DOUGGUAN CITY LONG LIAN TRADING CO. LTD. v. SO KIT AND OTHERS

HCA 13667/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13667 OF 1999

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J U D G M E N T

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1. This action arises out of the theft of a bank draft in the sum of RMB14,560,000.00 obtained on behalf of the Plaintiff by Mr Wei Song, its Purchasing Manager, from the Industrial and Commercial Bank of China. The Plaintiff's object in obtaining the bank draft was to exchange it for HK$13,000,000.00 for the purpose of the Plaintiff's computer business. The 1st Defendant represented that he would effect the exchange transaction on the Plaintiff's behalf. It is apparent from the evidence that on an occasion on 16 August 1999 when the bank draft had been handed to him for inspection, the 1st Defendant must have substituted a forged document for the bank draft. The bank draft was then encashed.

2. The Plaintiff's claim against the 1st Defendant is for wrongful conversion of the bank draft and its proceeds. Default judgment has been entered against him.

3. The Plaintiff's claim against the 2nd, 3rd and 4th Defendants is in respect of the proceeds of the bank draft. The Plaintiff claims that HK$1,792,453.00 of the proceeds were paid into an account of the 2nd Defendant with the Po Sang Bank and that HK$10,830,000.00 of the proceeds were paid into an account of the 3rd Defendant with the Sin Hua Bank with the agreement of its director, the 4th Defendant.

4. The Plaintiff's primary claim against the 2nd , 3rd and 4th Defendants is for knowingly assisting the 1st Defendant in acting in breach of trust. In putting its claim at its highest the Plaintiff claims the total sum of RMB14,560,000.00 from each of the Defendants, but it accepts that if this court cannot be satisfied that the Defendants knew that their assistance went beyond the sum that was paid into their respective bank accounts (In the case of the 4th Defendant, the 3rd Defendants' bank account) then they are only liable for that sum.

5. In the alternative, the Plaintiff alleges that the 2nd and 3rd Defendants are liable for knowing receipt of the respective sums.

6. In any event, the Plaintiff claims it is entitled to trace the proceeds to the current credit balance in the respective accounts of 2nd and 3rd Defendant, which were frozen by a Mareva injunction granted by Waung J on 23 August 1999.

7. Having established that its bank draft of RMB14,560,000.00 was stolen by the 1st Defendant, the Plaintiff must go on to show that the sums paid into the 2nd and 3rd Defendants' bank accounts respectively were proceeds of that stolen bank draft.

8. I am satisfied that the Plaintiff has satisfied that burden. Officers of the Public Securities Bureau of Dongguan City arrested a 31-year old women, Li Jing Di on 19 August 1999 and took a statement from her which was admitted in evidence in this trial. She said that she operated a foreign currency exchange business and had received a call from a woman named Wu Li Wen on 16 August 1999 who wished to exchange a RMB bank draft for HK$13 million. After Li had made the arrangements for that sum of money in Hong Kong dollars to be paid into the account through which she operated with the Nanyang Commercial Bank Limited (which she identified) for the purpose of the transaction, she had received the Plaintiff's bank draft in the sum of RMB14,560,000.00 from Wu Li Wen. Li had arranged for the bank draft to be deposited by her staff. Acting on Wu Li Wen's instruction she had then transmitted the sum of HK$10,830,000.00 into the 3rd Defendant's account and HK$1,792,453.00 into the 2nd Defendant's account from the Nanyang Commercial Bank account.

9. The payment advice slips in respect of those two sums were obtained from the Public Securities Bureau and produced to the court. They showed the transmission of the two sums to the 2nd and 3rd Defendants' bank accounts from the Nanyang Commercial Bank. An officer of the Nanyang Commercial Bank, Chan Ka Leung, produced the bank statement of the account with Nanyang Commercial Bank identified by Li Jing Di. It is apparent from the coincidence of the sums that part of a cash withdrawal of $13,622,453.00 must have been used by Li Jing Di to make the transfers into the accounts of the 2nd and 3rd Defendants. I find therefore that the sum of $1,792,453.00 paid into the 2nd Defendant's account with the Po Sang Bank and the sum of HK$10,830,000.00 paid into the 3rd Defendant's account with the Sin Hua Bank were the proceeds of the Plaintiff's stolen bank draft in the sum of RMB$14,560,000.00 and had arrived into their accounts in breach of the 1st Defendant's duty of trust to the Plaintiff.

