HKSAR v. MAK CHAI KWONG AND ANOTHER

Press Summary (English)

Press Summary (Chinese)

FACC No. 2 of 2015

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 2 OF 2015 (CRIMINAL)

(ON APPEAL FROM CACC NO. 309 OF 2013)

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REASONS FOR JUDGMENT

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Chief Justice Ma:

1.  I agree with the Reasons given by Mr Justice Ribeiro PJ.

Mr Justice Ribeiro PJ:

2.  At the hearing, for reasons to be provided, the Court allowed the appeals, quashed the appellants’ convictions and ordered that they should have their costs here and below, including costs certified fit for three counsel in the Court of Appeal.  The following are my reasons.

3.  At the time of their arrest on 12 July 2012, the 1^st appellant (“Mak”) was Secretary for Development and the 2^nd appellant (“Tsang”) was an Assistant Director of the Highways Department.  They were convicted in the District Court[1] of the common law offence of having conspired to defraud the HKSAR Government as well as having committed statutory offences[2] involving the use of documents as agents with intent to deceive their principal, being offences arising out of property transactions entered into between 1985 and 1988/1990 when they were both engineers in the civil service.  They were sentenced to concurrent sentences of imprisonment for 8 months on the conspiracy charge and 6 months on the other charges, suspended for a period of two years.

4.  On appeal, the Court of Appeal[3] found that the Judge had made findings of fact which were materially erroneous but nevertheless upheld their convictions, applying the proviso.  Leave to appeal to this Court was granted by the Appeal Committee.[4]

A.  The initial acquisitions and tenancies

5.  On 8 June 1985, Mak and his wife Wong Lai King (“Wong”) signed an agreement to purchase Flat 21E in a new property development known as City Garden in Electric Road, North Point (“Flat 21E”) for $925,800.00.  On the same day, Tsang and his wife Pau Wai Ming (“Pau”) acquired Flat 22E in the same block of that development (“Flat 22E”) for $928,000.00.  They each obtained mortgage finance from Wayfoong Credit Limited and duly completed the purchases, so that Mak and Wong became the registered owners of Flat 21E and Tsang and Pau, the registered owners of Flat 22E.

6.  On 4 August 1986, Wong entered into a tenancy agreement with Tsang, letting Flat 21E to him at the monthly rental of $8,000 for a two-year term starting on 1 August 1986.  On the strength of that tenancy, Tsang applied for and received from the Government, a Private Tenancy Allowance (“PTA”) in accordance with specified entitlements.

7.  By a tenancy agreement dated 29 August 1986, Pau let Flat 22E to Mak for $8,000 per month for two years beginning on 1 September 1986.  Mak applied for and received PTA in respect of that tenancy. 

B.  Termination of tenancies and sale of the flats

8.  Tsang resided in Flat 21E, receiving PTA payments as Wong’s tenant until 31 December 1990 (with an interval when the flat was tenanted by his sister Tsang Wai-wah, another government engineer, while Tsang was abroad on study leave).  After he was allocated government quarters on 28 November 1990, he moved out and stopped paying rent and receiving PTA payments.  Soon after he left, Flat 21E was sold with vacant possession, with Tsang executing the assignment dated 22 December 1990 on behalf of Mak and Wong under a power of attorney they had given to him dated 1 December 1990. The sale proceeds were kept by Tsang, a fact given prominence by the prosecution. 

9.  On 8 December 1990, Tsang and Pau gave a power of attorney to Mak authorising him to sell Flat 22E.  It was, however, not sold until July 1992.  Meanwhile, on 26 October 1988, Mak had been allocated government quarters and no longer needed to rent the flat and PTA payments ceased.  After he left, Flat 22E was let by Tsang and Pau to Dennis Leung (“Leung”) who became its tenant as from 19 November 1988. 

