XCHRX CHARK FUNG SECURITIES CO. LTD. (IN LIQUIDATION) AND OTHERS v. MING FUNG GOLDSMITH

HCA 1360/1999
HCA 1361/1999 and
HCA 1362/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1360, 1361 AND 1362 OF 1999

(CONSOLIDATED)

____________

______________________________________

REASONS FOR JUDGMENT

______________________________________

1. There are three separate actions with the two Plaintiffs, Chark Fung Securities Company Limited ("CFS") and Kee Fung Sing International Finance ("KFS") suing Ming Fung Goldsmith in one action and Link Standard Limited in another. In the third action "CFS" and "KFS" are joined by Ming Fung Bullion Company Limited ("MFB") as the third Plaintiff against Lau Miu King.

2. In each of those three actions the Learned Master gave leave to the respective Defendants to defend conditional on a sum of money being paid into court. The Defendants each appeal against the orders contending that they should have unconditional leave to defend. At the same time as he gave conditional leave in respect of the three actions, the Learned Master made an order consolidating the actions. This was eminently appropriate and there is no appeal against this.

3. All three Plaintiff companies are in liquidation. The Petition for winding up the companies was presented by the Securities and Futures Commission on the grounds that it was in the public interest. The winding up order in respect of all three companies was made by Mrs Justice Le Pichon and the Learned Judge appointed Nicholas Etches, Gabriel Tam and Alan Chung as Liquidators.

4. The pivotal figure in these companies and in a number of other businesses is Mr Chan Kwong Hung. He was the Managing Director and holder of 50 per cent of the shares in each of the Plaintiff companies (and other linked companies). He is also one of the three partners in the 1st Defendant business, the husband of the 2nd Defendant and, with the 2nd Defendant, a director and shareholder in the 3rd Defendant company.

5. At the time of the appointment of the Liquidators (as Provisional Liquidators) in late May 1998 the potential claims by investors against the Group was in the region of $335 million of which claims for stock amounted to $290 million approximately. Only $44 million worth of stock was in fact held by the Group.

6. From the Affirmation of Gabriel Tam it is clear that the shareholders current account of KFS shows considerable sums had been advanced to entities associated with the Group through Mr Chan including his wife, the 2nd Defendant; over $43m was owed to KFS. The general ledger entries recorded, essentially, amounts paid to and received from Chan Kwong Hung but scrutiny of the individual transactions showed a significant number of payments to and from the second Defendant, his wife.

7. Action number 1361 of 1999 concerns the claims by all three companies against the Defendant Lau Miu King. In the case of CFS it is $16,366,000.00; in that of MFB it is $28,233,000.00; and for KFS it is $940,000.00. I propose to set out this position first because of the peculiar nature of Madam Lau Miu King's involvement and her accounts, and to reflect what she and her husband have to say about the system behind these transactions.

8. The summary of the claims and adjustments (P1) prepared by Mr Harris in answer to Mr Hung's summary and tables, reflects the above figures followed by some provisional credits to reflect alleged deposits which have still to be investigated further. This provisionally reduced the amount claimed by CFS to $11,366,000.00. A provisional adjustment of the same nature reduces MFB's claim to $830,000.00, and thirdly that of KFS on the same basis, is reduced to $27,133,000.00. The net total of these provisionally adjusted claims is therefore $39,329,000.00.

9. A number of advances allegedly made by her (for which credit has provisionally been given) are matched by reciprocal payments of the same amount on the same day, an odd form of transaction which has no satisfactory explanation even in the light of Mr Chan's dismissive and vague attempt to explain the involvement of his wife's personal savings accounts on a day to day basis.

10. Some of Madam Lau's alleged deposits with the company (KFS) are recorded in the company's books as made by clients of KFS and are therefore unrelated to her. There are five in particular and they total $5.352m. As one example of this is a payment of $1.479m. on 6 January 1997 credited to the account of Lau Siu Man for which Madam Lau claims credit as a payment by her. Neither her husband nor she herself has sought to provide an explanation for this.

