THE AGRICULTURAL BANK OF CHINA v. LAU YUET WAH AND OTHERS

HCA 2804/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2804 OF 2000

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J U D G M E N T

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1. The plaintiff claims against the defendants for damages for conspiracy and alternatively, conversion or negligence.

2. The plaintiff has a branch office in Changchun長春市of Jilin province吉林省which is called the Jilin Branch.  The Jilin Branch has an International Business Department (“IB Dept”).  One Liu Chenglai 劉成來 (“Liu”) and one Yan Shikui 顔世奎 (“Yan”) were at all material times the General Manager and Vice General Manager of the IB Dept. 

3. The plaintiff alleges that the defendants had conspired with Liu and Yan to and did fraudulently obtain substantial sums of money from the plaintiff by procuring the issue of letters of credit (“L/Cs”) by the IB Dept and the payment thereunder by that department when there was no genuine commercial transaction relating to the L/Cs.

4. The 3rd and 4th defendants had been dissolved in 2005 and 2008 respectively.  The plaintiff has indicated at the pre-trial review that it did not want to pursue them in this action anymore.

The background

5. The 1st and 2nd defendants are sisters.  They are the shareholders and directors of the 3rd defendant with each holding 500 shares of the 3rd defendant.  They are also the directors of the 4th defendant. The 3rd and 4th defendants are companies incorporated in Hong Kong.

6. At all material times, the 1st defendant and her husband Sun Yafei were operating a Jilin Province Overseas Chinese Long Wei Wood Enterprise Co Ltd (“Long Wei”).  Long Wei was then a customer of the IB Dept.

7. The 1st defendant had executed a declaration of trust dated 28 January 1997 in favour of Yan over 400 of her shares in the 3rd defendant. The 2nd defendant had also executed a declaration of trust of the same date in favour of Yan over all her 500 shares in the 3rd Defendant. By virtue of the declarations, the shares of the 3rd defendant were beneficially owned by Yan as to 90% and the 1st defendant as to 10%.

The modus operandi of drawing money under the L/Cs

8. This action covers 31 L/Cs and a few other transactions also involving L/Cs.  There was a section in the IB Dept that was responsible for issuing L/Cs of the plaintiff.  Liu and Yan procured that section of the IB Dept to issue all the L/Cs in question.

9. Of the 31 L/Cs, Long Wei was named the applicant for 25 of them.  The purported applicants of the remaining six were other entities.  All proceeds under the 31 L/Cs and the few other L/C transactions were paid to the 3rd defendant.

10. The 3rd defendant was named the beneficiary of these L/Cs.  The L/Cs were used to withdraw money from the plaintiff to pay the 3rd defendant purportedly for goods purchased by the applicants of the L/Cs from the 3rd defendant.  The 3rd defendant provided the necessary commercial documents stipulated in the L/Cs to the IB Dept of the plaintiff and obtained payments under the L/Cs.  The commercial documents did not relate to any genuine commercial transaction and were issued solely for obtaining payments under the L/Cs.  The 3rd defendant had not provided any consideration for the money it obtained under the L/Cs and it used the money for investment purposes.

11. The plaintiff’s 2nd witness (“PW2”), Ms Xu Ying, the officer in charge of the Consolidated Supervisory Department of IB Dept (國際業務部綜合管理部) since 1999, referred to a table of L/C transactions in para 15 of her 1st witness statement (p. B33 to 35), produced another table of L/C transactions (p. C498) and copies of the L/Cs.  She also produced copies of the invoices, packing lists and bills of exchange (drafts) that were used to obtain payments from the L/Cs.  She also produced some correspondence between the plaintiff, the 3rd defendant and its negotiating banks which was exchanged in the course of negotiating the L/Cs.  It can be seen from these documents that most of the L/Cs were issued with validity period of 6 months or longer. 

12. Upon issuance of an L/C to the 3rd defendant, the 3rd defendant would quickly provide the necessary commercial documents to its negotiating bank.  There was no genuine commercial transaction underlying these documents.  The negotiating bank would use these documents and a draft drawn under the L/C to negotiate for payment by the IB Dept under the L/C.  The IB Dept would then advise the negotiating bank of the plaintiff’s acceptance of the draft and the plaintiff’s undertaking to effect payment at a future date as stated in the draft which was very often 6 months away.

13. On the strength of the plaintiff’s acceptance and undertaking to pay, the 3rd defendant would immediate obtain from its negotiating bank a loan in the sum as stated in the draft less the interest on the loan up to the date of payment by the plaintiff of the draft and other fees and charges of the negotiating bank.  This step was in line with usual commercial practice.

14. When the date of payment stated in the draft was approaching, Liu and Yan would procure the IB Dept to issue more L/C(s) to provide money to the 3rd defendant in the same way as before.  The 3rd defendant might use a different bank to negotiate the subsequent L/C(s).  The 3rd defendant had in fact used a number of banks in negotiating the 31 L/Cs.  The 3rd defendant would then use the money obtained from the later L/C(s) to discharge the plaintiff’s obligation to the previous negotiating bank under the draft previously accepted by the IB Dept.

15. There were also a few instances when the 3rd defendant would remit the money borrowed from the negotiating bank under a later L/C to the IB Dept and the IB Dept then paid such money to the previous negotiating bank per the draft accepted previously.

16. The above modus operandi is well borne out by the documents produced.  Typical samples of such transactions are at pp. C270 to C283 and pp. C543 to C 588. 

Additional transactions and miscellaneous sums

17. In addition to the 31 L/Cs, this action also covered a few other transactions under which funds were channelled to the bank account of the 3rd defendant.

18. The first transaction involved 2 L/Cs that are numbered 420LC97020 (“the Fake JFEC L/C”) and 070LC970039 (“the Genuine JFEC L/C”).  Both L/Cs were issued on 31 October 1997 and were said to be upon the application of one JFEC Import and Import Co Jilin China (“JFEC”).  Both were for the purchase of a consignment of barley of the same description at US$190/MT CIF Qinhuangdao, China.  The beneficiary of Fake JFEC L/C was the 3rd defendant and that of the genuine one was one LIEF International (HK) Co Ltd (“LIEF”).

19. The Fake JFEC L/C was not for payment of any goods.  It was only used to channel the plaintiff’s money to the 3rd defendant.  This L/C was negotiated by the 3rd defendant in the usual course.  The IB Dept accepted a draft drawn under this L/C on about 19 November 1997 to pay the 3rd defendant’s negotiating bank US$5,016,649.34 on 19 May 1998.  The 3rd defendant then borrowed US$5,016,649.34 from its negotiating bank on 9 December 1997 by discounting the draft ahead of its maturity (see pp. C502-516).

20. The Genuine JFEC L/C was indeed used to pay for the purchase of the barley.  A sum of US$5,250,555.99 was payable under this L/C to the beneficiary LIEF on 20 May 1998.  When this sum was due from the plaintiff to LIEF, the 3rd defendant repaid US$399,753.83 and US$2,750,555.99 to the plaintiff.  The plaintiff made up the shortfall and paid US$5,250,555.99 to LIEF. The 3rd defendant thus retained US$1,866,339.52 out of this transaction and the plaintiff suffered loss to this extent plus all charges and fees levied by the 3rd defendant’s negotiating bank.

21. The second transaction involved a purchase of chemical fertilizer by a Sinochem International Fertilizer Trading Corp (“Sinochem”) from a US Chem Resources Inc (“US Chem”).  Sinochem applied to the IB Dept for an L/C to pay US Chem.  It had the necessary funds to pay US Chem and did not have to borrow the same from the plaintiff.  It deposited US$12,595,000 with the plaintiff for opening an L/C.  An L/C no. 070LC980001-10 was issued by the IB Dept in favour of US Chem.  The negotiating bank of US Chem was Banca Commerciale Italia.  A sum of US$12,748,665.18 was due to US Chem on 3 April 1998 under the L/C.  The IB Dept then instructed the Italian bank to lend this sum to the plaintiff and pay the same to US Chem on behalf of the plaintiff.  This loan with interest was to be due to the Italian bank within 360 days. 

22. On 8 April 1998, which was five days later, the IB Dept effected payment of the same sum of US$12,748,665.18 to the 3rd defendant. 

23. When the loan of US$12,748,665.18 plus interest was due to the Italian bank at the end of March 1999, the plaintiff had to pay the Italian bank the same from its own resources.  The plaintiff thus suffered the loss of the sum of US$12,748,665.18 it paid the 3rd defendant and the interest and charges on the loan levied by the Italian bank.

24. The last transaction involved 2 L/Cs numbered 070LC970049 and 070LC970051 for US$786,000 and US$192,400 respectively.  They were issued on the application of one Jilin Province Supply and Marketing Cooperative (“Jilin Cooperative”).  The beneficiary in both L/Cs was one Monsanto Far East Ltd (“the Monsanto L/Cs”).  However, the beneficiary of the Monsanto L/Cs was later changed from Monsanto to the 3rd defendant to whom the 2 sums were paid. 