10.  Pursuant to a fresh power of attorney dated 11 May 1992 given to Mak by Tsang and Pau, Flat 22E was sold on 20 July 1992 with Mak executing the assignment on their behalf.   Mak kept the sale proceeds, a fact also highlighted by the prosecution.

C.  The Regulations and the charges

11.  The Judge referred to two versions of the provision in the Civil Service Regulations (CSR 825(5)) dealing with eligibility for PTA.  The first was effective as at 24th July 1985, stating:

“(5) An officer will not be eligible for a private tenancy allowance if he resides in accommodation owned by himself, his spouse and/or a relation of either himself or his spouse. 'Relations' here include (a) parents, (b) brothers, sisters, and their spouses, and (c) children and their spouses.”

12.  As at 13th March 1989, CSR 825(5) relevantly provided:

“(a) An officer shall not claim private tenancy allowance in respect of -

(i) accommodation owned by the officer himself and/or any relative of the officer; or

(ii) accommodation in which the officer himself and/or any relative of the officer have/has a financial interest; or

(iii) ...

(iv) accommodation owned by a trust of which the officer and/or any relative of the officer is/are a beneficiary.

For the purpose of this regulation, ‘relative’ includes - the officer’s spouse;...”

13.  The differences between these two versions have not been treated as material.  The regulations have throughout these proceedings been interpreted as excluding officers from receiving PTA if they or their relatives had a financial interest in the property they were renting.  That interpretation is not in issue.

14.  The prosecution case was that Mak and Tsang conspired to defraud the government by obtaining PTA which they knew they were not entitled to because they each had a financial interest in the respective flats which they were purportedly leasing from each other, concealing such interest by pretending merely to be tenants of each other’s wives. 

15.  The particulars of Charge 1 stated that between 8 June 1985 and 31 December 1990 the appellants conspired together to defraud the Hong Kong Government by dishonestly :

“(a) (i) falsely representing that they did not have a financial or proprietary interest in the flats that they leased (MAK leased [Flat 22E] ... and TSANG leased [Flat 21E]... ) and that the lease in relation to each of the said properties was a genuine lease;

(ii) concealing and not disclosing that they each had a financial or proprietary interest in the flat that they leased by stating the landlord to be their respective wives; and

(iii) claiming and receiving Private Tenancy Allowance from the Government; or

(b) causing a public officer or officers to act contrary to their public duty by paragraphs (a)(i), (ii) and (iii) above.”

16.  The other charges[5] alleged that the appellants’ had used documents, in particular their PTA applications, with intent to deceive their principal, namely the Hong Kong Government.  Like the conspiracy to defraud charge, those charges are premised on the appellants having had a financial interest in the leased premises.  Charge 2 against Mak is illustrative, specifying that on 29 August 1986, with intent to deceive his principal, Mak :

“... used a document, namely, the Application for Private Tenancy Allowance in relation to the leased property at [Flat 22E] ... in respect of which the Hong Kong Government was interested and which contained a statement which was false or erroneous or defective in a material particular, namely that the leased property was not owned by himself, his spouse and/or a relation of either his or his spouse and neither he, his spouse nor any of his or his spouse’s relations had a financial interest in it and which to his knowledge was intended to mislead the Hong Kong Government.”

D.  The defence case and the Judge’s decision

17.  The appellants’ case appeared mainly from their cautioned statements to the ICAC, they having elected not to testify.  It was that each had bought a flat which they had then leased to the other, quite properly claiming PTA in respect of the rental paid under such leases, having had no financial interest in the property which they were leasing.  It was common ground, as the Judge noted,[6] that the practice they claimed to have engaged in – a practice known as “cross-leasing” – was not unlawful.