11. Madam Lau Miu King has disclosed statements relating to two savings accounts held by her with the Hang Seng Bank. They are No. 293-7-300990, opened on the 3 September 1997, and No. 280-0-370500, the statements in respect of which start on the 1 January 1997 although the account was opened at an unknown date before that day. They both cover the period up to 25 May 1998. They are also both very busy accounts with many transactions on many days.

12. In Madam Lau's saving's account 293-7-300990 there are six entries for the 10 November 1997 covered by one transfer - 0242J TRM (Transfer withdrawal) - amounting to $6.93m. $1.5m. appears to have been paid into MFB. The balance, $5.43m. has gone to various recipients other than the Plaintiffs. There were 35 transactions in relation to that account on that day alone. There is not even an attempt to explain the pattern of transactions, their nature and the recipients of such large sums of cash.

13. In her first affirmation (paragraph 5) the Defendant said "I seldom returned to the office (of Ming Fung Group) and participate in the daily work". She did not however say what she did and what her position was. In relation to her account she said she signed blank cheques leaving them with her husband. The cheques were used for withdrawing cash and transfer of funds. All the paying in slips, withdrawal slips and cheque stubs were kept in her husband's office indicating that the Liquidators now have them.

14. Her second affirmation contains very little. She estimates total cash withdrawals from her accounts at $35m. although how she reaches that figure is not stated. She makes a further complaint against the Plaintiffs solicitors for not providing her with relevant documents. In fact she or her husband have been supplied with all that the Liquidators have, but, more pertinently, these are her accounts and she has easy access to her bank for the requisite documents. The importance of this fact is emphasised later.

15. The third Affirmation identifies some other bank accounts held by her but is concerned with putting forward a statement of her assets and liabilities and is in that regard, quite inadequate.

16. Against this paucity of information and explanation from the account holder herself it is necessary to see how her husband dealt with these accounts in his affirmations. He is equally vague and uninformative in many of his assertions.

17. In paragraph 8 of his first affirmation he said "often money inevitably had to be transferred from either the accounts of my wife or LSL to some of the companies and vice versa" without explaining the nature or purpose of the transfers, or why this activity was "inevitable" or the reason for his wife's personal accounts being involved at all. Paragraph 9 contains the assertion that in order to find out if his wife owes money to or is owed money by any of the Plaintiff companies it is necessary to look at documents and records of the Group as well as those of his wife. In fact that extensive exercise is hardly necessary and the documentation easily available to Madam Lau from her bank would be largely sufficient for their purposes.

18. The second affirmation repeats complaints about inadequacy of available documentation and in paragraph 10 he said he had, as a result of liquidation, "lost a large number of pay-in slips which would enable me to show large sum of cash have been regularly paid into the relevant bank accounts of the Plaintiff companies". He does not however deal with the availability of the documents from his wife's bank or from the bank of LSL.

19. In paragraph 12 he repeated the "inevitable" transfers from his wife's accounts to the companies without enlightening the reader as to the position or practice adopted; paragraph 15 makes one none the wiser. Paragraph 16 contains an explanation of the "system" adopted in relation to the accounts of his wife Madam Lau Miu King (and of LSL and MFG, the other two Defendants). The practice was to use a cheque drawn to cash by his wife (as she in her affirmation deposed) which the foki, Lau Kam Chuen, would then take to her bank and cash. The cash would then be paid into one of the company accounts at the same bank or would be carried to another bank for an identical purpose. The cash withdrawals from Madam Lau's account would "invariably" be in whole figures. As the statements when disclosed showed, this was most certainly not the invariable case.

20. As Mr Chan Kwong Hung rightly anticipated, this somewhat bizarre practice calls for an explanation. In paragraph 17 he purported to provide it. Transfer of funds in that manner avoided the delay which a paper transfer involved. This concept is somewhat difficult to understand if, by paper transfer, is meant something other than drawing a cheque to pay into an account. The paper transfer between two accounts in the same bank is in practice quicker than the cashing of a cheque, counting and checking of money, transferring it to another counter, and then being counted before being accepted into an identified account. Of course, if these cash transfers were effected in the way Mr Chan describes, the Bank concerned would have to have records of the amount paid in and the account credited, to supply, on request, to Madam Lau.

