RAYTECH INDUSTRIES CO LTD v. LEUNG WAI KIT

HCA 1360/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1360 OF 2011

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(HEARD TOGETHER)

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JUDGMENT

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Background

1.  The plaintiff is a company incorporated in Hong Kong carrying on the business of an exporter of household electrical appliances manufactured in the PRC.  The plaintiff has its own factory in the PRC but would also sub‑contract some of its production orders to other PRC factories.

2.  According to business registration records, a partnership named Raytech Industries Company “雷達實業公司” (“the Partnership”) commenced business on 2 August 1997.  There were originally two partners: Mr Ching Shui Chung (“Ching Senior”) and Mr Wu Yuk Kwan.  On 1 October 1998, Mr Wu ceased to be a partner.  On 1 December 1998 two persons joined as partners: the defendant herein (“Leung”) and Mr Hui Yau Keung (“Hui”).  Then eventually on 31 March 2002, the Partnership ceased its operation and was dissolved.

3.  In 1999, the plaintiff (“the Company”) was incorporated.  It has 10,000 issued shares of HK$1 each.  7,000 shares were allotted to Ching Senior and 3,000 were issued to Hui.  They were the first directors of the Company.

4.  On 8 July 2000, Ching Senior transferred 1,600 shares and Hui transferred 700 shares to Leung who also became the 3^rd director.  It is not entirely clear from the documents as to when Leung became a director of the Company.  Leung claims that he was appointed as an executive director on 25 June 1999.  I cannot find a copy of his consent to act as director.  It is rather unlikely since he only became a shareholder on 8 July 2000.  Furthermore, he was not stated to be a director in the Annual Return dated 25 June 2000. In any event, he signed the company’s 2001 Annual Return as a director on 29 June 2001.

5.  On 4 June 2001, the 5,400 shares held by Ching Senior were transferred to his son Ching Tim Hoi (“Ching”).  On the same day, out of the 2,300 shares held by Hui, 2,100 shares were transferred to Ching and 200 shares were transferred to the Leung.  From then onward, Ching and Leung were the only two shareholders and directors of the Company.

6.  On 30 March 2004, Ching transferred 1,100 shares and Leung transferred 700 shares to Mr Sham Hung Kwong (“Sham”).  Since then, Sham became the 3^rd shareholder and director of the Company.  Sham and Leung therefore each holds 18% of the shareholdings in the Company.

7.  It is not in dispute that at all material times until 29 April 2009, not only was the Leung a director of the Company, he was also employed to oversee that operation of the Hong Kong office of the Company including its finance, accounting and tax matters.  Leung alleged that he was unfairly dismissed from his employment on 29 April 2009.  He also lodged a claim in the Labour Tribunal for unfair dismissal on 2 February 2011.

The claims

8.  In HCA 1360/2011 (“the 1^st Action”), the Company alleged that Leung acted in breach of trust/fiduciary duty and/or conversion.  The Company claims against Leung for:

(i)  HK$12,668,174.86 as money misappropriated by Leung;

(ii) HK$2,706,494.75 as secret profits pocketed by Leung in his position as a fiduciary; and

(iii)    HK$720,000 as loss and damage suffered by the Company by reason of Leung’s breach of fiduciary duty which caused the Company to be liable for a penalty charged by the Inland Revenue Department (“IRD”).

9.  In HCA1776/2012 (“the 2^nd Action”), Leung sued Ching on three bases.  Firstly, Leung alleged an oral agreement to share commission amongst the three shareholders of the Company in or about 2002 (“the Commission Agreement”).  According to Leung, the terms of the Commission Agreement was that in respect of the 3% commissions received from various PRC factories that did business with the Company, the three shareholders and directors of the Company (Leung, Ching and Sham) would distribute such commissions pro rata in accordance with their respective shareholding in the Company.  Furthermore in 2007, the Company split its operation into five companies[1] (collectively referred to as “Raytech Group”).  Leung, Ching and Sham became shareholders and directors of each of the four additional companies.  It is Leung’s case that it was orally agreed between Ching, Sham and himself that the Commission Agreement would equally apply to these four additional companies.  Leung claimed that in breach of the Commission Agreement, Ching refused to account to him for the full extent of the commissions received from the various PRC factories.  Hence, Leung sued Ching for damages for breach of the Commission Agreement.

10.  Secondly, Leung alleged that as a result of instructions given to him by Ching, he conducted his financial affairs in a manner that caused him to be liable to pay income tax assessment plus penalty to the IRD for the 2002/2003 2007/2008 years of assessment in the sum of HK$1,496,826.  Ching directed and instructed him to accept the penalty imposed by the IRD and assured him that it was proper to do so.  Ching further orally agreed with Leung that Ching shall reimburse or indemnify Leung in respect of the penalty paid (“the IRD Agreement”).  In breach of the IRD Agreement, Ching refused to reimburse/indemnify Leung.  Apart from the said sum of HK$1,496,826, Leung also incurred HK$78,800 (being accountant’s fees).  Leung accordingly claimed damages for breach of the IRD Agreement in the total sum of HK$1,575,626.

11.  Thirdly, on or about 18 March 2009, at the request of Ching, Leung orally agreed to make a loan of HK$120,000 to Ching which was interest free and repayable upon demand (“the Loan Agreement”).  Leung alleged that in breach of the Loan Agreement, Ching refused to repay the said sum.  Leung thus sued for the return of the sum of HK$120,000.  Alternatively, Leung sued for damages for breach of the Loan Agreement.

Underlying transactions between the Company and various PRC factories

12.  A common background in both the 1^st and 2^nd Actions is the business arrangement between the Company and those PRC factories to which the Company sub‑contracted production orders.

13.  As mentioned earlier, the Company is an exporter of household appliances.  Although the Company has its own production factory in the PRC, it also sub‑contracted production orders to various PRC factories.  The Company would pay these sub‑contractors as per the sums stated in the respective contracts so that the sub‑contractors could obtain 17% tax rebate from the PRC Customs (ie 17% on the contract sum).  Payments of contract sums to the PRC factories would be made through certain import/export companies by telegraphic transfers, otherwise the PRC factories would not be able to obtain the tax rebate.  Such transfers would be effected in US currency.

14.  These PRC sub‑contractors would often request the Company to purchase and pay on their behalves raw materials, electrical parts or logistical expenses etc in Hong Kong.  These sub‑contractors would in due course reimburse the Company for such expenses in cash.  These reimbursements in cash were originally arranged to be paid into a DBS bank account (#825052860) opened in the name of Leung (“the 825 Account”).  Subsequently, another DBS bank account (#615194247) was opened in the joint names of Leung and Sham (“the Joint Account”) into which these reimbursements were to be paid.

15.  It is the Company’s case in the 1^st Action that:

(1) Between 11 December 2002 and 17 December 2008, Leung (acting without the knowledge and consent of the Company, Ching and Sham) wrongfully in breach of trust withdrew and misappropriated cash totalling HK$6,765,304.86 from the 825 Account[2]

(2) Between the same period, Leung (acting without the knowledge and consent of the Company, Ching and Sham) wrongfully in breach of trust withdrew a total sum of HK$457,734.20 in cash from the 825 Account and then paid it back to the Company but purporting the same to be Leung’s repayments to the Company for personal loans previously extended by the Company to Leung[3].

(3)Between 26 March 2004 and 24 May 2006, Leung procured Sham to sign some blank withdrawal slips in relation to the Joint Account for use of the Company.  Without the knowledge and consent of Sham and/or the Company and Ching, Leung withdrew two sums on 27 January 2005 and 24 May 2006 respectively totalling HK$259,700 from the Joint Account and misappropriated them for his own use.