18.  The Judge, however, convicted the appellants on all charges.  He identified as the “important question” the issue whether the prosecution was able to prove that when Mak and Tsang each applied for and obtained PTA (i) Mak and Wong “were holding Flat 21E on trust for” Tsang and Pau; and (ii) Tsang and Pau “were holding Flat 22E on trust for” Mak and Wong.[7]  If so, the prosecution would have established that they each had a beneficial and thus a financial interest in the respective flats.[8]

19.  His Honour referred to the fact that the two sale and purchase agreements had been signed on the same day to acquire flats in the same block, similar in size, view and price; that Tsang had retained a high degree of control over the flat in being able to arrange for his sister’s residence in it during his absence although he was ostensibly only its tenant; and that each had kept the proceeds of sale when the respective flats were eventually sold.[9] On this basis, the Judge stated that the “only compelling inference” he could draw was that “it was Mak or Mak and Wong who provided the purchase money for Flat 22E in 1985/1986” and that “[it] was Tsang or Tsang and Pau who provided for the purchase money for Flat 21E in 1985/1986”.[10]

20.  The Judge thus decided (although he did not say so in terms) that since they had provided the purchase monies to acquire the flats which they were ostensibly leasing, a resulting trust had come into being giving each appellant a beneficial and financial interest in the property concerned.

E.  The Judge’s erroneous findings

21.  Lunn VP (writing for the Court) held that His Honour’s finding that Mak or Mak and Wong had provided the purchase money for Flat 22E “was not only unsupported by the available evidence but also contrary to it”.[11]   His Lordship listed[12] documents including correspondence with the conveyancing solicitors and loan and mortgage payment receipts and statements which demonstrated that Tsang and Pau had provided the purchase monies in question.  While the evidence was not as extensive in relation to Flat 21E, Lunn VP held likewise that the Judge’s determination that Tsang and Pau had provided the purchase money for its acquisition “was against the weight of the available direct evidence”[13] which showed that the money had come from Mak and Wong. 

22.  The erroneous findings were plainly material since “...the issue of whether or not the respective appellants had a financial interest in the premises in respect of which they claimed a Private Tenancy Allowance went to the heart of the charges brought against them”.[14]

F.  The application of the proviso

23.  The Court of Appeal nevertheless applied the proviso, holding that the Judge had found that the appellants had “agreed to a cross-holding of the flats”, meaning that the appellants “had agreed that [Mak] [would] have a beneficial interest in Flat 22E, notwithstanding that it would be and was registered in the name of [Tsang and Pau] and that, in similar circumstances, [Tsang] [would] have a beneficial interest in Flat 21E”.[15]

24.  As the prosecution had put it, such purchases were made “on behalf of each other”,[16] with the appellants agreeing “to register them in the Land Registry, not in their own names, but in the names of each other and then pretend that they were renting from each other flats in which they did not have a proprietary or financial interest.”[17]

25.  The Court of Appeal was therefore distinguishing between a “cross-leasing” arrangement which was permissible; and a “cross-holding” agreement which it held the Judge had found to exist, constituting the alleged conspiracy to defraud.  The proviso was therefore applied on the basis that the Judge had found that each appellant (and his wife) had expressly agreed to hold the property of which they were the legal and registered owners on trust for the other appellant (and his wife), so that each appellant thereby acquired a beneficial interest – and therefore a financial interest – in the property he was leasing.

26.  There was no documentary or any other direct evidence of such an agreement.  The Court of Appeal, however, inferred its existence pointing to the fact that the Judge had “adverted on various occasions to the coincidence of the similarity of the conduct of the two applicants”[18] involving the sale and purchase agreements and mortgages being signed on the same day, and the purchase of flats in the same block, similar in size, view and price.  Their Lordships also noted that the Judge had found that naming their respective wives (rather than themselves) as landlords and using addresses other than the addresses of the newly-acquired flats was misleading conduct and concluded that these matters made it proper to infer that the parties were acting pursuant to an unlawful “cross-holding” agreement:

“[On] that evidence, the judge found:[19]

The provision of misleading addresses could not be a coincidence and it shows that Mak and Tsang were acting in pursuance to an agreement.