25. When the 2 sums were due to Monsanto on 14 August 1998, Yan and Liu procured a loan of US$5,000,000 from a customer of the plaintiff and applied US$978,400 out of that loan to pay the negotiating bank of Monsanto.  The plaintiff thus suffered the loss of this sum as it had to repay the US$5,000,000 loan to the customer at a later date.

26. In addition, Liu, Yan and the 1st, 2nd and 3rd defendants had on record also incurred and spent legal fees, travelling, meal and other miscellaneous expenses totaling US$166,595.44 which were disbursed from the said loan of US$5,000,000.

The Kui In Fong investment by the 3rd defendant

27. Regarding the net L/C proceeds received by the 3rd defendant, they were mainly used by the 3rd defendant for investments or speculations in real properties and shares in the stock market in Hong Kong.

28. The 3rd defendant used about HK$132 million to invest in the buildings at nos. 2 to 7 Kui In Fong, Sheung Wan, Hong Kong.  This investment was done through a joint venture agreement made between the 3rd defendant and a Hong Kong Golden Unity Finance Company (“Golden Unity”) which was controlled by one Chan Long Kam (“Chan”).  The agreement was made in about May or June 1997.  According to a statement given by Chan to the Jilin public security officers and dated 31 July 1999, 60% of the capital was to be provided by the 3rd defendant whilst Golden Unity was responsible for the remaining 40%, but the 3rd defendant would only be entitled to 40% of the joint venture profit whilst Golden Unity would be entitled to the remaining 60%.

29. The properties were purchased through three corporate vehicles called Gold Sales Limited, Chiston Limited and Donlink Limited.  The 3rd defendant duly invested about HK$132 million into the project.  However, Golden Unity later had liquidity problem and could not provide the remaining HK$100 million to complete the purchases from the former owners.  Yan, the 1st defendant and Chan then agreed to borrow HK$100 million from one Yu Fung Limited (“Yu Fung”) for the use of Golden Unity.  The security provided to Yu Fung for the lending was the mortgage of the properties held by the three companies, the shares of the three companies and the personal guarantees of the 1st defendant and Chan.

30. Later on, Golden Unity was unable to pay the interest on the loan to Yu Fung.  A further HK$20 million was then borrowed from Yu Fung.  But the then financial crisis deepened and Golden Unity could not repay the loan or interest.  The mortgaged properties were then liquidated by Yu Fung for HK$120,250,000.  This investment resulted in a total loss.

The investments in shares in the accounts with Prudential

31. About HK$140 million was used by the 3rd and 4th defendants for buying stocks and shares through their share dealing accounts opened with Prudential-Bache Securities (Hong Kong) Ltd (“Prudential”).  As a result of the financial crisis in 1997 and 1998, the total value of the stocks and shares they acquired was reduced to some HK$12,920,000.  These stocks were later handed over to the plaintiff in August 1999.

Loan to or joint venture with Carine Securities Ltd.

32. The 4th defendant had also lent HK$50 million of the 3rd defendant’s money to one Carine Securities Ltd (“Carine”) at an interest rate of 16% per annum.  Carine was a BVI Company controlled by one Choi Sai Leung (“Choi”).  Each of the 3rd and 4th defendants had signed an agreement with Carine in similar terms and dated 1 September 1997.  Each agreement provided that HK$50 million be deposited into Prudential for Carine’s use in the investment of shares for four months.  Apart from repaying the HK$50 million with interest, Carine also had to distribute 30% of the investment profits to the lender.  Carine’s obligations to the 3rd defendant were guaranteed by Choi by a guarantee signed by Choi. 

33. Choi in a statement given to the Jilin Public Securities Bureau dated 3 August 1999 said that the agreement was between the 4th defendant and Carine and that his guarantee was given to the 4th defendant.  The 1st defendant said the same in her evidence.  The parties have now confirmed that the agreement was between the 4th defendant and Carine and Choi’s guarantee was given to the 4th defendant.  In the end, HK$50 million was duly provided to Carine which lost it in investment activities.

Loans to HK Macau International Finance

34. Finally, the 3rd defendant had lent two sums of HK$19 million and HK$52.3 million to one HK Macau International Finance Co Ltd (“HK Macau”) on 29 April 1997 and 1 August 1997 respectively.  Curiously, HK Macau on the same days or shortly thereafter on-lent the same sums of money to the 4th defendant.  The first sum of HK$19 million was said to have been repaid to the 3rd defendant. However, the 4th defendant did not repay the HK$52.3 million to HK Macau and HK Macau likewise did not repay this sum to the 3rd defendant.

The defence of the 1st defendant

35. The 1st defendant does not dispute that there were these irregular L/C transactions.  She also does not dispute that the net proceeds of all these L/Cs were the only income of the 3rd defendant which had been invested, spent and lost as aforesaid.  She however denies that she was a party to the alleged conspiracy.  She said that the 3rd defendant was a window company of the plaintiff and the plaintiff injected money into the account of the 3rd defendant by the said L/C transactions.

36. She in her amended defence admitted that the 25 L/Cs issued on the purported applications of Long Wei and the 6 L/Cs issued purportedly on the applications of other entities were all in favour of the 3rd defendant as the beneficiary.

37. She also admitted in a letter dated 30 January 2013 issued by her solicitors that the 31 L/Cs did not have any genuine underlying transactions.  However, she maintained in the letter that the Fake JFEC L/C and the Monsanto L/Cs, which had the beneficiary changed from Monsanto to the 3rd defendant, had genuine underlying transactions.  The plaintiff of course accepts that the applicants of the three L/Cs, namely JFEC and Sinocham had received the goods they purchased.  The goods, however, were not provided by the 3rd defendant, but by LIEF to JFEC and by Monsanto to Jilin Cooperative.  She also produced nothing to show how the 3rd defendant had purchased any goods for delivery to JFEC or Jilin Cooperative to fulfil the purchases by them.

38. She also pleaded that the IB Dept was the plaintiff’s only department having authority to deal with all matters relating to the plaintiff’s business and investment outside the mainland.  Liu and Yan, who were the General Manager and Vice General Manager respectively of the IB Dept, were the only persons in charge of the department having express authority to act for the plaintiff and to deal with matters relating to its investment and business outside the mainland. 

39. She alleged that there were various meetings between August and November 1996 in which Liu and Yan told her that the plaintiff intended to set up a company in Hong Kong.  The company was to serve as the plaintiff’s window to the west and to raise funds for its prospective international business.  Liu and Yan further invited her defendant to assist the plaintiff in this task.  She agreed to do so in about November 1996.

40. Pursuant to the agreement, she on or about 3 December 1996 and upon the direction of Liu and Yan incorporated the 3rd defendant.  She and her sister, the 2nd defendant were the shareholders and directors of the 3rd defendant.  They had, however, executed declarations of trust over the shares of the 3rd defendant in favour of Yan as the beneficiary (the 1st defendant only declared 400 of her 500 shares as belonging to Yan beneficially).

41. She further pleaded that she at all material times honestly and reasonably believed that Liu and Yan had actual authority from the plaintiff to establish a window company in Hong Kong for the purpose of raising funds in Hong Kong for its international business.  To support her plea of a reasonable belief, she further pleaded that it was a custom and practice of Chinese state-owned banks to found window companies in Hong Kong for investing outside the mainland.  She also pleaded that it was a practice of these banks to have window companies to be registered in the names of their officers or nominees and beneficially owned by the banks.

42. She then pleaded that after the 3rd defendant was incorporated, Liu and Yan notified her that the plaintiff intended to inject capital into the 3rd defendant by payment under L/Cs and to invest the capital in Hong Kong.  She admitted that the 31 L/Cs, the Fake JFEC L/C and the Monsanto L/Cs were issued by the plaintiff for the purpose of injecting money into the 3rd defendant and the 3rd defendant obtained money under these L/Cs by negotiation and/or discounting and/or drawing upon them.  The money so obtained was used at the direction of the plaintiff given through Liu and Yan for investments in the Kui In Fong properties, stocks and shares in the Stock Exchange through the accounts of the 3rd and 4th defendants with Prudential and the HK$50 million loan to or joint venture with Carine and dated 1 September 1997.

43. She pleaded in the alternative that if the plaintiff had not authorised the said investments by the 3rd defendant, then the investments were still binding on the plaintiff as the plaintiff had held out Liu and Yan as having express authority of the plaintiff to direct the said investments.  To support this plea of apparent authority, she relied on the fact that at all material times, Liu and Yan were the only persons in charge of the IB Dept and had express authority to act for the plaintiff in matters relating to the plaintiff’s investments and business outside the mainland. 

