HIGH FASHION GARMENTS CO LTD v. NG SIU TONG AND OTHERS

HCA 12093/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12093 OF 1999

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J U D G M E N T

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1.  The Plaintiff in this action is a company within the High Fashion group which operated as a manufacturer and exporter of garments.  The holding company of the Plaintiff is a listed company in Hong Kong.  The group has production facilities in mainland China with warehouses there as well as in Hong Kong.  It is usual for garment manufacturers to produce at a quantity larger than that ordered by their overseas customers to cater for various contingencies.  The Plaintiff usually accumulated the excess quantity and then shipped the same to its overseas subsidiary.  The Plaintiff would also sold part of these garments to local retailers as stock garments.

2.  The Defendants operated a shop called Yin’s Collection which sold stock garments.  At the material time, about 30% of their stocks came from the Plaintiff.  They would go to the warehouses of the Plaintiff to select the garments.  After they made the selection and paid deposit for the same, the Plaintiff would arrange for shipment to Hong Kong (if the selection was made from goods in warehouses in mainland China).  The Defendants would later pay and collect the selected items from the Plaintiff’s warehouse in Hong Kong.  That had been the arrangement in the course of dealings between the Plaintiff and the Defendants between 1995 and 1998.

3.  The main contact person who dealt with the Defendants on behalf of the Plaintiff was Lau Kam Wing, Kevin [“Lau”].  He was an employee of the Plaintiff and since about February 1995, he was a wholesale manager of the Plaintiff.  According to the evidence of Mr Edwin Lin, the financial controller of the Plaintiff, Lau’s duties included,

(a)	The sale of stock garments;
(b)	Arranging delivery of the stock garments;
(c)	Managing the Hong Kong warehouse of the Plaintiff;
(d)	Procuring arrangement for release of goods from the mainland factories for delivery to overseas buyers and/or to the Hong Kong warehouse;
(e)	Procuring signature by authorized signatory for release of goods from Hong Kong warehouse;
(f)	Informing the account department of the Plaintiff to issue invoices or debit notes to purchasers;
(g)	Collecting payments by way of cash or cheques and handing over the same to the account department.

4.  Lau’s wife, Li Yee Mei [“Li”] became a partner to Yin’s Collection in about October 1996.  There is a dispute as regards Lau’s knowledge about Li’s interest in Yin’s Collection.

5.  In late 1998, the Plaintiff discovered that Lau had been misappropriating the proceeds of sale of some stock garments.  Report was made to the police.  Lau was subsequently charged and he pleaded guilty to 13 counts of theft.  He was sentenced to 4 years imprisonment on 24 May 1999 in DCCC No. 207 of 1999.

6.  The Plaintiff claimed it suffered loss of garments with a total market value of $8,557,715 (the actual proceeds of sale thereof was allegedly $4,115,985).  The Plaintiff sought to recover the same in this action. Lau and Li were sued in a separate action, HCA No 3345 of 1999.  I was told that default judgment was entered against Lau in the sum of $6,900,000 and a sum of $1,316,817.29 had been paid “in satisfaction of the sum claimed”.  No explanation has been given to me as to the discrepancy between these figures.  Neither was the implication of the acceptance of $1,316,917.29 by the Plaintiff in satisfaction explored before me.  Since the parties agreed that this trial should be confined to the question of liability (as explained below), I need not concern myself regarding these points in this judgment.

7.  Regarding the items misappropriated by Lau, the Plaintiff was able to trace that a large quantity of the stock garments involved were sold to the Defendants.  The Plaintiff pursued the claim against the Defendants because it believed that the Defendants were aware of Lau’s illicit activities and the Defendants dishonestly assisted Lau.  The Plaintiff advanced three causes of action against the Defendants in the final version of the Statement of Claim,

(a)	conversion;
(b)	dishonest assistance;
(c)	knowing receipt.

8.  The trial of this action started on 28 April 2003.  It was disrupted due to the fact that an important witness for the Plaintiff would not come to Hong Kong during the SARS crisis.  The trial was adjourned part heard on 2 May 2003.  The trial resumed on 9 June 2004 with change of counsel representing the Defendants.  In response to an amendment of the Statement of Claim (to advance a claim based on conversion), defence counsel sought further discovery and particulars regarding ownership of the stock garments in question.  To facilitate that, I reluctantly adjourned the matter again on 10 June 2004.

9.  For some reasons, the matter did not come back to me until 28 April 2005 for the hearing of an application for specific discovery.  Having read the papers in connection with that application, it seems to me that putting the Defendants’ case at its highest, the application only has relevance on the quantum of damages.  If such exercise were allowed, it would be quite likely that the trial could not resume until 2006 or later.  I regarded that as highly satisfactory bearing in mind the long lapse of time since I heard the testimony of the Plaintiff’s witnesses.  Parties were agreeable to dispose of the question of liability first in order to avoid undue delay caused by the intended discovery.