10. There has been no dispute as to the state of mind required by the law before a defendant can be found liable for knowing and/or dishonest assistance in a breach of trust. It is that of 'dishonesty' as defined and explained by Lord Nichols of Birkenhead in Royal Brunei Airlines v Tan [1995] 2 AC 378 at 389.

11. I have borne in mind that whereas the standard of proof to be applied is that applicable for civil proceedings generally, namely proof on the balance of probabilities, the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probabilities (see Hornal v Neuberger Products Limited [1957] 1 QB 247, and in re H and others [1996] AC 563 at 586, 587).

12. There has also been no dispute that for the purpose of these proceedings, it is the state of mind of the 4th Defendant, its director, that is relevant in considering the liability of the 3rd Defendant (see El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685).

13. This trial has primarily been concerned with the Defendants' explanation as to how the money in question came to be paid into their bank accounts and their state of mind in relation to these payments.

The 2nd Defendant

14. In so far as the 2nd Defendant is concerned, his explanation is that he was involved in the business of foreign currency exchange which mainly involved buying foreign currency in Macau and changing it at the more favourable rates offered by Banks in Hong Kong.

15. One of his foreign currency customers was a Mr Lou Kin Chon, whom he called as a witness. For about two months prior to the granting of that Mareva injunction by Waung J freezing his account on 23 August 1999, the 2nd Defendant had allowed Mr Lou to use his Po Sang Bank account in Hong Kong for the purpose of receiving Hong Kong dollar deposits. Acting on Lou's faxed instruction he would then transfer the proceeds to accounts nominated by Mr Lou. He had believed that the recipients were customers of Mr Lou, but had no further knowledge of the transactions. He had not known the nature of the business between the recipients and Mr Lou. He had done this purely as a favour to Mr Lou who had no bank account in Hong Kong. He had received no reward. It had no connection with his foreign currency business other than the fact that Mr Lou was his customer in that line of business.

16. The receipt of the sum of $1,793,453.00 was one of these transactions. Mr Lou had telephoned him when he was at his office in Zhongzhen telling him to expect the deposit and to check when it had arrived. The 2nd Defendant had then instructed his elder brother who was in Hong Kong to go to the Po Sang Bank with his passbook and verify the arrival of the funds. After his brother had confirmed the receipt of the money he had informed Lou. Lou had subsequently sent him a number of faxes informing him of the 10 accounts into the which transfer of the proceeds should be made. The 2nd Defendant claimed that he had no suspicion as to these transactions which he regarded as normal business.

17. Lou himself gave evidence. His evidence was that he was in the timber business but did some freelance currency dealing. He said that a man named Lau Sheung Wai, whom he had known for about a year and who frequented casinos and other entertainment areas in Macau, had telephoned him on the morning of 17 August saying that he had some money ($1.79 million) in Hong Kong which he wanted to deposit into Lou's bank account in Hong Kong and asked Lou to give him the money in return on Macau. Lou said that he had given the 2nd Defendant's account number to Lau as he did not have his own bank account in Hong Kong. He had later telephoned the 2nd Defendant and asked him to check if the money had been received. When he received confirmation that it had been, he had paid Lau the same sum in Hong Kong dollars in Macau. $400,000.00 had been deposited into Lau's account from his wife's account. He had given Lau the remaining balance of $1.4 million in cash at the Lisboa Casino. He explained that he had given the 2nd Defendant instructions to make the 10 transfers from the 2nd Defendant's bank account at the request of his foreign currency customers who wanted to pay their own customers.

18. I found Lou to be a thoroughly evasive witness. He had given different accounts on different occasions as to what occurred on 17 August. In court his evidence was that he had been telephoned by Lau who had discussed the proposed transfer prior to Lau transferring the money to the 2nd Defendant's account. This is the same account he had given to officers of the Public Security Bureau on 2 September 1999. This differed from what he said in a statement taken by the 2nd Defendant's former solicitors on 4 September 1999 when Lou said that Lau had first deposited sum in the 2nd Defendant's account (as he had done on previous occasions) and then notified him. He (Lou) had then contacted the 2nd Defendant. Furthermore Lou's account to the Public Security Bureau had been that after Lau had telephoned him about the proposed transaction, he (Lou) had 'approached Leong (2nd Defendant) and asked him to help me transfer $1,790,000.00 to Macau'. This is contrary to his evidence and that of the 2nd Defendant in court that far from being asked to transfer the money to Macau, the 2nd Defendand had been asked to transfer the money to individuals or companies in Hong Kong.