44. She further relied on a letter dated 1 April 1997 and purportedly addressed by the IB Dept to Sin Hua Bank in Hong Kong. The letter described the 3rd defendant as the plaintiff’s foreign resident organisation responsible for fund raising outside the mainland.  It asked Sin Hua Bank to provide fund raising support to the 3rd defendant.  The letter is unsigned but bears a chop mark of the IB Dept the authenticity of which the plaintiff cannot dispute.

45. She pleaded further or in the alternative that she had at all material times acted as the innocent conduit of the plaintiff and/or Liu and Yan and had honestly and reasonably believed that Liu and Yan had actual authority of the plaintiff to act as they did.

The defence of the 2nd defendant

46. The defence of the 2nd defendant is short.  She admitted to be a shareholder and director of the 3rd defendant and a director of the 4th defendant.  She denied of having played any role in the preparation of the commercial documents used for obtaining money under the L/Cs.  She also denied knowledge of any of the misconduct of Liu or Yan. 

Return of the residue of the investments to the plaintiff

47. Before dealing with the evidence of the defendants, I would also mention that between 1999 and 2000, the 1st, 3rd and 4th defendants had, at the direction of the plaintiff relayed through Yan, accounted for and handed over to the plaintiff the declarations of trust over the shares of the 3rd defendant, all the documents and share certificates of the investments in stocks and shares, the 4th defendant’s rights in the HK$50 million loan to or joint venture with Carine, the guarantee of Choi in favour of the 4th defendant and all the money and assets that originated from the plaintiff’s money.

The evidence of the 1st defendant

48. The 1st defendant spelt out in her evidence her background and how did she come to know Liu and Yan.  She received education in the mainland until she was 20 years old.  She worked in various jobs in the mainland until she was 29 years old.  She came to Hong Kong in 1989 and started the 4th defendant as a trading company in 1993.

49. She and her husband Sun Yafei undertook the operation of Long Wei with other partners.  Long Wei was then a customer of the plaintiff’s Jilin Branch.  Sun got acquainted with the staff of the plaintiff.

50. In October 1996, Liu and Yan together with a subordinate Madam Huo Lijie (“Huo”) passed through Hong Kong on their way from Singapore back to the mainland.  The 1st defendant entertained them for two days in Hong Kong.

51. In about November 1996, Yan phoned the 1st defendant and asked her to assist the plaintiff to found a fund raising window company in Hong Kong.  The 1st defendant thought that she could maintain a good relationship and enhance the smooth conduct of business with the plaintiff by providing the assistance.  After several telephone conversations with Liu and Yan, she agreed to assist.  She then started with the preparation works. 

52. She was told that the plaintiff needed the new company quickly as they had to put through a deal through it shortly.  Since at that time a company should have at least two shareholders and it was inconvenient for Liu and Yan to come to Hong Kong to be made shareholders of the company, she therefore used her own name and borrowed the name of her sister, the 2nd defendant to act as shareholders to incorporate the 3rd defendant.

53. Yan later came to Hong Kong and suggested that the 1st and 2nd defendants should remain as shareholders and directors of the 3rd defendant and they could sign declarations of trust over their shares in favour of Yan.  They agreed and duly signed the declarations. I have already mentioned that the 1st defendant’s declaration of trust only covered 400 of her 500 shares in the 3rd defendant.

54. The 1st defendant also referred to the unsigned letter dated 1 April 1977 purportedly addressed by the IB Dept to Sin Hua Bank in Hong Kong claiming the 3rd defendant to be the plaintiff’s window company.

55. The 1st defendant also said that once the 3rd defendant was incorporated, the plaintiff made arrangements for the fund raising exercise.  Yan and Huo also obtained multiple visits permits from the mainland government to come to Hong Kong to handle all the fund raising arrangements.  Yan stayed in Hong Kong most of the time and there was a room in the 3^rd defendant’s office reserved for Yan’s exclusive use.  His subordinate Huo came to Hong Kong once every month to every two months to check the account of the 3rd defendant.  The plaintiff’s instructions were mainly given through Huo and another staff member Huang Li (“Huang”) by phone or fax.  The 1st and 3rd defendants acted as directed by them from time to time.  Yan, however, was the one who made contacts with the banks from which funds were raised.

56. On 5 June 1997, the 1st defendant had a meeting with Yan and Liu in Guangzhou to discuss the operation, investment and way forward of the 3rd defendant.  Yan and Liu said the funds raised in Hong Kong should be used for investment in Hong Kong.  Liu was of the view that there should be a document setting out in greater detail the sharing of the investment profit between the plaintiff and the 1st defendant and that the plaintiff and the 1st defendant should share the profit at the ratio of 60%:40%.  The 1st defendant then procured a draft agreement from her solicitors for carrying out Liu’s instructions.  She gave the draft to Yan, but Yan never gave her any reply and the agreement was not signed. 

57. When she gave statements to the Jilin public security officers on 29 July and 3 August 1999 (pp. C133, 171-172), she on both occasions referred to the profit sharing scheme and stated that her entitlement was at 40% and the plaintiffs’ at 60%.  She affirmed the truthfulness of her statements in oral evidence.  Her cross-examination of the profit sharing was also predicated upon the ratio of 60%:40% which she did not detract from.

58. However, when she was referred in re-examination to a so-called draft agreement she disclosed at discovery (pp. D25-26), she then suggested that she only had a share of 4% of the net profit as the agreement provided that the 3rd defendant would share the profit with the plaintiff at the ratio of 40%:60% and she only owned beneficially 10% of the shares of the 3rd defendant. 

59. The content of the draft does not tally exactly with the agreement she described in her evidence in chief.  It is a draft of an agreement supposed to be made between IB Dept and the 3rd defendant and not between the plaintiff and her.  It provided that the IB Dept should inject capital into the 3rd defendant for the 3rd defendant to invest.  The 3rd defendant would provide accommodation, transport and office for use of the IB Dept’s representative in Hong Kong.  The net profit or loss would be shared between the IB Dept and the 3rd defendant at the ratio of 60%:40%.  The 1st defendant suggested that by the terms of the draft agreement, she would only be entitled to 10% of the 40% (or 4% overall) net profit attributable to the 3rd defendant because she only owned 10% of the 3rd defendant’s shares beneficially. 

60. However, she had already made it quite clear in her statement to the Jilin public security officers dated 3 August 1999 (pp. C133, 171-172), which she had affirmed to be true and correct, that the draft agreement, once executed, would replace the trust arrangement effected by the declarations of trust.  That means the declarations of trust made by her and her sister over the shares of the 3rd defendant would be replaced by the agreement as reflected in the draft.  In that event, they would become the absolute beneficial owners of the shares of the 3rd defendant.  They through the 3rd defendant would then be entitled to the 40% net profits of the investments and not just 4%. 

61. Though the draft agreement had not been executed, it is the 1st defendant’s clear evidence orally and in writing that she was entitled to 40% of the net profits of the investments.  Her copy of the declaration of trust as shown to the public security officers was also endorsed with Chinese characters to the effect that it had been cancelled.

62. She also referred to how the 3rd defendant’s bank accounts could be operated. All the bank accounts of the 3rd defendant had to be operated by her and Yan jointly save and except one account with the National Commercial Bank where either she or Yan could withdraw no more than HK$100,000.

63. She also said that the net proceeds received by the 3rd defendant under the L/Cs were invested by the 1st defendant for the 3rd defendant according to Yan’s directions.  Yan in turn took instructions from Liu.

64. She also mentioned that she had been detained in the mainland by the Jilin Public Security Bureau from 27 February 2001 to 10 August 2001 for investigation on the 3rd defendant’s accounts and the plaintiff’s money.  She was released after the investigation.

65. In cross-examination, she said she was not clear as to how the funds of the 3rd defendant were being raised and she just did as told.  She knew that the L/Cs were applied for in the name of Long Wei with the 3rd defendant as the beneficiary.  She knew that the money of the 3rd defendant came from the negotiation/discount of these L/Cs.  She also knew how to use L/Cs to conduct business as she had used L/Cs to buy timber in her own business.  But she said she thought the plaintiff was raising funds in a different way. 

66. She agreed that she had signed many documents that were used for negotiating payments under the L/Cs and she was aware of how the documents were used.  These documents were prepared by a Ms Mak of the 3rd defendant upon the instructions of the plaintiff’s officers.  She said she just signed them as told and never looked at any one of them.  She was referred to a cargo receipt in re-examination.  This document was supposed to have been issued by Long Wei, but it had the word “Wood” omitted in Long Wei’s long name and also had the 1st defendants’ name below her signature spelt in Putonghua pinyin.  In fact, there are a number of cargo receipts that were prepared in the same manner.  She said she had signed this document without reading it and had she looked at it, she would have asked for the errors to be corrected before signing it.

67. However, despite these so-called errors which were very minor, the IB Dept accepted all the cargo receipts in the negotiation of the L/Cs.  Hence, the minor errors did not cause any hiccup in the negotiation.  Furthermore, the cargo receipts were to be read by the staff of the IB Dept who would have pronounced the 1st defendant’s Chinese name in Putonghua.  It is thus arguable whether the spelling of the 1st defendant’s name in Putonghua pinyin was an error in this context.