(4) Between 22 December 2001 and 28 March 2006, Leung fraudulently submitted false invoices purporting the same to have been issued by a factory known as 中山市小欖賢鑾塑膠廠 (“Siu Lam Factory”) in PRC and caused the Company to issue cash payment cheques to Leung for the purported purpose of paying for these false invoices [4] .  The total sum misappropriated by Leung by this fraudulent method amounted to HK$3,980,056.

(5) In respect of another bank account of the Company at DBS (#0130591368) (“the Company’s Account”), Ching had signed a number of blank cheques and entrusted to Leung so that he can issue them for proper and legitimate purposes of the Company when Ching would be out of Hong Kong.  Between 11 September 2002 and 28 August 2006, without the knowledge of the Company, Ching or Sham, Leung used the said pre-signed cheques and withdrew a total sum of HK$720,000 for his own use[5].  Leung did so by falsely insert Ching’s name as payee on the cheques.  Leung then obtained cash from the bank as holder of such cheques.

(6) The Company entered into various contracts with a PRC factory (“Yuet Ngai”) for production of goods for the Company.  Yuet Ngai requested the Company to purchase raw materials on its behalf and would reimburse the Company.  To facilitate Yuet Ngai to claim tax rebate for such reimbursements, cash and/or blank cheques signed by Yuet Ngai would be delivered to the Company.  Between 29 May 2007 and 28 May 2008, Leung instructed the Company’s accounts department to issue receipts for reimbursement to Yuet Ngai without any proof of Yuet Ngai actually having paid those reimbursements to the plaintiff company.  Leung breached his fiduciary duty by failing to deposit those reimbursements back to 825 Account or the Company’s Account.  The total sum misappropriated by Leung was HK$485,379.80[6].

(7) Between 2001 to 2007, Leung wrongfully procured the Company to purchase goods from Sato Industrial Co Ltd (“Sato”).  Leung failed to disclose/declare to the Company or any board member that his wife was a shareholder of Sato.  Leung also procured the Company to purchase goods from Sato at 20% higher than market price.  Leung thereby made secret profits in breach of his fiduciary duty.  The secret profit amounted to HK$2,706,494.75[7] for which Leung is liable to account to the Company.

(8) By reason of the misappropriations as aforesaid, Leung deprived the Company of income and/or profits in the total sum of HK$12,668,174.86.  Between tax years 2000/2001 to 2006/2007, Leung knowingly submitted false/incorrect tax returns to the IRD.  By reason of Leung’s breach of fiduciary duty to act in the best interest of the Company, he caused the Company to become liable to a penalty of HK$720,000 imposed by the IRD.  The Company thus suffered loss and damage in that amount.

16.  In the Defence, Leung argued as follows:

(1) Leung denied converting HK$7,223,039.06[8] or any part thereof for his own use.  Leung admitted that the 825 Account and the Joint Account were opened upon Ching’s direction.  At all material times, the monies deposited into the said two accounts consisted of:

(i)  reimbursements from PRC factories;

(ii) commissions paid by PRC factories to the Company, which there was an oral agreement between the three shareholders that such commissions would be distributed to them pro rata to their shareholdings in the Company[9];

(iii) as directed by Ching, Leung withdrew reimbursements from the 825 Account and Joint Account and deposited them into the Company’s Account unless otherwise directed by Ching to make payments including:

(a) payments of office rentals and other running expenses of the Company’s office in Zhongshan; and

(b) Ching’s repayment of the Company’s loans or advances made to Ching;

(iv) upon Ching’s directions, Leung withdrew cash (representing commissions) and gave the money to Ching who shall distribute them according to the Commission Agreement; and

(v) all the withdrawals and payments were known to Ching and Sham.

(2) In relation to the sum of HK$259,700, Leung denied that he applied the sum for his own use.  He also denied that Sham had signed and provided any blank withdrawal slips of the Joint Account to him.

(3) In relation to Siu Lam factory, Leung denied submitting false invoices or misappropriation.  Leung said that Ching was responsible for liaising with PRC factories.  Ching signed payment cheques and directed him to present them for cash payment.  Cash were given to Ching.  It was Ching who provided the Siu Lam invoices.  In June 2011, Leung discovered that the invoices were false and reported the same to the police.

(4) In relation to the Company’s account, Leung alleged that Ching did not sign blank cheques and provide them to him.  All withdrawals from the Company’s Account were authorized and directed by Ching.  They were not blank cheques pre-signed by Ching.

(5) In relation to Yuet Ngai Factory, Leung alleged that the receipts for reimbursements were issued by the Company’s accountants upon verification.  Such reimbursements were paid in cash or cheques, either given to Ching personally or banked into the Company’s Account. They were recorded in the accounting records, sometimes as repayments by Ching of personal loans owed to the Company.

(6) In relation to Sato, Leung alleged that it was all along known to Ching that Leung’s wife was a shareholder of Sato.  Ching approved the purchases of goods from Sato.  There was no marked up of prices.  The Company chose Sato because it offered cheaper prices than other competitors.

(7) As for the penalty paid to IRD, Leung alleged that it was Ching who asked him to accept the said penalty imposed by IRD.  There was an oral agreement in 2009 between him and Ching that Ching would reimburse him of the penalty paid[10].  Acting in reliance of the IRD Agreement, Leung accepted the penalty of HK$780,000 and an additional tax assessment of HK$716,826 (totalling HK$1,496,826) which he paid to IRD in early 2010. 

17.  In the Reply, the Commission Agreement was denied and the plaintiff asserted that no purported payments for commissions had been distributed amongst shareholders.  The Company denied that monies withdrawn were used to pay rental and expenses of the Zhongshan office or as Ching’s repayments of personal loans to the Company.  The money transactions between Ching and the Company had been properly reflected in the Director’s Current Account maintained for Ching in the books.  The Company denied the various factual assertions of Leung.  As for Sato, Ching and Sham only came to know that Leung’s wife was a shareholder of Sato after they were interviewed by the IRD.  As for the IRD penalty imposed on Leung, they related to the personal tax liability of Leung and had no connection with the Company or Ching.  They were imposed because the IRD discovered that Leung’s personal income tax did not match his personal wealth.  Hence, IRD started investigation on the source of Leung’s income leading to the penalty and reassessment.

18.  The issues involved in the 2^nd Action are basically the same.  Leung’s defences put forward in the 1^st Action are the basis of his causes of action in the 2^nd Action.

List of Issues

19.  Since Leung acts in person, counsel for the Company provided a List of Issues as follows:

“                                  List of Issues

1^st Action

1.PRC factories’ reimbursements into DBS Account (HK$7,223,039.06)

(a) Whether Leung had converted and shortfall between the total withdrawals from his DBS account 825052860 and the total amount he deposited to Raytech’s DBS bank account 016-201-30591368.

(b) Did Leung apply the said difference for:-

(i) rental and running costs of Zhongshan office

(ii) given to Ching for sharing of the 3% commissions

(iii) repayment of Ching’s loan/advances due to Raytech

2. PRC factories’ reimbursements into Joint Account of Leung & Sham (HK$259,700)

(a)Whether Sham pre-signed withdrawal slips of DBS Joint Account 615194247 for Leung’s use.

(b)Whether Leung applied the HK$259,700 he withdrew from the said Joint Account for his own use.