19. In Lou's witness statements of 4 September 1999 and 14 November 2001, he said that Lau had made the deposit into 2nd Defendant's account. In court he claimed not to know who made the deposit. At once stage in evidence, he claimed that he had to repay Lau in Macau currency until it was pointed out to him that he had told the Public Securities Bureau that he had given Lau $1.4 million in Hong Kong currency.

20. I found his explanation as to why he had to use the 2nd Defendant's bank account in Hong Kong quite implausible. He was on his own account a businessman with 3 companies in the timber business. Bearing in mind the magnitude of the deposits being made into the 2nd Defendant's bank account over the 9 or 10 days for which he produced records (over $12 million or on average $1.4 million per day) and the amounts allegedly paid to him by the 2nd Defendant in cash in Macau, I have no doubt that if these had been the legitimate transactions he alleged, he would have opened his own bank account to deal with these transactions. I found equally implausible his explanation that the transfers from the 2nd Defendant's account were all payments to customers of his foreign exchange customers made at the customers' request. I found him to be an initially evasive and ultimately unconvincing when asked about where he claimed that he had obtained the $1.4 million in cash which he said that he had repaid Lau at the casino.

21. It is not of course Lou's state of mind but that of the 2nd Defendant that is relevant in this case. The 2nd Defendant impressed me as intelligent and shrewd businessman but his evidence was characterised by evasiveness and lack of frankness. There were numerous examples of his evasiveness and lack of frankness in his evidence.

22. It was particularly apparent in his evidence regarding what he described as the second part of his business, the part that involved the use of his bank account to receive large sums of money and the payment out of that money often in cash. It was this part of his business with which the case was concerned. He admitted in evidence that this part of his business had nothing to do with the first part of his business (the foreign currency business). Indeed in so far as Lou is concerned, he said it was purely a favour, yet previously he had attempted to justify this part of his business as connected to foreign exchange dealing (e.g. see para. 9 of his affirmation of 30 August 1999 and para. 4 of his witness statement of 24 November 2000).

23. The 2nd Defendant was far too shrewd not to have had his suspicions aroused if Lou had deposited or caused to be deposited the very large sums of money daily into his account, a significant of proportion of which he was obliged to deliver to Lou in cash in Macau and had been required to make the other remittances. I found his claim that he did not even know what money laundering was to be totally unconvincing.

24. The account he had given to the Public Securities Bureau on 27 August 1999, only 10 days after the day in question, that Lou had contacted him at noon or in the afternoon of 17 August, telling him that $1.9 million was being transmitted into his account was demonstrated to be inconsistent with the times on the faxed instructions he allegedly had received from Lou and the timing of a number of the remittances from the award. Those timings suggested that the 2nd Defendant had probably been aware on the previous day that money would be paid into his account. His explanation as to why he had not informed the Public Securities Bureau on 27 August of the name Lau Sheung Wai, if as he said, Lou had informed him of Lau's name on 23 August was also unconvincing.

25. I am satisfied that the 2nd Defendant knew the transaction whereby $1,792,453.00 was remitted into his account was an illicit one and that when he remitted the proceeds on, he was assisting in an illicit transaction. He accordingly acted dishonestly with the meaning of that term as defined in Royal Brunei Airlines v Tan [1995] 2AC 378.

26. I am unable to find that he probably knew the transaction went beyond the $1,792,453.00 which he was required to transmit, thereby rendering him liable for the whole sum of RMB14,560,000.00. He is however liable for the sum of $1,792,453.00 having knowingly and dishonestly assisted in the breach of trust by the 1st Defendant.