68. I accept that the two so-called errors in the cargo receipts might indicate that the 1st defendant had not read the receipts closely when she signed them.  However, the errors may not be enough to support her case that she did not look at these documents at all when signing them. She was a businessperson and would have taken care not to have signed any commercial document blindly which could prejudice her own interest either in the 3rd defendant or otherwise. 

69. She also agreed that if a vendor should negotiate for payment under an L/C without delivering the goods, that was cheating by the vendor.  She knew that for the L/Cs issued to the 3rd defendant that were used for the plaintiff’s fund raising, they were not for purchase of goods and no goods were involved in the fund raising.  Nevertheless, she said she had never thought about the question that these L/Cs had no underlying commercial transaction.  I think this is unlikely as she was involved not just in one or two transactions, but 31 transactions plus the those involving the Fake JFEC L/C and the Monsanto L/Cs and the period spanned to more than a year.  She should have been aware that there was no goods and hence these transactions were not genuine or regular L/C transactions.

70. She even asserted in cross-examination that she had never seen the L/Cs.  This assertion however does not tally with what is stated in the contemporaneous documents.  The L/Cs were all notified to the 3rd defendant’s negotiation banks and she was a director and perhaps the only active director of the 3rd defendant.  Negotiating banks always forward the L/Cs received from issuing banks to their customers the beneficiaries to verify if the L/Cs bear the correct terms and are acceptable to their customer.  In the present case, there are also fax letters purportedly emanated from the 1st defendant seeking amendments to an L/C with copy of the L/C enclosed in her faxes (see p C-543-544 and C-549-550). 

71. She also said that her roles were only to sign the documents prepared by Ms Mak, provide investment advice and carry out the investment directions.  She agreed that she was only a businessperson and not an investment advisor.  But she did not regard 40% of the profit on the investments made with the plaintiff’s money as inappropriately generous.  Her reason was that the ratio was suggested by Yan.  She denied of having asked for such handsome profit in the first place.  She tried to justify the generous profit sharing by saying that she had provided a room in the 3rd defendant’s office for Yan’s use and a flat as his accommodation in Hong Kong.  However, the 3rd defendant’s premises were rented with the plaintiff’s money.  Regarding the accommodation provided to Yan in Hong Kong, she in fact charged the 3rd defendant HK$400,000 per annum as rental for the same since about mid-1997 (see pp D955 and D1001). 

72. She also charged the 3rd defendant management fee of HK$2 million per annum (see p D955) which she obtained by deducting such sum from what she or her company owed the 3rd defendant.  She could not explain why she was entitled to such generous fees when, on her case, there was nothing much for her to do.

73. She was also asked why she had to give a personal guarantee of HK$120 million to Yu Fung for the loan advanced to Golden Unity for use in the Kui In Fong investment when she said part of this investment in fact belonged to the plaintiff.  Her only answer was that the net equity of the investment was substantial implying that the risk she undertook was small.  But she did not explain why the plaintiff had to rely on her guarantee if the part of the investment should belong to the plaintiff.

74. She could not explain why she and her sister had to remain as shareholders and directors of the 3rd defendant after Yan and his subordinate Huo had in early 1997 obtained multiple visits permits to come to Hong Kong.  She also could not explain why she and her sister were given the boardroom control of the 3rd defendant or that she was given the veto control of the 3rd defendant’s bank accounts.  Liu, Yan or their subordinates were also not appointed as directors to the boards of the three companies that held the Kui In Fong investment.

75. Despite all the above, she maintained that she reasonably believed that Liu and Yan were authorised by the plaintiff to do what they did and that she had no reason not to believe that the 3rd defendant was a window company of the plaintiff.

Evidence of the 2nd defendant

76. The evidence of the 2nd defendant is short.  She said in her witness statement that she was told by her sister, the 1st defendant that the plaintiff intended to do business in Hong Kong through a company established in Hong Kong.  The plaintiff was represented by Yan.  She agreed to act as a trustee for the plaintiff to hold some shares of the company.

77. She had at the request of her sister gone to the office of the defendants’ solicitors in December 1996 to sign some documents for acquiring the 3rd defendant.  She also signed a declaration of trust over her 500 shares of the 3rd defendant in favour of Yan.  She had no knowledge as to the business of the 3rd or 4th defendants.

78. When cross-examined on whether she thought she was holding the shares of the 3rd defendant for Yan or the plaintiff, she deliberated and then said that she thought she was holding the shares for Yan. I think this is a considered and truthful answer.

79. She was a homemaker and looked after her child and the 1st defendant’s child. She had been to the office of the 4th defendant to provide assistance when called upon to do so.  She had no particular duty in the 4th defendant.  She would assist in matters like going to the utility companies to pay bills.  She had also signed the audited reports of the 3rd and 4th defendants when the 1st defendant asked her to do so.  She also had no knowledge of the 3rd defendant’s investments.

80. She had not been investigated by the Jilin Public Security Bureau and had not made any statement to the bureau.  I find that she is a truthful witness.

What happened to Liu and Yan

81. I also refer to the plaintiff’s evidence on what happened to Liu and Yan.

82. According to the plaintiff’s first witness (“PW1”), Zou Fubao, the officer in charge of the Legal Department of the plaintiff’s Jilin Branch, the misconduct of Liu and Yan in channelling funds to the 3rd defendant through misuse of L/Cs was discovered sometime in September 1998 when Liu was transferred to another position in Guangdong province. 

83. Yan was then removed from his post on 30 December 1998 and was required to assist the plaintiff to recover the lost assets (下崗清收).  Sometime in March 1999, Yan was authorized to recover the money for the plaintiff.  He was authorised to do so by a written authorisation dated 15 March 1999 given by the legal representative of the plaintiff (p D28).  

84. The plaintiff on 5 May 1999 disciplined Liu and Yan as members of the Chinese Communist Party by placing them under detention and interrogation.  They were required to explain their conduct in these matters by a certain date at a certain place (雙規).  The Public Procuratorate of Jilin later approved the arrest of Yan.  But he absconded in May 2000 in the course of criminal proceedings and has not been located even at the time of this trial. 

85. Liu was arrested on 19 January 2000 and tried by the Intermediate People’s Court of Changchun city, Jilin province for various matters including the subject matters of this action. He was convicted and sentenced to 15 years of imprisonment for misappropriation of public funds held by the plaintiff and to 7 years for illegally issuing financial instruments.  The court ordered the total sentence at 20 years to count from 19 January 2000.  The public funds misappropriated by him included those channeled into the 3rd defendant by the said L/Cs.  The details of the criminal case against him are contained in a Chinese judgment of the Jilin court and dated 13 June 2000 (see p. C896 to 909).

The Judgment of the Intermediate People’s Court of Jilin

86. The judgment of the Jilin Court recorded that Liu and Yan (Yan was being dealt with in a separate case) had set up the 3rd defendant in Hong Kong as a fund raising window without authority and contrary to the regulations of the plaintiff.  They also entered into a trust arrangement with the 1st defendant for the plaintiff to own 90% of the 3rd defendant.  Liu also directed Yan to be responsible for the 3rd defendant’s business activities.  In so doing, they together contravened the regulation of the plaintiff that no fund raising window could be set up without approval.

87. The Chinese judgment also said that Liu and Yan, under the pretext of raising finance for domestic enterprise, had contravened the management method authorised by the plaintiff and the procedural rule for dealing with import L/C.  They had, without approval from the head office or the provincial branch, used Long Wei as the L/C applicant and the 3rd defendant as the beneficiary and directed responsible persons to issue 25 L/Cs contrary to the regulations.

88. The 25 L/Cs were also issued without security deposit or pledge given to the plaintiff or underlying commercial transaction. The 3rd defendant provided fake credit bills to negotiate these L/Cs.  These L/Cs were then discounted by the 1st defendant with the 3rd defendant’s negotiating banks for cash.  Liu and Yan then used the discounted proceeds for investments in Hong Kong pending the maturity of the plaintiff’s payment obligations under the L/Cs.  However, when the investments suffered loss, Liu and Yan used new L/Cs to obtain proceeds to feed the payment obligations under the old L/Cs so as to roll over the payment obligations.  They issued, contrary to regulations, 14 such L/Cs.  Their conduct had resulted in huge loss to the plaintiff. 

89. The judgment also recorded the evidence of one Wan Leiyan (“Wan”), a member of staff of the IB Dept that there was a meeting of the management of the IB Dept in January 1997 in which Liu said that he had reported to the legal representative of the plaintiff that he had decided to set up a fund raising window in Hong Kong.  Hence, Wan said the leaders of the plaintiff should be aware of this.

90. Liu also gave evidence in his defence.  He said he and Yan had together obtained approval from their leaders to found the 3rd defendant in Hong Kong.  However, he was unable to provide any evidence save his assertion.  His evidence was not accepted by the court.  He was found guilty and sentenced as above-mentioned.

