TRI-UNION (INTERNATIONAL) DEVELOPMENT LTD v. SHUM LEE MAN

HCA 2723/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2723 OF 2004

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J U D G M E N T

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1.  This is a claim for damages by the plaintiff against a former employee.  The pleaded causes of action are breaches of contractual and fiduciary duties and conspiracy.

BACKGROUND

2.  The plaintiff is a trading company.  It has four trading departments that trade in different goods.  Trade Department 3 (“TD-3”) trades in chemical industrial raw materials.

3.  The plaintiff employed the defendant in 1989 to work in TD-3.  She initially worked as a clerk.  Her task was to develop the business of chemical industrial raw materials for TD-3 as the plaintiff was new to this type of business.  She was promoted to be the manager of TD-3 in July 1992.  She remained in this position until July 1997 when she resigned.

4.  The plaintiff relied on certain alleged express terms in the employment agreement.  They purportedly prohibited the defendant from putting herself into any position of conflict of interest, required her to report to it any matters of such conflict, prohibited her from providing financial assistance to or obtaining such assistance from its customers or suppliers and required her to uphold the plaintiff’s interest generally.  The plaintiff also relied on implied terms of good faith and fidelity.

5.  The plaintiff claimed that the defendant had breached these terms in her dealings on behalf of the plaintiff with a customer Yeung Choy Keung (“Yeung”).  Yeung used to trade as East Trust Development Company (“East Trust”).  The plaintiff also claimed damages from the defendant for her alleged conspiracy with her husband Kwan Kim Hung (“Kwan”), Yeung and Yeung’s manager Wong Chi Kong (“Wong”) against the plaintiff.

6.  The defendant has denied the claims.  She has also denied the alleged express terms of employment. 

7.  The plaintiff also had a claim against the defendant for $2,245,037.96.  It was made up of certain sums in a few cheques that had allegedly been given by Yeung to the defendant for delivery to the plaintiff.  The plaintiff alleged that these cheques had been intercepted or misappropriated by the defendant.  This claim was abandoned at the start of the trial.

THE PLAINTIFF’S EVIDENCE

8.  The plaintiff’s first witness is Ma Shi Zhao (“Ma”).  He joined the plaintiff in March 1989.  He was promoted to be the general manager at the end of 1991 and retired in January 1998. 

The Employees’ Manual and the Regulations Regarding Acceptance of Advantage

9.  Ma referred to the terms of employment contained in two documents.  The first document is an Employees’ Manual made in September 1990 (“the Manual”).  Ma said before he distributed copies of the Manual to his staff, he had put numbers on the top right hand corners of the copies.  After the distribution, he recorded their numbers against the names of the staff in a document called “the List of Basic Information of Staff Members” which was dated 1 March 1995.  The List also recorded the dates of joining and departure of the staff members.  The copy of the Manual given to the defendant was numbered 21 as recorded in the list. 

10.  The parts of the Manual relied on by the defendant together with the agreed translations are:

“一、序言

[Chapter 1: Preface]

…

為此，我們編印這本員工手冊，使大家明瞭公司的政策和規例，聘用條件，福利待遇和其他資料，讓大家知道，公司願為員工提供怎樣的待遇，而員工又怎樣能為公司盡力。

As such, we publish this Employees’ Manual so that everyone can fully understand the policy and regulations, terms of employment, welfare benefit and other information of the Company, what sort of employment package the Company is prepared to offer and how the employee can best contribute to the Company.

此外，本手冊內容日後如有任何更改，自當另行公佈，請自行對有關內容作相應的更改。公司保留修訂權及解釋權。

In addition, should this Manual be amended subsequently, such amendments shall be published and the employee should make the corresponding changes to his/her Manual him/herself.  The Company reserves the right to amend and interpret the contents of this Manual.

…

七、員工規章

[Chapter 7: Employee’s Rules]

（一） 工作守則

1.  熱愛公司 ：維護公司之利益和聲譽，誠實地為公司服務。

…

3.  盡忠職守 ：辦公時間應全心全力為公司服務，不因私事會客、長談或經常佔用辦公電話。

4.  嚴謹操守 ：不得貪污、受賄、私自收受佣金/客戶饋贈、挪用公款或從事其他營私作弊行為，不得搞第二職業，不得濫用職權，濫用公司名義在外擔保/捐款/借款或從事其他有損公司名譽和利益之行為。凡超越本人權限事項，須按規定請示批准，方可辦理。

…

7.  愛護公物 ：愛護公司財物，不得盜窃、損毀，浪費或挪為私用，以及不小心使用公司財產的行為。

(1) Rules of Work:

1.  Love the Company: To do all in his/her power to protect the interests and reputation of the Company, and to serve the Company loyally and faithfully.

…

3.  Serve the Company loyally and faithfully: During office hours the employee should do all in his power to promote, extend and develop the business of the Company and should not devote his/her time to private or personal meetings, long conversations or frequent use of the Company’s telephone.

4.  Proper conduct of the employee: The employee should not engage in corrupt conduct, accept bribes, accept secret commission or gifts from customers, divert or use the Company’s funds or engage in malpractices for personal benefit, should not engage in another profession or employment, should not abuse his/her powers arising from his/her office in the course of employment, should not use the Company’s name without proper authority to guarantee debts, solicit donations or obtain loans, or to carry out any act detrimental to the Company’s reputation and interests.  Where the employee has to perform an act that exceeds his/her usual authority, he/she must seek prior approval from [the Company] in accordance with the rules.

…

7.  Protect the Company’s property: Take good care of the Company’s property, should not steal, damage, waste or appropriate the same for personal use, and should handle the Company’s property with care when using the same.”