The 4th Defendant

27. The 4th Defendant was a director of the 3rd Defendant, a small transportation business with the monthly turnover of about $600,000.00. His account of how $10.83 million came to be deposited in the 3rd Defendant's account is that he had been telephoned by a man named Tsang Wai, a building sub-contractor whom he had known for the previous 20 years on about 10 August 1999 Tsang had asked for permission to be allowed to use the 3rd Defendant's bank account to receive a remittance from China as Tsang claimed he did not have a company account. The 4th Defendant said that he anticipated that a small sum would be paid into the account.

28. When giving evidence in court he said that he regarded this as a very normal transaction. Earlier in his witness statement, however, he had said that he regarded the request as a bit strange and, when asked about this, said that was because he wondered why Tsang should not open his own bank account.

29. On the morning of 17 August 1999, Tsang had informed him that the money had arrived and arranged to meet him at his bank. Tsang had come to the meeting with two other men. The 4th Defendant checked the balance in the account and found, to his surprise, that it amounted to $10.9 million whereas he believed that the previous credit balance in the account had only been in the region of $100,000.00 - $200,000.00. He did not ascertain from the bank exactly how much had been deposited into account. Tsang Wai himself had claimed that he did not know more than that a sum of "$10 million something" had been deposited. At the request of Tsang, the 4th Defendant had drawn two cheques in his favour for $6 million and $4.1 million respectively. Tsang had asked him to withdraw a further $800,000.00 in cash for him, he refused because that represented almost the total balance in the account but agreed to withdraw $500,000.00 in cash which he gave to Tsang. He had never seen or heard from Tsang since this happened. He had not ever attempted to contact Tsang until after he learned that the account was frozen on 23 August. It was only then he asked for a bank statement to ascertain how much had been deposited into the account.

30. A very significant feature of the evidence is that while $10.83 million had been deposited into the 3rd Defendant's account, on the 4th Defendant's evidence he had only returned $10.6 million of that sum and no attempt had been made to recover the additional $230,000.00 from him.

31. The 4th Defendant has attempted to explain this by claiming that Tsang had been unaware of exactly how much had been remitted into the account. I found that this aspect of the 4th Defendant's evidence did not ring true. On the 4th Defendant's account Tsang had initially asked for the total balance of $10.9 million to be withdrawn. Such a request would have been very strange indeed if Tsang's knowledge of the amount deposited was limited to the fact that it was simply a sum greater than $10 million. It is stranger still that neither party in such circumstances took any steps to enquire from the bank on 17 August as to the amount of the deposit. Tsang's alleged ignorance of the exact amount remitted into the 4th Defendant's account is seriously undermined by the fact that he allegedly went to the bank with two other men, indicating serious concern that the 4th Defendant should hand over the money remitted into the account. Even if Tsang had not known the exact amount of the deposit it is inherently unlikely that he would not have taken steps at the bank to find out.

32. The 4th Defendant's own account of his behaviour is unlikely. Although I formed the impression that he was attempting to down play this evidence at the trial, in his witness statement of 12 January 2001 he had stated that he was 'extremely surprised and worried to find such a large sum of money in the account' (para. 8). In the affirmation, he made for the purpose of Mareva of proceedings, he had said that he was 'extremely surprised' to find such a large sum of money in the account and 'suspecting that there might be something wrong with the money I asked Tsang Wai to take it away immediately'. If he had been so concerned for Tsang Wai to take it away immediately, he would have ascertained the amount of the deposit. However, on his own account he made no attempt to find out the exact amount that had been deposited until after the Mareva injunction resulted in the freezing of the account on 23 August. What makes this even more surprising is that, on his own account, he would have known that part of the remittance still remained in the account even after he had made the cheque and cash transfers to Tsang Wai.

33. On his account he believed that there had been a balance of $100,000.00 to $200,000.00 in the account before the deposit in question. He had found out that there was a balance of more than $10.9 million on 17 August after the deposit had been made. Accordingly after giving Tsang $10.6 million, he would have known that there still remained $100,000.00 - $200,000.00 of Tsang's money in the account. Not only did he make no attempt until 23 August to find out how much of Tsang's money remained but he drew cheques on 17 August for $71,582.00 and $104,800.00, which on his account of what he believed was in the account, he would have believed could well have involved drawing on Tsang's money. It is difficult to see how this behaviour is consistent with someone acting honestly when as he claimed, he believed that there might be something wrong with the money and had asked Tsang to take it away immediately.