3. False invoices of 中山巿小欖賢鑾塑料廠(HK$3,980,056)

(a) Who was the party (Ching or Leung) presented the false invoices to Raytech to cause Raytech to pay Leung as per the false invoices?

(b) After Leung cashed the purported payment cheques for the payment to the said factory, did he give the cash to Ching?

4. Withdrawals by Leung from Raytech’s DBS 016-201-30591368 (HK$720,000)

(a) Whether Ching left pre-signed cheques of Raytech’s DBS Account for Leung to make withdrawals.

(b) Whether the withdrawals were authorized by Ching.

(c) Whether the monies withdrawn were used by Leung for his own use.

5. Reimbursement from Yuet Ngai Factory (HK$485,379.80)

(a) Whether Leung converted the shortfall of what he received from Yuet Ngai and what he deposited to Raytech’s bank account.

(b) Whether Leung gave the shortfall to Ching or banked in and recorded as repayment of Ching’s loan due to Raytech.

(c) If Leung had converted the shortfall, whether in so doing, Leung breached fiduciary duty owed to Raytech.

6. Making Secret Profits through Sato (HK$2,706,494.75)

(a) Whether Ching had knowledge that Leung’s wife was a shareholder of Sato before Leung and/or Raytech placed orders with Sato.

(b) Whether Leung caused Raytech to purchase goods from Sato.

(c) Whether the price of Sato’s goods was about 20% more expensive than the market price?

(d) Whether Leung breached fiduciary duty owed to Raytech.

7. False Tax Returns of Raytech (HK$720,000)

(a) Whether the accounts and tax matters of Raytech were under Leung’s sole supervision and/or control at the material time.

(b) Whether Leung caused or allowed false tax returns to be submitted on behalf of Raytech between tax years 2000/2001 and 2006/2007.

2^nd Action

8. Commissions Agreement

(a) Whether Ching, Leung and Sham agreed to distribute the 3% of all payments from PRC factories among themselves.

(b) Whether any such commissions were paid to Ching or Leung or Sham.

9. IRD Agreement

(a)Whether Ching agreed with Leung that he would reimburse Leung or Leung’s personal tax penalty imposed by IRD.

10. Leung’s Loan to Ching

(a) Whether Leung and Ching agreed that Leung would lend HK$120,000 to Ching on or about 18 March 2009.

(b) Whether Ching is indebted to Leung for that HK$120,000.

(c) Whether Leung transferred a sum of HK$650,000 from Raytech International to Raytech on or about 18 March 2009.

(d) Whether Leung booked the said sum as salary or bonuses with HK$150,000 transferred to himself and HK$500,000 transferred to Ching.  If so, whether the act was authorized by Raytech International or Ching.

(e) If the act was not authorized, whether Leung repaid the said HK$150,000 to Raytech or other related companies.”

Evidence of Li Fung Siu

20.  Madam Li Fung Siu (“Li”) was called as the plaintiff’s 1^st witness.  She is the wife of Sham.  In or about September 2009, she was invited by Ching to join the Company as the Accounting Manager.  By that time, Leung had left the Company for nearly five months.  The IRD had also invested into the affairs of the Company and the salary tax liability of Leung.  Li formally joined the Company on 1 November 2009 and was entrusted with the task of investigating into the financial affairs of the Company which was hitherto controlled and managed by Leung.  Li had 20 years of experience in financial management and auditing.

21.  Li began with information revealed in the IRD investigation.  She then ploughed through the Company’s books.  Her task was complicated by the fact that prior to Leung’s departure, and according to an accounting staff Madam Yuen Suk Mei (“Yuen”) who worked under Leung, Leung had erased some of the Company’s computer accounting records and destroyed many hardcopies of accounting records[11].  Li examined the accounting records compiled by an accounting services company named MBA which the Company had been engaging its service as bookkeeper.  These records were seized by the IRD for its investigation and were later returned to the Company.

22.  In relation to the 825 Account, Ching had provided Li with four bank passbooks left behind by Leung.  Li thus compiled a list of all “deposits” into the 825 Account.  The total deposits between 11 December 2002 and 17 December 2008 amounted to HK$18,945,669.06.  Relying on the Company’s accounting records, Li then worked out a list of deposits back into the Company’s Account which were recorded as “reimbursements from PRC factories” in the Company’s accounting records.  There was only a total of HK$11,128,630 accounted for and returned to the Company.  Li also discovered that on five occasions, money withdrawn from the 825 Accounts were deposited into the Company’s Account but were recorded as repayments by Leung to the Company for his personal loans. These five transactions amounted to a total of HK$457,734.20.  Li found that there were a total of 79 occasions in which monies were withdrawn from the 825 Account but were not returned to the Company’s Account.  They amounted to a total sum of HK$6,765,304.86.  They did not feature in the Company’s books at all.  Accordingly, she believed that Leung had misappropriated a total sum of HK$7,223,039.06. 

23.  In relation to the Joint Account, Li discovered that there were only 14 deposits (including bank interests) totalling HK$509,860.60.  Only five of such deposits were accounted for in the Company’s books.  A total sum of HK$259,700 went missing.  It comprised of two withdrawals of cash on 27 January 2005 and 24 May 2006 respectively.  According to the subsequent evidence of Sham, the withdrawals were made by Leung using cheques signed in blank by Sham in advance.  This was supposed to facilitate operation of the Joint Account when Sham would be away from Hong Kong.  Unknown to Sham, Leung however made use of these cheques to withdraw cash for his own use.

24.  In relation to Siu Nam Factory, Li gathered all invoices purportedly issued by “ 中山市小欖賢鑾塑膠廠 ” together with purported receipts issued by this factory.  The total amount was HK$3,980,056. Some of these payments could be traced to cheques issued by the Company.  Some were paid by cash.  Li obtained copies of all these cheques from the bank and discovered that they had all been endorsed by Leung at the back.  Leung had thus obtained payments under the cheques as holder.  Li also discovered that for cheques issued by the Company in 2001 and up to 31 July 2002, the “Payee” of the cheques all bore the name of Ching Senior.  For cheques issued after 1 August 2002, the name of Ching was inserted as payee.  Li also obtained confirmation from Yuen that the handwritings on the purported receipts issued by Siu Nam Factory were those of Yuen.  In her police statement, Yuen explained that Leung asked her to issue cheques to pay for the Siu Nam Factory invoices and to help Siu Nam Factory to prepare the corresponding receipts.  Yuen gave the “un-chopped” Siu Nam Factory receipts to Leung.  Later Leung returned the receipts each bearing the chop of Siu Nam Factory to Yuen for account processing.  Li believed that all these Siu Nam Factory invoices were false.  The chops that appeared in the receipts were also falsified.  The falsity of these invoices and receipts was in fact admitted by Leung when he gave a statement to the Police.  Leung stated that this purported Siu Nam Factory did not exist[12].  In fact, the falsity of these invoices and receipts were first discovered by the IRD in the course of their investigation.

25.  In relation to the Company’s Account, Li discovered seven cheques co‑signed by Ching and Leung with Ching as payee.  These cheques however bore issue dates on which Ching was clearly not in Hong Kong.  This was proven by Ching’s movement records obtained from the Immigration Department.  Furthermore, Leung again endorsed at the back of these seven cheques to obtain payments.  The total sum of these seven cheques was HK$720,000. Li believed these cheques were the cheques previously signed in blank by Ching and given to Leung.