21. Mr Andy Hung for the Defendants used as the basis for his submission that Mr Chan and his wife were unsophisticated, unworldly, inexperienced business people, running their financial concerns along traditional cultural lines with no understanding of present systems of accounting and recording. There are many reasons why this picture of commercial naïvety has no ring of truth about it, a not unimportant one being that CFS was registered with the Stock Exchange, KFS was a licensed money lender and MFB traded in bullion. All were effectively under his management. Other entities in the Group were involved in commodities and forex trading.

22. This is one of those cases, unfortunately not rare, where those responsible for managing these Plaintiff companies have adopted such methods of financial accounting or recording of transactions, or more accurately lacked a method of bookkeeping and accounting as to create considerable problems for those investigating a company, or companies' financial affairs.

23. As a consequence Mr Hung's robust, broadly sweeping submission to the effect that his clients cannot be blamed for not being able to explain what are clearly on the face of it highly dubious but clear financial transactions, purportedly made by the Defendants to one or more of the Plaintiff companies, when all the Defendants and all Plaintiffs were effectively under the control of Mr Chan Kwong Hung, is short on substance. In his argument that an account is necessary to enable the Defendants effectively to deal with the claims against this unattractive background of commercial inexpertise - or something worse - he has come close to accusing the Liquidators, or their solicitors, of lack of bona fides, or at the very least of withholding documents which would assist the Defendants' case.

24. The accounts of Madam Lau show that they have unarguably been used as a vehicle for depositing and withdrawing substantial sums of money, but no explanation has been provided for this.

25. The sworn statements of Mr Chan and the 2nd Defendant, and the submission of Mr Hung have been to the effect that the practice was to deposit into the accounts of the Plaintiff companies large sums of cash which it has not been possible for Madam Lau to identify specifically as deposits to a particular company, on a particular date in a particular sum because in some way the Plaintiffs are in exclusive possession of the records relating to these.

26. To my mind that is not a credible argument. It is well within the capacity of Madam Lau and/or her husband to obtain from her bank the relevant records in relation to such purported transactions. On the position as it stood in the light of the information, or lack of it, in the affirmations of Mr Chan and Madam Lau, on the accounts of Madam Lau and the picture disclosed, the defence and ancillary arguments advanced are not credible.

27. In fact in the light of the schedules (P.2) prepared by Mr Harris and or his team, from Madam Lau's accounts, the picture is significantly different from that hitherto portrayed by the Defendants and their Counsel. Far from being a case of cheques for substantial amounts being cashed at Madam Lau's bank and substantial amounts of cash which she cannot now identify specifically as to amount and recipient being paid over at that same bank (and perhaps at some other banks), in the main large amounts of cash were being deposited in her accounts and then removed to other destinations by cheques or formal transfers.

28. The schedule for Madam Lau's savings account 280-0-370500 shows in the month of January 1997 a total of over $15.775m. cash deposits and only $83,995.00 cheque deposits. Transfer withdrawals i.e. formal transfers, totalled over $22.858m. and cash withdrawals were only $110,000.00. In September 1997 there were cash deposits of $410,575.00 and cheque deposits of only $11,500.00 whereas there were formal transfers of $332,500.00, and cash withdrawals of only $137,000.00.

29. The same picture emerges from the schedule prepared in respect of her other savings account 293-7-300990 for September 1997 which in that month was much busier than the other account. There were cash deposits of over $3.2m. and cheque deposits of only $233,280.00 by comparison. There were formal transfers of over $6.2m. and cash withdrawals of a little over $2.436m.

30. These details are the complete opposite to the pattern of operation of the account attested to by and argued on behalf of the Defendants. It is a devastating picture of activity which, whether or not tantamount to a laundering activity, must have been documented which documentation could so easily be demonstrated if the Defendants wished.