10.  The trial therefore resumed before me on 24 June 2005 on the basis that it would be confined to question of liability.  Counsel had put their heads together and jointly formulated the issues as follows,

“On the basis that the Plaintiff was at the material time the owner of some or all of the subject garments (which issue of the quantity of the subject garments being owned by the Plaintiff at the material time shall not form part of the matters for determination in the trial of liability), the trial on liability shall be for the determination of the following board matters,

Whether the Plaintiff has established liability on the part of the Defendants in respect of the cause of action based on dishonest assistance;

Whether the Plaintiff has established liability on the part of the Defendants in respect of the cause of action based on knowing receipt;

Whether the Plaintiff has established liability on the part of the Defendants in respect of the cause of action based on conversion.”

11.  I wish to emphasize that this court only adopted this course due to the very exceptional circumstances of the present case mentioned above.  The general rule remains that usually all issues in dispute should be resolved at the trial.

The pleaded case

12.  Mr Lee submitted in his closing submissions for the Defendants that although three different causes of action were advanced, the facts relied upon by the Plaintiff to support these causes of action were identical.  Counsel further contended that the Plaintiff’s case was pitched on the basis that the Defendants conspired with Lau to steal the subject garments from the Plaintiff.  This is of course a very serious allegation. Mr Lee quite properly reminded this court of the dicta of Lord Nicholls in Re H [1996] 563 at p.586C to 587F regarding the standard of proof in the context of a civil trial involving allegations of serious nature.  Counsel highlighted the point that the Plaintiff has not produced any direct evidence to implicate the Defendants and it could only advance a case based on inference.

13.  Whilst I have no quarrel with the other propositions of Mr Lee set out above, I do not think the Plaintiff’s case against the Defendants hinges solely on the existence of a conspiracy between Lau and the Defendants.  There is in fact no plea of conspiracy in the Re-re-amended Statement of Claim.  However, participation and assistance to Lau in his breach of duties towards the Plaintiff were pleaded in Paragraphs 12(1), 13 and 15.  Hence, it is fair to say that the Defendants’ active involvement in Lau’s misappropriation forms at least one limb of the Plaintiff’s case. Yet, as I read the pleadings, it is not the only limb.    

14.  In Paragraph 14, the Plaintiff pleaded by way of alternative that in view of the Defendants’ knowledge that Lau sold the stock garments to them in breach of trust or in breach of fiduciary duty, it was unconscionable for the Defendants to retain the benefit of the stock garments.  The knowledge of the Defendants was pleaded in Paragraph 12.  Paragraph 12(3) pleads an alternative that the Defendants should have been put on alert that the transactions were improper and further enquiries should have been made.  Paragraph 12(4) pleads that the sales to the Defendants were at under-value.  It is averred that dishonesty could be inferred from these matters.

15.  Hence, even if the Plaintiff fails to establish a case of active assistance or participation or conspiracy, it may still succeed on an alternative limb under Paragraphs 12(3) and 14.  In this connection, Mr Yu appears to be relying on the principle set out in the judgment of Nourse LJ in BCCI (Overseas) Ltd v Akindele [2001] Ch 437 atp.455A to G.

16.  As regards the claim of conversion, the Defendants pleaded that the Plaintiff had cloaked Lau with implied or apparent authority to sell the stock garments to them (see Paragraphs 5, 9 and 20D(b) of the Re-re-amended Defence).  Based on that the Defendants asserted that they were bona fide purchasers for value without notice (see Paragraph 17).  Although the Plaintiff did not deal with these pleas in the re-amended Reply by reference to the matters pleaded in the Re-re-amended Statement of Claim, the case had been argued before me in closing submissions on the basis the allegations of dishonesty were relied upon to rebut the contention of implied or apparent authority.

17.  By reference to the approach adopted in Criterion Properties v Stratford UK Properties [2003] 1 WLR 2108, Mr Lee contended that whilst the burden of proof is on the Defendants to establish the primary facts supporting a case of apparent authority, once that is done the burden shifted to the Plaintiff to establish unconscionability averred in the Statement of Claim to defeat such a defence.  Mr Yu accepted this to be the correct analysis.  The test for unconscionability is the same as the one set out by Nourse LJ in BCCI (Overseas) Ltd v Akindele (see the judgment of Carnwath LJ in Criterion Properties at Paras.28 to 37).  I agree that this is the right approach.

18.  From the above analysis, it can be seen that the common thread of all three causes of action advanced by the Plaintiff are the allegations of dishonesty in Paragraph 12 of the Re-re-amended Statement of Claim.  It is essential to support a case of dishonest assistance (see Royal Brunei Airlines v Tan [1995] 2 AC 378 and Twinsectra Ltd v Yardley [2002] 2 AC 164).  Although as a matter of law dishonesty is not essential for a claim based on knowing receipt, the Plaintiff’s pleaded case relied on matters set out in Paragraph 12 to establish unconscionability.  The Plaintiff also relied on the same to rebut the case of apparent authority in the conversion claim.