11.  The second document relied on by the plaintiff is called “the Plaintiff’s Regulations Regarding the Acceptance of Advantage by Staff Members” and dated 30 December 1993 (“the Regulations”).  Ma said he had invited the ICAC to come to promote the virtues of honesty and fidelity to the plaintiff’s staff.  The Regulations were then drafted by the ICAC for the plaintiff.  The Regulations had been posted on the plaintiff’s notice board for a long time.  Ma had also arranged for copies of it to be distributed to the staff.  The parts of the Regulations relied on by the plaintiff together with the agreed translations are:

“…

防止賄賂條例

2.  根據香港政府防止賄賂條例第九條，任何僱員在未得公司的許可下，索取或收受任何與其職務有關的利益，均屬違法。[利益]一詞的定義在防止賄賂條例第二條已有說明，包括禮物，借貸，費用，報酬，職位，契約，服務及擾惠。

Prevention of Bribery Ordinance:

2.   According to Section 9 of the Prevention of Bribery Ordinance of Hong Kong, it is illegal for any employee to solicit or accept any advantage relating to his/her employment duties without the permission of his/her employer.  The definition of ‘advantage’ is set out in Section 2 of the Prevention of Bribery Ordinance [and] includes any gift, loan, fee, reward, office or employment, deed, service or favour.

…

酬酢

6.  生意酬酢在所難免，但如遇過於奢華或頻密，則應予以拒絕，以避免日後同對方在公事上，出現為難的情況，或不能客觀地處理，假若拒絕赴會可能被視為不禮貌，則可接受，但應盡量回敬對方。

Entertainment arising out of business dealings:

6.   Entertainment arising out of business dealing is unavoidable, but if such entertainment is excessively extravagant or frequent, the employee should turn down such invitations in order to avoid placing him/herself in a position where it may cause him/her any difficulty or embarrassment, or compromise his/her impartial judgment, when subsequently attending to business matters of that customer.  If it is discourteous to turn down such invitations, the employee should attend such entertainment but should strive to reciprocate, whenever possible.

…

利益衝突

8.  僱員必須向公司申報個人或直系家屬在任何與本公司有業務來往的集團，合股公司或其他機構持有的直接或間接金融權益，僱員在任何與本公司競爭的營業團體持有相類權益，亦須申報，申報事項以書面呈交。

Conflict of interest:

8.  The employee shall report to the Company any direct or indirect financial interest, which the employee or his/her direct family members hold in any corporation, partnership or other entity which has business dealings with the Company.  An employee who holds such interest in a business entity which competes with the Company shall likewise report such interest to the Company.  The aforesaid report must be made in writing.

貸款予供應商或向其借貸

9.    僱員或其直系家屬不可向任何與公司有業務往來人士或機構提供貸款，或作其貸款擔保人，亦不可接受其貸款，或由其作貸款擔保人，銀行借貸，則不受限制。

Making loans to suppliers or obtaining loans from suppliers:

9.  The employee or his/her direct family members shall not provide loans to any person or entity which has business dealings with the Company.  Neither should they stand surety for the borrowings of any person or entity which has business dealings with the Company.  Nor should they accept any loan from any such person or entity, or [allow] such person or entity to stand surety for their borrowings.  The latter prohibition does not apply in the case where the employee or his/her direct family members borrow from a bank which has business dealings with the Company.]

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13.    本‘規則’是公司‘員工規章’的補充，從公佈之日起生效。

13.    These Rules and Regulations are supplemental to the Company’s Employee’s Manual and shall come into effect on the date of publication.

    馬世照簽署

三聯國際輕工有限公司蓋章

    一九九三年十二月三十日

    Signed by Ma Shi Zhao,

chopped with the Company Chop of Tri-Union (International Development Ltd.  30^th December 1993”

Operation of Trade Department - 3

12.  There is no dispute that the defendant was initially the only staff in TD-3.  Ms Lee Bo Sim and Ms Ivy Lee were recruited in June 1993 to assist her.  Ms Ivy Lee was later transferred to the finance department.  Mr Lee Bo Sim worked in TD-3 until her resignation on 3 March 1997.  She then went to work for the defendant in her company Wellsmart Far East Limited (“Wellsmart”).

13.  The business of TD-3 was the import and export of chemical industrial raw materials.  The defendant was employed to start this business for the plaintiff.  There are two main categories of customers of the plaintiff.  They are the Mainland customers and the Hong Kong customers.  The Mainland customers are mostly state enterprises and the plaintiff usually gave them credit period in sales.  For Hong Kong customers, the transactions are normally on cash on delivery basis.  There was however one exceptional Hong Kong customer, namely Yeung trading as East Trust. 

Yeung’s East Trust

14.  The defendant introduced Yeung’s East Trust to the plaintiff for business.  She told Ma that it was a company of unlimited liability.  It was a reliable company owned by five to six young persons who were very promising.  They were eager to develop their business.  They were honest and reliable.  They had established a good business relationship with their customers in the Pearl River Delta.  Ma regarded it as a promising company.  On the basis of such recommendation, Ma agreed to do business with East Trust. 

15.  The defendant also told Ma that East Trust had ordered goods from the plaintiff every month.  If the business between the plaintiff and East Trust could be increased, it would also benefit the plaintiff as the plaintiff would have a better standing with its own suppliers.

16.  On the defendant’s recommendation, the plaintiff starting from 1994 also granted East Trust a revolving credit.  It did so by entering into written credit agreements with East Trust granting it a credit period for payment of purchase price.  At the beginning the credit limit was not stated in the agreement.  The plaintiff had an internal credit limit of $1 to $2 million.  At the end of every year, the defendant as the manager of TD-3 would report to Ma on the performance of East Trust and whether it had paid promptly.  On several occasions, the defendant’s reports on East Trust were satisfactory.  She also recommended the increase of the credit limit and her recommendations were mostly accepted by Ma.  The credit limit was increased to $5 million in the credit agreement of 15 January 1996.

