PANASONIC SH INDUSTRIAL SALES (SHENZHEN) CO. LTD. v. LIN YOUNG CAI AND OTHERS

HCA 7203/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7203 OF 1998

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J U D G M E N T

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Introduction

1. The plaintiff is a company within the Panasonic group. Incorporated under the laws of the Mainland, it carries on the business of selling electronic components and batteries in Shenzhen. The 1st defendant ("D1"), also known as Ken Lau, was the plaintiff's salesman between March 1995 and November 1997. Since May 1998, he has been detained by the Shenzhen authority in connection with the subject matter of the present dispute. The 3rd defendant ("D3") was incorporated in Hong Kong on 8 October 1996. D1 and the 2nd defendant ("D2") are its directors whereas D2 is also one of its shareholders. The 4th defendant ("D4") is incorporated under the laws of the Mainland, having a license to carry on business in Shenzhen between 16 September 1996 and 16 September 2000. D1 is its chairman and managing director. D2 is its vice-chairman and a 25% shareholder. It was the plaintiff's pleaded case that D1 and D2 represented to others that they were husband and wife. But it now accepts that in fact they are not.

2. The plaintiff's primary claim is based on a fraudulent scheme carried out by D1 during his employment with the plaintiff. Under this scheme, D1 asked three of the plaintiff's customers, namely, Bosom Company Limited ("Bosom"), Scud Group Company Limited ("Scud") and Hwasin Communication ("Hwasin") to pay the price of the goods supplied by the plaintiff to D3 and D4. Then certain remittances were purportedly made by D2, D3 and some other parties to satisfy the plaintiff's invoices issued to these customers. But the plaintiff had not received all the sums due. As a result, the plaintiff had suffered loss and damage of more than HK$7 million. D1 is liable because of, inter alia, breach of fiduciary duties. The other defendants are liable on the basis (1) that they knowingly and dishonestly participated in the scheme; (2) that they conspired with D1 to carry out the scheme; and (3) that they knowingly and dishonestly received and dealt with the plaintiff's monies.

3. The plaintiff has a further claim against D1 and D4 in conversion of some 54 cartons of its goods totalling JPY$2,708,800.00.

4. On 6 May 1998, the plaintiff obtained a Mareva injunction against D1 to D3. The injunction is still effective. Default judgment had already been entered against D1 and D3. What remains is the claim against D2 and D4. D4 had not filed any defence and does not appear for trial despite proper service of the hearing notice. Initially, D2 was unrepresented. On 15 May 1998, she filed a defence statement in Chinese ("D2's 1st defence"). Later she became represented and her lawyers filed a defence on 13 October 1998 ("D2's 2nd defence"). Although D1 does not take part in the proceedings, he had through D2 produced to the court a letter dated 15 June 1998 setting out his version of the events ("D1's statement"). At the trial now before me, D2 acts in person.

5. Some other companies also featured in the course of dealings. They are:

(1) Greatland Electronics (SC) Co. Ltd. ("Greatland"). It is a Shenzhen company. Its Chinese name reads "五洲豐電子（深圳）有限公司". It is identical to D4's Chinese name "深圳五洲豐電子有限公司" except that the order of the words is different. There is no suggestion by either D1 or D2 that Greatland is not D4.

(2) Power Trading Limited ("Power Trading"). It is the Hong Kong arm of the Bosom Group. Goods supplied by the plaintiff to Bosom were delivered to Power Trading who would in turn forward the same to Bosom in the Mainland.

(3) Guangyutai Electric (Shenzhen) Co. Ltd. ("GYT"). It is another company related to Bosom.

(4) Sunning Technology (HK) Co. Ltd. ("Sunning"). It is a Hong Kong company. Goods supplied by the plaintiff to Scud and Hwasin were delivered to it. It had also made remittances to the plaintiff in connection with invoices issued to Bosom.

(5) Shenzhen Jielu Consulting Service Co. Ltd. (深圳捷旅諮詢服務有限公司) ("the Travel Agency"). D2 is its managing director. The questions whether she is in fact its beneficial owner, whether D1 is connected and if so how have alluded to in evidence. I will deal with them when they arise.

6. I now turn to the evidence. The plaintiff and D2 agree that for the purposes of the trial, the copy documents contained in the plaintiff's bundles are to be admitted as evidence, with the exception of a copy letter from one Shenzhen Jindi Law Office to the plaintiff's solicitors dated 29 February 2000. The letter is in fact a legal opinion on certain aspects of the PRC law. (The plaintiff not calling the maker, I have ruled against its admissibility.) The parties also agree that certain hearsay evidence contained in their witness statements and documents is admissible despite the lack of formal hearsay notices. Consequently, I am only concerned with the weight rather than the admissibility of the evidence now before me. Unless otherwise stated, the documents referred to below are copy documents and "Annexures" mean "Annexures" to the witness statement of one of the plaintiff's witnesses, Mr Shinya Akaho, its deputy sales manager.

