. In my judgment the present case cannot be factually distinguished from Selangor.

The true ground of distinction

98. But it does not follow that the result is the same, for there is a crucial difference between the two cases. In Selangor the plaintiff contended that the circulation of the cheques did not discharge Woodstock's liability to it; so the question was whether it was bound to accept them as satisfaction. In the present case by contrast the Company contends that the circulation of the cheques did discharge the debtors' liabilities to the Company; so the question is whether the Company is entitled to accept them as satisfaction. That is a different question.

99. The purported effect of the circulation of cheques in both cases was to substitute one debtor for another. It is trite law that this cannot be achieved without the consent of the creditor. Because of the circular nature of the money movements neither creditor had an opportunity to accept or reject the substitution at the time. In Selangor the transaction would have substituted Sinclair and Burden as debtors to the plaintiff in place of Woodstock; but the plaintiff rejected the substitution, with the result that it was ineffective for want of the plaintiff's consent. In the present case the transaction was intended to substitute the appellant or his corporate vehicle as debtors to the Company in place of the existing debtors; and the Company is content to accept the substitution.

100. In my judgment the Company is entitled but not bound to accept the payment of $127 million as a discharge of existing liabilities, and it does not lie in the mouth of the appellant, as a party to the scheme, to deny it its right to do so. Counsel for the appellant submitted that the Company should not have what he described as the "luxury" of an option whether to accept or reject the transaction. But it is a commonplace that the victim of a fraud has the option of rejecting the transaction or affirming it and claiming damages. The circumstances are often such as to deprive him of the opportunity of rejecting it; but he cannot be denied the right to affirm it and to claim damages on the basis that it was effective and caused him loss.

101. It follows that the Company suffered a loss of $127 million as a result of the misapplication of its funds.

THE CAUSES OF ACTION

102. The appellant was party to the scheme for the misapplication of the Company's funds and was guilty of conspiracy to defraud the Company. The misapplication of the money was a breach of fiduciary duty on the part of the Company's officers, and the appellant was at the very least guilty of dishonestly assisting them in their breaches of fiduciary duty. Indeed, since the Company's funds were applied by his direction and for his benefit, he was guilty of dishonest receipt. But I agree with the Court of Appeal that he committed a breach of his fiduciary duty as chief executive officer of the Company when he caused the cashier orders to be delivered to the Bank with the intent that the proceeds should be put into the circle and used to pay for the Company's shares.

103. I also agree with the Court of Appeal that the appellant was guilty of conversion of the cashier cheques. It is trite law that conversion must be conversion of corporeal personal property; choses in action cannot be converted: see Clerk & Lindsell on Torts p.744 para. 14-41. A cheque can be converted because it is a piece of paper. It is treated as the means of obtaining the money in the account on which it is drawn and as having the value of the sum payable. As the payee of the cashier orders the Company could maintain an action for their conversion. But were they converted?

104. In the present case the cashier orders were drawn in favour of the Company and the proceeds were duly credited to its account. In the ordinary way that would not be a conversion of the orders. They then became paid orders and were of no further value. True, the moneys in the Company's account were immediately misapplied, but that was not itself a conversion of the orders which by then had fulfilled their purpose.

105. Nevertheless I agree with the Court of Appeal that in the unusual circumstances of this case the cashier cheques were converted. This is because the proceeds were paid into the Company's account with the specific purpose that they should be immediately withdrawn and misapplied. The payment to the Company was "not in reality a payment for the Company to have at all". The difficult question is whether the fact that the Company has affirmed the transaction by accepting the payment as satisfaction of the indebtedness in respect of which it was paid precludes it from claiming that the payment constituted a conversion. But I have come to the conclusion that it should not. The money was paid with the intention not only that the existing indebtedness to the Company should be discharged but also to fund the appellant's purchase of the shares. This is what has caused the Company loss, and it has in no sense been authorised by the Company.

COMPOUND INTEREST

106. As Lord Goff of Chieveley observed in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] AC 669 at p.682, the law of England in relation to the award of interest has developed in a fragmentary and unsatisfactory manner, with the result that insufficient attention has been given to the jurisdiction to award compound interest. Nevertheless it is well established in England that the equitable jurisdiction to award compound interest may be exercised in cases of fraud: ib p.696. Historically the Courts of Common Law did not award compound interest, and the Court of Chancery did so only when acting in its exclusive jurisdiction and not in its concurrent or auxiliary jurisdiction. But it did not confine such awards to proprietary claims, and a claim for breach of fiduciary duty would have fallen within its exclusive jurisdiction and attracted an award of compound interest. Accordingly Counsel for the appellant rightly did not dispute the Court's jurisdiction to award compound interest but confined his challenge to the frequency of the rests.