91. I would however not rely on the findings in the Chinese judgment as the parties are not the same as in this action and there is no issue estoppel or cause of action estoppels (see Secretary of Trade and Industry v. Bairstow [2004] Ch. 1).  The judgment was also not referred to the witnesses in the course of their evidence.

Analyses of the submissions on D1’s evidence and findings thereon

92. Mr Chong, counsel for the 1st and 2nd defendants reminded me that the plaintiff’s charge against the defendants is serious. Hence, the proof should be clear despite the standard of proof being on a balance of probabilities (see H (Minors), Re [1996] AC 563 and Phipson on Evidence, 17^th edn paras 6-55 to 6-56).  Mr Chong also reiterated one of the 1st defendant’s grounds of defence; namely, that she was only an innocent conduit for the channelling of money to Hong Kong.

93. Mr Chong submitted that Liu and Yan had the actual or apparent authority from the plaintiff to set up the 3rd defendant as the plaintiff’s window company in Hong Kong and to represent the plaintiff to do various acts including the procuring of remittance of money from the plaintiff to the 3rd defendant by fake L/C transactions.

94. He further submitted that the 1st defendant had all along operated under the belief that Liu and Yan had the plaintiff’s authority to do what they did and she had reasonable grounds to harbour such belief.

95. Mr. Man, counsel for the plaintiff submitted that the 1st defendant was a knowing participant of the dishonest scheme perpetrated by Liu and Yan.  It is incredible that she would have believed that Liu and Yan were authorised by the plaintiff to carry out the scheme to set up the 3rd defendant and channel money into it by fake L/Cs.

96. The plaintiff in particular relied on the 40% net profit that she was entitled to out of investments made with the plaintiff’s money.  Though she wanted to tune down her entitlement to 4% when her counsel referred her in re-examination to the draft agreement prepared on the instruction of Liu, I do not accept her evidence on this.  I have already dealt with this point above when I summarised her evidence.  She tried to tune down her share by ignoring the cancellation of the trust over the 3rd defendant’s shares as effected by the agreement which was reflected by the terms of the draft.  It was her evidence all along that she was entitled to 40% of the net profits.  She had also endorsed the words of cancellation on the declaration of trust.  She has produced nothing to support the late assertion that she was only entitled to 4% of the net profits. 

97. In any case, I would take the view that even if her share of the net profits should be only 4%, it is still an unreasonable amount as the investment capital exceeded US$60 million and her contribution to the operation of the 3rd defendant and the drawing of money under the L/Cs was non-monetary and quite minimal.

98. I also find that if Liu and Yan were indeed handling the plaintiff’s money for the plaintiff’s purposes rather than for their personal benefit, they would not have promised the 1st defendant even 4% of the net profit as they would then be handling public funds.  The 1st defendant’s contribution was merely administrative which would not have justified the management fee of HK$2 million per year.  The extraordinarily handsome reward to the 1st defendant for her participation in the scheme only reflected the high degree of risk she knew she was exposing herself to by taking part in it.

99. I also think that it is very unlikely that Liu and Yan would have volunteered a yearly management fee of HK$2 million and 40% of the net profits of the investments to the 1st defendant without bargaining. It is obvious that she knew that Liu and Yan were enjoying the use of the plaintiff’s money at no costs so that she thought that she could demand a huge share of the profits and a substantial management fee for herself.

100. Mr Man also submitted that it is inherently improbable that the 1st defendant was not aware that Liu and Yan were operating an unauthorised fraudulent scheme.  The plaintiff highlighted the lack of any executed document to evidence the relationship of the parties save the declarations of trust when the scheme involved over US$60 million.  If Liu, Yan and the 1st defendant were doing something proper and legitimate which involved so much money, they should have signed some documentation setting out the rights and obligations of all concerned.  I entirely agree.

101. Furthermore, Mr Man pointed out that there was no reason for Liu and Yan not to hold the shares of the 3rd defendant in their own names if this company were indeed a window of the plaintiff.  The so-called inconvenience because they could not come here is a lame excuse as Yan had in early 1997 obtained a multiple visits permit to come to Hong Kong.  He also stationed in Hong Kong for most of the time.  The 1st defendant provided him with a flat at the costs of the 3rd defendant.  There was a room in the 3rd defendant’s office designated for his exclusive use.  He was also a mandatory signatory to all the 3rd defendant’s bank accounts save one account where either he or the 1st defendant could singly withdraw no more than HK$100,000.  Mr Man suggested that Liu and Yan did not want to be registered as shareholders or directors of the 3rd defendant or the three companies holding the Kui In Fong properties because they wanted to avoid exposure of their fraudulent acts.  I agree with this obvious suggestion.

102. I also do not think the 1st defendant was playing a passive role as she had tried to portray.  She had veto control of all bank accounts plus the right to withdraw from one account of up to HK$100,000 by herself.  She also, through herself and her sister, controlled the board of the 3rd defendant.  I find that she was playing a dominant and active role in the whole scheme. 

103. The joint control of the bank accounts by her and Yan was obviously to ensure that neither could have dissipated the funds against the will of the other.  If the 1st defendant’s role was merely administrative, there was no reason to give her such control.  Furthermore, if Liu and Yan were properly and legitimately managing the plaintiff’s money for the plaintiff’s purposes, then they would be managing public money for public purposes.  In that event, they would have no reason to give her any control over the bank accounts as she would have no right to dictate the use of public money. To give her such control clearly implies that she had substantial interest in the money so much so that she had the control of its use.  She was therefore not treating the 3rd defendant as a window of the plaintiff investing the plaintiff’s money for the plaintiff’s purposes.  She was asserting a proprietary interest in the money held by the 3rd defendant by exercising her bank account control.

104. I also refer to her guarantee for HK$120 million given in the Kui In Fong investment.  If Liu, Yan and she had treated the investment as belonging to the plaintiff, nobody would have asked her to give such a guarantee and she would also not have given it.

105. Mr Man also submitted that the 1st defendant is not an honest witness.  Whilst she had knowingly taken part in channelling huge sums into the 3rd defendant through the fake L/C transactions, she at the beginning of her cross-examination pretended that she was not clear about the 3rd defendant’s fund raising.  She said it was the plaintiff’s business and she never considered whether the L/Cs involved any goods.  However, she admitted of knowledge from her business experience that it was cheating for a vendor to negotiate for payment under an L/C without delivering the goods.  She also admitted of knowledge that for the L/Cs issued used for the 3rd defendant’s fund raising, no goods was involved.  It is incredible that she was not aware that the way that funds were channelled from the plaintiff to the 3rd defendant was irregular. 

106. I also do not accept that she had signed without reading the documents for negotiation of the L/Cs.  She was a businessperson. She would not have signed so many commercial documents blindly as to do so would have exposed her to prejudice.  The minor error(s) in the cargo receipts also cannot support her assertion as the error(s) were minor and all cargo receipts were accepted by the IB Dept for payment under the L/Cs.

107. I also say that her attempt in re-examination to tune down her share of the net profits of investments from 40% to 4% is a dishonest attempt to change her deeply entrenched case on the ratio of sharing so as to make her case look less unreasonable.

108. Mr Chong for the defendants however submitted that she reasonably believed Liu and Yan had the plaintiff’s authority to do what they did.  Mr Chong further said that her acts were logical and accorded with common sense.  One ground relied on by Mr Chong is the unsigned letter bearing the chop mark of IB Dept and dated 1 April 1997 (p D18), which claimed the 3rd defendant as the plaintiff’s window company.

109. The letter sought help from Sin Hua Bank in the 3rd defendant’s fund raising activities.  Mr Chong said that Liu and Yan had authority to issue this letter which was an authentic document. 

110. He also submitted that since the 3rd defendant was established, its business had been managed by the staff of IB Dept.  The staff of IB Dept also checked the transactions between the plaintiff and the 3rd defendant every month.  He also referred to the undisputed evidence that the money channelled from the plaintiff to the 3rd defendant was applied according to the orders and directions of Liu and Yan mainly in investments in Hong Kong.  He also submitted that no part of the money had been used or applied by the 1st defendant for her own purpose.  He also said that Yan had been authorized by the plaintiff on 15 March 1999 to take over the 3rd defendant’s assets.  He also referred to the 1st defendant’s evidence that she had never seen any of the L/C applications.

111. Regarding the unsigned but chop-marked letter dated 1 April 1997 which was purportedly from the IB Dept to the Sin Hua Bank in Hong Kong, it is the plaintiff’s case that the chop was applied to this letter by Liu or Yan without the plaintiff’s authority and the plaintiff is not bound by this letter.  Even though Liu and Yan had the authority to use the official chop of the IB Dept, the authority was limited to using the chop for proper official business of the IB Dept.  If they should have wrongly used the chop for an unauthorised purpose, the purpose would still not become proper or authorised because of the misapplication of the chop.  PW2 has made it clear that Liu and Yan were in control of the IB Dept and could have used the chop of IB Dept to create the letter.  This evidence was not challenged and I accept it as true and correct.  I am of the view that the making of this letter is just one of the many wrongful acts of Liu and Yan in their overall scheme of misappropriating money from the plaintiff by fake L/Cs.