31. I do not believe that there was a credible defence on the Defendants' argument and affirmations before these schedules were produced. With these schedules there is a wholesale destruction of the Defendant Madam Lau's case. It is at the very least shadowy but in fact stretches credulity to the limit.

32. At the end of submissions, Mr Hung, who had had the opportunity overnight to consider the implications and inferences to be drawn from these schedules sought leave to adduce a further affirmation by Mr Chan (his 6th). Mr Harris once he had seen it did not object. It was as uninformative as the earlier ones.

33. Mr Chan's affirmation is still coy about the purpose of and system of operating his wife's account. There is no explanation for the substantial amounts of cash deposited in his wife's accounts other than to say "when branch offices of the Ming Fung Group were to repay money to my wife they would simply deposit money into [her] two Hang Seng accounts at whatever branches suited them". In paragraph 7 he harks back to the theme that identification of payments to the Plaintiff companies can only be made when the Plaintiff companies have disclosed their internal vouchers. The contents of this affirmation add only to the mistiness engendered around these two savings accounts. There is more obfuscation and no attempt to deal with the issue. His affirmations are wholly unreliable and he appears to avoid the issue.

34. In relation to the action against Madam Lau there is no credible defence and in relation to the substantial part of the Plaintiffs' claims no defence. However the Plaintiffs are content to abide by the Master's order in principle although the picture now emerging is one that significantly discloses the use of accounts for no legitimate commercial purpose. I will give leave to defend on condition that the sum of $5,000,000.00 is paid into court.

35. I must now turn to the position of the Defendant Link Standard Limited (LSL). It is the subject of action 1362. CFS claims $14.5, KFS $25,107,642.00, and MFB $6,656,435.00. After taking into account potential or claimed deposits or repayments yet to be investigated, and figures detailed in a counterclaim, the provisionally amended figures are CFS-$3,137,008.00, KFS-$22,097,642.00 and MFB a debit balance of $15,948,565.00 (i.e. on a provisional basis the claimed deposits and counterclaim exceed the claim by that amount.). The overall claim against LSL is $9,286,085.00 as provisionally reduced.

36. It is necessary to conduct the same exercise in relation to the affirmations submitted on behalf of the Defendants as was conducted in relation to Madam Lau.

37. The first affirmation makes no more than the general and 'question begging' comment that "in the course of operation of the group, often money inevitably had to be transferred from either of the accounts of my wife or Link Standard Ltd to some of the companies or business". Why this was "inevitable" and what nature the "transfers" took is nowhere explained - as we have seen this was the case with Madam Lau's accounts. The only other relevant comment was to the effect that in order to see if LSL owed money to the Plaintiff companies it was necessary to look at the documents and records of LSL. That was simply stating the obvious.

38. The second affirmation repeated the "inevitabliity" of transfers. It also repeated the "system" adopted of effecting such transfers. It was the same as that used in the operation of Madam Lau's accounts. It was used to "avoid delay". That is not a logical explanation given the circumstances of banking.

39. In the third affirmation Mr Chan describes LSL as a private company used by him and his wife to hold two properties - their home and a shop. There is nothing material in the fourth affirmation. I note that there is an affirmation by accountants instructed by Mr Chan. Exhibited to it is a "primary progress report" relating to some reconciliation work on accounts of the three Defendants and the three Plaintiffs. Notable by their absence are any references to documentation from the accounts of the three Defendants identifying purported payments to any of the Plaintiff companies.

40. Mr Chan's fifth affirmation sheds no more light on the activities and accounts or documentation of LSL. The sixth affirmation which I have already dealt with in the context of the situation in relation to Madam Lau, adds nothing to the picture concerning LSL. There is merely a passing reference in parentheses.