The conduct of Mak and Tsang between 1^st June 1985, ie the day they signed the sale and purchase agreements for Flat 21E and 22E and 31^st December 1990, ie the day that the tenancy agreement for Flat  21E was terminated, in particular the provisions of misleading addresses, the use of their wives as the landlords in the leases and the fact that both Mak and Tsang falsely stated in their PTA applications/memorandum for renewal that they and their wives did not have a financial interest in the property they leased, when considered together, point to the only compelling inference, ie Mak and Tsang had agreed to apply for and obtain PTA from the government by cross-holding and bogus cross-leasing between themselves Flat 21E and Flat 22E.” 

27.  The proviso was thus applied because “the inevitable consequence of the judge’s findings as to their agreement to cross-hold the flats was that each enjoyed a beneficial interest, and therefore a financial interest, in the flat registered in the name of the other applicant and his wife”.[20]

G.  The present appeal

28.  The central issue on this appeal is whether, notwithstanding the unsustainable basis of the appellants’ conviction by the Judge, the Court of Appeal was justified in applying the proviso on the footing that it was properly to be inferred that the appellants had, from the time of acquisition of the flats, entered into an express “cross-holding” agreement (that is, an agreement to hold their respective units on trust for each other) and not merely a “cross-leasing” agreement (where they had let out flats which they owned to each other). 

29.  The test for application of the proviso is demanding.  As this Court stated in Kissel v HKSAR:[21]

“The test for the application of the proviso is well established: Whether a hypothetical reasonable jury, properly instructed, would on the evidence without doubt convict or would inevitably come to the same conclusion.”

H.    Inferring an agreement between the appellants

30.  It is well-established that the requirement of proof beyond reasonable doubt in criminal cases can be satisfied by drawing an inference of fact, but that such an inference “must be compelling – one (and the only one) that no reasonable man could fail to draw from the direct facts proved.”[22] As was stated in this Court in Winnie Lo v HKSAR:

“There are three requirements for drawing such an inference. First, it must be grounded on clear findings of primary fact. Secondly, the inference must be a logical consequence of those facts. Thirdly, beyond being logical (since more than one inference might logically be drawn), in a criminal case the inference must be ‘irresistible’, that is, it must be the only inference that can reasonably be drawn on the basis of those facts.” [23]

31.  It is not in dispute that each appellant was renting a flat of which the other was the registered owner.  The crucial question was whether the prosecution had proved beyond reasonable doubt that, pursuant to an agreement to hold their respective units on trust for each other, they each had a beneficial interest, and thus a financial interest in the flat being leased, disqualifying them from PTA.  Put another way, the central issue is whether the evidence compels the court to infer as the only reasonable inference that the appellants had entered into a cross-holding – and not simply a cross-leasing – agreement when purchasing the flats.

H.1  The prima facie position

32.  The Court of Appeal set aside the Judge’s findings regarding provision of the purchase monies because their Lordships accepted that the evidence showed that each appellant had paid for the flat of which he and his wife were the registered owners.  It follows that when considering the appellants’ criminal liability, the starting-point must be that each appellant (and his wife) had duly acquired and was the legal owner of the flat which was rented out to the other appellant, so that the arrangement was on its face a permissible cross-leasing arrangement.

33.  There was certainly no direct evidence that the parties had expressly agreed to a cross-holding arrangement constituting themselves trustees of the flats they owned in favour of each other.  Indeed, the suggestion that the appellants might have chosen to enter into such an agreement is inherently implausible.  Since it was common ground that a cross-leasing arrangement with a view to claiming PTA was permissible, it is difficult to detect any possible motive for the appellants to choose instead to enter into an unlawful cross-holding arrangement with the identical objective of claiming PTA.  It is inherently improbable that the appellants should have (as the Judge thought it proper to infer[24]) “agreed to apply for and obtain PTA from the government by cross-holding and bogus cross-leasing between themselves...”  If PTA could legitimately be obtained by a cross-leasing arrangement which they were going to set up in any event, why should they make that a “bogus” arrangement and engage in unlawful behaviour by entering into a surreptitious cross-holding agreement?