26.  In relation to Yuet Ngai, initially Li did not discover any irregularity.  However, shortly before Yuen left the Company in 2010, she provided Li with a number of copy receipts issued by the Company to Yuet Ngai.  Yuen said that Leung had instructed her on a number of occasions to issue receipts which were then taken away by Leung.  Li then discovered that between March 2007 and May 2008, Leung had obtained a total of HK$595,379.80 from Yuet Ngai.  Yet, Leung only returned HK$110,000 to the Company.  Leung had thus misappropriated HK$485,379.80. The fact that Leung had received various payments from Yuet Ngai was corroborated by two police statements made by Choi Kuen Fai [13], the owner of Yuet Ngai.  These statements have been adduced as hearsay evidence which Leung did not seek to require Choi to attend for cross‑examination.

27.  In cross‑examination, Leung questioned whether Li has attempted to locate the missing accounting books and records from MBA.  Li explained that the accounting books and records now contained in the hearing bundles were received from the IRD.  IRD had obtained them from MBA in the course of IRD’s investigation.  These books and records were returned by IRD to the Company.  Li thus essentially conducted her analysis on these books and records.  Where documents appeared missing, she had conducted a search at the Company’s warehouse.  Leung was unable to point to any document that could have been retrieved from MBA which might shed light on any of the disputed issues.  I cannot find any valid criticism in Li’s conduct. 

28.  Li was cross‑examined on two items on Annexure E relating to Yuet Ngai.  Leung pointed out to Li that in respect of a sum of HK$30,000 taken from the 825 Account on 11 June 2007, HK$20,000 was recorded in the Company’s ledger as “repayment from Ching”.  Li agreed and said that hence, this sum was not treated as misappropriated by Leung and forms no part of the Company’s claim.  She also produced the relevant part of the ledger for the financial year 2008/2009[14] which demonstrates that the other sum of HK$30,000 withdrawn from the 825 Account on 28 May 2008 was deposited back to the Company and recorded as “loan from Ching”.  Again this sum has not been claimed by the Company as misappropriation by Leung.  Leung’s cross‑examination thus did not reveal any inaccuracy in Li’s evidence.

29.  Leung questioned Li’s expertise.  Li admitted that she is not a certified public accountant/auditor.  Yet, Li has had considerable experience in accounting.  She worked extensively in two of the big‑four accountancy firms in Hong Kong.  The excel table prepared by Li[15] and the gathering of supporting documents (which were presented in the hearing bundle) are in my view succinct and orderly.  Leung is unable to point to any inaccuracy that is of substance.

30.  I find that Li gave her evidence cogently and her evidence is substantiated by voluminous documents.  Leung submitted that Li is Sham’s wife and is likely to be biased.  I disagree.  There was nothing in her cross‑examination that cast any doubt on her honesty and reliability.  I find Li to be a reliable witness and accept her evidence.  She basically presented the objective results of her careful examination over the books of accounts of the Company and the relevant banking records.  As for matters outside Li’s personal knowledge which were told to her by Ching, I would have to assess the credibility of Ching.

Evidence of Ching

31.  Ching started his career in home appliances since 1974 when he was 17.  In 1987, he joined “黎氏電業有限公司” as production and marketing manager.  He came to know Leung who worked as a technician.  Sham also later joined the same company as person‑in‑charge of production department.  Later, Ching joined “美澤實業有限公司”.  Leung also worked in 美澤.  Around 1997, Ching and Mr Wu established the Partnership.  Since Ching had bad credit history in his younger days, he used his father Ching Senior as the partner on record.  Ching Senior was at the time already over 70 years old.  According to Ching, the Partnership was between him and Mr Wu.  Later in 1997, Ching and Mr Wu allowed Leung to join.  In late 1998, Mr Wu left the Partnership.  Ching then arranged Leung and Hui to join as salary partners.

32.  The Company was established in 1999.  Ching arranged his father, Hui and Leung to act as shareholders and directors.  According to Ching, they were all his nominees.  He considered himself to be the boss of the Company.  When shares were transferred to Leung, he was told that the shares would have to be returned to Ching if Leung should leave the Company.  This was also the same basis on which Sham later joined the Company in 2003 as shareholder and director.  Ching’s evidence in this regard was corroborated by the evidence of Sham hereunder.  In fact, part of the shares that were transferred to Sham came from Leung pursuant to Ching’s direction[16].  Ching considered the Leung and Sham were his two trusted assistants.  Ching reposed considerable trust on both of them.  Leung was entrusted with overseeing the entire operation in Hong Kong office.  Sham was responsible for R&D and production in the PRC.  Ching was responsible for getting export businesses and liaising with PRC OEM factories. 

33.  There were 14 to 15 staff members in the Hong Kong office.  In the Defence, Leung admitted that after Hui left the Company, he became responsible for managing the operation of business of the Hong Kong office including its accounting, financial and tax matters with the assistance of the Company’s accountants and MBA.  According to Ching, he trusted Leung completely and he left all matters pertaining to accounting to Leung.  Ching said he would not concern himself with day to day operation of the Hong Kong office.  He had hardly asked about the Company’s finance and accounting matters.  As for Leung, he alleged that he was all along acting under the directions and approval of Ching.

34.  Although he could not remember clearly, Ching accepted that for a number of years, PRC factories that produced products for the Company had been paying 3% of the contract prices as commissions to the Company.  This arrangement was on the basis that the PRC factories would be paid in full in US dollars on the contract sum.  This would entitle them to claim for a 17% tax rebate from the PRC government.  Hence the factories were willing to return 3% to the Company as commission.  Ching said that this arrangement continued until sometime around 2007 and 2008.  Ching said that these commissions belong to the Company. He had never agreed to share or distribute these commissions amongst the three shareholders. 

35.  As for reimbursements from PRC factories for raw material costs or logistic charges that the Company had incurred on their behalves, Ching said that in 2002, Leung suggested to him to establish the 825 Account to handle these reimbursements.  Leung’s idea was to group up all these sporadic payments in the 825 Account before returning them to the Company’s Account.  Leung said that this would prevent the messing up of the accounts.  Ching said he trusted Leung and accepted his idea.  After Sham joined, the Joint Account was established with a view to taking over the use of 825 Account.  Ching originally thought that the use of the Joint Account could provide mutual supervision between Sham and Leung.  Yet eventually, since Sham was also required to stay most of his time in the PRC, Leung claimed that it would be more convenient to continue using the 825 Account.  Ching reluctantly agreed.

36.  Throughout the years, Ching and Sham were unaware of any problem.  In 2007, Ching learnt that IRD was investigating into the Company’s affairs.  Leung assured him that it was a small problem.  Ching therefore left the matter to Leung to handle.  Then in March 2009, Ching went up to the office of the Company’s auditor and discovered that the Company had been paying for professional fees incurred in the filing of personal tax return of Leung.  Ching felt suspicious.  He then asked Leung to return all bank passbooks and cheque books to him.  He also felt that since then, Leung behaved suspiciously.  After discussing with Sham, it was decided that Leung should be dismissed.  Ching therefore terminated Leung’s employment on 29 April 2009.  Although Leung was asked to transfer back the shares he held in various Raytech companies, Leung refused to sign the transfer documents and refused to resign from his directorship.  Then shortly afterward, Ching and Sham were invited by the IRD to attend an interview.  During the interview, IRD informed them that the accounts of the Company included two kinds of unlawful deductions: (i) some fees for production moulds kept in the PRC; and (ii) payments to Siu Lam based on invoices that were falsified.  In the end, IRD reassessed the profit tax payable by the Company and made additional tax demand in the sum of HK$1,448,887.  The Company was also required to pay a penalty of HK$720,000.  Then in November 2009, Ching and Sham invited Li to investigate into the accounts of the Company.  He was later informed as to the results of Li’s investigation as set out above.  Ching said that after the termination of Leung’s employment on 29 April 2009, he did not meet or talk to Leung again[17].