Plaintiff's evidence

7. The plaintiff calls 3 witnesses: Mr Akaho ("PW1"), Mr Edward Chan Kim Hung, its assistant general manager ("PW2") and Mr Chikafumi Ono, a former finance director ("PW3"). I will summarize their evidence below.

8. In about October 1997, PW1 received from PW2 a business card of D1 in the name of Greatland (Annexure 40), which was in turn obtained from a customer. One month later, suspecting that D1 was operating his own trading company Greatland whilst in its full employment, the plaintiff asked D1 to resign. He did. Before his departure, D1 was responsible for sale of batteries to customers in the telecommunications field. He had handled the transactions with Bosom, Scud and Hwasin since July 1997 until he left.

9. Later in or about December, the plaintiff found out that the outstanding invoices of the above customers amounted to more than HK$8 million. As they were previously handled by D1, PW2 contacted him on or about 13 January 1998 to see if he would agree to be responsible for the outstanding amounts. D1 did not give a definite answer. Between December 1997 and early 1998, PW2 visited these customers but none of them agreed to pay the outstanding invoices. In March 1998, Bosom confirmed that payment was in fact made to D3 upon D1's instruction. Upon legal advice, the plaintiff investigated into the matters and retrieved the relevant documents. D1's fraudulent scheme was then discovered. In May 1998, the plaintiff reported the matter to the Shenzhen authority.

Bosom

10. In connection with Bosom, the relevant invoices covered the period between July and October 1997. The plaintiff is unable to locate any purchase orders placed by Bosom for the relevant period apart from a fax dated 29 August 1997 from GYT placing an order for batteries on behalf of Bosom. There are also 3 internal memos written by D1 on behalf of the plaintiff giving instructions to place orders for Bosom.

11. The plaintiff has however located several letters written by D1 between July and November 1997 (Annexure 9) in which he had given instructions to Bosom to make payments into D3's bank account no 042 326 694001 with the Hong Kong Bank in Hong Kong ("D3's bank account"). In the letter dated 30 October 1997, D1 set out the details of the plaintiff's goods delivered to Bosom in October 1997 and asked that payment be made to D3's bank account in Hong Kong currency. The total amount was $1,734,282.00. Bosom made the payment in early December 1997, as evidenced by D3's bank statement for the period between 29 November and 31 December 1997 and the pay-in-slips on 8 and 10 December 1997 (Annexure 12).

12. In December 1997, the plaintiff, not aware of D1's scheme yet, asked him to confirm the outstanding amount due from Bosom and to assist in collecting payment. D1 therefore wrote 3 letters. One is undated. The other are dated 15 and 17 December 1997 respectively. They were all written on the letterheads of Greatland. (They form part of the correspondence at Annexure 9.) In the letter dated 17 December, D1 confirmed that price for goods supplied in October 1997 had been received already. He also stated the outstanding prices for the goods supplied in November and December 1997 to be HK$4,490,445.40. In an internal memo also dated 17 December 1997 prepared by D1 (Annexure 13), he informed the plaintiff that Bosom owed the plaintiff that amount. By a letter dated 25 March 1998 by GYT to the plaintiff (Annexure 12), Bosom confirmed through GYT that it had paid $1,734,282 for the goods supplied on October 1997 into D3's bank account.

13. For the goods supplied to Bosom between July and October 1997, the following remittances had been made by D2, D3 and Sunning to settle some of the invoices:

Approximate date in 1997	By	Amount in JPY
(1) 6 October	D2	$2,985,000
(2) 28 October	Sunning	$5,965,080
(3) 30 July	D3	$6,107,000
(4) 15 December	D3	$8,465,280
(5) 22 December	D3	$16,528,982

14. Of the 5th remittance, the plaintiff cannot locate the corresponding invoices for part of it, namely JPY$3,625,982. Copies of the Bosom's invoices, remittance advice and payment vouchers can be found at Annexures 6 and 11.

15. PW2 has prepared a table showing the details of the Bosom's invoices and remittances (Annexure 5). According to this table, the invoices for July to September had been fully paid up. 5 invoices remained outstanding. They all relate to goods delivered in October 1997. The total amount is JPY$19,105,218. As noted above, Bosom had already paid part of it, namely, HK$1,734,282, into D3's bank account. The plaintiff has continued to trade with Bosom directly after the departure of D1, and all invoices for goods supplied after October 1997 have been settled by Bosom with the plaintiff directly.