Any dishonesty or unconscionability on the part of the Defendants?

19.  Counsel have agreed that the appropriate test for dishonesty is the one laid down by the majority in the House of Lords decision of Twinsectra Ltd v Yardley [2002] 2 AC 164.  The combined test of Lord Hutton at Paragraph 36 of the judgment requires the Plaintiff to establish following,

“…dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct.”

20.  Lord Hoffmann put it in the following terms at Paragraph 20,

“…I consider that those principles require more than knowledge of the facts which make the conduct wrongful. They require a dishonest state of mind, that is to say, consciousness that one is transgressing ordinary standards of honest behaviour.”

21.  I also bear in mind the observations of Lord Nicholls in Royal Brunei Airlines v Tan [1995] 2 AC 378 at p.389 and 390-1.  I have analysed some English cases on the point in my judgment in PBM (Hong Kong) Ltd v Tang Kam Lun, Allan HCA 12138 of 1997, 24 May 2002 and I see no need to repeat the same exercise here.  A recent illustration of the application of these principles can be found in the judgment of Deputy High Court Judge L Chan in Bank of China v Kwong Wa-po HCA 5291 of 2001, 18 July 2005.

22.  As regards unconsionability, the relevant test is set out in the judgment of Nourse LJ in BCCI (Overseas) Ltd v Akindele [2001] Ch 437 atp.455A to G.

“The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorizations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made …”

23.  I also derive valuable guidance from the discussion of Carnwath LJ in Criterion Properties on the Akindele test, in particular as regards the distinction between dishonesty and unconsionability (see Para.32 of the judgment in Criterion Properties) and the application of the test against a finding of actual knowledge of circumstances surrounding the breach of duty by the fiduciary (see Paras.34 to 40).  In Para.32, Carnwath LJ said,

“A third party’s right to rely on the apparent authority of the agent is not lost merely because after contract and before action he becomes aware of the lack of authority. Nor, in the absence of fraud or the like, is it necessarily ‘unconscionable’ for him to hold the principal to a bad bargain.”

At Para.40, the learned judge said,

“To decide whether to set aside the agreement, under the correct test, it is necessary to consider their actions and knowledge in the context of the commercial relationship of the parties as a whole.”

24.  The Plaintiff relied on the following matters in Paragraph 12 of the Re-re-amended Statement of Claim,

(a)	Para.12(1):	the Defendants’ assistance or participation in Lau’s breach of duty by paying him a monthly salary of $6,500;
(b)	Para.12(2):	the Defendants’ actual knowledge that Lau was not authorized to receive payments for the stock garments in the way he did from the Defendants;
(c)	Para.12(3):	the Defendants’ knowledge or being put on alert as to the impropriety of the transaction due to absence of debit notes and/ or official receipts;
(d)	Para.12(4):	the Defendants’ purchase at an under-value;
(e)	Para.12(5):	the Defendants’ permitting stolen, unpaid or not properly accounted for garments at their shops.

It is important to bear in mind that these are the basic premise of the Plaintiff’s case.  Allegations of dishonesty and unconscionability, like other serious allegations which are fact-sensitive, should be pleaded specifically.  A defendant facing such allegations should be able to tell from the pleadings what were the basis on which he is alleged to be dishonest and unconscionable.  If a plaintiff failed to establish dishonesty or unconscionability on his pleaded case, it is not fair to allow him to succeed on another basis which had not been pleaded and as a result his opponent has not come to meet at the trial.   

25.  In his closing submissions, Mr Yu invited the court to draw inference against the Defendants by reason of the following,

(a)	One of the Defendants, Kam Kwok Mei [“Kam”] had worked as an ex-employee of the Plaintiff;
(b)	Payment of salary to Lau;
(c)	Modes of payment by the Defendants in respect of stock garments purchased from the Plaintiff;
(d)	Purchases by the Defendants at under-value;
(e)	Handling of the labels attached to the stock garments;
(f)	Absence of debit notes or official receipts;
(g)	Return of stock garments by the Defendants;
(h)	Tampering with documents.

I shall examine these matters one by one (but not in the same order) against the pleaded case, in particular the allegations in Paragraph 12 of the Re-re-amended Statement of Claim to support the Plaintiff’s case as to dishonesty and unconscionability.  After that, I would re-examine the contentions of the Plaintiff globally against the overall picture having regard to all the circumstances.

26.  I shall first deal the payments of  “salary” to Lau.  It can conveniently be considered together with the allegation of tampering with documents.  Amongst the documents of the Defendants, the Plaintiff identified five items (set out in items 1 to 5 at Para.44 of Mr Yu’s closing submissions) which contained writings suggesting payments of “salary” and there is no dispute by the Defendants that these were paid to Lau.  Some of the items are repetitions.