17.  The Plaintiff would import chemical industrial raw materials from its suppliers and sell them to East Trust.  East Trust would in turn sell them to its customers in the Mainland.  For a typical transaction between the plaintiff and East Trust, the defendant would prepare a contract calculation sheet for Ma’s approval.  The defendant would set out in the calculation sheet the particulars of East Trust’s purchase of materials from the plaintiff and also the particulars of the plaintiff’s purchase of the same materials from its supplier.  The plaintiff’s gross profit would also be spelt out.  It was usually at about 1.2%.  Ma said when he considered whether to approve a transaction, his focus was on the gross profit, he would leave the rest of the deal to the defendant.

18.  TD-3 was also the department which had the information to determine if any particular proposed transaction would bring the outstanding price to beyond the credit limit.  TD-3 had the information of how much goods had been delivered to East Trust and how much purchase price was outstanding.  Ma also confirmed in re-examination that if the defendant would tell him that a proposed order would not bring the outstanding price to beyond the credit limit, he would approve it. 

19.  At that time, the finance department was not in a position to give instant advice to Ma on the credit status of East Trust.  The reason being that the finance department did not know when the bills of lading were delivered by TD-3 to East Trust.  That was the time of delivery of goods for the purpose of counting the credit period and the finance department was ignorant of it.  The accounting system of the plaintiff at that time had also not been computerized.  The finance department also had limited staff.  It would take a day or two to find out the net position of the account of East Trust.  The review of East Trust’s account by this department was only conducted on an annual basis.

20.  When East Trust tendered a cheque for payment, it would do so through TD-3.  TD-3 would pass the cheque to the finance department together with directions on how the money in the cheque should be applied and which of the goods sold and delivered to East Trust should be paid.  The instructions were written on a copy of the cheque as tendered.

21.  Since the credit limit for East Trust had been increased to $5 million in early 1996, Ma therefore desired to pay a visit to East Trust’s office and warehouse.  He requested the defendant several times to arrange the visit but the defendant put forth excuses for not doing so.  Ma however insisted and the defendant eventually took him there in October/November 1996.  Ma found out in the visit that East Trust’s office was very small (of 10 odd square metres), the warehouse was on the same floor and also of a small scale and there were only two to three ladies working there in addition to Yeung and Wong.

22.  After the visit, Ma though that there was something wrong about the dealings with East Trust.  He asked the finance department to look into East Trust’s account.  He then discovered that the credit limit of $5 million had been exceeded. 

23.  He also found that when TD-3 received bills of lading from the finance department, it would not acknowledge receipt of the same in writing.  Likewise when TD-3 passed bills of lading to East Trust, East Trust would also not acknowledgment receipt of the same in writing.  Since the goods were delivered by TD-3 to East Trust by way of delivery of bills of lading, the lack of written acknowledgment of receipt of bills by East Trust would mean the lack of written proof of delivery of goods.  Ma then directed that TD-3 should acknowledge in writing the receipt of bills of lading from the finance department and East Trust should also be required to give the same acknowledgment when it received the bills from TD-3.

24.  Ma also directed the defendant’s subordinate to prepare a list of purchases and payments by East Trust.  He then entered into another credit agreement with East Trust on 19 February 1997.  This agreement reduced the credit limit to $4 million.  There was in the 1996 agreement an extra $1 million credit for purchases from a particular supplier of the plaintiff.  This $1 million credit was not repeated in the 1997 agreement.  East Trust also admitted in the 1997 agreement the total outstanding purchase price at $7,046,859.40.  It also agreed to repay the same by several instalments in 1997. 

25.  Since East Trust had admitted in the 1997 agreement that the total outstanding purchase price was at $7,046,859.40, Ma was no longer worried about the lack of evidence of delivery of bills of lading to East Trust.  He also hoped to make use of this agreement to reduce the plaintiff’s exposure to East Trust step by step.  However, East Trust only repaid $1 million of the outstanding sum and left a balance of $6,046,859.40 unpaid.  The plaintiff therefore started HCA 7059/1997 against Yeung trading as East Trust in July 1997.

26.  Yeung filed various witness statements in this action.  In a statement dated 5 September 2003, Yeung alleged that the defendant had misappropriated certain sums of money through cheques that were given by Yeung to the defendant for paying the plaintiff.  These sums constitute the abandoned claim of $2,245,037.96.  That action was tried in March 2004.  Yeung was adjudged liable to the plaintiff as claimed.  No credit was given to him on account of his story relating to the sum of $2,245,037.96.  (For that reason, the plaintiff abandoned its claim against the defendant for this sum in this action.)  Despite the judgment, Yeung made no payment to the plaintiff.  He was then adjudged a bankrupt on 1 July 2004.

The defendant’s dealings with East Trust

27.  After the trial of HCA 7059/1997 and as a result of the evidence of Yeung, the plaintiff then made some investigations and discovered some information showing that the defendant might have committed certain irregularities in her dealings with East Trust. 

28.  Regarding three of the cheques alleged by Yeung to have been intercepted/misappropriated by her, her explanation was that they were for payment by Yeung to her former husband Kwan and they were paid into her for convenience as her former husband was often on business trip.  When Ma learnt about this, he was more suspicious of her as she had told him that her husband was an officer of a public body and was not a businessman.  Furthermore, her allegation that she had divorced from her husband in 1995 also made Ma felt strange as she and her husband had joined the plaintiff’s staff tour to Australia in 1996 as husband and wife.  Half of her husband’s expenses were paid for by the plaintiff on account of their relationship.  The plaintiff further discovered that the defendant had on one occasion used her own cheque to pay $300,000 to the plaintiff on account of the purchase price due from East Trust.

