CURRENT FINANCE LIMITED AND OTHERS v. CHUNG PUI LIN, PAULINE AND ANOTHER

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HEADNOTE

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COMPANY FUNDS - FIDUCIARY DUTY OF DIRECTOR AND OF AGENT WITH CONTROL OVER SUCH FUNDS.

Director using company funds to repay personal loans and to pay household expenses - breach of fiduciary duty.

Position of Third Party receiving such funds - whether a constructive trustee for the funds - actual or constructive knowledge of the breach.

Constructive knowledge - test of "the reasonable man".

Third Party recipient of funds bona fide for consideration without notice - not a mere volunteer.

IN THE HIGH COURT OF JUSTICE

HONG KONG

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JUDGMENT

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1. The 1st Plaintiff CURRENT FINANCE LIMITED (in liquidation) (CFL) was registered as a deposit taking company an the 24th March 1981 the principal shareholder and director being Mr CHEUNG LONG CHUNG. In addition Mr Cheung controlled a group of companies under the name A CBG Group Limited. Included in that group were the 2nd Plaintiff CBG Financial Investments Limited (in liquidation) (CBG Financial) and the 3rd Plaintiff CBG International Credit Card (H.K.) Limited (in liquidation) (CBG International). The companies got into financial difficulties and CFL and CBG Financial were wound up on the 9th March 1983. CBG International, was wound up on the 21th April 1983.

2. Cheung met and started to cohabit with the Defendant CHUNG PUI LIN, Pauline in about 1970 and that relationship continued until the early 1980's.

3. The Plaintiffs' action was originally framed to recover from the Defendant, first the value of cheques paid by CFL and CBG Financial to the Defendant and secondly the value of cheques paid by CFL, CBG Financial and CBG International to Cheung and then allegedly passed on by Cheung to the Defendant. In the course of the hearing the Plaintiff abandoned the claim in respect of the second block of cheques.

4. The claim is now restricted to nine cheques paid out of the funds of CFL, totalling $795,118.20 and one cheque paid out of the funds of CBG International for $100,000.

5. In April, 1984 Cheung was convicted on 14 charges of false accounting relating to inter alia the accounts of CPL. The offences were committed between June, 1981 and August, 1982. Cheung was sentenced to 7 years imprisonment. MARIA PUN SID FUN a co-director and shareholder in the Cheung group of companies was convicted on 11 charges of false accounting and given a suspended sentence.

6. Courts 1 and 2 of the indictment alleged that Cheung and MARIA PUN had falsified a CFL ledger which purported to show that the Defendant was indebted to CFL in the sum of $2.3 million. Two loan applications were produced in respect of the alleged loans purporting to have been signed by the Defendant. The ledger entries were proved to be false and in the trial the Defendant gave evidence for the Crown and claimed that she had never signed the loan application forms.

7. Madam CHUNG KWAN HING and Madam CHUNG SUI WAI sisters of the Defendant gave evidence as to the mental health of the Defendant. They say this started to deteriorate early in the 1980's when she became aware e that CHEUNG had' become friendly With MARIA PUN and was, returning home infrequently. Cheung married MARIA PUN in January, 1983. The decline in her mental capacity has continued and I accept that she is now in a state that prevents her solicitors from obtaining coherent instructions and from calling her as a witness. This has Beverly restricted the Defendant's solicitors in the presentation of the defence case and to some extent has also caused difficulties to the Plaintiff in being unable to test the Defendant's case by cross-examination. However Cheung and to a lesser degree the two sisters gave evidence to support the defence case that the monies received by the Defendant were in repayment of loans made to Cheung and in meeting household expenses.

8. Six of the nine cheques drawn of the bank accounts of CFL were made payable to the Defendant and were paid to the credit of her bank accounts. A cheque dated 21st July 1981 for $100,000 was made payable to cash and was duly cashed. There is no evidence from the documents which directly links the proceeds of this cheque to the Defendant. Cheung is his evidence said he paid the cash proceeds of the cheque to the Defendant and I accept his evidence on this. A cheque dated. the 20th July 1981 for $5,418.20 with SUN HUNG KAI FINANCE CO LTD as drawee had the number of the Defendant's bank account endorsed on the back and was paid to the credit of that bank account. A cheque dated 25th March 1981 for $15,000 was made payable to cash. This cheque was paid to the credit of the Defendant's bank account. The cheque dated the 22nd December 1982 for $100,000 drawn on the bank account of CBG Financal was made payable to the Defendant and paid to the credit of her bank account.