37.  In relation to the Company’s Account, Ching said that since he was frequently out of Hong Kong, Leung asked him to sign cheques in blank so as to facilitate the Company’s operation whilst Ching was away.  He said he signed cheques in blank because he trusted Leung.  These cheques include cheques of the Company as well as the other subsidiaries.

38.  In cross‑examination, Ching agreed that every month, he would bring back from the PRC office in Zhongshan a pile of bills/invoices/receipts relating to expenditures incurred in the PRC.  They would include rental for the Zhongshan office, salaries for PRC staff, utility bills and entertainment expenses.  Ching would give these documents to Leung for handling.  He admitted that Leung once told him that the bookkeeping services company MBA advised that salaries for staff in Zhongshan could not be booked into the Company’s account.  This was probably due to the fact that the Zhongshan office was a representative office which could not legitimately employ staff in the PRC.  Ching therefore agreed that money could be withdrawn from the Company in his name (ie as if it were his director’s drawing).  He would then bring the cash into PRC to pay for the staff’s salaries.  Ching however pointed out that every time when he withdrew money from the Company, he was required to sign on documents/vourchers to acknowledge such drawing.  Leung suggested to Ching in cross‑examination that Leung was only responsible for handing over the bills/invoices/receipts to Yuen who would then follow up with MBA.   

39.  Ching was also cross‑examined on a number of entries in the Director’s Current Account showing that on the same day that Leung withdrew a sum of money from the 825 Account, a portion of such withdrawal would be deposited into the Company’s Account as recorded in the books as “Repayment to the Company from Ching”[18].  Leung then suggested that the balance were all given to Ching in cash.  Ching said that he was unaware of these alleged repayments by him to the Company.  These were all done by Leung without his knowledge.  Ching categorically denied having received cash balance from Leung as alleged.

40.  Leung suggested to Ching in cross‑examination that he never signed blank company’s cheques.  Ching categorically denied.

41.  In relation to monies received from Yuet Ngai, Leung cross‑examined Ching specifically on one item: a sum of HK$80,000 purportedly received by the Company on 28 May 2008[19].  Leung pointed out that on the same day, a sum of HK$30,000 was recorded as having been received into the Company’s Account but as “repayment by Ching”.  Ching said he did not know about it.  As for other cheques received from Yuet Ngai, Leung suggested to Ching that these cheques were cashed and cash were handed over to Ching.  Ching again denied.

42.  In relation to Siu Lam Factory, although it was Leung’s pleaded case that the sale invoices were provided by Ching to him, Leung did not suggest that to Ching in his cross‑examination.  Neither was it suggested to Ching that he had taken away the cash supposed to be payable to Siu Lam.  Leung only cross‑examined Ching on one cheque in the sum of HK$250,000 issued on 23 February 2003[20].  Written at the back of the cheque were two bank account numbers: (i) 825050671 and (ii) 0110105175.  A sum of HK$150,000 was transferred to account (i) and a sum of HK$100,000 was transferred to account (ii).  After checking with the bank, Ching accepted that account (i) belonged to him.  Leung suggested that account (ii) belonged to Ching Senior. Ching denied knowledge.  Ching also denied instructing Leung to split the HK$250,000 in that manner and to transfer them to the two bank accounts. 

43.  Leung suggested to Ching in cross‑examination that there was a Commission Agreement between the three shareholders which Ching denied.  Leung also suggested that these commissions paid by PRC factories were transferred to the 825 Account through underground banks.  Ching denied knowledge of that and said that as far as he knew, cash were brought to Hong Kong by persons from the PRC factories and handed to Leung.  Leung however did not suggest to Ching any particular withdrawal from the 825 Account as representing distribution of commissions.  Neither did Leung suggest to Ching that there was in fact distribution of commissions amongst the three, let alone any specific amount or occasion.

44.  In relation to the IRD Agreement, Leung suggested to Ching that there was such an agreement and Ching denied.  Leung however did not put to Ching any detail relating to when the alleged IRD Agreement was made.  Leung did not challenge Ching’s assertion that he did not meet or talk to Leung after the 29 April 2009 incident.

45.  Ching is an important witness for the plaintiff’s case.  His evidence was in many aspects directly conflicting with Leung’s case.  A determination of the relative credibility between Ching and Leung is the key in resolving various issues in this case.  I shall discuss the evidence in greater detail in due course.  At this juncture, I will note that Ching appeared to me to be a credible witness.  His inability to provide details about the daily operations of the plaintiff is reflective of the fact that he considered himself the boss of the company and left mundane operations to his staff, including Leung whom he trusted.  Ching was more of an outward figure.  Ching was generally forthcoming and spontaneous in his answers to questions.  He gave straightforward answers even though some may not appear advantageous to his case.

Evidence of Sham

46.  Sham has been engaged in home appliances business since graduation from secondary school.  He came to know Ching in 1985.  In 1987, when he worked at 黎氏電業有限公司, he also came to know Leung.  In 2003, he was invited by Ching to join the plaintiff company.  Ching gave him 18% of shareholding in the plaintiff.  He agreed that the shares were given to him on the basis that when he leaves the company, he would have to return the shares to Ching.  He was responsible for production in the PRC factory including research and development. 

47.  Sham testified that Ching asked him to set up the Joint Account with Leung with the view to replacing the 825 Account.  However, since Sham was frequently in the PRC, Leung later suggested that it would be more convenient to continuing using the 825 Account.  Sham also said that at Leung’s request, he signed a number of withdrawal slips to Leung so as to facilitate Leung’s operation of the Joint Account whilst Sham was not in Hong Kong.

48.  Sham said that after he joined the plaintiff, he learnt that the company purchased “on/off switches” from Sato.  His considered that the quality of the switches was not different from ordinary brands but the price was more expensive by 20%.  He had requested Leung on divers’ occasions to purchase the switches from other sources.  Leung explained that the switches purchased from Sato had already obtained EU certification and a change in supplier would delay production.  Sham then did not insist.  He only came to know, after investigation by Li into the company’s accounts in November 2009, that Sato was a company in which Leung’s wife was a shareholder and director.

49.  In 2007, he learnt from MBA that the plaintiff was investigated by the IRD.  Leung later arranged another auditing firm Chan & Kwok to replace MBA.

50.  On 14 March 2009, he learnt from Ching that Leung had caused the plaintiff to pay for professional fees for the preparation of Leung’s own personal tax return.  Both Ching and Sham felt suspicious.  He noted that after Ching retrieved all bankbooks from Leung, Leung began to behave suspiciously.  Ching and Sham then decided to dismiss Leung.  On 29 April 2009, Sham was present at the time when Leung was dismissed.  Leung were given a number of documents to sign including documents of re-transferring shares held by Leung to Ching[21].  Leung refused to sign other than the document recording Leung’s handing over of certain company properties. 

51.  On 4 May 2009, Ching and Sham were invited to attend the IRD.  It was pointed out by the IRD that the plaintiff was suspected of false accounting.  One of the items IRD pinpointed related to deductions of expenses purportedly paid to Siu Lam.  IRD also told him and Ching that IRD had checked the personal wealth of the three shareholders and suspected that “someone” had been misappropriating money from the plaintiff.  This prompted the later engagement of Li to investigate into the accounts of the company.  Eventually, the plaintiff company had to pay re‑assessed profit tax. The plaintiff was also required to pay a penalty of HK$720,000.