The various East Trusts and related businesses 

29.  The searches by the plaintiff’s solicitors at the Company’s Registry and the Business Registration Office also revealed that there were a number of East Trusts and other companies in which the defendant, her husband Kwan, Yeung, Wong and others were interested.  The searches at the Land Registry also showed that the defendant and Kwan had mortgaged their matrimonial home to secure banking facilities for some of these companies.  The result of these searchers are summarised below.

30.  There were four businesses called East Trust Development Company.  They are hereinafter called “the 1st East Trust”, “ the 2nd East Trust” and so on.  For the 1st East Trust, no business registration record could be found.  It was the only East Trust that had operated from a unit in Everest Industrial Centre on Kwun Tong Road.  It also seemed to be the oldest East Trust. 

31.  The first piece of evidence of its existence is an invoice dated 26 June 1990 issued by the plaintiff to it at the Kwun Tong address.  The invoice was for the purchase from the plaintiff of 19.96 metric tons of PVC resin.

32.  The 2nd piece of evidence is a mortgage dated 19 March 1991 executed by the defendant and Kwan mortgaging their matrimonial home in Elegant Garden in Western in favour of a bank for credit facilities for it.  The mortgage stated that it was solely owned by Wong and operated at the Kwun Tong address.  The mortgage was released on 4 March 1993.  There is no other evidence of its existence.

33.  No one knows when it commenced business or ended.  It was probably in operation between 26 June 1990 and 19 March 1991.  The only other significant matter about this company is its sole proprietor Wong who had been involved with other businesses also called East Trust.  There is no evidence that it had any further business with the plaintiff after 19 March 1991, the date of the aforesaid mortgage.

34.  The 2nd East Trust was owned by a limited company called IBI Corporation Limited (“IBI”).  It was acquired by the defendant and a Mr Hui Man Long (“Hui”) on 15 January 1991 with each holding one share.  They were appointed directors on 20 February 1991.  On 10 February 1992, the defendant resigned from IBI’s board.  Her husband Kwan and Wong were appointed to this board and made its shareholders on the same day.  From then onwards, the shareholders and directors of IBI were Hui, Kwan and Wong with each holding one share.

35.  The registered office of IBI was initially at Au Pui Wan Street, Fotan, the New Territories.  After Kwan and Wong had joined it, it moved the registered office to Nan Fung Industrial City in Tin Hau Road, Tuen Mun on 13 February 1992.  It again moved the registered office to a flat in Parkview Mansion, Causeway Bay on 15 January 1995.  This was also the residential address of Mr Hui.  The Registrar of Companies struck it off the register of companies under section 291 of the Companies Ordinance on the ground that it was not carrying on business.  It was dissolved on 14 September 2001.

36.  There is evidence to suggest that the 2nd East Trust had done some business with the plaintiff in March and April 1994 when its registered office was at Nan Fung Industrial Centre (see pages D136 and D137).  

37.  Before dealing with the 3rd East Trust, I will deal with the 4th East Trust first.  It was a partnership business.  The business registration records show that it commenced business on 15 March 1993.  Its address was at Ka Ming Factory Building on Castle Peak Road.  There were six partners including Wong.  The other five partners were not related to this action.  All six partners retired on 7 September 2000 and the partnership should have dissolved on that day.  The business registration records show that it had not changed its place of business throughout.  There is no evidence of any dealing between this East Trust and the plaintiff.

38.  Yeung was the sole proprietor of the 3rd East Trust.  It was the most important one.  The business registration records show that it had commenced business on 4 July 1992.  Its place of business was at On Kay Court, Ngau Tau Kok. 

39.  On 4 March 1993, the defendant and Kwan procured a release of their 1st mortgage, which was in favour of the 1st East Trust owned by Wong.  On the same day, they mortgaged their flat again to support credit facilities of up to $1 million for the 3rd East Trust, the address of which was still at On Kay Court, Ngau Tau Kok.

40.  The history of the 3rd East Trust then intertwined with that of the 2nd East Trust as operated by IBI.  Yeung on 24 May 1993 bought a unit no. 3 on 22nd floor of Luen Cheong Can Centre in Tuen Mun (hereinafter called “Unit 3”).  Kwan bought unit no. 4 on the same floor (hereinafter called “Unit 4”) on the same day.  The two assignments recorded the addresses of Yeung and Kwan at the then registered office of IBI in Nan Fung Industrial Centre.  This shows a connection between Yeung and IBI though he did not appear as a shareholder or director of this company.  Kwan was of course a shareholder and director of IBI at that time.  On 12 September 1994, Yeung changed the place of business of the 3rd East Trust from On Kay Court, Ngau Tau Kok to Unit 3.  

41.  On 29 November 1994, the defendant and Kwan executed a further charge of their flat to support an increase of credit facilities to the 3rd East Trust of up to $2 million. 

42.  All these show a very close relationship between Yeung on the one hand and Kwan and the defendant on the other.  The copy cheques at pages D168-D169, D171, D173-D176, D179 and D182-D183 as signed by Yeung show that the 3rd East Trust was doing business with the plaintiff between 23 January 1995 and 16 June 1995.  The 3rd East Trust also entered into two written revolving credit agreements with the plaintiff on 15 January 1996 and 19 February 1997 and its address was still at Unit 3 on those days.