9. The evidence establishes that the proceeds of all ten cheques to which the claim now relates were paid to and received by the Defendant.

10. It is also established and nor disputed by the Defendant that at all material time's Cheung was a director of CFL and although not a director of CBG Financial was in control of that company's financial affairs.

11. In Belmont Finance Corporation Ltd v Williams Furniture Limited (N02)⁽¹⁾ Buckley L.J. at Pg 405 considered the duty of a director in relation to his company's funds :-

"A limited company is, of course, not a trustee of its own funds, it is their beneficial owner but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control and if they misapply them they commit a breach of trust".

 

The same fiduciary duty applies to those agents who have actual control of the company funds, as Cheung did in respect of CBG Financial. Authority for this comes from the decision of the New Zealand Court of Appeal in Westpac Banking Corporation v SAVIN.⁽²⁾

12. Cheung clearly had a fiduciary duty in respect of the funds of CFL and CBG Financial.

13. It is the evidence of Cheung, for the Defendant, that all of the funds paid to the Defendant were from his directors current accounts with CFL and CBG Financial.  He claims that at all material times that account was in credit and that it was money to which he was entitled. In fact his director's current account ledger shows entries of only four of the nine CFL cheques and there is no entry in the. CBG Financial ledger of the $100,000. In respect of the six CFL cheques and the one CBG Financial cheque there is no documentary evidence to support Cheung's claim that these were paid from his directors current account ledger and quite clearly these were company funds to which he had no claim. The ledger entries were the subject of criminal charges and, it is a document upon which it would be unsafe to rely. I do not accept Cheung's evidence that the payments were from monies to which he was entitled and am satisfied that the four cheques were drawn on company funds to which he had no right.

14. I do, however, accept Cheung's evidence that during the 1970's he was in business and that from time to time he borrowed money from the Defendant. He estimated the figure borrowed at about $4.00,000. In addition he borrowed $3000,000 from the Defendant to help set up CFL in 1981. The two sisters of the Defendant gave evidence of inheritances received by the Defendant and of her dealing on the stock exchange and the gold market. I am satisfied that during this period the Defendant was a woman of considerable wealth. I also accept the evidence of the sisters that she was a very frugal person who was besotted by Cheung and accordingly was prepared to help him financially. The Plaintiff in the course of the trial accepted that the Defendant was in a financial position in the 1970's to advance $400,000 to Cheung. In the absence of any documentary proof and any evidence from the Defendant it is difficult to be sure as to the exact amount of the loans made by the Defendant to Cheung but I am satisifed that she did make substantial sums of money available to him, at the very least in the amounts detailed by him. I am also satisfied that Cheung did pay for the household expenses. The deterioration in the relationship between the Defendant and Cheung which was taking place at the relevant times is a factor to consider. Maria Pun was taking g over the Defendant's place in Cheung's affection, a fact borne out by their subsequent marriage. Given this background it is difficult to conceive Cheung making payments to the Defendant for anything other than his personal commitments to her, namely repayment of loans and payment for household expenses. I am satisfied that the amounts paid were for this purpose and not simply gratutions payments to the Defendant.

15. Cheung in using company funds to meet his personal liabilities was in breach of his fiduciary duty as a constructive trustee of the company funds (see Nelson v Larholt) ⁽³⁾. In relation to persons in the position of the Defendant Lord Selborne in the Belmont Finance Corporation Ltd⁽¹⁾ case said at Pg 405 :-

"So if the directors of a company in breach of the fiduciary character of their duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives with knowledge (actual or constructive) of the breach he cannot conscientiously retain those funds against the company for the misapplied funds. He becomes a constructive trustee for the misapplied funds".

Snells Principles of Equity (27th Edn. 1973) has this to say on I the point, at Pp 186-187:-

16. If it can be shown that the Defendant had actual or constructive knowledge that Cheung in breach of his fiduciary duty was misapplying company funds then she is deemed to be a constructive trustee and is accountable to the companies for those funds.

17. The Plaintiffs' submit that the inference to be drawn from the evidence is that the Defendant had actual knowledge of the breach by Cheung. They point to three pieces of evidence. First the two loan application forms made to support false loan entries in the ledger of CFL, purport to have been signed by the Defendant. The entries were the subject of charges against Cheung and Pun. In the course of her interview with the police and in the Cheung trial she denied having signed the loan application forms. Cheung maintained at his trial and in evidence before me that she did sign the forms.