52.  Sham confirmed that there was no such Commission Agreement alleged by Leung.  He specifically said that he had never received any distribution of commissions from Leung.  Sham also mentioned that between 2002 and 2008, the average monthly aggregated salaries paid to PRC staff in Zhongshan office was RMB40,000.

53.  Sham was only cross‑examined briefly by Leung.  On the issue of Sato, Sham admitted that he did not know about the contractual terms under which Sato supplied the switches to the plaintiff.  In particular, he did not know about the credit period and delivery lead time.  On his view that Sato was charging 20% above other suppliers, Sham agreed that it was just based on his experience. 

54.  Sham was also asked about his knowledge as to Ching signing blank cheques.  Sham said that he knew Ching had signed such cheques but were not clear as to details.

55.  Sham was asked about a bonus of HK$100,000 that was given by the plaintiff to him in March 2008.  Sham said he was told by Leung that the company would give him a bonus of HK$100,000.  After receiving it, Leung then later told him that the company needed cash flow and asked Sham to lend back HK$50,000 to the company which Sham did.  The company was later able to repay Sham HK$50,000.  Sham adduced further documentary evidence to support his evidence[22].  Leung never suggested to Sham that this incident has anything to do with the alleged “distribution of commissions”.  In fact, Leung never suggested to Sham that commissions had ever been distributed to Sham at all.  Sham was also not questioned as to the two cash withdrawals from the Joint Account totalling HK$259,700.  It has always been the plaintiff’s case that the said two withdrawals were made without Sham’s knowledge and consent.  Leung never suggested to Sham that he had knowledge of and consented to the said two withdrawals.

56.  I also find Sham to be a straightforward and reliable witness.  He was not seriously challenged in cross-examination.  The only reservation that I have about his evidence is on the Sato issue.  He was not called as an expert witness.  I cannot accept his opinion evidence on Sato’s sale prices being 20% above other suppliers of switches of comparable quality.  This is particularly the case when Sham admitted in cross-examination that he did not know the detail supply terms such as delivery lead time and credit periods provided by Sato. 

Evidence of Yuen

57.  Yuen was subpoenaed to give evidence.  She confirmed the contents of two police statements she gave in June and August 2010[23].  She joined the plaintiff in or about March 2005 as accounting clerk.  She was responsible for assisting Leung in the handling of company documents and finance matters.  She confirmed that Leung was responsible for day to day operation of the plaintiff.  She confirmed that Ching did not give her instructions on account-booking.

58.  She was responsible for gathering bills/invoices/receipts etc and handing them over to MBA (every two to three months) for bookkeeping.  She said every month, Ching would bring from PRC a pile of bills/invoices/receipts placed in a document envelope.  These would include expenses of the Zhongshan office although she could not specifically remember whether they included salaries for PRC staff. 

59.  Yuen said that after joining for one year, Leung entrusted him with cheque books of two company bank accounts, namely a DBS bank account and an ICBC bank account. She remembered that for cheques issued in favour of Leung, it would be done by Leung himself.  As for other payees including Ching, she would issue cheques upon Leung’s instructions.  She had no knowledge of and had not handled the 825 Account or the Joint Account.  She also said that when a particular director drew money from the company accounts, he would not be required to sign any acknowledgment. The relevant cheque copy would however be sent to MBA for bookkeeping.  She also said that the plaintiff seldom transacted in cash.  She could however remember some PRC factories reimbursing the plaintiff in cash for raw material costs which the plaintiff had previously paid on their behalves.

60.  On the issue of “blank cheques”, Yuen remembered seeing and handling cheques signed by Ching in blank.  In cross‑examination, she clarified her evidence.  What she meant were company cheques signed by Ching but either with payees filled in or chopped with “Account Payee Only” or with “Or Bearer” crossed out.  She did not remember seeing any cheque that was signed by Ching wholly blanked.  Leung put to her, and she agreed, that every month in anticipation of payments of shipping costs and other expenses, a list of intended payees would be drawn up. Cheques would be prepared with names of such payees filled in and chopped with “Account Payee Only” or with “Or Bearer” crossed out.  In the end, the company might not need to pay some of those payees and cheques prepared would be cancelled.  She had not handled cheques which bore only Ching’s signatures.  Yuen’s evidence thus apparently supported Leung’s case rather than that of the plaintiff.  However, Yuen later stated that for the two company bank accounts, she would apply a few cheque books at a time.  Leung could possess some of such cheque books.  When Yuen was shown company cheques (with no “Account Payee Only” chop and without “Or Bearer” crossed) that bore issued dates on which Ching could be proven to have left Hong Kong[24], Yuen said that she could not exclude the possibility of Ching having signed some cheques wholly in blank.  In my view, Yuen’s evidence in this regard is thus rather equivocal.  This issue would still have to be resolved upon the relative credibility of Ching and Leung.

61.  In relation to her second police statement, Yuen explained that when it referred to “suspicion of misappropriation by Leung”, she was not expressing her personal suspicion.  They were rather the result of what she was told from the result of Li’s investigation.  Nonetheless, she was able to make the following additional points:

(1) When she handled reimbursements from PRC factories, she remembered that the boss or representative of a factory would attend the Company office.  He/she would hand over cash or a cheque to Leung for the latter to handle. Sometimes, Yuen would assist Leung in counting cash and issuing receipts.  As for how the money or cheque was handled by Leung, she could not tell.

(2) In or about February 2009 shortly before Leung was dismissed, Leung instructed her to delete some records in the Company’s computer.  Leung said that as the PRC factory(s) had settled all reimbursements due, she could delete the records. Yuen followed Leung’s instruction and made deletions from the computer.  One week before Leung’s dismissal, he again instructed her to shred the related documentary records such as lists of amounts due and invoices.  As she was busy at that time, she did not immediately shred the documents.  Later, Leung asked her to give him those documents so that he could personally shred them.  Yuen was however unable to recollect whether the shredded documents related to one factory or more than one factory.

(3) In relation to Siu Lam, Yuen mentioned in her 2^nd police statement that towards the end of 2007, Leung had provided her with a pile of invoices of Siu Lam and photocopies of cash cheques purportedly issued to pay for those invoices.  Leung instructed her to help Siu Lam to prepare “receipts” of such payments.  Yuen did so and handed the original receipts to Leung.  Subsequently, Leung returned her those receipts, this time with Siu Lam’s chop placed on each.  Thereafter, she kept these documents and provided them to MBA for bookkeeping.

(4) In relation to Yuet Ngai, Yuen assisted Li in retrieving relevant documents.  Yuen knew the boss of Yuet Ngai Mr Choi.  She remembered that every time when Mr and Mrs Choi attended the plaintiff’s office, they would hand over cash or cash cheque to Leung.  Leung would instruct Yuen to issue the plaintiff’s receipts to Yuet Ngai.  Then the cash/cash cheque would be given to Leung for his handling.  Leung told her that the cash/cash cheque would be deposited to the plaintiff’s bank account.  As to whether it was in fact done by Leung, she could not comment as she did not follow up any further.

62.  In cross‑examination, Yuen admitted having an impression of MBA having mentioned that since the Zhongshan office was a representative office only, salaries payable to the PRC staff could not be properly booked into the accounts of the plaintiff.  Yuen also agreed with Leung’s suggestion that when a director withdrew money from the company, he was not required to sign any acknowledgment.  A photocopy of the cheque representing the drawing would however be made and submitted to MBA for bookkeeping.  Yuen also said that Ching would not give her instructions on account‑booking.  She normally dealt with Leung.  Yuen also could not remember how salaries for PRC staff were paid.