Scud

16. In about the end of December 1997, PW2 met with Scud's directors and vice general managers, Mr Lin Zeng Fo ("Mr Lin") and Mr Guo He Chen ("Mr Guo") in Shenzhen to obtain details in respect of the invoices issued to Scud. However, they were not co-operative. They told PW2 that they considered that the transactions were entered into between Scud and D1 personally and not with the plaintiff at all. They also refused to disclose how much of the goods they had paid, and to whom the payments were made.

17. PW2 was unable to locate any purchase orders placed by Scud with the plaintiff except a fax dated 10 June 1997 from Scud to the plaintiff with attention to D1 (Annexure 15) in which Scud asked for confirmation of certain orders and delivery dates for July and August 1997. There are also 4 internal memos dated 21 August 1997, 26 August 1997, 22 September 1997 and one undated written by D1 giving instructions on behalf of the plaintiff to place orders for Scud (Annexure 16).

18. PW2 had also visited the factory of Scud at Fuzhou in about the end of January 1998. He saw some of the goods in their warehouse were placed in carton boxes bearing the plaintiff's case mark. With the above documents and his observation, PW2 believes that Scud had in fact received goods supplied by the plaintiff.

19. Mr Shimizu, the manager of the sales department of Panasonic Industrial Company (Shanghai) Limited ("PICS"), a joint-venture company between the PRC government and the Panasonic Group, told PW1 that Scud approached them in December 1998 for business and PICS then began to supply goods to Scud on "payment in advance" basis; that those payments were made in Japanese yen by Sunning; and that the contact person of Sunning was a person, called Ken Lau who was based in Shenzhen. It should be noted that in PW1's witness statement, the time when Scud approached PICS was said to be February 1998. In his oral evidence, PW1 first says it was November or December 1997 and then he changes it to December 1998. It would appear that he has made a mistake when he says that it was December 1998 for two reasons. First, as will be seen below, in April 1998, PICS assisted the plaintiff to make enquiry with Scud. It could happen only after Scud had approached PICS. Secondly, PW1 seems to suggest that the said Ken Lau was in fact D1. However as at December 1998, he had already been detained by the Shenzhen authority. He could not have acted as the contact person for Scud. In any event, I do not consider this mistake material. PW1 alludes to the above event in order to explain why Scud would later change its mind and provide information to the plaintiff. To this I now turn.

20. On or about 6th April 1998, PICS upon PW1's request, asked Scud to disclose details of the goods ordered from the plaintiff. Scud told PICS that for 1997, Scud had paid around RMB$10.76 million for price of goods supplied by the plaintiff and that sum was paid to "Wuzhoufeng"; that Scud owed "Wuzhoufeng" the sum of around RMB$2.77 million which "Wuzhoufeng" paid on behalf of Scud, for the price of goods sold by PICS to Scud; and that remittances for payment of the price of goods sold by PICS to Scud were made by Sunning. PW1 believes that "Wuzhoufeng" referred to by Scud was in fact D4.

21. On 20 April 1998, PW1 together with three other colleagues of the Panasonic Group, met with Mr Lin and Mr Guo and their two other colleagues in Scud's factory in Fuzhou. The Scud representatives said that Scud made the following payments to "Wuzhoufeng" in 1997 for the price of goods supplied by the plaintiff:-

Month in 1997	Amount in RMB
(1) July	$444,000.00
(2) August	$876,042.00
(3) September	$548,730.00
(4) October	$752,054.00
(5) November	$2,089,582.00
(6) December	$2,820,703.20
Total	$7,531,111.20

22. Scud's representatives also said that for the period between February and 15 March 1998, Scud had been supplied with the plaintiff's goods of the value of RMB$3,230,684. Scud paid part of it, namely, RMB$1.4 million, to "Wuzhoufeng". They promised to supply the plaintiff by 27 April 1998 a breakdown of the description and quantity of the plaintiff's goods so supplied. In the end, they failed to do so.

23. According to the figures supplied by the Scud's representatives, PW1 believes that, as at April 1998, Scud had paid "Wuzhoufeng", that is D4, the price of all the goods supplied by the plaintiff up to 15 March 1998 except about RMB$1.8 million, which is the difference between RMB$3,230,684 and Scud's payment to D4 of RMB$1.4 million.