112. I accept that several subordinates of Liu and Yan had been to the office of the 3rd defendant to check the accounts and verify the assets and investments of the 3rd defendant.  However, it is disputed whether these people were undertaking an official task for the plaintiff or were just working for the personal purposes of Liu and Yan.

113. PW1, Mr Zou said in his evidence that Liu and Yan were the senior employees of the plaintiff and their subordinates would be afraid to report their wrongdoing because their promotion and pay were largely controlled by their superiors who were Liu and Yan.

114. PW2 also confirmed that the three subordinates in question namely; Huo, Huang and Wan had all been dismissed and punished by the plaintiff.

115. I also do not rule out the possibility that these subordinates might have been given some benefit like the opportunity to travel to Hong Kong from time to time with board and lodging provided for them by the 3rd defendant.

116. Liu and Yan might also have told them that the 3rd defendant was the plaintiff’s window and they might have accepted such statement on its face value, as they would then have a convenient excuse to go by the instructions of Liu and Yan and to enjoy the benefit of free travels to Hong Kong.

117. One other cause for these and other subordinates not reporting the wrongdoings to more senior officers could be because of their fear that officers in even higher ranks might be involved in the wrongdoings as they might not have known all those who were involved.  Hence, the scheme of Liu and Yan was not discovered until Liu was transferred to Guangdong.

118. However, I do not believe that staff like Huo, Huang and Wan would wholeheartedly accept that the 3rd defendant was the plaintiff’s window as no aspect of its operation bore any indicia of its being a subsidiary of a large state owned bank of the mainland.  The mode of channelling money from the plaintiff to the 3rd defendant is particularly damning.  It is beyond imagination that a state owned bank would have to resort to fake L/C transactions to evade the currency control of the state.  Such is against the criminal law to say the least.  Liu was given 20 years imprisonment partly because of what he did in the 3rd defendant.

119. Liu and Yan, in their dealings with people in Hong Kong like Chan Long Kam and Choi Sai Leung, might have held themselves out as representatives of the plaintiff.  Such self-serving holding out as a matter of law would not have affected the plaintiff’s position (see AG for Ceylon v A D Silva [1953] AC 461 at 479and Armagas Ltd v Mundogas SA [1986] AC 717 at 731 to 735).  Such holding out also does not mean that Liu and Yan were genuinely treating the 3rd defendant as the plaintiff’s window in Hong Kong.  But such holding out could have facilitated their dealings with people like Chan and Choi.

120. Regarding the submissions that the money channelled to the 3rd defendant was applied according to the directions of Liu and Yan and mainly for investments in Hong Kong, I do not think this submission can assist the 1st defendant.  If the capital of the investments were sourced by Liu and Yan and invested for the benefit of Liu, Yan and the 1st defendant, then the fact that Liu and Yan had the final say on what to invest is not surprising at all.  This does not indicate that the operation of the 3rd defendant was for the benefit of the plaintiff rather than for Liu, Yan and the 1st defendant.  In fact, the 1st defendant’s very generous share of profits and management fee cry out that she was engaged in something extraordinary and risky but not for providing mere administrative support to the 3rd defendant.  After all, the funds channelled into the 3rd defendant were public funds and not private capital.  If she were merely providing some administrative service to the 3rd defendant, she would not have imagined to be given such generous management fee and share of profit.  I have already mentioned above that the extraordinarily handsome reward to her only reflected the degree of risk she knew she was exposing herself to by taking part in the scheme.

121. Mr Chong also submitted that the 1st defendant had not taken any money from the 3rd defendant for her own purpose.  That however is contrary to the evidence.  The audited accounts of the 3rd defendant for the financial year ending 31 March 1998 shows that there was HK$1,130,960 due from the 1st defendant to 3rd defendant.

122. Regarding the argument that Yan had been authorised on 15 March 1999 to recover the plaintiff’s assets, that was a different matter.  Yan was then properly authorized by the legal representative of the plaintiff to do something lawful and proper, i.e. to recover the loss suffered by the plaintiff as caused previously by the unlawful acts of Liu, Yan and the 1st defendant.  I do not see how this authorization can imply that what Yan did previously was also authorized by the plaintiff.

123. The 1st defendant also asserted that she had never seen the L/C applications.  But these were all handled by Liu and Yan in Jilin.  It was not necessary for her to be involved.

124. Having reviewed all the evidence and the submissions on both sides, I accept the plaintiff’s submissions and reject those of the defendants.  I find that the 1st defendant is not an honest witness.  I find that the plaintiff has proved on a balance of probability that the 1st defendant was a knowing participant of the dishonest scheme operated by Liu and Yan.  The scheme was to misappropriate the plaintiff’s money by using false L/C transactions to channel the plaintiff’s money to the 3rd defendant. The money was then invested in Hong Kong per the direction of Liu and Yan. 

125. I also find that the 1st defendant was entitled to 40% of the net profit of the 3rd defendant’s investments.  This was so regardless of whether the declarations of trust executed by the 1st and 2nd defendants over the 90% shares of the 3rd defendant had or had not been formally cancelled.  Even if the trusts had not been cancelled, the ratio of beneficial interests in the shares of the 3rd defendant need not have any bearing on the sharing of profit between Liu and Yan on the one part and the 1st defendant on the other.  This is so because after the verbal agreement made between Liu and Yan on the one hand and the 1st defendant on the other in Guangzhou on 5 June 1997, the 1st defendant already regarded that she was entitled to 40% of the net profit of the investments.

126. I also find that the 1st defendant knew that the 3rd defendant was not the plaintiff’s window.  If the 3rd defendant were the plaintiff’s window, there was no reason why the 1st defendant would be allowed to have legal and beneficial interest in 10% of the 3rd defendant’s shares.  The draft agreement prepared for use by the IB Dept and the 3rd defendant, which was supposed to replace and cancel the declarations of trust, further shows that Li, Yan and the 1st defendant treated the shares of the 3rd defendant as their property which they could manage at their whim.

Has the plaintiff omitted to call other witnesses?

127. Mr Chong also criticized the plaintiff for not calling certain witnesses.  He referred to the decision of Le Pichon JA in Telings International Hong Kong Ltd. v John Ho & Ors CACV 10/2010 para. 79 which quoted Wigmore on Evidence (Chadbourn Revision) (1979) Vo1. 2) from Fuad JA in Chan Yiu Wah v Law Sim Yuk CACV 92/1986 (unreported p. 18):

“285. Failure to produce evidence, as indicating unfavorable tenor of evidence: (1) In general. … The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so; and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavorable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which make some other hypothesis a more natural one than the party’s fear of exposure. But the propriety of such an inference in general is not doubted.

The non-production of evidence that would naturally have been produced by an honest and therefore fearless claimant permits the inference that its tenor is unfavorable to the party’s cause.  Ever since the case of the Chimney Sweeper’s Jewel [Armory v. Delamirie] this has been a recognised principle.”

128.  Mr Chong said that the plaintiff should have called the plaintiff’s former manager who was in the post from 17 January 1995 to 18 June 1997, his successor from 18 June 1997 who authorized Yan in March 1999 to recover the assets for the plaintiff, the deputy manager of IB Dept from 20 February 1997 to 21 July 1997, his successor from 21 July 1997 to 17 August 1998 and Huo and Huang.  Mr Chong submitted that these people could testify on the actual management system of the plaintiff.  He said the plaintiff has neither called them nor proffered any explanation for not doing so.  He further submitted that the defendants could establish from these witnesses the actual and ostensible authority of Liu and Yan from the custom and practice of the plaintiff and the conduct of the senior management.

129. I do not think these witnesses formerly at managerial rank can assist the defendants in establishing any ostensible authority on the part of Liu or Yan as there is no suggestion that the 1st or 2nd defendant had ever met them.  Regarding Huo and Huang, I do not think the 1st defendant has suggested that she had relied on their representations as to the authority of Liu or Yan.  They were merely subordinates of Liu and Yan and any representation by them of such authority is of no use.

130. Mr Chong further submitted that I should infer from the absence of these witnesses that Liu and Yan had actual authority (i) to set up the 3rd defendant as the plaintiff’s window company in Hong Kong for sourcing finance (i.e. by the 3rd defendant negotiating the plaintiff’s L/Cs and borrowing money from the negotiating banks); and (ii) to authorize the issuing of L/Cs in excess of their written authority in the plaintiff’s written authorization and (iii) the plaintiff’s manager at the head office or the Jilin Branch had approved or connived at the use by Liu and Yan of faked L/C transactions to transfer money out from the plaintiff.