63.  Yuen is an independent witness.  In giving viva voce evidence, she seemed unable to recollect many details.  This is however readily understandable as she was asked to give evidence on matters some five to six years after her departure from the plaintiff.  She was trying her best to recollect past events and I find her reliable.  I accept her evidence as given in the police statements noting however that in the 2^nd police statement, she was expressing the suspicion of the plaintiff rather than her own personal suspicion.

Evidence of Leung and Discussions

64.  There are three areas of evidence pivotal to my assessment of Leung’s credibility.  The first is in relation to the “Commission Agreement”.  I have the following observations:

(1) According to Leung’s evidence[25], the Commission Agreement was reached in 2002.  This was an agreement that Ching, Sham and Leung would share the 3% commission pro rata to their shareholdings in the plaintiff.   It is however clear from the company registration documents that Sham only became a shareholder of the plaintiff on 30 March 2004.  Leung further alleged that Sham was invited to join the plaintiff in June 2002[26].  However, according to Sham’s evidence[27], he was only invited by Ching to join the plaintiff in June 2003.  Sham also said that Ching promised to give him 18% shareholdings in June 2003.  If Sham was correct, there could not have been such an alleged agreement reached in 2002.  It is important to note that Sham was never challenged by Leung in cross‑examination on this point.  Although Leung acted in person, I had clearly explained to Leung the purposes and objectives of cross examination.  In particular, I explained to Leung that if there were any aspect of a witness’s evidence which he did not consider truthful or accurate, he should question that witness on that aspect of his evidence in cross‑examination.

(2) Leung was unable in his pleaded case or his evidence to identify when and in what amounts the shareholders of the Company had received distribution of commissions.  Leung was specifically asked to identify any withdrawal from the 825 Account which he said was for distribution of commission pursuant to the alleged agreement.  Leung consistently avoided by saying that he could not remember.  I find this extraordinary.  Again, I note that Leung never put to Ching or Sham that they had received any sum of distribution of commission.

(3) It is more revealing when one analyses Leung’s pleaded case in the 2^nd Action.  Under paragraph 7 of his Statement of Claim[28], Leung purported to set out in tabular form the amounts of commissions distributable for each financial year which Ching failed to pay to him pursuant to the Commission Agreement.  Take for instances the financial year of 2002/2003, Leung put up a specific figure of HK$555,996.24 as what was due to him.  Under cross‑examination, it became clear that this figure must have come from the figure of “Annual Cost of Sales” of HK$102,962,267.44 set out in the audited financial statement of the plaintiff[29].  3% of this figure of gives rise to total alleged commissions of HK$3,088,868.01 and 18% of which would be HK$555,996.24.  This is exactly the sum that Leung pleaded that Ching failed to pay him.  In other words, paragraph 7 of his Statement of Claim alleges that he was not paid any of the commissions distributable at all.  This is contradictory to Leung’s case that monies withdrew from the 825 Accounts were partly defrayed on distributing commissions to shareholders.  The same contradiction can be observed in relation to the other sums claimed under the paragraph 7 table[30].

(4) It is also noteworthy that in calculating the amounts of commissions due to him under the paragraph 7 table, Leung sometimes used the “Annual Costs of Sales” figures and sometimes used the “Turnover” figures.  When asked in cross‑examination, Leung said that he did not know whether his estimations were correct.  He could not provide cogent explanation as to why he adopted inconsistent approaches in his calculation.

(5) According to the evidence of Leung, he and Sham was entitled to 18% of the commissions received by the plaintiff.  After the plaintiff’s business became split into four more companies, Leung said that the same 18% would apply to commissions received by the other Raytech companies.  It was then pointed out to Leung in cross‑examination that paragraph 7 of his Statement of Claim pleaded that that commission due to him was “pro rata to his shareholding in each of the Raytech Group of companies”.  In fact, in calculating the amounts of commission due to Leung under the other Raytech companies, Leung’s respective percentage shareholding in each of such companies were adopted instead of a flat 18%[31].  It would also follow that Sham, who has no shareholding in two of the newly established company, would not be entitled to share commissions in relation to those 2 companies.  Leung’s evidence was thus inconsistent with his pleaded case.  His purported explanation of not understanding English was beguiling as the Statement of Claim was duly interpreted to him before he signed his statement of truth.

65.  In my view, Leung’s case on the alleged Commission Agreement is frequently contradictory and inconsistent.  Leung’s evidence on this issue was also shifty and evasive.  The alleged distributions of commissions were wholly undocumented and based solely on Leung’s bare assertion.  I do not find Leung credible. I have no difficulties preferring the evidence of Ching and Sham.

66.  The second pivotal issue relates to the IRD Agreement.  In the 1^st Action, Leung pleaded that: (i) it was an oral agreement made between him and Ching in 2009; and (ii) in reliance of the IRD Agreement but not otherwise, on 3 December 2009, Leung accepted the penalty imposed by the IRD[32].  In his viva voce evidence, Leung however alleged that in 2007, the IRD investigated into the affairs of the plaintiff.  Then in 2008, Ching agreed to reimburse him for the penalty imposed.  When further asked by this Court, Leung even said that it was around mid-2008 that the agreement was made.  His evidence was thus contrary to his pleaded case.  It is also important to note that in fact, the IRD only suggested the tax reassessment and penalty on 3 December 2009 [33].  By that time, Leung had been dismissed for over seven months.  Ching’s evidence was clear that after Leung’s dismissal on 29 April 2009, he did not meet or talk to Leung except on one occasion when he bumped into Leung and his wife at the Convention Centre.  Ching said that there were no conversations other than exchange of pleasantries.  This evidence of Ching was again not challenged by Leung in cross-examination.  It is also noteworthy that Leung has always failed to condescend on particulars (both in pleadings and in his witness statements) as to the detail circumstances under which he and Ching allegedly entered into the IRD Agreement.  For these reasons, I again find Leung’s evidence unreliable and have no difficulties preferring the evidence of Ching.

67.  Thirdly, it was originally pleaded by Leung in his Defence to the 1^st Action[34] that part of the monies withdrawn from the 825 Account were used to make payments for “office rental and other running expenses of plaintiff’s office in Zhongshan”.  Then in the course of plaintiff’s opening, it was pointed out that payments for office rentals and various expenses incurred by the Zhongshan office were duly recorded in Ching’s Director’s Current Account [35].  From these ledger records, it can be seen that from time to time, Ching would draw cash from the Company Account to defray rental and other expenses in respect of the Zhongshan office.  Such withdrawal would first be credited as “drawing by Ching”.  Ching would later produce bills/invoices/receipts as evidence of such expenditures which were then recorded as debt-entries in the Director’s Current Account.  Leung then shifted his case to suggesting that PRC staff salary could not be booked.  He thus suggested that cash were given to Ching to pay for staff salary in the PRC which were not reflected in the accounts.  In the course of cross-examination, however, Leung stated that cash for payment of PRC staff salaries were withdrawn from the Company Account, rather than the 825 Account.  Hence, Leung’s evidence was again contrary to his pleaded case.  In other words, the evidence showed that cash withdrawn by Leung from the 825 Account were not used for expenses relating to the Zhongshan office (whether as rental, staff salary or other expenses).  Counsel for the plaintiff also submitted that according to Sham’s evidence, the average monthly salaries for PRC staff were around RMB40,000.  Between end of 2002 and mid‑2008 (around 5.5 years), the total salaries would be around HK$2.64 million.  According to Ching’s Director’s Current Account as of 31/3/2008[36], Ching had drawn from the Company Account a total of HK$1.76 million which could not be off set by bills/invoices/receipts.  This deficit is thus consistent with Ching drawing cash from the Company’s Account to pay for PRC staff salaries over the years which could not be booked as proper expenses in the accounts.  I agree that the documentary evidence is consistent with plaintiff’s submission that PRC staff salaries had not been paid by any of the monies withdrawn by Leung from the 825 Account.