43.  When Yeung was sued by the plaintiff in HCA 2059/1997 on 7 July 1997 for the debt of the 3rd East Trust, he was still operating at Unit 3.  He sold Unit 3 to Wong on 31 March 1999, but continued to operate therefrom.  When he made affirmations in HCA 2059/1997, he used Unit 3 as his address.  The business registration records show that the 3rd East Trust continued to operate therefrom until its cessation on 12 September 2002.  The mortgage by the defendant and Kwan of their flat in favour of the 3rd East Trust was released on 5 May 1999.  

44.  The evidence shows that the plaintiff had traded with the 1st East Trust sometime in 1990.  Its sole proprietor was said to be Wong.  There are two contract calculation notes made in February 1992 in relation to deals with East Trust, but it is not clear whether it was the 1st or 2nd East Trust.  There is also a contract calculation note dated 4 July 1992.  Again, it is not clear whether it was a deal with which of the 1st to 3rd East Trusts.  By the address on the letterheads, the 2nd East Trust as owned by IBI appeared to have traded with the plaintiff in March and April 1994.  Its representative also appeared to be Wong.  Though Yeung’s 3rd East Trust was registered on 4 July 1992 and had banking facilities at least from 4 March 1993 onwards, it is unclear as to when it had started trading with the plaintiff.  The copy cheques and revolving credit agreements however prove that it had traded with the plaintiff from 23 January 1995 to sometime in 1997 before it was sued by the plaintiff on 7 July 1997.  There is no evidence to suggest that the 4th East Trust had any dealing with the plaintiff. 

45.  Apart from the evidence relating to the 2nd and 3rd East Trust and the mortgage and further charge in favour of the 3rd East Trust, there is other evidence showing a close relationship between Yeung on the one hand and Kwan and the defendant on the other.  Yeung registered a business called King Tai Company on 13 September 1993.  The place of business was at Unit 3.  There were dealings between this King Tai and the plaintiff between 4 September 1993 and 5 January 1994 (see pages D125–D130 and D134).  In fact the evidence suggests that the plaintiff and this King Tai might have done some business in June 1993.  Its letterheads stated Units 3 and 4 as its place of business. 

46.  Yeung put an end to his King Tai on 31 March 1995.  Before he did this, Kwan started another King Tai Company a few days earlier on 28 March 1995.  The place of business was at Unit 4.  This King Tai came to an end on 28 January 1998. 

47.  Between 13 September 1993 and 31 March 1995, Yeung was the owner of both the 3rd East Trust and King Tai.  Between 12 September 1994 and 31 March 1995, both the 3rd East Trust and this King Tai operated from Unit 3.  It is the defendant’s evidence that she knew only one East Trust which was owned by Yeung.  If this evidence is considered together with the documentary evidence, then Yeung was trading with the plaintiff in the names of East Trust and King Tai between 13 September 1993 and 31 March 1995.

48.  Whilst Kwan was still having his King Tai Company at Unit 4, he, Yeung and Wong on 12 December 1995 procured the incorporation of a company called Eastern Chemical Company Limited (hereinafter called “Eastern Chemical”).  They were the subscribers.  The registered office was at Units 3 and 4.  Yeung then transferred his shares to Wong on 25 February 1999.  He also sold Unit 3 to Wong on 31 March 1999.  When the defendant and Kwan procured the release of their mortgage on 5 May 1999, which was for credit facilities in favour of Yeung’s 3rd East Trust, they executed another mortgage on the same day to support credit facilities for Eastern Chemical.  Wong and Kwan also executed mortgages over their Units 3 and 4 to support credit facilities for this company.

Using the plaintiff’s name to purchase materials for Wong

49.  The plaintiff also discovered that the defendant had in the plaintiff’s name ordered three containers of chemical industrial materials from another importer for Wong.  Wong took delivery of these containers on 1 September 1995 and the price of US$69,600 was paid by a cheque drawn by the defendant on her account and dated 4 September 1995.

The plaintiff’s response to the defendant’s alleged conduct

50.  Ma said unequivocally in his evidence that if he was aware of the mortgage executed by the defendant and her husband over their matrimonial home to support banking facilities for East Trust, he would not have allowed the plaintiff to do business with it.  In that event, the plaintiff would not have suffered the loss of $6,046,859.40.  Ma also regarded the plaintiff as having a duty to disclose her husband’s business relationship with Yeung, Wong and East Trust.  Ma also said that the account of East Trust was all along monitored by the defendant.  If any delivery of goods on credit would have brought the outstanding amount to beyond the credit limit, the defendant should have withheld the delivery pending payment for the previous deals or required delivery against payment.

51.  Ma’s evidence was clear and straightforward.  Despite having retired in January 1998, he has a good memory of what had happened when he was still with the plaintiff.  He was not shaken in cross-examination. 

The other plaintiff’s witness

52.  The plaintiff also called another witness Mr Wang Shi.  But his evidence is mainly based on what he has read from the documents produced in this action and what his colleagues told him.  He basically confirmed Ma’s evidence.

ANALYSES OF THE DEFENDANT’S EVIDENCE AND FINDINGS

53.  The defendant gave evidence by herself.  She denied of having received the Manuel or the Regulations.  She challenged the plaintiff to produce written acknowledgments of her receipt of the documents and her agreement to abide by their terms. 

The defendant knew the credit status of East Trust

54.  She denied the responsibility for the day-to-day operation of the account of East Trust.  She said that was the duty of the manager Madam Wong Yuet Mui of the finance department.  She said she only became aware of East Trust’s indebtedness at over $7 million upon the signing of the credit agreement on 19 February 1997.