24. D2, D3 and one Yeung Chun Kwai ("Yeung") had made remittances to the plaintiff to pay some of the invoices issued to Scud:

Approximate date	By	Amount in JPY
(1) 23 September 1997	D2	$10,115,000
(2) November 1997	D3	$17,091,000
(3) 20 November 1997	D3	$18,203,720
(4) 13 January 1998	D3	$24,042,000
(5) 3 April 1998	Yeung	$3,910,780

25. For the remittance made by Yeung, the plaintiff is unable to locate the corresponding invoices. Copies of the Scud's invoices, the remittance advice and payment vouchers regarding these invoices can be found at Annexures 18 and 19.

26. PW2 has prepared a table showing all the transactions between the plaintiff and Scud between July and December 1997 (Annexure 17). According to the table, 13 invoices are outstanding. They relate to goods supplied in November and December 1997. The total amount is JPY$58,940,510. After D1 left the plaintiff's employment, Scud has not ordered any further goods from the plaintiff.

Hwasin

27. PW2 first met with Miss Kwok Man of Hwasin in about the end of December 1997 to January 1998 in Shenzhen. Hwasin was slightly more co-operative than Scud. Miss Kwok confirmed that Hwasin had paid all outstanding invoices except "several odd ten thousands dollars". But she did not tell PW2 how much Hwasin had paid in total or to whom it had made the payments.

28. The plaintiff has located some purported purchase orders placed by Hwasin with the plaintiff (Annexure 21). However, PW1 doubts if these purchase orders are genuine for several reasons. First, although the purchase orders purportedly bear the letterhead of Hwasin, they also bear the signature clause of Anderson Electronics (Shenzhen) Co. Ltd., which is another customer of the plaintiff. The plaintiff is not aware of any connection between Hwasin and Anderson. Secondly, the purchase orders are predominantly in English. But after the departure of D1, Hwasin requested that Chinese be used in all the documents between Hwasin and the plaintiff. Thus it appears that Hwasin does not have the practice of issuing documents in English. And lastly, none of the purchase orders was signed. Apart from the purchase orders, the plaintiff has also 2 internal memos written by D1 giving instructions on behalf of the plaintiff to order goods for Hwasin (Annexure 22).

29. D2, D3 and Yeung had made remittances to settle some of the invoices issued to Hwasin:-

Approximate date in 1997	By	Amount
(1) 1 August	Yeung	US$50,484
(2) 30 September	D2	US$16,600
(3) 6 October	D2	JPY$7,637,200
(4) 8 December	D2	JPY$6,637,600
(5) 15 December	D2	JPY$7,507,200
(6) 31 October	D3	US$16,600
(7) 3 November	D3	JPY$10,554,20

30. Copies of Hwasin invoices, the remittance advices and payment vouchers in relation to these invoices are provided as Annexure 24 and 25.

31. PW2 has also prepared a table of all the invoices issued by D1 on behalf of the plaintiff to Hwasin between July and December 1997 (Annexure 23.) According to the table, there are 12 outstanding invoices, totalling JPY$37,241,900.00 and USD11,220.00. They relate to goods supplied in November and December 1997. Since the departure of D1, Hwasin has continued to do business with the plaintiff and settled their invoices directly.

Total amount of outstanding invoices

32. In summary, the total amounts of outstanding invoices issued to Bosom, Scud and Hwasin are JPY$115,287,628.00 and USD11,220.00. A breakdown appears as follows:-

Customer	Outstanding Invoice Amount
(1) Bosom	JPY $19,105,218
(2) Scud	JPY $58,940,510
(3) Hwasin	JPY $37,241,900
	US$11,220
Total	JPY $115,287,628
	US$11,220

Conversion

33. PW2 describes the process of delivery of goods by the plaintiff to Bosom, Scud and Hwasin thus. After D1 had received orders for the goods, he would give instructions for production and delivery. The Japan office of Panasonic would deliver the goods to a freight forwarder Kintetsu World Express ("KWE") in Hong Kong, who would then, on instructions of D1 on behalf of the plaintiff, deliver the goods to, in the case of Scud and Hwasin, Sunning; and in the case of Bosom, Power Trading. Power Trading would then deliver the goods to Bosom in the Mainland.

34. In about mid-January 1998, PW2 met with Stephen Tsoi, the General Manager of Sunning. Tsoi told him that it was D1 who gave Sunning instructions to deliver the goods but as Sunning used their own "special channel" to deliver, all the delivery documents were destroyed within 2 weeks. Tsoi further told him that 54 cartons of goods, part of which were ordered by Hwasin from the plaintiff directly and which were supposed to be delivered by Sunning to Hwasin on or about 8 January 1998, were in fact received by D1. They are:

Part No.	Quantity	No. of cartons	Price in JPY
(1) P-110AAS/E58	30,000 PCS	50	$2,060,800
(2) HHR-120AAB14	3,200 PCS	4	$648,000
	Total:	54	$2,708,800