18. Shortly before the commencement of the hearing of this case the Defendant's solicitors sought and obtained an order permitting the examination of the signatures by a handwriting expert. No report was produced nor did the defence call an expert. I am asked to infer from this lack of evidence that the Defendant did sign the loan application forms and that she knew this was part of an attempt to falsify the records of CFL. The Plaintiff had the opportunity to call its our evidence to support this serious allegation but elected not to do so. On the evidence I have before me I do not intend to draw the adverse inference sought by the Plaintiff in respect of the loan application forms. The second piece of evidence relied upon by the Plaintiff is that when interviewed by the police the Defendant said that Cheung had told her that if and when she was asked she could say that the money he had given her every month were in repayment of debts borrowed from her. In the light of my finding that cheques paid to the Defendant were at least in part in repayment of loans I find nothing sinister in her statement. The third piece of evidence relates to the entry of four of the cheques in the ledger of CFL which the Plaintiffs suggest shows that the Defendant might have been insolved in the maintenance of a false loan account. The Defendant was not employed by any of Cheung's companies and took no active part in, their operations. Even if the ledger could be relied upon as accurate, which it cannot, no such conclusion can be drawn from these four entries.

19. I find that there is no evidence which establishes that the Defendant had actual knowledge that Cheung had misapplied the companies' funds.

20. I turn now to the question of constructive In Nelson v Larholt⁽³⁾, Larholt, a turf accountant from time to time me cashed cheques drawn by one Potts made payable to Larholt and signed "G A Potts of WM. Burns decd" The money obtained by Potts was used for his private purposes and not for the purposes of the estate. Denning J. as he then was said at Pg 343 :-

"It is plain that he (LARHOLT) received them (the cheques) for value and Mr Low does not suggest that he did not receive them in good faith. But did he have notice of the want of authority? That depends on what amounts to notice. He was the original payee of the cheque and as such, was not protected by the fact that it was a negotiable instrument. He must, I think, be taken to have known what a reasonable man would have known. If, therefore, he knew or is to be taken to have known of the want of authority as, for instance, if the circumstances were such as to put a reasonable man on inquiry, and he made none, or if he was put off by an answer that would not have satisfied a reasonable man, or, in other words if he was negligent in not perceiving the want of authority, then he is taken to have notice of it. That is I think the result of Rechitt v Barnett".

 

The judgment concluded at p 344 :-

"..... the inference s irresistible that the Defendant knew or ought to have known that Potts had no authority to do what he was doing. Any reasonable man in the Defendant's position would have known it".

 

In the Westpac Banking Corporation case ⁽²⁾ Sir Clifford Richmond after considering the authorities concluded at Pg 71 :-

"In my view the actual knowledge of the bank was such as ought to have led a reasonable man in the position of the bank manager to the belief that Aqua Marine was dealing with the proceeds of boats sold 'on behalf of’for its own benefit in a manner not authorised by the owners of the boats".

The test then to be applied in determining whether the Defendant had constructive knowledge of the misapplication of funds by Cheung is to ask whether the knowledge of the Defendant was such as ought to have led a reasonable person in her position to the belief that the funds had been paid without authority; or was such as to put a reasonable person on inquiry.

21. The Defendant had lived as the de facto wife of Cheung for many years and over that period had lent him considerable sums of money for his various business ventures. Cheques that were found in her premises by her sister show that it was not unusual for her to have received cheques both from Cheung and from his companies. While she was not involved personally in his companies she must have been aware that he was the mastermind behind the various companies. The documents show that he had control of the operations and financial affairs of CFL and of all the companies in the group. With the knowledge that the Defendant must have had of this I do not consider that a reasonable person in a similar position would or ought to have been led to the belief that Cheung was misapplying company funds nor would such a person be put on inquiry.

22. The Plaintiffs have failed to prove that the Defendant holds the funds as a constructive trustee of the Plaintiff's.

23. Having found that the funds were paid to the Defendant by Cheung in repayment of loans and for household services there was consideration passing between the Defendant and Cheung. I am satisfied she was a bona fide recipient of the funds for value and without notice of the trust; she was not a mere volunteer.  As such the Defendant is not liable to the Plaintiffs for the company funds paid to her by Cheung.

24. The claim of the Plaintiff fails and is dismissed.

(1)    [1980] 1 ALL E.R. 393

(2)    [1985] 2 N.Z.L.R. 41

(3)    [1947] 1 K.B. 339