27.  Lau was not employed by the Defendants at the material times.  There was therefore no reason why the Defendants would pay him salaries.  Such a description in the documents of the Defendants naturally aroused suspicion on the part of the Plaintiff.

28.  Amongst those items is one bank pay-in slip of 2 June 1998.  It evidenced a payment in the sum of $10,000 to Lau.  A copy of that pay-in slip was part of exhibit D-1.  Upon the pay-in slip, there was some handwriting which had been obliterated by white correction fluid.  The words read “Kevin wages”.  Kam admitted in her testimony that those words were written by her and subsequently obliterated by her before she handed the same to her solicitors.  An un-obliterated version can be found at Bundle 1 p.47.   

29.  Another document bearing alteration is a packing list dated 19 December 1995 (Bundle 7 p.42).  At the bottom of the document, there were some handwritings by Kam.  The description and the sum of one handwritten item were deleted.  Based on another copy available to the Plaintiff at Bundle 1 p.15, the description was “salary” and the figure was “6,500”.  Kam admitted that the deletion was done by her.

30.  Kam gave the following explanation as to these when she gave evidence.  She said that the true nature of these “salary” payments to Lau were in respect of packaging and carton charges.  The practice was that Lau would from time to time demanded the Defendants to pay such charges to cover carton and the labour costs for packaging arranged by Lau.  The Defendants felt the figures were reasonable and paid accordingly.  The Defendants had not asked for all the invoices or receipts to verify the sums though they had seen some documents.  Regarding the alteration to the documents, Kam said it was in respect of some draft copies sent to her solicitors.  Those were drafts copied from documents already seized by the police shortly after the arrest of Lau.  There was no alteration in the originals seized by the police.  Hence, there were other copies in the trial bundles that were not altered.

31.  Chow Chor Yin [“Chow”] gave the same explanation for the nature of these salary payments in her evidence.

32.  I have great reservation about whether these witnesses had told me the truth as to the nature of these payments.  To start with, it is clearly an inapt description for packaging and carton charges.  Even taking their educational background and working experience into account, I do not think Chow or Kam failed to appreciate the difference between wages for Lau and packaging or carton charges.  The point is not whether this was understood between the Defendants.  There was simply no reason why Chow and Kam would give such a description to these payments if the true nature was as testified by them.  Further, I am not satisfied with Kam’s explanation as to the alterations to the documents.  The alterations were deliberate and Kam must have been conscious of how these descriptions would put the Defendants in an unfavourable light.

33.  Even though the Defendants might not be in a very strong position to bargain with Lau about packaging and carton charges, I do not believe that they could not even inquire with Lau as to the breakdowns for the same.  The Defendants wanted this court to believe that they just paid whatever demanded by Lau. Ng Siu Tong [“Ng”] was asked in his cross-examination whether they had asked Lau about the figures.  Initially he said they had not.  Then he changed his evidence and said he had asked Lau as to the price of one carton.  He thought the amount quoted by Lau was about right and the Defendants just paid Lau when asked.  The payments were not regular monthly payments.  There was no such payment in 1995.  There were four payments in 1996 and no payment in 1997.  There was one payment in 1998.  One would imagine that packaging charges had to be incurred continuously throughout the business relationship between the Defendants and the Plaintiff.  It was not explained why these charges had to be paid so haphazardly.      

34.  I do not believe these payments were packaging or carton box charges.  Equally, they could not be payment of salaries as Lau did not work for the Defendants.  The Defendants obviously had something to hide about these payments.  But this does not mean I can therefore conclude that they assisted in Lau’s breach of duty or that they were aware of Lau’s misappropriations or that there were improprieties in their purchases of stock garments from the Plaintiff through Lau so that the Defendants could be characterized as dishonest or unconscionable.  As illustrated by Heinl v Jyske Bank [1999] Ll Rep (Bank) 511, the mere fact that a defendant has told lies in his testimony or committed some irregularity in the course of a transaction does not necessarily mean that he is liable for dishonest assistance.  In Grupo Torras v Al-Sabah [2001] Ll Rep PN 117, Para.61, the Court of Appeal held that the mere fact that a defendant received money from fraudsters to compromise him was not sufficient to establish dishonest assistance.  The crucial question in this case can only be decided against all the circumstances of the case.

35.  The next matter I shall discuss is the methods of payment adopted by the Defendants regarding the purchase prices of the stock garments.  Instead of paying the Plaintiff by cheques with Plaintiff as payees, the evidence shows that a lot of payments, either in cash or by cheques, were made to Lau personally or deposited into Lau’s bank account.  As far as sale of stock garments were concerned, the Plaintiff did not dispute that cash payments could be made to Lau.  However, the Plaintiff said it did not mean that the Defendants could pay Lau personally by cheques or by deposit into his personal account.