35. 13 cartons of the above goods, that is, 9 cartons of Part P-110AAS/E58 and 4 cartons of HHR-120AAB14: 4 cartons, were ordered by Hwasin directly from the plaintiff after D1 left the plaintiff. When the goods were ready to be delivered to Hwasin on or about 6 January 1998, the plaintiff was not aware of his fraudulent scheme. Tsoi told PW2 that the above 54 cartons of goods were in fact received by D1 on or about 9 January 1998 after Sunning transported them into China; and that on previous transactions where D1 on behalf of the plaintiff instructed KWE to deliver the plaintiff's goods to Sunning, purportedly for onward delivery to Scud or Hwasin, the goods were in fact received by D1 or his driver or agent after Sunning transported the goods into China.

36. Sunning supplied PW2 with a receipt dated 9 January 1998 given by "Wuzhoufeng" (五洲豐) for 54 "pieces" of goods (Annexure 20). "Wuzhoufeng" (五洲豐) is the same as D4's Chinese name.

37. PW1 denies that the plaintiff could not, as alleged, do business with customers in the Mainland directly. He says the plaintiff has always had direct relationship with customers in the Mainland, although it does not have any import or export right. Delivery of goods, as described above, is made by KWE to customers or as designated by them. Payment is usually made in Japanese yen and has to be paid into the plaintiff's bank account in Shenzhen. The plaintiff does not have any bank account in Hong Kong to receive payment. After D1's departure, Bosom and Hwasin continue to trade directly with the plaintiff. PW1 accepts that payment on behalf of a customer may be made by a third party. However, the plaintiff had never consented to what D1 had done.

38. PW2 denies the allegation that D1's allegation that he was competing with D1 and hence accused him of wrongdoing. He says prior to D1's departure, he and D1 were engaged in different fields. There was on competition between them as alleged. It was only after D1's departure that PW2 took up his area of work.

39. PW3 denies the allegation that the plaintiff knew or approved of the scheme of payments. He confirms that after the plaintiff had reported the matter to the Shenzhen authority in early May 1998, the People's Public Security Bureau had retrieved from D1 and the plaintiff's customers a total of RMB$4,884,732.33 in respect of outstanding payments for goods supplied by the plaintiff. The sum had been released into the plaintiff's custody pending the outcome of the prosecution proceedings against D1.

D1's position

40. D1 set out his position in D1's statement, a letter from him to the Shenzhen Public Security Bureau dated 15 June 1998 and a "certificate" given by him dated 13 February 1999 (Annexures 35 to 37). It is necessary to deal with his position because it is part and parcel of D2's defence. He makes a number of allegations. I will set out the more pertinent ones below.

41. D1 explained why D3 and D4 had to be set up. In brief, the reason appeared to be this. The plaintiff did not process export rights. It had to trade with customers in the Mainland through Hong Kong or through agents in the Mainland. There could not be direct commercial activities between the plaintiff and its customers. It had to go through a middleman. D1 had made this point very clear to the customers before he established relationship with them. The companies involved here were D3, D4 and Sunning. Since customers in the Mainland could not make direct payment to Hong Kong, a company in Shenzhen (presumably D4) needed to be established to receive payment from the customers and then to pay the plaintiff through the company in Hong Kong (presumably D3 or Sunning). At the end of each month after receipt of the goods, the customers would make payment in RMB by remitting the same to the company in Shenzhen and then by making payment in foreign currency through the company in Hong Kong. After arrival in Hong Kong, goods would be exported and distributed to customers of the Mainland by nominated importers and exporters. Payments would then be effected as described above.

42. He further alleged that the plaintiff had agreed with the customers that D3 would pay money to the plaintiff on behalf of them as aforesaid. And his senior had approved of what he had done.

43. According to D1, he and D2 were mere friends. There existed no other relationship between them. They were financially independent. D1 was responsible for and managed his own business. D2 was never involved in his business. He only asked her occasionally to assist him in managing the remittance and transfer of money in Hong Kong. Apart from the plaintiff, there were others as well. Her involvement in D3 and D4 was limited. These companies were wholly owned by D1. The power to manage their affairs vested with him. D2 did not participate in their management and she was not entitled to any profit or remuneration. He explained that he had spent years in international trading and had business relationship with customers from different countries. As most of the suppliers were in Hong Kong, payment of money and delivery of goods had to be done in Hong Kong. Accordingly, he wanted to incorporate a company in Hong Kong. However, as a PRC national, he could not do so unless there is a Hong Kong shareholder. He therefore invited D2, who holds Hong Kong identity card to be a nominal director of D3. She agreed on the condition that she would not take part in its business and management; that she would not bear any risk or take any profit; and that D1 would bear all risks and receive all profits and be responsible for all legal related matters.