34. Bearing in mind all the circumstances the evidence points clearly to the sum of $230,000.00 remaining in the 4th Defendant's account as being his reward for complicity in the enterprise.

35. I am satisfied that the 4th Defendant did not act as an honest person would have done in the circumstances, I find that he dishonestly assisted in the 1st Defendant's breach of trust within the definition of dishonesty in Royal Brunei Airlines v Tan. As with the 2nd Defendant, I am unable to say that his knowledge of the transaction extended beyond the $10.83 million transmitted into his account.

36. I find that he, and therefore in view of his position with the company, the 3rd Defendant, is liable to the Plaintiff for that sum.

37. In the light of this finding, it is necessary for me to consider the Plaintiff's alternative case of "knowing receipt".

Tracing

38. I find that the Plaintiff is entitled to trace its property into the assets represented by the credit balances in the two accounts.

39. In respect of the sum $117,524.51 being the credit balance in the 3rd Defendant's bank account on the date that the account was frozen by the injunction of Waung J, the position is straightforward. There had been no deposits since the deposit of the $10,830,000.00 on 17 August, only withdrawals. I find that the Plaintiff is entitled to a declaration that that sum standing to the credit of the 3rd Defendant is held by the 3rd Defendant on trust for the Plaintiff.

40. The position of the 2nd Defendant's bank account is not so straightforward. The balance on 23 August at the time the account was frozen was $1,352,762.17 but there is evidence that the 2nd Defendant had effectively withdrawn the whole credit balance in the account at the close of business on 17 August, the date the $1,792,453.00 had been received. The 2nd Defendant's evidence was however that he had simply transferred the credit balance to another of his accounts with the bank. Moreover there were other deposits into the account both on 17 August and on subsequent days prior to the freezing of the account on 23 August. Despite these matters, I am satisfied that the Plaintiff is entitled to trace its property into the credit balance in the account when it was frozen. That balance represented an asset in the hands of the 2nd Defendant, namely a debt owed by the bank to the 2nd Defendant.

41. Bearing in mind that all the 2nd Defendant had done at the close of business on 17 August was to transfer the balance to another account with the bank, it can be said that the asset represented by the debt of $1,352,762.00 of the bank to the 2nd Defendant on 28 August would not have been there had it not been for the deposit of the Plaintiff's $1,792,453.00 on 17 August. It is well settled that by making deposits subsequent to the deposit of $1,792,453.00, thereby mixing his assets with those of the Plaintiff, the 2nd Defendant has not changed the position of the Plaintiff in so far as his assets are concerned. The Defendant being a wrongdoer has to subordinate his claims to a share in the mixed assets created by his subsequent deposits to those of the Plaintiff, the innocent party (see Foskett v McKeown [2000] 2 WLR 1299).

42. Accordingly I make the following orders:

Against 2nd Defendant

(1) a declaration that the sum of HK$1,392,762.17 standing to the credit of the 2nd Defendant in his account number 070-916-1-094505-6 with the Po Sang Bank is held by the 2nd Defendant upon trust for the Plaintiff absolutely;

(2) an order that the 2nd Defendant pay the said sum of HK$1,352,762.17 to the Plaintiff;

(3) an order that the 2nd Defendant pay the sum of HK$439,690.93 in addition to the said sum of HK$1,352,762.17 to the Plaintiff.

Against the 3rd Defendant

(1) a declaration that the sum of $117,524.51 standing to the credit of the 3rd Defendant in its account number 031-356-0-015922-1 with the Sin Hua Bank is held by the 3rd Defendant in trust for the Plaintiff absolutely;

(2) an order for the payment to the said sum of $117,524.51 to the Plaintiff.

Against the 3rd and 4th Defendants

(1) an order against the 3rd and 4th Defendants (in so far as the 3rd Defendant is concerned in addition to the order to pay the sum of $117,524.51) jointly and severally for payment of the sum of $10,712,476.00 to the Plaintiff.

43. I order that the Defendants pay interest on all sums ordered to be paid at prime plus one percent per annum from 17 August 1999 until judgment; thereafter at judgment rate until payment.

44. I order that unless either party applies to be heard on the question of costs within 14 days, the Plaintiff's costs to be taxed and paid by the Defendants.