36.  The evidence of the Plaintiff’s witnesses confirms that the Plaintiff did not authorize its staff to deposit payments into their personal accounts.  I have no reason to doubt this.  But it is obvious to me that this is a case where actual practice deviated substantially from the rules laid down by the Plaintiff.  I have heard evidence from various witnesses as to the system set up by the Plaintiff to guard against misappropriation by its own staff.  There was a system supposedly in place to ensure that the sale of stock garments were at prices approved by directors, approval of each sale by superior of Lau, countersigning of delivery orders by superior of Lau and annual stock taking of stock garments by auditors.  Yet all these were ineffective in that Lau was able to misappropriate large sums of money between 1995 and 1998.  It shows quite clearly that the system had not been duly observed and there had been some lapses in proper supervision in the Plaintiff’s office.  The Plaintiff had not produced any evidence to account for how Lau was able to perpetuate his misdeeds for such a long time without being detected.  In view of that, I doubt very much whether the system of the Plaintiff had been fully observed at the material time.

37.  Therefore, insofar as a number of Plaintiff’s witnesses without personal involvement in the dealings with Lau or the Defendants in the sale of stock garments testified before me as to the measures that should have been in place to safeguard misappropriation, I do not find their evidence to be of much assistance in establishing what actually happened.  The only witness from the Plaintiff who had some personal involvement was Lam Pik Yue [“Lam”], the immediate supervisor of Lau until end of June 1996.  She basically left the dealings with purchasers of stock garments to Lau.  Lau was to negotiate with the purchasers and arrange for delivery.  He was responsible for collecting payments as far as local purchasers were concerned.

38.  From the evidence of Lam, the safeguards in the Plaintiff’s system against misappropriation by someone in the position of Lau were to require that the prices at which the stock garments were sold could not be lower than those set out in a price list determined by a director.  The price list was not given to the purchasers.  However, before a sale could be effected, either Lam or another director had to countersign on a Transportation Order (like Exhibit P-6) for ordering the transportation of the goods from mainland factories or warehouses to Hong Kong.  Further, before the goods were released to the purchasers in Hong Kong, Lam or another director had to check that proper payment had been made with reference to pay-in slip before signing a Release Order (出廠紙) authorizing the release of the goods from the Plaintiff’s premises.  The Plaintiff had not given discovery of these documents.

39.  According to the evidence of Edwin Lin, a director should check that the goods were approved to be sold before he countersigned the Transportation Order.  He should check the quantity and unit price in the process.

40.  There was no explanation from the Plaintiff’s witnesses as to why Lau was able to misappropriate the proceeds of sale when the Plaintiff had a system of cross-checking that proper payments had been before the goods were released.  There was also no explanation as to why the goods could have been sold to the Defendants at alleged gross undervalue if a director had checked the details of transactions before he countersigned the relevant Transportation Orders.

41.  There is no dispute that Release Orders were necessary before the Defendants could remove the goods from the Plaintiff’s premises in Hong Kong.  Even though the Plaintiff did not produce such orders, given the evidence of Lam, I shall deal with this case on the basis that such Release Orders were signed by a director of the Plaintiff.  The Defendants collected the goods by means of these Release Orders.  I do not have the benefit of any evidence from any witnesses called by the Plaintiff as to how the Release Orders relied on by the Defendants to collect the garments came to be signed without actual payment being received by the Plaintiff.

42.  Mr Yu laid considerable emphasis on the payments for stock garments by the Defendant being made to Lau’s personal accounts.  Counsel submitted that any reasonable and honest merchant would appreciate that the Plaintiff as a subsidiary of a listed company would not accept such practice.  He also adverted to the lack of official receipts and debit notes regarding transactions with the Defendants.         

43.  I do not attach much significance to the last point.  The evidence showed that in the trade of stock garments, transactions with local purchasers were effected rather informally.  The Defendants had produced some evidence concerning their dealings with the Plaintiff and the other suppliers to support their evidence in this respect.  These were basically transactions done on the basis of cash upon delivery.  To an extent, Lam’s evidence as to the checking of proper payment being effected prior to release of goods corroborated the defence on this point.  What was important to the purchaser was that he got the goods after payments.  I also do not attach too much importance on the fact that the Plaintiff was a subsidiary of a listed company.  Even in a listed company, I can readily see why stock garments were disposed of in a manner different from other sales in the ordinary course of its business.  As I mentioned, the Defendants got the Release Orders which should have borne signatures of the Plaintiff’s director to enable them to take delivery.  Against that background, I do not regard the lack of official receipts and debit notes as strong indications of lack of probity in the transactions.  In coming to this conclusion, I also bear in mind the fact that in some previous dealings before Yin’s Collection was set up, Ng got official receipts and debit notes from the Plaintiff.  I think that was clearly outweighed by the number and the duration of subsequent transactions in which the Defendants managed to complete sales without such formal documents.      