44. D1 further suggested that some of the invoices are outstanding because the plaintiff delivered goods to customers due to over-stocking, even when no goods had been ordered by the customers.

45. Lastly, D1 blamed PW2 for competing with him, implying that it was the reason why PW2 would go against him.

D2's evidence

46. The evidence of D2 may be summarised as follows.

47. She was born in the Mainland in 1968 and came to Hong Kong in about May 1995. She managed the Travel Agency in Shenzhen. According to her witness statement, she does not own the Travel Agency. She denies the allegation that she was D1's wife. In about mid-1996, she came to know D1. He told her that the plaintiff did not have import and export rights and the legal right to deal with customers in the Mainland directly; that the plaintiff could only receive money through a Hong Kong company for goods sold and delivered to those customers; and that the goods were delivered to those customers' appointed agents in Hong Kong. As D2 had already obtained her Hong Kong identity card, D1 asked her to incorporate a limited company in Hong Kong and to open an account with a bank here to receive money from Mainland customers for and on behalf of the plaintiff. It would be convenient for money to be transmitted to the plaintiff's account in Shenzhen from that Hong Kong company's bank account. D1 told her and she believed that this arrangement was consented to and approved by the plaintiff. She agreed to help D1 by remitting money because she always travelled to Hong Kong in connection with the business of the Travel Agency and her own affairs. Consequently, D3 was incorporated on or about 8 October 1996 with D2 as a director and shareholder. D3's bank account was opened. Remittances were made subsequently for several months which reinforced D2's belief that the plaintiff approved of such arrangement, as it did not raise any complaint.

48. D4 also asked her to join D4 as deputy managing director and as a 25% shareholder on record. D4 was a joint venture company wholly owned by D1. A joint venture company must have both Chinese and foreign capital. She became a shareholder to represent the foreign capital in D4.

49. D1 and she entered into a written agreement dated 25 December 1996 to confirm the arrangements between them. In this connection, she relies on D1's certificate at Annexure 37.

50. Between early 1997 and early 1998, monies were remitted into D3's bank account. D1 told her that they were from the plaintiff's customers. D2 then remitted the monies to the plaintiff's account in Shenzhen according to D1's instructions. She personally did not know who deposited the money into D3's bank account. She only knew that they should be remitted to the plaintiff to settle the prices of goods supplied by the plaintiff to its customers in Shenzhen. She knew that such customers included Bosom, Scud and Hwasin. All the money transactions of D3 were controlled by D1. When she made a remittance, she would always fax a copy of the remittance record to D1 and his accounting clerk for confirmation. She had not made any profit out of the exercise.

51. It is her evidence that the plaintiff knew that remittances came from D3 and her and had consented to it. No complaint had been made by the persons who made the deposits into D3's bank account.

52. In response to the enquiry made by her former solicitors, the Shenzhen People's Prosecution Department confirmed in a letter dated 1 April 1999 that after investigation, D2 was found to be innocent and that the Public Security Bureau had recovered from the plaintiff's clients a total sum of RMB$4,884,732.33 and had returned the same to the plaintiff.

Evaluation of evidence

53. The primary facts are not in dispute. D3 and D4 had been set up with D1 and D2 as the shareholder and director for the purpose of making remittances to the plaintiff purported to settle some of the invoices issued to Bosom, Scud and Hwasin. Some of the remittances were made by D2, Sunning and Yeung. The remittances made were not of small amount. All these happened while D1 was in the plaintiff's employment. The plaintiff's case is some of the invoices are still outstanding and the customers concerned refuse to pay. The total amount is JPY$115,287,628 and US$11,200 respectively. D2 has not adduced any evidence to contradict this aspect except that the plaintiff had already received from the People's Public Security Bureau a total of RMB$4,884,732.33.

54. D1 and D2 have explained why such a scheme needed to be set up and why D2 was involved. Having carefully considered all the evidence before me, I do not find their version of the events credible. I will analyze their evidence under the following major headings.

(1) Relationship between D1 and D2.

55. Both of them maintain that they are just friends, that they had no business relationship and that they were financially independent. D2 does not know what business D1 carried on. Under cross-examination, D2 admits that she met D1 in or about July or August 1996 and that she was once D1's girlfriend. When pressed further, she refuses to answer if she was his lover. She insists that they were just good friends. What they have not answered is this. Why would friends, even good friends, engage themselves together in commercial activity to such an extent as revealed here? They are co-directors and shareholders in D3 and D4. There is little doubt that D1 completely trusted D2. D1 owned D3 beneficially. Yet D2 was in the control of D3's funds as the sole signatory of D3's bank account. D1 could not operate D3's bank account in Hong Kong. Only D2 could do it when she came to Hong Kong. D1 relied on D2 to carry out his instruction to do the remittances faithfully. And as noted, the remittances involved large sums of money. It is D2's case that she did carry out D1's instructions. Under cross-examination, she even said that there were occasions where she did the remittances by using her own money in her own account before she was put in funds by D1. For all what she had done, she received no monetary benefit at all. Instead, D1 owes her more than $400,000 as a result. Would D2, a mere friend, albeit a good friend of D1, do all these? I do not think so.