55.  Her claim of ignorance of the credit status of East Trust did not sit well with what she said in cross-examination and the documentary evidence.  When she said Ma had to ask the finance department for the credit status of East Trust when approving an order of purchase on credit, she was asked why did she not provide such information to Ma.  Her answer was that if Ma should have asked her, she would have done so.  In fact, she had all the information from which East Trust’s credit status could be ascertained.  Her department had the particulars of the purchases.  Her department also made all the deliveries to East Trust.  Her department also received the cheques from East Trust and passed them to the finance department for payment of the goods.

56.  The plaintiff also produced a number of copy cheques bearing her directions to the finance department on how the moneys in the cheques should be applied.  She denied that these were her instructions to the finance department.  She said these were TD-3’s records or references of East Trust’s payments that she obtained from the finance department.  Even if she were right that these were not instructions but were only her records of payments, that still showed that her department had the records of payments by East Trust.  She could therefore ascertain the credit status of East Trust.  Her claim of ignorance cannot stand.

57.  I also find that the copy cheques bearing her handwriting or that of her subordinate and endorsed with her signature were instructions from her to the finance department.  These instructions told the finance department how to apply money in the cheques for payment of different goods under different contracts.  I do not accept her explanation that these were merely the records or references of payments by East Trust as kept by TD-3.  If she should have decided to keep a record of how much and which of the goods had been paid by East Trust, she would have kept them systematically in a book or a file and not haphazardly in such copy cheques.  East Trust was a longstanding client with tens of millions of dollars of business each year.  The defendant could not have kept a proper record of all its payments in this unmethodical way.  These instructions also show that East Trust was tendering the cheques with payment instructions to TD-3 and the defendant relayed them to the finance department.

58.  The defendant’s counsel, in order to argue that TD-3 did not know the credit status of East Trust, referred to one incident in Ma’s evidence where Ma had told TD-3 to seek instructions from the finance department on how East Trust should pay for a particular proposed transaction.  But that transaction was to be done at a time when a revolving credit agreement had expired and a new one had not yet been made.  It was not a transaction that depended on how much credit was available.  It was a case of no credit being available.

The defendant allowed East Trust to go beyond the credit limit

59.  Both Ma and the defendant said that Ma would find out if a proposed transaction with East Trust would bring the credit to beyond the limit before approving it.  Ma said he got the credit information from the defendant.  The defendant instead said that Ma got the information form the finance department.  Since I have found that the defendant had all the information to enable her to determine East Trust’s credit status, I see no reason why Ma should have asked the finance department for such information.  This is so regardless of whether the finance department could provide such information instantly or would require a day or two to do so.  I therefore find that it was the defendant who advised Ma on the credit status of East Trust when Ma considered a proposed transaction with East Trust. 

60.  This finding would lead to a finding that the defendant had the duty to monitor the credit status of East Trust as Ma was relying on her for such information.  These findings would also lead to a further finding that she had knowingly allowed East Trust to order and take delivery of goods from the plaintiff to beyond the credit limit as she had to advise Ma about East Trust’s credit status every time an order was proposed. 

The defendant’s payment for East Trust

61.  Regarding her cheque dated 30 April 1996 for $300,000 for payment on behalf of East Trust to the plaintiff for price of goods sold, she said she issued the cheque at the request of her husband.  She admitted that she knew it was for payment on behalf of East Trust, but she refused to provide any more information on this cheque on the ground of no recollection.  Bearing in mind that her salary was just about $10,000 per month and $300,000 was a substantial sum, her alleged inability to recall any further information was unconvincing.  She probably had some money dealings with Yeung which resulted in her drawing this cheque to pay $300,000 on Yeung’s behalf.

The defendant’s receipt of cheques of East Trust

62.  Regarding the fact that some cheques of East Trust had gone into her bank account, she said she was merely receiving payments on behalf of her husband who was often on business trips, but she could not explain why the cheques in question could not have been made payable to her husband and for her to deposit them into his bank account direct.  If payment to her husband should have been made in this manner, it would have saved her trouble of transferring the money from her account to her husband’s account.  This explanation is again unconvincing.  It is probable that these cheques were paid by East Trust to her in connection with some dealings between East Trust and her.  She had not disclosed such dealings as they could amount to breaches of the rules in the Manual and/or the Regulations.

Ma’s visit to East Trust

63.  She also denied of having taken Ma to the office and warehouse of East Trust.  If she was right, then Ma must have gone without her company.  Alternatively Ma had not been there but only fabricated the story of paying a visit with her.  If Ma had indeed been to East Trust’s place but not in the defendant’s company, then why did Ma not go with the defendant?  Ma had no suspicion about the defendant at that time.  There was no need for him to visit East Trust behind the defendant’s back.  Even when the plaintiff sued East Trust in 1997, the plaintiff still made no attempt to involve the defendant.  Regarding the possibility of Ma fabricating the visit.  I do not think there is any evidence for any apparent motive for the fabrication.

64.  It is also clear form Ma’s evidence that it was after this visit that he found that East Trust was just a modest operation.  He thought that there was something wrong with the dealings between the plaintiff and East Trust.  He then found out that there was excess in credit for East Trust and East Trust had never acknowledged receipt of delivery of bills of lading.  What followed was the credit agreement of 19 February 1997 which required Yeung to pay off the $7 million odd outstanding price by instalments and reduced the credit limit from $5 million to $4 million.  Yeung only paid $1 million and was sued by the plaintiff a few months later.  There was still no suspicion about the defendant.  The suspicion only came into being when Yeung filed a witness statement on 5 September 2003.

65.  Ma’s discovery of the modest scale of East Trust was thus the trigger for the subsequent events leading to Yeung being sued.  If there was in fact no visit by Ma to East Trust, then there is nothing in the evidence to explain how these events were triggered off.