34.  Mr Peter Duncan SC[25] was unable to suggest any benefit that they might gain by entering into an illicit instead of a lawful arrangement as the basis for claiming PTA.  Reference was made to the Judge’s suggestion[26] that a possible motive for a cross-holding arrangement was that this would enable each couple securely to spend money decorating and improving their own flats.  That was purely speculative since, as Mr Duncan accepted, there was no evidence of what, if any, money each appellant had spent or intended to spend on improving their respective units.  Moreover, the evidence showed that they each had real prospects of obtaining government quarters on promotion and that, upon such prospects being realised, they had sold off the flats, indicating they had not held them as long-term investments on which significant sums were likely to have been invested on improvement.

35.  The inference that the appellants had entered into a cross-holding agreement is not a natural inference for another reason. The appellants had access to legal advice and, as we shall see, sought legal advice in relation to a proposed declaration of trust in connection with the disposal of the flats.  If similar legal advice had been sought as to the legal consequences of an informal agreement to hold the respective flats as trustees for each other, they would have discovered that in the absence of a written and signed document, such an arrangement had little to recommend itself since it would have been invalid for want of formality by virtue of section 5(1) of the Conveyancing and Property Ordinance.[27] The Judge’s speculative suggestion that a cross-holding arrangement would have secured to each appellant the ability to spend freely on improving a beneficially owned apartment also lacks substance for this reason.

H.2  The evidence relied on in support of the inference

36.  The broad considerations mentioned above weigh substantially against inferring the existence of a cross-holding agreement. What then is the evidence relied on by the prosecution for upholding the Court of Appeal’s application of the proviso?  It must be evidence which compels the inference that the parties entered into a cross-holding agreement as the only reasonable inference to be drawn.  It must justify application of the proviso on the footing that conviction of the appellants based on such an irresistible inference was inevitable.

37.  The evidence relied on by Mr Duncan is set out in the respondent’s printed case as follows :[28]

“... the following factors (found by the Judge and referred to by the Court of Appeal) led irresistibly to such an inference being drawn :

(a) The odds against A1 [Mak] meeting A2 [Tsang] when they queued up to buy the flats.

(b) The two flats were in the same block, one directly above the other and were very similar in size, view and price.

(c) The sale and purchase agreements and the equitable mortgages for both flats were signed by the two couples on the same day.

(d) The similarities in the manner in which the lease agreements were effected:

i. The leases of the two flats stated the landlords to be the Appellants’ wives only and left out the Appellants’ names.

ii. The PTA applications of the two flats provided misleading addresses of the landlords which were not the addresses of the two couples.

(e) A2 retained a very high degree of control over Flat 21E when he departed HK on study leave. A2 and PW5 were able to break their lease of Flat 21E without a break clause.

(f) A2 retained the proceeds from the sale of Flat 21E; A1 retained the proceeds from the sale of Flat 22E.”

H.3  Matters listed in sub-paragraphs (a) to (e)

38.  It is readily apparent that the matters referred to in sub-paragraphs (a) to (e) are at least as consistent with the existence of a permissible cross-leasing agreement as with that of a cross-holding agreement, making the inference urged by the prosecution far from irresistible. Sub-paragraph (f), concerning the sale proceeds, is separately dealt with below.

39.  Sub-paragraph (a) records that the Judge rejected the suggestion that the appellants had met by coincidence in the queue formed by would-be purchasers of units in the development.  At its highest, this means that His Honour found that they had met by design and not by chance – a finding equally consistent with a permissible cross-leasing arrangement.

40.  The same applies to the finding that the two flats were in the same block, similar in size, view and price (§(b)); that the sale and mortgage documentation were signed on the same day (§(c)); that the tenancy agreements named the wives as landlords and gave addresses other than the addresses of the newly-acquired flats (§(d)); and the ability of Tsang to arrange for his sister to step in as tenant while he was away on study leave (§(e)).