107. Despite this, and because of the unsatisfactory state of the law in England, I think it right for me to say a few words on the position in Hong Kong as I see it.

108. The refusal of English law to award compound interest at common law in cases of fraud while making such an award as a matter of course in equity is very difficult to defend. There may be concurrent jurisdiction at law and in equity on the same facts. In the Westdeutsche Landesbank case at p.696 Lord Goff asked rhetorically:

"Is it to be said that, if the plaintiff decides to proceed in equity, compound interest may be awarded; but that if he chooses to proceed in an action at law, no such auxiliary relief will be available to him?"

And he answered his own question:

"I find it difficult to believe that, at the end of the 20th century, our law should be so hidebound by forms of action as to be compelled to reach such a conclusion."

The principle on which the English Court of Chancery awarded compound interest was explained by Lord Hatherley in Burdick v. Garrick (1870) 5 LR Ch App 233 at p.241:

"the Court does not proceed against an accounting party by way of punishing him for making use of the Plaintiff's money by directing rests, or payment of compound interest, but proceeds upon this principle, either that he has made, or has put himself into such a position as that he is to be presumed to have made, 5 per cent., or compound interest, as the case may be. If the Court finds ... that the money received has been invested in an ordinary trade, the whole course of decision has tended to this, that the Court presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in those cases the Court directs rests to be made."

It is not easy to see why the same principle should not be applicable to any commercial claim whether based on fraud or not. At first instance in the Westdeutsche Landesbank case Hobhouse J was in no doubt that he should award compound interest if he had jurisdiction to do so. He said:

"Anyone who lends or borrows money on a commercial basis receives or pays interest periodically and if that interest is not paid it is compounded..... I see no reason why I should deny the plaintiff a complete remedy or allow the defendant arbitrarily to retain part of the enrichment which it has unjustly enjoyed."

Unless the Court awards compound interest, the plaintiff in a commercial case will not receive full compensation for being deprived of his money.

109. The present unsatisfactory state of English law in relation to the award of interest is the product partly of history, partly of outmoded social attitudes (Victorian society's hostility to trade in general and to the lending of money at interest in particular), and partly to piecemeal intervention by the legislature. In the Westdeutsche Landesbank case Lord Goff and Lord Woolf of Barnes made a powerful case for developing the Court's jurisdiction to award compound interest, to embrace not only common law claims of fraud, but also ordinary cases of restitution such as the case before them. But they were in a minority. The majority considered that the development of the law in this area should be left to the legislature. They took this view for two reasons. First, Parliament had twice since 1934 legislated in regard to interest on awards at common law, and on each occasion it authorised an award of simple interest only. The majority considered that they would be usurping the function of Parliament if they were to develop the common law jurisdiction in the manner proposed. Secondly, the question had not been fully argued, and while they expressed no concluded view on the question the majority considered that it would be imprudent to introduce such an important change in the law without the benefit of full argument.

110. The majority acknowledged the moral basis of the plaintiffs' claim for compound interest and based their decision to deny the claim on policy grounds. They did not express a concluded view, and the question remains open for reconsideration by the House of Lords in a future case.

111. The position in Hong Kong is not necessarily the same. Its history and social attitudes, particularly in relation to interest, may be different. Had the Hong Kong Court of Appeal awarded compound interest in a commercial case not based on fraud before 1997, the Privy Council might well have deferred to the decision of the local court informed by its knowledge of local conditions. In these circumstances I do not think that our Court of Final Appeal should necessarily feel constrained by the majority decision in the Westdeutsche Landesbank case to abstain from developing the law in a manner suited to local needs. The question does not arise for decision in the present case, and its determination must await a more appropriate case in future. Such a case can be fully argued on the basis of Hong Kong conditions, and will raise the question, not whether the change should be left to the English Parliament, but whether it should be left to the Legislative Council of Hong Kong. The policy considerations may well not be the same.

112. On the frequency of the rests, I am in full agreement with what has been said by Chan PJ and Nazareth NPJ.

CONCLUSION

113. I agree that the appeal should be dismissed.

Chief Justice Li :

114. This Court unanimously dismisses the appeal and makes an order nisi for costs against the appellant with the directions as proposed in para. 65 above in the joint judgment of Mr Justice Chan PJ and Mr Justice Nazareth NPJ.