66.  In fact, it was not surprising for Ma to have asked the defendant to arrange the visit to East Trust so that he could understand East Trust better.  The reason being that the plaintiff and East Trust had been in business for many years and East Trust was enjoying a $5 million unsecured revolving credit from the plaintiff.  For such facilities to be granted by a bank, security of a substantial value would have been required.  All in all, I accept Ma’s evidence that he had requested the defendant to arrange a visit to East Trust and one was indeed arranged by the defendant in October/November 1997.  I do not accept the defendant’s evidence on this.

Using the plaintiff’s name to purchase materials for Wong

67.  Regarding the purchase in the plaintiff’s name of three containers of industrial chemical materials from an importer at US$69,600, the defendant’s only answer was no recollection of having issued the cheque.  However, her name card was faxed to the importer on 1 September 1995 for the purpose of future reference.  The importer had notified her and her subordinate Miss Lee Bo Sim of the arrival of the goods.  The invoice was issued to the plaintiff for her attention.  These documents show that she was deeply involved in this transaction and her claim of no recollection again does not sound convincing.

Mortgage of matrimonial home and the defendant’s positions of conflict of interest

68.  The defendant together with her husband had mortgaged their matrimonial home to support banking facilities for Yeung’s East Trust.  The mortgage dated 4 March 1993 was for $1 million.  It was increased to $2 million by a further legal charge dated 29 November 1994.  She has denied knowledge or agreement to the plaintiff’s Manual and Regulations, hence she denied that the making of the mortgage and further charge constituted any breach of the terms therein.

69.  She further said that the flat was purchased with her husband’s money though he put it under both their names.  She therefore thought that the flat belonged to her husband.  Hence, she executed the mortgage upon his request.  She was aware that this mortgage was to assist Yeung. 

70.  In fact, before this mortgage was executed, she and her husband had on 19 March 1991 mortgaged their flat for unlimited banking facilities in favour of the 1st East Trust owned by Wong.  Her liability for Wong’s East Trust was then unlimited.  It was very likely that she and/or her husband had some interest in that business.  Otherwise, I cannot see why she and her husband would have exposed themselves to such liability.  That East Trust also had business with the plaintiff in 1990.  It seems that the defendant was already in a position of conflict of interest then.  I would not accept her explanation that she only signed the mortgages as told by her husband.  Both of them were represented by solicitors.  She was then earning no more than $10,000 per month.  It is unthinkable that she would have exposed herself to such liability without full knowledge of it and without a good reason for so doing.

71.  Another instance of her being in a position of conflict of interest was when the plaintiff sold industrial chemical goods to the East Trust operated by IBI.  IBI was initially acquired by her and Hui.  She later transferred her interest to her husband Kwan.  Wong also joined in at that time.  There was evidence that the plaintiff had dealt with this East Trust in March and April 1994.  She again tried to defend herself by relying on ignorance, but I would not accept it because she was involved in IBI when it was first acquired. 

Granting of credit to East Trust

72.  On the granting of credit to Yeung’s East Trust, she said Ma granted the credit because of his desire to expand the business of TD-3 and Yeung’s East Trust was one of those good clients who were given credit.  She further said that Ma would negotiate with Yeung in a meeting every time the credit limit was reviewed.  However, she also agreed that Yeung’s East Trust was the only Hong Kong customer which had been given a revolving credit by a written agreement and the credit limit was reviewed yearly.  This company was also introduced by her to do business with the plaintiff.  She and her husband had mortgaged their matrimonial home to assist it.  It appears that she and/or her husband had some sort of interest in this company.  It was more likely than not that she had recommended East Trust to the plaintiff for the grant of revolving credit.  If the revolving credit was granted on Ma’s initiative for the purpose of expanding the business of TD-3, then East Trust should not have been the only Hong Kong customer to benefit from such favour.

73.  Furthermore, the plaintiff’s gross profit margin from the sales to East Trust was no more than 1.2% and the annual gross profit was at about ½ million at the best of times.  Such does not appear to warrant the substantial revolving credit as granted.  Ma’s evidence was that he just acted on the defendant’s recommendations.  That sounds more credible.  I accept Ma’s evidence.  In coming to this conclusion, I do not overlook Ma’s evidence that he had been told by the defendant that if the business between the plaintiff and East Trust could be increased, the plaintiff would benefit from a better standing with its own suppliers.  However, Ma had also said that the defendant had commended the reliability of East Trust and had given good reports for it.  If not, I cannot see any point for the plaintiff to expand the business with East Trust.  A good standing with the suppliers cannot be built by selling more goods to bad customers.  According to Ma, the defendant had painted to him a promising picture of East Trust.

Relationship between the defendant/her husband and Yeung

74.  The business relationship between the defendant, her husband and Yeung was a very close one.  The mortgage of the matrimonial home which was used to support banking facilities for Yeung was only released on 5 May 1999.  Yeung had signed blank cheques for the defendant to fill in the amount to pay the plaintiff and her husband.  She also said that she had acted as a go-between for her husband and Yeung in their payments by one to the other.  There were also substantial dealings between her husband and Yeung.  The evidence shows that between 2 August 1995 and 13 March 1996, her husband had paid $46 million to Yeung’s East Trust.