44.  The Defendants explained why payments were made to Lau’s personal account.  Some of the stock garments sold by the Plaintiff were goods of the associated companies within the High Fashion group.  Amongst the payments acknowledged by the Plaintiff, there were in fact cheques payable to High Fashion Knitwear Overseas Limited.  Lam also agreed that the knitting garments were goods of the latter.  Hence, according to the Defendants, Lau told them to pay by cheques with the names of payees left blank for him to fill in the appropriate payee.  In his closing submissions, Mr Lee reminded this court that the Plaintiff had actually received personal cheques from Lau as payment for stock garments purchased by the Defendants.  Yet the Plaintiff did not object to the same nor raised query with the Defendants.

45.  Kam further testified that sometimes Lau instructed the Defendants to make payments into his personal account when he was not in Hong Kong to collect payments.  Since the Plaintiff was happy to entrust with Lau the task of receiving cash payments from purchaser of stock garments, the Defendant did not find anything amiss in making payments to Lau’s personal account.

46.  On the whole, I accept the Defendants’ explanation on this point.  I therefore would not regard payments into personal account of Lau per se as implicating that the Defendants were aware of and assisted in Lau’s misappropriations.

47.  Mr Yu referred to several specific payments to question the bona fide of the Defendants.  There were some cases where payments were split into more than one cheque.  For example, a transaction dated 2 October 1996 evidenced by a packing list at Bundle 7 p.81, the total payment, according to the handwritten notes by Kam, should be $136,160.  The payment was split into a cheque of $36,160 dated 2 October (at p.82 with the Plaintiff as payee) and another cash cheque of $100,000 paid into Lau’s personal account on 3 October (at p.83).

48.  Another instance cited by Mr Yu was a transaction of 9 April 1996 evidenced by the document at Bundle 7 p.45.  The total price was $37,620, of which $20,000 had been paid to Lau with the balance paid by a cheque in the sum of $17,620.  The document at p.46 of the same bundle shows that the $20,000 was a payment of deposit.  The pay-in slips at p.47 show that both payments were deposited into Lau’s account, the deposit was paid on 5 February 1996 whilst the balance was paid on 9 April 1996.  Given that time lapse, it could well be payment of deposit followed by the balance when the goods were delivered.  I do not attach much significance to this transaction. 

49.  A further example was a transaction of April 1997 evidenced by documents at Bundle 7 p.110 to 112.  Two cheques were issued on 23 April 1997 as payments for this lot of goods.

50.  Mr Yu also referred to the transaction at Bundle 7 p.198 in the total sum of $41,850 of which $10,000 was paid by cash with the balance of $31,850 paid by cheque.  The cheque at p.201 was however a cheque payable to Ng.  Ng explained that it was due to the fact that he had issued his personal cheque for payment as he did not bring along Yin’s Collection cheque on the date in question.

51.  Then at Bundle 7 p.155 was a transaction in June 1996.  The total was $68,480.  Deducting a deposit of $20,000, the balance was $48,480.  That was split into two payments, a sum of $40,000 was paid by cheque (with the Plaintiff as payee, presumably with a chop put down by Lau or someone in Plaintiff’s office) whilst the balance of $8,480 was deposited by cash into Lau’s personal account.  Kam explained that the cash deposit was made directly from the cash income generated by sale at the Defendants’ shop.  Hence, the Defendants had subsequently issued another cheque to pay such a sum into the Defendants’ account to record the same.  She said that was why the words “入公司生意” were written on the pay-in slip as a record.

52.  I have cross-checked Kam’s explanation against the bank statements of the Defendants.  There was a record of the cheque (No.484639) being issued but no distinct record of the cheque deposited back into the Defendants’ account.  I am not going to speculate whether this cheque was included in the entry for cheque deposit in the sum of $15,020 on 18 June.  In any event, I fail to see the rationale behind issuing a cheque from the account of Yin’s Collection and deposited the same into it again.  Mr Yu invited this court to treat such explanation with suspicion.

53.  In any case, the most crucial point about these transactions is that prima facie these split payments were not in line with ordinary business dealings and they called for explanation.  I do not have a credible explanation from the Defendants.  Kam and Ng said they did what Lau told them to do.  Even though I accept that payments into Lau’s personal account were not unusual in the trade, it would be stretching credulity too far to suggest that a purchaser would not have any queries if he were directed to pay for one lot of goods by two different payments.  The arrangement was suggestive of someone keeping part of the proceeds without accounting the same in full to the rightful owner.