56. D2's evidence on D1's involvement in the Travel Agency is unsatisfactory. To begin with, her case on who owns the Travel Agency changes in the course of evidence. Initially, she says in her witness statement that she does not own it. Later in oral evidence, she says she is the actual owner. She admits that she might have introduced D1 to friends as the general manager of the Travel Agency, because D1 was commonly referred to as "general manager Lau". She did not know why D1 would cause a name card (Annexure 10) describing him as the general manager of the Travel Agency to be printed. According to that name card, D1's position in D3 and D4 was also stated. And all the three companies had the same address, which is D2's property in Shenzhen. Several questions are unanswered. Why would D1 print such a name card if he was in fact not the general manager of the Travel Agency, bearing in mind they are good friends? Why would the card at the same time also give D1's true position in D3 and D4? And what purpose would he achieve by using such a card? D1 has not dealt with his involvement in the Travel Agency at all.

57. I do not accept that they are mere friends as alleged. In my view, they were at all material times close business partners actively engaged in commercial activities.

(2) Why D3 and D4 had to be set up.

58. Even assuming that the plaintiff could not do business with its customers in the Mainland directly, why would the plaintiff not set up its own scheme similar to that of D1's to facilitate the trade with its customers? Why would the plaintiff allow one of its employees to set up such a scheme instead? And why would D1 incur all the trouble and expense in setting up the scheme when, according to him, it was only to assist the plaintiff and he would not derive any benefit out of it?

59. I also have considerable doubt on D2's evidence that she believed D1 when he explained why D3 and D4 need to be set up. She was a business woman running her own business. I do not accept that she would simply believe what D1 had told her without any doubt as to the propriety of the scheme, which to me, are quite apparent. I also reject their allegation that it was necessary to involve D2 in the setting up of D3 because she holds a Hong Kong identity card. There is simply no such requirement.

(3) D2's involvement in D3 and D4

60. It is D2's evidence that D1 asked her to set up D3 shortly after they first met in July or August 1996. But according to the answer to request for further and better particulars of her defence dated 6 February 1999, it was in about 1995 that D1 made the request. She says it was a mistake in the answer but does not explain why it was made. She simply insists that it was not 1995.

61. It is also D2's evidence in her witness statement that the purpose of setting up D3, namely, to remit money for plaintiff's customers to the plaintiff upon D1's instructions. However, under cross-examination, she says at the time of incorporation, she did not know what business D3 would carry out or indeed for what purpose it was set up. She says that she did not participate in D3's business at all. Nor had she obtained any profit or remuneration from it. She agreed to set up D3 at D1's request because he had given him an undertaking (Annexure 32). When it is pointed out that the undertaking was signed on 25 December 1996, she says D1 had given her the undertaking orally beforehand.

62. Like the case for D3, D2 agreed to be a director and shareholder of D4 because of the undertaking given by D1. Similarly, at the time of its incorporation, she did not know what business it would carry out. She says that she is not aware if D4 had done any business. She agrees that its registered address is at her property in Shenzhen, which is also the address of the Travel Agency. She explains that the property had two floors. D4 occupied one floor. It needed not pay rent except utility charges. She then says that she has a rough idea from its name that it carried on electronic or trading business and that it is incorrect to say that she does not know what business it was doing.

63. It defies common sense that at the time of their incorporation, D2 as a shareholder and director did not know or was not concerned with the purpose of setting up D3 and D4. The effect of her evidence is that she was not bothered at all because of D1's undertaking. It is her evidence that the undertaking was given to confirm the arrangements between D1 and D2. However, under cross-examination, she says she cannot recall whether, when this undertaking was signed, it was envisaged that she would remit money for D1 or D3. The main purpose of the undertaking was to make it clear that she would not be responsible for the liability of D3 and D4. She agrees that she, as a shareholder and director of D3 and D4, would not be personally liable anyway. The agreement was nevertheless made as a matter of caution.