131. Mr Man disagreed.  He submitted that the 1st defendant has not even established a prima facie case of existence of actual authority that would require the plaintiff to call evidence to rebut.  He also referred to the evidence of PW1 and PW2.  PW1 is the officer of the legal department of the Jilin Branch and PW2 is the officer in charge of the Supervisory Department of IB Dept.  Mr Man further submitted that their evidence is adequate to show that Liu and Yan had no authority to do what they did.  I also hold that PWs 1 and 2 are already witnesses of the plaintiff who can testify on the actual management system of the IB Dept. 

132. I also refer to the shorter statement of the principle by Harris J in Tam Bo Kei v Tam Bo Kin & Ors (No. 1) [2011] 1 HKLRD 537 at para. 27 that “[i]f a defendant elects not to give evidence which is material to an issue, the court is entitled to draw from the facts which have been disclosed all reasonable inferences as to what are the facts in respect of which the defendant has chosen not to adduce evidence.”  I do not think on the basis of the evidence adduced, I am entitled to infer that Liu and Yan had the actual authority of the plaintiff to do what they did. 

133. Based on my analyses of the evidence and findings above, I think it is clear that Liu and Yan intended to set up the 3rd defendant to conduct investments in Hong Kong with the plaintiff’s money but for the benefit of themselves and the 3rd defendant.  Their scheme could well have involved others including some of their subordinate who took part in the issuing and processing of the L/Cs and those who came to Hong Kong to check the books and accounts of the investments.  However, when the investments suffered because of the financial crisis in late 1997 to 1998, they then conveniently treated the 3rd defendant as the plaintiff’s window for explaining away and escaping from the consequences of their misdeeds and misappropriation of public funds. 

134. I do not think that the plaintiff would have actually given Liu and Yan the authority to use faked L/C transactions to raise funds for its so-called window, the 3^rd defendant to invest in Hong Kong.  To do so is to cheat the negotiating banks which are, in addition to the Bank of China, mostly foreign banks.  I cannot imagine that the plaintiff, being a state-owned Chinese bank, would have authorized its officers to cheat foreign banks to lend out millions of US Dollars by using faked L/C transactions. That is very far-fetched.

135. I have also decided that even if Liu and Yan should have held themselves out as representatives of the plaintiff in their dealings with some businesspersons in Hong Kong, they did so only to facilitate their dealings with these people.  It does not mean that they had any authority from the plaintiff to do so.

136. I further say that if Liu and Yan should have initially wanted to set up the 3rd defendant as the plaintiff’s window for the plaintiff’s purposes, they would have applied in the proper way to the plaintiff’s leadership for authority to do so.  This is particularly so when so much money was to be injected into the 3rd defendant for its operation and investments.  The first L/C negotiated on 30 January 1997 already involved more than US$4.8 million and was in excess of the written authority given by the plaintiff to Liu and Yan.  In any case, I do not think the plaintiff would have authorized them to cheat other banks to lend out millions of US Dollars by faked L/C transactions.

137. Furthermore, if authority should have been granted to Liu and Yan in respect of what they did in the 3rd defendant, it is unthinkable that the authority would not have been granted in writing and properly recorded in the plaintiff’s records.  Liu and Yan would also have insisted on the authority being granted in writing to protect themselves from accusations of misconduct.

138. I further say that if they should have been authorised by the plaintiff to set up the 3rd defendant for legitimate purposes and they then found it necessary to call upon the 1st defendant for help, they would also have procured the execution of proper documentation between the plaintiff and 1st defendant to set out the relationship, rights and obligations in detail.

The 3rd defendant

139. Though the plaintiff is not pursuing the 3rd defendant anymore, I do note that the Chinese judgment of the Jilin Court seemed to have taken the 3rd defendant as the plaintiff’s window in Hong Kong, but the court stated with no ambiguity that the 3rd defendant was set up by Liu and Yan without authority from the plaintiff and contrary to the plaintiff’s regulation.  I think the court regarded the 3rd defendant as the plaintiff’s window only to facilitate the recovery by the plaintiff of the 3rd defendant’s assets.  It has also not found that Liu and Yan had wanted to set up the 3rd defendant as the plaintiff’s window right at the start.

Actual authority of Liu and Yan

140. I now consider the 1st defendant’s submissions that Liu and Yan had actual authority from the plaintiff to do what they did.  Bowstead and Reynolds on Agency, 19^th Edn explains actual authority in para 3-003 as follows:

“Actual authority. Actual authority is the authority which the principal has given the agent wholly or in part by means of words or writing (called here express authority) or is regarded by the law as having given him because of the interpretation put by the law on the relationship and dealings of the two parties (called here implied authority).

…

  It is common to distinguish express actual authority from implied actual authority.  The most obvious case of express authority is a power of attorney.  In a commercial setting, express authority can also arise when the principal authorises the agent to do something ‘by express words, such as when a board of directors pass a resolution which authorises two of their members to sign cheques’.  Letters conferring authority are also common.  The most obvious cases of implied authority arise in the forms of incidental authority (implied authority to do whatever is necessarily or normally incidental to the activity expressly authorised), usual authority (implied authority to do whatever an agent of the type concerned would usually have authority to do) and customary authority (implied authority to act in accordance with such applicable business customs as are reasonable); there is a further general category of implied authority arising from the course of dealing between the parties and the circumstances of the case.  But where the express authority is not clear the court will interpret it, and in this and other situations, whether the authority is to be regarded as express or implied is obviously a question susceptible of argument.”

141. I find that the plaintiff had not given Liu and Yan any express actual authority to set up the 3rd defendant as the plaintiff’s window company, to channel the plaintiff’s money into it and to invest such money in Hong Kong for the plaintiff.  Both PW1 and PW2 have testified on behalf of the plaintiff that Liu and Yan had never been given such authority. The fact that Liu was sentenced to 20 years imprisonment partly because of what he did in and through the 3rd defendant is strong proof that he was not authorised by the plaintiff to do so.  I also accept the plaintiff’s submissions that no one in the plaintiff would have authorised Liu and Yan to channel money out of the plaintiff by fake L/C transactions.  I also refer to what I said in paras. 133 to 138 above.

142. I also accept PW1’s evidence that the plaintiff’s operation at the material times was entirely conducted on paper and there was no electronic monitoring system as there is now.  Furthermore, the IB Dept at the material times was basically in charge of the auditing of its own records because auditing by the head office staff was infrequent.  The subordinates of Liu and Yan also did not report their wrongdoings because they controlled the pay and career prospect of the subordinates who dared not report their wrongdoings.  I have already discussed above the situations of the three subordinates Huo, Huang and Wan.  I have also mentioned one other possible cause for the subordinates not reporting the wrongdoings to more senior officers as they might fear that higher rank officers might be involved in the wrongdoings too.  Hence, the scheme of Liu and Yan was not discovered until Liu was transferred to Guangdong.

143. I also point out that the L/Cs that Liu and Yan authorised the IB Dept to issue were issued in contravention of the limits of authority imposed by the plaintiff in writing on all its officers including the two of them (p C-538 to 542).

144. I do not think the law would regard what Liu and Yan did as necessarily or normally incidental to what they were actually authorised to do.  The 1st defendant alleged that they had express authority to act for the plaintiff in matters relating to the plaintiff’s investments and business outside the mainland.  Even if they had such authority, it still does not mean that they would have been given express authority to channel money out of the plaintiff to the 3rd defendant by fake L/C transactions.

145. The law would also not bless the use of fake L/C transactions as incidental to what they were expressly authorised to do or within the usual authority of bank officers in their positions.  There is no basis to suggest that Liu and Yan had implied authority to do what they did. 

Apparent or ostensible authority of Liu and Yan

146. The defendants also submitted in the alternative that Liu and Yan had apparent or ostensible authority of the plaintiff to do what they did.  Bowstead and Reynolds explains such authority in para 8-013:

“Where a person, by words or conduct, represents or permits it to be represented that another person has authority to act on his behalf, he is bound by the acts of that other person with respect to anyone dealing with him as an agent on the faith of any such representation, to the same extent as if such other person had the authority that he was represented to have, even though he had no such actual authority.”

It is settled law that no representation by the agent as to the extent of his authority could amount to a “holding out” by the principal (AG for Ceylon v Silva at 479and Armagas Ltd v Mundogas SA at 731 to 735).

147. Since the alleged representation of Liu and Yan as having the plaintiff’s authority to set up the 3rd defendant as the plaintiff’s window, to channel the plaintiff’s money into the 3rd defendant by fake L/C transactions and to invest such money in Hong Kong were all made by Liu and Yan themselves, there was clearly no holding out by the plaintiff.  The 1st defendant plainly cannot rely on apparent or ostensible authority as her defence.  