41.  Mr Duncan laid particular emphasis on sub-paragraph (d), criticising the appellants for acting in a misleading way by naming their wives rather than themselves as landlords when leasing to each other, and giving other addresses for the respective landlords even though they had, by the time PTA was applied for, moved into the newly-acquired flats. 

42.  It is fair to say that this conduct suggests a desire not to draw attention to the existence of a cross-leasing scheme. However, it does not compel inference of a cross-holding agreement.  Contrary to Mr Duncan’s submission, the facts do not indicate an attempt at concealment of the cross-leasing arrangement (therefore suggesting, so Mr Duncan submitted, the existence of an underlying cross-holding arrangement).  Each appellant and his wife were the registered owners of each flat.  Anyone who did a land search to ascertain who owned the flat in respect of which PTA was claimed would see that they were named as owners and that one of them (the wife) was the landlord from whom the person claiming PTA was renting the flat.  A cross-leasing arrangement was therefore readily discoverable from public records.  None of this logically suggests that there must have been a cross-holding arrangement.

H.4  Sub-paragraph (f): retention of the sale proceeds

43.  The point sought to be made at sub-paragraph (f) is that Tsang, while purportedly merely a tenant, had kept the proceeds after Flat 21E was sold; and similarly, Mak had kept the proceeds after Flat 22E was sold, indicating that Tsang and Mak had all along been the beneficial owners of each of the flats in question.

44.  The appellants’ case was that in 1990, after they had been allocated quarters and stopped being each other’s tenants (and stopped claiming PTA), they each agreed effectively to swap flats (or, more precisely, as the evidence indicates, to grant each other the right to receive the sale proceeds of each other’s flats), resulting in each appellant retaining such sale proceeds.  

45.  The admitted facts included the fact that government quarters were allocated to Mak in October 1988 and to Tsang in November 1990;[29] and that Flat 21E was sold in December 1990 and Flat 22E in 1992.[30] 

46.  In cautioned interviews, Mak told the ICAC that in November 1990, Tsang had wanted to sell Flat 22E, but since there was an existing tenant (Leung) in it, a sale would be difficult, so he had asked Mak to swap flats and Mak agreed.  He said that he believed that ownership in the respective flats was exchanged with the help of a solicitors’ firm Lawrence Ong and Co (“LOC”) and that he thought there ought to have been a trust document or IOU prepared by LOC.[31] The arrangement had led to Tsang selling Flat 21E and keeping the proceeds in 1990, and to Mak doing the same with Flat 22E in 1992.[32] 

47.  In his cautioned interviews, Tsang likewise explained to the ICAC that he had wanted to sell Flat 22E but was hampered by a sitting tenant and persuaded Mak to agree to a swap of the flats to enable him to effect a sale.[33] He said that he believed that a “trust document” had been prepared to facilitate the swap, which accounted for the mutual retention of the sale proceeds, but that after the lapse of over 20 years, the relevant document could not be found.[34]

48.  The Judge, who was upheld by the Court of Appeal on this point, rejected the appellants’ explanation essentially because that they had stated that the flats had been swapped pursuant to some “trust document” prepared by LOC; whereas the Judge accepted the testimony of Andus Lai Sai-on (“Lai”) of LOC that he had declined to prepare such a trust document because, among other things, he did not think it a viable option because of anticipated problems with the mortgagee.  It was accordingly found that there had been no swap of the properties to explain retention of the sale proceeds.

49.  With respect, this was not an adequate approach to the evidence.  It is true that, asked to account for the cross-retention of the sale proceeds at a remove in time of over 20 years and without the benefit of contemporaneous documents, both appellants (laymen, not lawyers) stated their belief that there had been a swap of the flats effected by some trust document.  In the light of Lai’s evidence the Judge was clearly entitled to find that no trust document had in fact been executed.  However, that finding did not diminish the importance of the available evidence regarding an intended “swap” as the explanation for the way the sale proceeds were dealt with.  The significance of that evidence was evidently overlooked.