41. LSL's position is therefore as illustrated by the accounts of Madam Lau according to the sketchy information in Mr Chan's affirmations, but of course lacking in material such as has been produced to illustrate the activity in Madam Lau's accounts. There is no explanation of the "inevitability" of the involvement of LSL's account with the Plaintiff companies, nor of the activity of the account (or accounts) and the "transfers" which are alleged to have taken place. Mr Chan's affirmations, which lump together Madam Lau's accounts and LSL's accounts in their involvement with money to and from the Plaintiff's accounts, provide no information which helps to put LSL in any particular light, and certainly do not distinguish between the role played by those accounts. The position remains as murky and obscure as Madam Lau's accounts. If Mr Chan's accountants were even to begin to attempt the reconciliation of the accounts referred to they must have been provided with - at the least - bank statements of LSL. As far as these proceedings are concerned this Defendant has produced a list of cheques drawn to cash on the Wing Hang Bank between 2 January 1997 and 23 May 1998. We have not however been enlightened by any other information or documentation relating to this list other than copies of the cheques drawn to cash. The only bank account evidence relating to LSL is one sheet covering the position in August 1999 at the Wing Hang Bank which is quite useless. In his third affirmation he states that the account of LSL at the Ka Wah Bank was cancelled in December 1998 over 6 months after the end of the period with which we are concerned. Not even the closing sheet of that account is exhibited, though again it would have told us nothing. What would have been of interest are the bank statements for the relevant period. I find his affirmations no more capable of belief in relation to LSL than they are in relation to Madam Lau's accounts. There is no explanation for the missing money and, what is more significant in relation to a company of which he and his wife were directors, no attempt to do so.

42. I will give leave to defend on condition that the sum of $2,500,000.00 is paid into court.

43. Finally I consider the position of MFG. It is the subject of action 1360. CFS claims $680,000.00 and KFS claims $4,580,000.00. After taking into account figures referred to in a counterclaim the provisionally amended figure claimed is $2,460,000.00.

44. The affirmations of Mr Chan in respect of MFG are similarly bare. The first affirmation says nothing. The second affirmation identifies in a list of bank accounts four held by MFG, three of which are at the Wing Hang Bank. Also exhibited is a schedule of payments made by MFG to MFB evidenced by copy cheques and paying in slips. But MFB has no claim against MFG so these do not fall to be considered.

45. His third affirmation merely discloses that MFG had three accounts with the Wing Hang Bank all of which were closed on the 17 July 1998 i.e. after the end of the period with which these actions are concerned. No bank statements are disclosed. The 4th, 5th and 6th affirmations do not deal with any defence advanced on behalf of MFG.

46. Thus the position stands. Mr Chan's affirmations do not contain anything of substance. None of his general assertions is supported by anything which could reasonably be considered to constitute an answer to the claims, and yet any material which could conceivably support those contentions is within his possession or control. Given the lapse of time now and the omission of MFG's position from his last three affirmations one could reasonably conclude that either there is nothing in such material available to him or he is unwilling to subject such material to scrutiny. His affirmations throughout, in my view, smack of what is known "trans-Atlantically" (or "trans-Pacifically") as a "snow-job".

47. Despite my view that there is no credible defence, I will, as invited by Mr Harris, confine myself to granting leave to defend, as the Master did, on condition that a payment into court is made. I will leave the figure at $2.5m. as ordered by the Master.

48. Mr Hung invited me to add all the potential counterclaims and disputed sums together - including those purportedly 'owed' by other companies in the group to one or more of the Defendants. I firmly rejected that suggestion. The sums have been ascertained carefully by reference to distinct entities. To approach this dispute on a global basis would muddy the waters and simply condone the manner in which these Defendants appear to have conducted their financial activities without proper records and with the use of various "financial vehicles" to move money. It would also be wrong in law.

49. In seeking an account to deal with the disputes Mr Hung has relied upon a number of authorities. Miles v. Bull 1968 1 Q.B. p. 258 is not in point. It related to the sale by the husband of the matrimonial home in which the wife was still living to a third party, completion taking place on the day on which the contract for sale was made. That alone would have raised alarm bells for the need to protect the wife's interest. The purchaser sought to obtain judgment under Order 14 against the occupying wife. She was given unconditional leave to defend. The transaction had a dubious element and Megarry J thought that it was a device to evict and he applied the words "there ought for some other reason to be a trial." In the circumstances of this case, the Defendants cannot bring themselves anywhere near that wide provision.