54.  Chow tried to give another explanation.  She said in her oral examination in chief that in dealing with some other vendors, she learnt that these stock garments were written off by the company and they were sold by the staff as their fringe benefit.  But when she was pressed about whether she knew the same practice was adopted by the Plaintiff, she shifted to another excuse that Lau had told her that the Plaintiff had a number of associated companies and he would distribute payments amongst these companies after the price was paid to him.  However, this does not sit well with the split payment arrangements.  If Lau was to distribute the proceeds amongst the various owners of the goods, there was simply no need to split the payments.  Also this was not the explanation given by Kam or Chow.

55.  The Defendants produced a document regarding their transactions with another supplier with a view to prove that split payments also occurred in relation to other suppliers.  I do not attach much weight to that.  I do not think I was given sufficient information about the Defendants’ relationship with those suppliers to conclude that they were typical examples of sale of stock garments.

56.  I turn next to the alleged undervalue in the sale to the Defendants.  Mr Lee criticized the evidence of the Plaintiff on the price levels of stock garments as unreliable.  Counsel pinpointed the variation in the unit prices for sales to the United States and comparisons were made between debit notes supposedly issued regarding sales to the Defendants and those for sales to other local buyers in Paragraphs 34 and 35 of his closing submissions.

57.  I agree that the evidence as to undervalue is unsatisfactory.  The Plaintiff only produced a handful of debit notes in its dealings with local purchasers and some invoices to US purchasers.  The calculation of Lin was based on very little documents.  The Plaintiff did not produce the price lists of stock garments which, according to its own witnesses, Lau was obliged to observe.  Common sense tells us garments of different style and different quality may fetch different prices.  It also depends on the timing of the sales and the age of the stock.  Those price lists would be the most relevant evidence as to the normal price levels charged by the Plaintiff.  Short of that, the director who set the price list could give evidence as to the same.  However, not only did the Plaintiff not produce the price lists, neither did it call the director concerned to give evidence.  Given the evidence of Lin as to the checking of sales by a director before countersigning Transportation Orders and such a director could presumably cross-check with the price lists, cogent evidence is required before this court would conclude that the sales to the Defendants (which were apparently approved by a director in countersigning Transportation Orders) were at variance with the price lists.  I do not think the evidence adduced by the Plaintiff meets such standard.  I am therefore not satisfied that the sales to the Defendants were at undervalue. 

58.  Likewise, I am not satisfied that inference should be drawn against the Defendants based on the states of the labels.  Lin and Lam gave evidence about what should have happened.  However, there is no witness from the Plaintiff testifying on what happened in actual practice at the material times as to the removal or obliteration of labels.  There is also a paucity of evidence as to the actual state of the stock garments sold to the Defendants.  The police had seized those goods identified by the Plaintiff from the Defendants’ shop. Lin had inspected the same.  He said some labels were still there and some were still identifiable even though they were cut.  He did not go into the details.  The evidence of Lam was that the house label “August Silk” needed not be removed.

59.  As regards the return of the garments by the Defendants, the Defendants testified that they were returned at the request of the Plaintiff due to the fact that the Plaintiff had mistakenly allowed them to select the same before the expiry of the moratorium.  Stock garments were not allowed to be sold in the market until about 6 months after the delivery to the Plaintiff’s customers.  Otherwise the customers would complain.  Lam said such mistake had occurred whilst she was with the Plaintiff.  For reasons given in Paragraph 37 above, I do not attach much weight to the evidence of the Plaintiff’s witnesses as to the measures adopted by the Plaintiff to avoid such mistakes.  The Plaintiff did not call any witnesses who had been involved in accepting the returned items from the Defendants to tell me how these could have happened if there was a strict policy of not accepting returned items.  Nor is there any explanation before me as to how such return of goods escaped the attention of those supervising Lau.  Although Mr Yu drew my attention to the quantities of returned goods involved, on balance I am not persuaded that the return of garments takes the Plaintiff’s case against the Defendants further.

60.  Neither do I attach much importance to the fact that Kam had previously worked for the Plaintiff in its retail outlet.  That outlet did not sell stock garments and I am not prepared to infer from such previous employment that Kam must have known that the dealings between Lau and Yin’s Collection were conducted in an irregular manner.

61.  In the end, I must assess the liability of the Defendants by asking whether they were acting dishonestly or unconscionably as alleged by the Plaintiff.  Ultimately, as mentioned in the cases, it is a jury question.  As far as dishonesty is concerned, I have to assess the position by reference to the actual knowledge, the personal attributes of the Defendants as well as the reasons why they acted as they did (see Royal Brunei Airlines v Tan [1995] 2 AC 378 at p.391B).  The Defendants were obviously not very sophisticated persons.  I accept their evidence as to how they came together to set up Yin’s Collection.  Each of them had contributed substantial amount from their savings as start-up capital.  The Plaintiff was not their only supplier.  They dealt with the Plaintiff openly and there were quite a number of Plaintiff’s staff apart from Lau who handled their transactions.  These transactions had been conducted smoothly and apparently with endorsements by senior management in terms of delivery of the garments to Hong Kong warehouse and Release Orders.  On the evidence before me, I am not satisfied me that they conspired with Lau to misappropriate the proceeds of sale.  Nor am I satisfied that they knew all along Lau had been misappropriating their payments for the Plaintiff’s stock garments.