50.  The undisputed evidence was that (i) by a fax dated 27 November 1990 (whose faded and illegible contents were only recovered by forensic scientists after the ICAC interviews) the appellants had given “clear instructions ... to create a document of trust”;[35] (ii) on their instructions, Lai drew up a power of attorney dated 1 December 1990, whereby Mak and Wong authorised Tsang to sell Flat 21E on their behalf; and a power of attorney dated 8 December 1990 whereby Tsang and Pau authorised Mak to sell Flat 22E on their behalf; (iii) after Lai declined to draw up the trust document, he refunded $1,000 which had been paid to his firm as costs on account;[36] (iv) a fresh power of attorney dated 11 May 1992 was prepared by Lai whereby Tsang and Pau authorised Mak to sell Flat 22E on their behalf; (v) the sales which took place on 22 December 1990 (of Flat 21E) and on 20 July 1992 (of Flat 22E) were effected pursuant to those powers of attorney; and (vi) Tsang and Mak retained the sale proceeds respectively of Flat 21E and Flat 22E.

51.  The faded fax dated 27 November 1990 conveys instructions to Lai in two parts.  First, it asks him to prepare an “Authorization Document” in relation to Flat 21E owned by Mak and Wong in favour of Tsang.  As noted above, a power of attorney dated 1 December 1990 authorizing Tsang to deal with Flat 21E was duly prepared and was in fact operated by Tsang on 22 December 1990.  Secondly, the fax instructs Lai to prepare an “Authorization Document” and “a Declaration of Trust” to authorize Mak and Wong to sell Flat 22E and to make the “Existing Owners” Tsang and Pau the trustees of the same in favour of Mak and Wong.  It also records that Flat 22E was then rented to Leung at $15,000 and mortgaged to the Wayfoong Finance Group for $788,000.

52.  The fax provides clear contemporaneous support for the appellants’ case that they had sought to grant each other the right to sell their respective flats in 1990.  It shows that it was intended that Tsang should be authorized to sell Flat 21E on behalf of Mak and Wong and, as the evidence establishes, to keep the proceeds.  Since Flat 22E, owned by Tsang, would not be sold until later, Lai was asked to prepare a power of attorney authorizing Mak and Wong to sell it in due course and, in the meantime, to prepare a declaration of trust so that Tsang (who would have availed himself of Flat 21E’s sale proceeds) would become trustee of Flat 22E in favour of Mak and Wong.  

53.  Lai complied with the instructions regarding the powers of attorney and they were in fact utilised in implementing the “swap” arrangement. The fact that Lai advised against and did not draft the declaration of trust is not to the point.  The evidence clearly shows that in 1990 there had in fact been an agreed “swap” – not, as the appellants had erroneously recollected, by exchanging legal title in the two flats, but by agreeing to give each other the right to sell and to receive the sale proceeds of each flat.  The fax shows that the plan was for the registered owners to remain unchanged and for the flats to be dealt with using powers of attorney.  Mak and Wong were intended to be given a measure of security by means of a declaration of trust in respect of Flat 22E while it remained in the registered ownership of Tsang and Pau. 

54.  The fact that the sale of Flat 21E went ahead without drawing up such a declaration of trust and without Mak and Wong obtaining such security does not detract from the significance of this evidence.  It shows that there was a “swap” arrangement in the aforesaid sense and therefore a plausible explanation for the retention by Tsang and Mak of the relevant sale proceeds, consistent with them having previously entered into a cross-leasing arrangement.  It indicates that the appellants were (as the Land Registry showed) the owners of their respective flats and that it was only in 1990 that any attempt was made to create an equitable interest in Flat 22E in favour of Mak and Wong as part of the swap arrangement.  This evidence makes inference of the existence since 1985 of a cross-holding agreement on the basis of the appellants’ retention of the respective sale proceeds far from irresistible.  