50. A number of authorities have been cited - I need not refer to them individually - to the effect that I must not embark upon a mini-trial on affidavits. I have not lost sight of such exhortations. The Defendants' affidavits lack substance and in my view any indication of effort to deal with even the bare bones of a defence. There are clear inferences to be drawn from the omissions which are, in my view, deliberate. The number of affidavits filed, which do no more than 'waffle' over the issues, attest to this.

51. Mr Hung relied in particular upon the English Court of Appeal decision in Lynde v. Waithman 1895 2 Q.B. p. 180.

52. The court granted leave to defend on the basis that an account was necessary in order to determine what the true position was between mortgagor and mortgagee. In that case a receiver had been appointed by the Plaintiff and moneys had been received which had been paid to the Plaintiff; other moneys had been received which may not have been applied in reduction or discharge of the interest or capital of the mortgage debt. The principle is of course quite clear but in the circumstances of this appeal. The Defendants are in a position to provide an account or accounts or statements showing the payments alleged by them. They have studiously avoided doing so.

53. Mr Harris for the Plaintiffs referred me to the case of Lady Anne Tennant v. Associated Newspapers in one of the less well-known reports Fleet Street Reports 1979 p. 298 though the case itself excited much interest at the time. It was the pithy observation of the Vice-Chancellor (Sir John Megarry) on Order 14 which reflects one of the best approaches:

"A desire to investigate alleged obscurities and a hope that something will turn up on the investigation cannot, separately or together, amount to sufficient reason for refusing to enter judgment for the Plaintiff. You do not get leave to defend by putting forward a case that is all surmise and Micawberism."

54. That is a much more elegant and generous approach than my reference to the "snow-job" approach in the Defendants' affirmations and arguments.

55. The English Court of Appeal's approach in Banque de Paris et des Pays-Bas (Suisse) S.A. v. Costa de Naray and anor L.L.R. 1984 Vol. 1 p. 21 is also refreshingly practical:

"It is .... trite that the mere assertion in an affidavit of a given situation which is to be the basis of a defence, does not, ipso facto, provide leave to defend; the court must look at the whole situation and ask itself whether the defendant has satisfied the court that there is a fair or reasonable probability of the defendants' having a real or bona fide defence." - Ackner LJ at page 23 (Col. 1).

The court also increased the amount of the payment in as the condition for the leave to defend, in the light of the contents of affidavits filed since the hearing before the single Judge. In this appeal Mr Chan has filed four affirmations since the decision of the Learned Master. I have already made my comments on them and do not propose to repeat myself.

56. The appeals are dismissed with the variations as to the payments into court. The Defendants are to pay the Plaintiffs costs.

Costs

57. I indicated that I proposed to exercise the courts powers under Order 62 rule 9(4)(b) to assess a gross sum of costs for the successful party to eliminate the need for taxation. Neither party opposed this. This exercise relates only to the costs of the appeal.

58. Although this appeal was estimated to last 1 1/2 days, its length was spread out over 4 days and in total occupied over 2 1/2 days most of that time being taken up by the Appellants' case.

59. There was clearly a substantial amount of work to be done in considering the material produced by the Defendants in the form of banks statements from the 2nd Defendant in particular.

60. This case does not justify charging for two fee earners and I have trimmed the charges for the qualified solicitor. The hourly charge is somewhat high for some of the less demanding work and there is I think an over-estimate in respect of items 4 and 6 in particular. I do not consider that the fee for a costs draftsman is justified for this short statement.

61. I allow $100,000.00 for the profit costs plus $7,500.00 for other disbursements (item 10). Counsel's fees are allowed as claimed i.e. $144,000.00. The order for gross assessed costs to be paid by the Defendants is therefore $251,500.00. The order is a forthwith order. This appeal in my judgment lacked any merit.