62.  On the other hand, the Defendants were aware of the split payments.  Even though they might not know for sure that Lau had misappropriated part of those payments, they were not acting honestly in making split payments according to Lau’s directions without asking any questions.  There was simply no need to split the payments if they were paid to the legitimate payees and it was not in accordance with ordinary course of business.  If I may respectfully adopt the description of Lord Nicholls in Royal Brunei Airlines at p.390F, by making payments in such manner without any query, the Defendants fell below the standard which would be observed by an honest person placed in similar circumstances.  Having reminded myself of the combined test of Lord Hutton in Twinsectra Ltd v Yardley [2002] 2 AC 164, I hold that the Defendants were dishonest in that they knew at the time when they made the split payments that an honest trader would not comply with such directions without any queries.  What was said by Coleman J in Heinl v Jyske Bank [1999] Ll Rep (Bank) 511 at p.535 is applicable here,

“If the accessory knows facts which fall short of constituting a breach of trust, but which lead him to believe that other facts exist which do amount to an actual breach of trust or will involve a future breach, although he cannot be certain that those facts exist, he will be judged to have been acting dishonestly if he renders assistance when in all the circumstances an honest man, having that knowledge, would not have done so, either at all or without making further enquiry or taking some other steps to satisfy himself that there was no breach of trust.”

63.  Having regard to all the circumstances of the present case (including all the matters alluded to above, in particular the “salary payments” to Lau) I do not consider it right to infer from the Defendants’ dishonesty regarding the split payments that they were also acting dishonestly in respect of the other transactions between the Plaintiff and Yin’s Collection. 

64.  In the context of the commercial relationship of the parties as a whole, I hold that aside from the transactions with split payments, the Plaintiff failed to establish any unconscionability on the part of the Defendants to bar them from relying on the apparent authority of Lau in selling the stock garments and receiving payments on behalf of the Plaintiff.

65.  I should mention that in coming to the above conclusions, I have not omitted to consider the interest of Li in Yin’s Collection. Mr Yu criticized Kam’s evidence on that topic by reference to the statement given by her to the police.  I do not find that to be of much assistance.  One of the questions and answers at the last page of the statement shows that Kam had told the police that Li was aware of her interest in Yin’s Collection.  Although Li’s partnership in the firm might have generated some suspicion on the part of the Plaintiff, I do not think it can be elevated as evidence of complicity of the Defendants in Lau’s misappropriations. 

Results

66.  It follows that no matter how one analyses the Plaintiff’s claims, it only succeeds against the Defendants regarding the split payment transactions.  With regard to the other transactions, the Plaintiff failed to prove the Defendants acted dishonestly or unconscionably. 

67.  Hence, the Plaintiff’s claims in respect of the transactions without any split payments are dismissed.  For the avoidance of doubt, I would set out again what I meant by split payments.  It refers to transactions involving payment for one lot of goods split into two different payments within one or two days.  Obviously, it does not cover transactions like the one mentioned in Paragraph 48 above where there were payments at different stages on account of part payments by deposits.

68.  Parties should be able to agree the quantum without any inquiry in view of the limited extent to which I find the Defendants liable.  In calculating the quantum, parties should bear in mind what had been said by the Court of Appeal in Grupo Torras v Al-Sabah [2001] Ll Rep PN 117 at Para.119,

“	However, we think the judge was right when he said:
	‘	… the requirement of dishonest assistance relates not to any loss or damage which may be suffered but to the breach of trust or fiduciary duty. The relevant enquiry is … what loss or damage resulted from the breach of trust or fiduciary duty which has been dishonestly assisted. In this context, as in conspiracy, it is inappropriate to become involved in attempts to assess the precise causative significance of the dishonest assistance in respect of either the breach of trust or fiduciary duty or the resulting loss.’
	This is the essence of accessory liability clearly spelled out by Lord Nicholls in Royal Brunei ([1995] 2 AC 378, [1995] 3 All ER 97).”

69.  I therefore direct the parties to attempt to agree on the order to be made in view of my above conclusions.  An agreed draft shall be filed for approval within 21 days from the handing down of this judgment.  If parties cannot reach agreement for any reason, the matter will be restored for argument with the following directions,

(a)	the case be listed for a 9:30 appointment with half an hour reserved;
(b)	each party shall file their draft order and skeleton submissions at least 5 days before hearing;
(c)	counsel’s attendance is excused.

70.  Instead of making any cost order nisi, I will leave it to the parties to see if they could agree on the question of costs in the light of this judgment.  If parties cannot reach agreement on that, it would also be dealt with by the same procedure set out in the above paragraph.