H.5  Continued payment of rent

55.  In his oral argument, Mr Duncan submitted that there ought to be added as a fact which militates against accepting that there was a “swap” arrangement in 1990, the fact that Leung, the tenant of Flat 22E, testified that he had continued to pay his rent after 1990 by delivering cheques to Tsang.  The Judge commented:

“If there was a swap of properties in 1990, one would expect [Leung] be informed that Mak and Wong had become the new owners of Flat 22E and henceforth [Leung] should pay his rents to Mak, not Tsang. ... The fact that Tsang continued to receive rent from [Leung] after 1990 is wholly incompatible with Mak’s and Tsang’s claim that they had exchanged the properties in 1990.”[37]

56.  Since Leung was Tsang’s tenant, it is unsurprising that the rent continued to be paid to Tsang in accordance with the tenancy agreement.  There was no evidence as to what Tsang did with the rent received.  However, as the prosecution accepted and the Judge noted:

“... it is perfectly possible that Tsang had been accounting to Mak for the rent received from [Leung] albeit there is no banking evidence available after the long lapse.”[38]

57.  Oddly, acceptance of this possibility did not lead the Judge to question the cogency of the evidence as to rental payments for undermining the case that there had been a “swap”.  Instead, the Judge reasoned tangentially that:

“Such arrangement [ie, Tsang handing over the rent to Mak] is compatible with the Prosecution’s case that all along Mak and Tsang did not want others to know about their true arrangements.”[39]

58.  But the premise of this approach is that their “true arrangements” did involve a “swap”.  Retention of the sale proceeds therefore remained consistent with a permissible cross-leasing arrangement and did not provide any basis for inferring a cross-holding agreement.

59.  Later in his Verdict, the point became merely a criticism for failing to inform Leung of a change of ownership, while accepting that Tsang might have been receiving rent on Mak’s behalf.[40]  That criticism suffers from the erroneous assumption – which the faded fax dispels – that the intended swap involved a change in the ownership of the properties rather than granting each other the right to receive the respective sale proceeds.  There was no change of ownership to inform Leung about and it was no concern of Leung’s whether upon sale of Flat 22E, the sale proceeds would go to Mak and Wong or to Tsang and Pau.

I.     Conclusion

60.  The Court of Appeal rightly held that the appellants’ convictions based on the Judge’s finding that they had provided the purchase monies for the leased flats could not stand.  However, the Court of Appeal erred in applying the proviso.  In the absence of any direct evidence, it felt able to draw the inference that when acquiring the flats, the appellants had expressly agreed to hold them on trust for each other, thereby giving each of them a beneficial and thus a financial interest in the cross-leased flats, and making their claims for PTA dishonest. 

61.  Such an inference was inherently implausible and none of the matters relied on by the prosecution and by the Court of Appeal were capable of sustaining it.  The contemporaneous evidence showed that each appellant (and his wife) had duly paid for and become the legal owners of their respective flats and that they had then entered into cross-leasing tenancy agreements. There was no cogent reason to infer that there was any illicit underlying “cross-holding” agreement.  As the faded fax dated 27 November 1990 indicated, it was not until the end of 1990, after the appellants had stopped claiming PTA, that any steps were taken to create a beneficial interest in Flat 22E in favour of Mak and Wong as part of an agreement to swap the right to receive the sale proceeds of each unit.  There was accordingly no basis for applying the proviso and the appellants were entitled to have their convictions quashed. 

Mr Justice Tang PJ:

62.  I agree with the Reasons given by Mr Justice Ribeiro PJ.

Mr Justice Fok PJ:

63.  I agree with the Reasons given by Mr Justice Ribeiro PJ.

Mr Justice Gummow NPJ:

64.  I agree with the Reasons given by Mr Justice Ribeiro PJ.