The defendant was bound by the Manual and the Regulations 

75.  Ma in his evidence showed that he had treated the Manual as an important document.  He had numbered them before distributing them to the staff.  He also recorded the numbers in a list containing the information of the staff.  For the Regulations, they were made by the ICAC and he had invited the ICAC to promote the virtues of honesty and fidelity to his staff.  He was keen to promote such virtues.  I accept his evidence that he had taken care to ensure that every member of the staff including the defendant had received a copy each of the Manual and the Regulations.  I find that the defendant had received both documents when they were distributed.  I also find that she had received these documents without demur and was thus bound by their terms as quoted above in addition to her common law duties of good faith and fidelity to the plaintiff (see Williams v. Raffey Bros. & Nicholls (Contractors) Ltd. [1990] 2 WLR 1153 at 1165 C to H and UBC (Construction) Limited v. Sung Foo Kee Limited [1993] 2 HKLR 207).

Rejection of defendant’s evidence and resolution of disputes

76.  The defendant is a very capable person.  She managed the plaintiff’s TD-3 as its manager for about five years.  She did so to the satisfaction of her seniors.  However, she has performed poorly in this trial.  A number of matters were prima facie against her and required her explanations.  Many of her answers were that she could not recollect or she had no knowledge.  However, I do not accept that she could be so ignorant.  My analyses above show that her claims of ignorance were unconvincing.  Considering her evidence as a whole, I come to the view that she is a poor witness.  I reject her evidence in so far as it is in conflict with that of Ma.  I find that she had, unbeknown to the plaintiff, placed herself in positions of conflict of interest and had breached the plaintiff’s rules and regulations.

77.  A number of issues have been raised in this action.  I have dealt with most of them.  For matters of dispute, I have resolved them against the defendant.  I would however make it clear that I have not taken the evidence of Yeung in HCA 7059/1997 into consideration when I resolve these disputes.

78.  Though a number of issues have been raised, not all of them relate directly to liability.  However they all relate to the defendant’s credibility and her having repeatedly placed herself in situations of conflict of interest.  The situations include her money dealings with Yeung, her purchase of industrial chemical materials from an importer for Wong, her mortgage of the matrimonial home for Wong’s East Trust and then for Yeung’s East Trust, her dealings on behalf of the plaintiff with Wong’s East Trust or IBI’s East Trust, her dealings on behalf of the plaintiff with Yeung’s East Trust, her recommending Yeung’s East Trust to Ma for revolving credit and for the increase of the credit limit for several years and her allowing Yeung’s East Trust to buy and take delivery of goods from the plaintiff on credit to beyond the credit limit.

The defendant’s breaches of duty

79.  When she dealt with IBI’s East Trust, she had breached regulation no. 8 on conflict of interest as referred to above.  When she mortgaged her home for the benefit of Wong’s East Trust and subsequently of Yeung’s East Trust, she breached regulation 9 on loans to suppliers.  Under the Manual, she had the duty to protect the plaintiff’s interest and to serve the plaintiff loyally and faithfully.  However, she had also breached these duties when she put herself in situations of conflict of interests as referred to above.  Her conduct also amounted to breaches of her common law duties of good faith and fidelity to the plaintiff. 

Finding on liability

80.  Though she had breached her duties in many of her dealings, it was her breaches relating to Yeung’s East Trust that had led to the loss suffered by the plaintiff.  If she had not committed these breaches and not placed herself in the positions of conflict relating to Yeung’s business, she would not have recommended to Ma for credit to Yeung or she would have revealed to Ma the business involvement between her/her husband and Yeung.  In that event, the plaintiff would not have granted any credit to Yeung’s East Trust or would have stopped any business with it.  In either case, the plaintiff would not have suffered the loss.

81.  Counsel for the defendant submitted that the plaintiff had not put any blame on the defendant after her resignation in June 1997.  In fact no blame was laid at the defendant’s door until after Yeung had filed his witness statement in September 2003.  It was that witness statement that started the train of inquiry that unearthed her irregularities.  Hitherto, nobody thought that she had misconducted herself.  Suspicion came when the intricate business relationship between her and/or her husband and Yeung and their mortgage in favour of Yeung’s business were discovered. 

Conspiracy

82.  The plaintiff has an alternative claim of conspiracy against the defendant, Yeung, Kwan and/or Wong.  The claim says that they with intent to injure or cause loss to the plaintiff by unlawful means conspired together to carry out the defendant’s breaches of duty and to conceal the same from the plaintiff.  However, the defendant is the only party sued for this.  Though the defendant had breached her duties in relation to the plaintiff’s customers other than Yeung’s East Trust, there is no evidence that Wong’s East Trust, IBI’s East Trust, Kwan’s King Tai or Eastern Chemical was in any way connected with Yeung’s East Trust or with one another.  There is also no evidence that Wong had anything to do with the defendant’s breaches of duty.  He was just Yeung’s manager.  There is no case of conspiracy against Wong.

83.  Though Kwan might have some interest in Yeung’s East Trust, that is insufficient to make him a party to the alleged conspiracy.  There is no evidence that he was a party to the defendant’s breach of duties in relation to Yeung’s East Trust.  There is no evidence to show that Kwan was aware of the plaintiff’s Manual or Regulations.  Kwan might have known that Yeung was given credit by the plaintiff, but that is not enough to make him a party to the conspiracy. 

84.  There is also no evidence to show that Yeung was aware of the Manual or the Regulations and no ground to allege that he was a party to the defendant’s breach of duties.  I do not think the plaintiff has established enough evidence to support this claim against him.

JUDGEMENT

85.  On the basis of my findings above, I hold that the defendant is liable to pay the plaintiff $6,046,859.40 by reason of her breaches of the terms of employment aforesaid.  I also order her to pay the plaintiff interest on this sum at the rate of 2% over the best lending rate of the Hong Kong Bank from 7 July 1997, the date when the plaintiff sued Yeung, to today.

86.  I also make a costs order nisi that the defendant do pay the plaintiff the costs of this action.