64. Further, in D2's 1st defence, she made no reference to this undertaking. Nor was it raised in her affirmations previously filed with the court in connection with the Mareva injunction proceedings. It was first mentioned only in D2's 2nd defence. D2 explains that the contents of the undertaking had already been set out in her 1st defence. In her witness statement, she says she lost the original of this agreement in early 1999. She had not produced the original agreement to her lawyers for the purpose of preparing the defence. She only produced a copy. When asked by her lawyers to produce the original, she could not locate it. Later she asked D1, who had by then been detained, to sign an undertaking in identical terms, which resulted in Annexure 32.

65. I do not accept D2's evidence. If the undertaking did exist, given its importance, there is no reason why she would have chosen not to mention it in her 1st defence but just stated the contents. Likewise there is simply no reason why it was not referred to in the Mareva injunction proceedings. In my view, the undertaking was made up subsequently to bolster their case on D2's involvement. Her evidence on why D4 was allowed to use her property rent-free is also unsatisfactory. She is just trying to play down her relationship with D4.

(4) Remittances by D2.

66. D2 cannot recall the details of the remittances made. There are occasions where D1 asked her to remit money out of her own personal account before the same was deposited into such account. Reimbursement was sometimes made to the Travel Agency's account. This of course has never been mentioned in her witness statement. She says that the bank statements of the Travel Agency can show the reimbursement. However, the documents had been seized by the Shenzhen authority. Enclosed with her 1st defence is a list issued by the Shenzhen authority listing out the items seized. She agrees that the list does not contain the documents seized from the Travel Agency. But she says there was a separate list. Her own documents seized, as evidence by the list, had not been returned to her. She was only allowed to make copy. However, she did not make copy of the Travel Agency's bank documents because they were not hers. They belonged to the Travel Agency. According to her, although the Travel Agency was in fact hers, from a legal point of view, she was just an employee. There was a record between D1 and her on the remittances she made for him. The record had also been seized by the Shenzhen authority. But it was not referred to in the seizure list.

67. I have no doubt that D2 is making up when she goes along in her evidence.

68. For the foregoing reasons, I find D2 a poor and untruthful witness. I do not find the versions of the events as alleged by D1 and D2 believable and I reject them altogether. I find the witnesses for the plaintiff truthful and accept their evidence. Indeed, D2 has not been able to discredit any of them and she has not challenged any of the documentary evidence adduced by the plaintiff to support its claim. The evidence against the defendants, in my view, is overwhelming.

Liability

69. I am satisfied that D1 had acted in breach of his fiduciary duty as the plaintiff's employee in setting up the scheme as aforesaid. He had done so dishonestly and in fragrant disregard of his duties. The reasonable and necessary inference is that the customers concerned, namely, Bosom, Scud and Hwasin, had refused to pay the outstanding invoices because they had already made the payment to D3 or D4. Indeed, Bosom had already confirmed that it had paid D3 some of the invoices for October 1997. Such payments to D3 and D4 would have gone to the plaintiff but for the fraudulent scheme.

70. I am also satisfied that all the other defendants had knowingly and dishonestly assisted D1 in the breach of his duty and in receiving and dealing with the plaintiff's monies. And as a result of their concerted efforts, the plaintiff has suffered loss and damage. D2 and D4 are therefore liable in equity to make good the loss the plaintiff has suffered: Royal Brunei Airlines Sdn Bhd v. Tan [1995] 3 All ER 97.

71. The claim of conversation is relatively strict forward. On the contradicted evidence before me, I find as a fact that D4 did convert 54 cartons of the plaintiff's goods for the value of JPY$2,708,800.00.

72. On 28 August 2000, the plaintiff has through enforcement proceedings against D3 recovered HK$179,999.34. Credit must be given to this sum.

Conclusion

73. For the foregoing reasons, I will enter judgment against D2 and D4 for:

(1) the sums of JPY$115,287,628.00 and US$11,220.00 or their equivalent in Hong Kong currency, representing the direct loss suffered by the plaintiff in respect of the outstanding invoices for Bosom, Scud and Hwasin, minus the said sum of HK$179,999.34;

(2) an account of all monies received from the plaintiff's said customers;

(3) an account for all secret profits made out of the receipt of such monies;

(4) payment to the plaintiff of the sums found due upon taking the accounts; and

(5) damages to be assessed.

74. The plaintiff is entitled to interest. Interest on the sums under (1) would be at the judgment rate from date of writ to date of payment. Interest on sums found due upon taking of accounts and damages would be determined by the master taking the accounts and assessing the damages.

75. Judgment is also entered against D4 for damages of conversion in the sum of JPY$2,708,800.00 or its equivalent in Hong Kong currency with interest at judgment rate from date of writ to payment.

76. The plaintiff will also have the costs of this action against D2 and D4, to be taxed if not agreed.