148. I also refer to the 1st defendant’s submission that between 1980s and 1990s, it was fashionable for state owned Chinese enterprises to set up window companies in Hong Kong with the shares held by the employees.  This submission was made to support the submissions of actual or apparent authority.  There is however, no evidence of such practice and the court cannot take judicial notice of it.  In any case, such practice, even if it existed in those days, does not assist the 1st defendant in this case.  The reason being that there is no document saying that the shares of the 3rd defendant belonged to the plaintiff.  Furthermore, the plaintiff at the material times already had a branch operating in Hong Kong.  There was no need to have the 3rd defendant as its undercover window company in Hong Kong.  I also repeat my view that the plaintiff would not have authorized its officers to use faked L/C transactions to cheat other banks to lend out millions of US Dollars. 

149. The 1st defendant also submitted that she was an innocent conduit used by Liu and Yan.  My findings above that she is not an honest witness but was a knowing participant of the dishonest scheme ran by Liu and Yan have defeated this submission.

The case of conspiracy to defraud against the 1st defendant

150. The plaintiff claims against the 1st defendant for loss occasioned by her unlawful conspiracy with Liu and Yau against the plaintiff. Para 3 of the amended statement of claim pleaded that all four defendants together with Liu and Yan unlawfully conspired to misappropriate substantial sums from the plaintiff by procuring a number of L/Cs to be issued by the Jilin Branch of the plaintiff in favour of the 3rd defendant when in fact there did not exist any commercial transaction which warranted the issue of the L/Cs and the obtaining of payments hereunder by the 3rd and 4th defendants.  The 1st defendant at the start of the trial criticized the plaintiff for not having pleaded its claim properly.

151. Ma CJHC (as he then was) set out the elements that have to be pleaded in a conspiracy claim in para 17 of Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537:

“17. As a matter of pleading, a case based on conspiracy, must contain the following elements:

(a) The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(b) The intention to injure the plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(c) The acts that were carried out pursuant to the agreement and the stated intention.

(d) The damage caused to the plaintiff.

See Bullen & Leake & Jacob’s Precedents of Pleadings (16^th ed., 2008) Vol. 2, p. 855 para. 51-02.”

152. The pleadings in para 3 of the amended statement of claim clearly satisfied the requirements of an agreement between the 1st and 3rd defendants, Liu and Yan to unlawfully injure the plaintiff by misappropriating the plaintiff’s money by the fake L/C scheme. The carrying out of the acts pursuant to the agreement, the intention to injure and the inflicting of damage to the plaintiff have all been pleaded elsewhere in the amended statement of claim.  I find that the plaintiff has properly pleaded its case of conspiracy against the 1st defendant.

153. I have made findings above that the 1st defendant is not an honest witness and that the plaintiff has proved on a balance of probability that she was a knowing participant of the scheme of Liu and Yan to set up the 3rd defendant, misappropriate the plaintiff’s money into the 3rd defendant by fake L/C transactions and invest such money for their own benefit.  On these findings, I conclude that the plaintiff has succeeded in proving its conspiracy claim against the 1st defendant. 

The case of conspiracy against the 2nd defendant

154. There is no evidence that the 2nd defendant was a party to the agreement to use the fake L/C transactions to channel the plaintiff’s money to the 3rd defendant.  She had not signed any of the documents used for negotiating the L/Cs.  I find that the plaintiff has failed to prove its case of conspiracy against her and I dismiss this claim as against her.

Conversion

155. The plaintiff has an alternative cause of action of conversion against the 1st and 2nd defendants.  However, the plaintiff’s money, in being channelled to the 3rd defendant, passed into currency.  Hence, there is no cause of action in conversion (see para 17-36 of Clerk & Lindsell on Torts, 20^th edn).

Negligence

156. The last alternative cause of action against the 1st and 2nd defendants is negligence.  On my findings against the 1st defendant, she committed the wrongful acts with full knowledge of the same.  It is not a case of negligence.  However, if I should be wrong in finding her a knowing participant in the scheme of Liu and Yan, then on her case that she honestly regarded the 3rd defendant as the plaintiff’s window, she was negligent in not asking for verification from the seniors of Liu and Yan on whether the plaintiff indeed wanted to channel money to the 3rd defendant by the fake L/C transactions.  It was extremely extraordinary for the plaintiff to have channelled money to its window company by fake L/C transactions to get round the state’s currency control.  I find that the 1st defendant is liable to the plaintiff on the alternative ground of negligence if I should be wrong on finding her liable under conspiracy.

157. Regarding the 2nd defendant, since she was not involved in any of the fake L/C transactions, it cannot be said that she had any duty of care to the plaintiff or had breach such duty. 

158. Mr Man for the plaintiff in final submissions verbally added that the 2nd defendant had consented to hold the shares of the 3rd defendant for Yan and to be the 3rd defendant’s director.  She thus facilitated Yan’s hiding from the registered records of the 3rd defendant.  She also knew that the 3rd defendant was to be used for doing business with the plaintiff though she had no idea of what business was to be done.  On this submission, Mr Man further submitted that the 2nd defendant had a duty of care to the plaintiff and breached it.

159. Such alleged duty was not pleaded in the amended statement of claim.  Hence, the 2nd defendant was never required to face and respond to such a claim.  In fact, such claim has not even appeared in the plaintiff’s written opening or closing submissions.  It was only raised for the first time in the oral supplement to the written closing submissions.  Mr. Chong opposed to its being raised at all.  I doubt its validity.  But in any case, I would pay no regard to it as to do so would be unfair to the 2nd defendant.

160. The plaintiff therefore has no case of negligence as against the 2nd defendant and I dismiss this claim as against her.

Quantum

161. There is no dispute that a total sum of US$62,067,895.10 had been channelled into the 3rd defendant which ultimately came from the plaintiff through the fake L/C transactions.  After the scheme of Liu and Yan was exposed, a total sum of US$17,462,410.08 was recovered by the plaintiff.  The net loss of the plaintiff is at US$44,605,485.02.

162. I therefore give judgment against the 1st defendant in the sum of US$44,605,485.02 or its Hong Kong dollar equivalent.

Interest

163. Regarding the commencement date for accrual of interest, I have to apply a broad brush.  The plaintiff started to pay the negotiating banks from its own resources in August 1998.  The last payment was effected in May 1999.  The scheme of Liu and Yan was discovered in September 1988 when Liu was transferred to Guangdong.  This action was started in March 2000.  Bearing in mind the large number of L/C transactions involved, I hold that there was no delay in the institution of the action.  I order interest on the judgment debt to accrue at the judgment rate from 1 January 1999.

164. However, the plaintiff was not diligent enough in prosecuting the claim despite having obtained a Mareva injunction against the 1st and 2nd defendants in March 2000.  The delay necessitated an application by the 1st and 2nd defendants in August 2001 for an unless order for it to file and serve the witness statements. 

165. The trial then commenced for the first time on 12 May 2003, but it was aborted because SARs had prevented the plaintiff’s witnesses from coming to Hong Kong to testify at the trial.  The trial was adjourned, but the plaintiff took no step to revive it.

166. If the trial should have commenced on 12 May 2003, there would have been a period of delay before that date for which no interest should have been given.  Since the trial was adjourned because of SARs, it should have been relisted shortly thereafter.  Interest should have been allowed for this short interim period.  Doing the best I can, I would take the short interim period after the first trial date as equivalent to the earlier period of delay.  The two periods would cancel each other out.  I therefore order that interest should accrue up to 12 May 2003 and no more interest to accrue thereafter.  Post-judgment interest will of course accrue per section 49 of the High Court Ordinance, Cap 4.

Costs orders nisi

167. Having found the 1st defendant liable to pay the plaintiff the judgment debt with interest, I also make an order nisi that she do pay the plaintiff the costs of this action.

168. Regarding the 2nd defendant, the plaintiff’s case against her has never been a strong one.  The Jilin Public Security Bureau did not find it necessary to investigate her at all.  In the light of the dismissal of all causes of action that have been brought against her, she should be entitled to the costs of her defence of the action. 

169. However, there is something aggravating in the plaintiff’s conduct in this action as against the 2nd defendant.  The plaintiff obtained a Mareva injunction against the 1st and 2nd defendants in March 2000.  But it was dilatory in prosecuting the action resulting in an application for an unless order against it in August 2001.  After the trial was aborted in May 2003, it took no step to relist the trial but kept the injunction in place. 

170. The matter went to sleep for some seven years until the 2nd defendant applied with the 1st defendant on 5 July 2010 for striking out of the action for inordinate delay and discharge of the injunction. The plaintiff resisted the application and succeeded in doing so.

171. In the usual case, any party to litigation who has obtained an interlocutory injunction against the other party or parties must prosecute the action with diligence and expedition.  The plaintiff has failed to do so for some seven years and counsel could not provide any reasonable explanation for the failure.  The plaintiff’s conduct is unfair to the 2nd defendant who is now vindicated by this judgment.  In order to show the court’s displeasure to the plaintiff’s dilatory and unfair conduct, I make a costs order nisi that the costs payable by the plaintiff to the 2nd defendant be taxed on the indemnity basis.