68.  I had watched Leung’s conduct of his case and the giving of his evidence closely.  He might not have had high education but he is definitely street‑smart.  On various material aspects as exemplified above, his evidence either contradicted his pleaded case or was internally conflicting.  He frequently shifted his case when confronted with inexplicable documentary evidence.  When he could not offer cogent explanations, he evaded. I do not find him to be a credible witness. 

69.  It is also important to note that Leung at least admitted to the IRD that he had received from the plaintiff HK$4,181,192 over and above his salaries entitlement between 2002 and 2008[37].  He tried to wriggle out of this admission by alleging that Ching lured him into such admission by agreeing to the IRD Agreement.  I have pointed out that Leung’s case on the alleged IRD Agreement is incredible and unreliable.  In the circumstances, I would prefer the evidence of Ching and Sham whenever they conflict with that of Leung.

Findings of fact

70.  I make the following findings of fact as per the List of Issues:

(1) In relation to the monies withdrawn from the 825 Account, plaintiff’s case is that HK$6,765,304.86 had been misappropriated by Leung.  This amount of deficit was calculated by Li as per the excel table produced[38] which I find as accurate and reliable on balance of probability.  I also reject Leung’s evidence that the deficit were made up of cash given to Ching (whether as payments of expenses for PRC office or distributions of commission). I find that when Leung re‑deposited some of the monies into the Company Account as “repayments by Ching”, such repayments had been duly recorded in the excel table and had not been included in calculating the total deficit.  Leung did not dispute that monies in the 825 Account belonged to the plaintiff. I accordingly find that Leung had misappropriated HK$6,765,304.86.  I also find that HK$457,734.20 (which was not included in the calculation of the deficit) were withdrawn by Leung from the 825 Account and deposited back to the plaintiff’s Company Account purporting to reduce the indebtedness he owed to the plaintiff.  Such an act also constituted misappropriation.  I therefore find that Leung had misappropriated the total amount of HK$7,233,039.06.

(2) In relation to the Joint Account, I accept the evidence of Sham that he did pre‑sign withdrawal slips and entrusted them to Leung.  Leung had provided no explanation as to the total sum of HK$259,700 which I find as having been withdrawn by Leung using pre-signed withdrawal slips.  I find that Leung did so without the knowledge and consent of Sham and that Leung had converted the sum to his own use.

(3) In relation to Siu Lam, it is common ground that the Siu Lam invoices were false.  Leung’s evidence was that they were given to him by Ching.  Ching’s evidence was that he did not.  I accept the evidence of Yuen that it was Leung who gave the Siu Lam invoices to her and instructed her to prepare payments.  It was also Leung who asked her to prepare “receipts” on behalf of Siu Lam.  It was also Leung who later returned “receipts bearing chops of Siu Lam”.  Leung did not challenge Yuen on this evidence at all.  Leung’s case is thus: everything was done at Ching’s instruction.  I prefer the evidence of Ching over that of Leung.  I find that the false invoices were made up and presented by Leung without Ching’s knowledge.  I also reject Leung’s evidence of “discovery of falsity of Siu Lam invoices and reporting that to police” as contrived.  By that time, plaintiff had already reported to the police on the suspected falsity of the Siu Lam invoices, having been alerted by the IRD.  In fact, Leung was at the material time being investigated by the police.  I find Leung’s evidence of visit to PRC to “find out about the falsity of the Siu Lam invoice” contrived and not credible. The fact that he did make a trip to PRC is neither here nor there. I find that the cash cheques issued in purported payments to Siu Lam were presented by Leung.  I also prefer the evidence of Ching and reject Leung’s evidence.  I find that the cash obtained by Leung were not given to Ching except the occasion on 23 February 2003.  On that occasion, I find on balance of probability that the sum of HK$250,000 were somehow transferred to an account of Ching and another unknown account albeit without Ching’s knowledge.  Ching could have asked Leung to effect such transfers expecting Leung to properly account for them in the company’s account. In the circumstances, I find that Leung converted the sum of HK$3,730,056 (ie HK$3,980.056 minus HK$250,000).

(4) In relation to the sum of HK$720,000, it was not entirely clear from the evidence of Ching (whether in‑chief or in cross‑examination) as to what he meant when he said he signed some company cheques “in blank”.  In the evidence of Yuen, she said that when she said she had seen company cheques signed by Ching “in blank”, she meant that such cheques would still bear “Account Payee Only chop” or with “Or Bearer” crossed. Yuen’s evidence however left open a possibility that Leung might possess other cheque books of the plaintiff with cheques bearing Ching’s pre‑signed signatures only.  On balance, I find that the plaintiff had failed to discharge the legal burden of proving that there were in fact such cheques signed by Ching wholly in blank.  Neither do I find that Ching had lied about it.  Since Ching was accustomed to asking Leung to withdraw cash for him and relying on Leung to handle the matter, Ching could just have been mistaken in his recollection.  In this state of evidence, I cannot find that Leung had converted the total sum of HK$720,000 for his own use. 

(5) In relation to Yuet Ngai, I accept the hearsay evidence of Choi (which was not challenged by Leung) and the evidence of Yuen.  I also accept the calculation of the shortfall of HK$485,379.80 by Li.  I find that Leung had breached his fiduciary duty and converted the shortfall of HK$485,379.80.

(6) In relation to Sato, I find that there is no reliable evidence that Sato had charged 20% above market price in relation to the supply of switches.  I decline to award this claim to the plaintiff.

(7) As for the penalty of HK$720,000, I find that it was imposed by IRD largely due to the discovery of the false invoices of Siu Lam.  I had found Leung responsible for the said false invoices.  I accordingly find that Leung breached his fiduciary duty in presenting those false invoices and including them in the company’s accounts.  It is not disputed that Leung was responsible for preparing tax returns for the plaintiff, albeit assisted by professionals.  However, since Leung knowingly presented and included the false invoices to the company’s accounts, Leung is responsible for the damage caused to the plaintiff.  I accordingly allow this claim of HK$720,000.

(8) I reject Leung’s claim based on the alleged Commission Agreement.  I accept the evidence of Ching and Sham that there was no such agreement.

(9) I also reject Leung’s claim based on the alleged IRD Agreement.  I accept the evidence of Ching that there was no such agreement.

(10) In relation to the alleged loan of HK$120,000, I accept Ching’s evidence that he never borrowed this sum from Leung. 

Conclusion

71.  I find for the plaintiff in the 1^st Action and give judgment against the defendant in favour of the plaintiff for a total sum of HK$12,428,174.90 with interest at judgment rate from the date of judgment.  I also order that the defendant do pay to the plaintiff costs of the 1^st Action to be taxed, if not agreed, on party‑and‑party basis.

72.  In relation to the 2^nd Action, I dismiss all claims by Leung.  I also order that Leung do pay to Ching costs of the 2^nd Action to be taxed, if not agreed, on party‑and‑party basis.