TIN KWONG INTERNATIONAL ENTERPRISE CO LTD AND OTHERS v. SAN TUNG AND ANOTHER

HCA7165/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7165 OF 2000

------------------------------

---------------------

-----------------------

J U D G M E N T

-----------------------

Introduction

1. The plaintiffs are all limited companies incorporated in Hong Kong.  Mr Sun Tian Gang (“Mr Sun”) is a 50% shareholder of the 1^st plaintiff and a majority shareholder of the 2^nd and 3^rd plaintiffs.  He is also the director and general manager of each of the plaintiffs. 

2. The 1^st defendant was at all material times the director and assistant general manager of the plaintiffs.  The 2^nd defendant is his wife.

3. Between 27 October 1999 and 14 February 2000, the 1^st defendant received a total of HK$63,338,216 (“the Sums”), which were monies deposited in his bank account no.079-921-0-0021778 with Po Sang Bank (“the 1^st defendant’s bank account”) by 14 instalments.  The Sums were subsequently disposed of in various ways.  The plaintiffs commenced these proceedings against the defendants to recover part of the Sums.

The central issue

4. The first and foremost issue in this trial is : who owned the Sum beneficially?

5. It is the plaintiffs’ case that the Sums are their monies.  At the material time, they caused a total of RMB72,601,500 (converted into HK$63,338,216) to be transferred to Hong Kong for their exclusive use and benefits.  The 1^st defendant was instructed to receive them on behalf of the plaintiffs and to deposit the same in the plaintiffs’ bank accounts, and/or to hold upon the same to the order and/or instructions of the plaintiffs.  Accordingly, the 1^st defendant held the Sums upon trust for the plaintiffs.

6. The defendants’ case is this.  They admit that they are not the owners of the Sums.  Neither are the plaintiffs.  The Sums in fact belong to Mr Sun, who controlled the plaintiffs and could single-handedly give directions about the disposal of the plaintiffs’ assets.  Further, they do not admit it was the plaintiffs who caused the Sums to be deposited into the 1^st defendant’s account.  This line of defence is run consistently throughout the trial against the plaintiffs’ claims.

How the Sums were disposed of

7. The plaintiffs’ complaints arose from how the Sums were disposed of.  It is therefore convenient at this juncture to look at the defendants’ case in this respect.

8. In his affirmation filed on 26 September 2000, which is accepted as evidence for the purpose of this trial (“the Affirmation”), the 1^st defendant described how the Sums were paid out as follows :

	Date	Amount (in HKD)		Payee
(1)	24/8/2000	$1,039,659.89		Payment into Court
(2)	27/10/1999	$4,665,600.00		Xinjiang Xingmei Oil Pipeline Co. Ltd (“XXOPL”)
(3)	27/10/1999	$150.00		bank charges
(4)	28/10/1999	$6,998,400.00		XXOPL
(5)	28/10/1999	$150.00		bank charges
(6)	29/10/1999	$700,050.00		Mr Tam Ying Chao (“Mr Tam”)
(7)	29/10/1999	$500,050.00		Mr Tam
(8)	29/10/1999	$500,050.00		Mr Tam
(9)	2/11/1999	$3,110,950.00		Mr Sun
(10)	5/1/2000	$7,783,150.00		XXOPL
(11)	12/1/2000	$5,448,600.00		XXOPL
(12)	18/11/1999	$2,000,000.00		Maxy Oil & Gas Ltd CQ264860
(13)	22/12/1999	$11,000,000.00		Maxy Oil & Gas Ltd CQ264864
(14)	5/1/2000	$981,092.00		Maxy Oil & Gas Ltd CQ264865
(15)	1/2/2000	$4,976,630.47		Okachi Investments (HK) Co. Ltd “Okachi” CQ264811 customer’s advice bought notes
(16)	3/2/2000	$1,041,107.27		Okachi CQ264869 customer’s advice
(17)	28/2/2000	$390,000.00		Vendor of Choi Tien Mansion, 12/F, Flat C Deposit
(18)	28/2/2000	$147,000.00		Koo & Partners, stamp duty at 3% on $4.9 million for the Choi Tien Mansion purchase
(19)	29/2/2000	$2,500,000.00		Maxy Oil & Gas Ltd CQ152131
(20)	1/3/2000	$1,451,726.66		Okachi CQ264870 customer’s advice
(21)	3/3/2000	$3,225,223.88		Okachi CQ152134 customer’s advice bought notes
(22)	6/3/2000	$213,844.23		Okachi CQ152136 customer’s advice
(23)	13/3/2000	$1,465,781.60		Okachi CQ152138 customer’s advice bought note
(24)	28/3/2000	$800,000.00		Koo & Partners CQ152140 further deposit re : Choi Tien Mansion purchase
(25)	28/3/2000	$49,000.00		Midland Realty Ltd CQ152141 estate agent commission re : Choi Tien Mansion purchase and receipt
(26)	29/3/2000	$100,000.00		Geomaxime Holdings Co. Ltd CQ152142
(27)	28/4/2000	$1,000,000.00		Tin Kwong International Enterprises Co. Ltd CQ264879
(28)	9/5/2000	$1,250,000.00		Geomaxime Holdings Co. Ltd CQ264882
		_____________
		$63,338,216.00
		_____________

The plaintiffs’ complaints

9. The plaintiffs initially claimed that the defendants were liable for HK$10,257,547.63.  However, at trial, they accepted the 1^st defendant’s account as aforesaid save and except four sums.  They are :

(1)	Item 1 : the payment into court of HK$1,039,659.89 on 24 August 2000 (“the 1st Sum”).
(2)	Items 6 to 8 : the three purported payments made to Mr Tam on 29 October 1999, totalling HK$170,100.00 (“the 2nd Sum”).
(3)	HK$2,369,251.46, part of the total sum of HK$6,017,737.74 purportedly paid to Okachi on 1 and 3 February 2000 under Items 15 and 16 (“the 3rd Sum”).
(4)	Item 20: the purported payment to Okachi of HK$1,451,726.66 on 1 March 2000 (“the 4th Sum”).

10. The plaintiffs claim that the 1^st defendant is liable to account for the 1^st and 2^nd Sums and the 1^st and 2^nd defendants, the 3^rd and 4^th Sums.  The 1^st defendant is so liable, having breached his fiduciary duties and trust in disposing of them.  The 2^nd defendant is liable as constructive trustee, having knowingly assisted the 1^st defendant in breach of his duties and trust.

Evidence

11. At the trial before me, the plaintiffs called Mr Sun, and one Ms Pui Hiu Yan, the plaintiffs’ manager to give oral evidence.  Their witness statements were ordered to stand as evidence-in-chief.  The documentary evidence that the plaintiffs sought to rely on is not in dispute.

12. The 1^st defendant, though legally represented, was absent throughout the trial.  The Affirmation is by consent admitted as evidence without cross-examination.  The 2^nd defendant chose not to give evidence.

Who owned the Sum beneficially?

13. It is convenient to first dispose of this central issue of who owned the Sum beneficially.  For it is the common defence that the defendants have raised in respect of each of the 1^st to 4^th Sums.

14. Mr Sun’s evidence on the source of the Sums and how the 1^st defendant was put in charge of them can be found in paragraphs 2 to 9 of his witness statement, which read :

“	2.	At all material times, the 1st Plaintiff carried on business of trading and hotel/restaurant investments, the 2nd Plaintiff carried on business of pipe lines for oil crude and natural gas transportation and the 3rd Defendant was the managing company for the Hong Kong operation of the 1st and 2nd Plaintiffs.
	3.	Apart from the business of the Plaintiffs in Hong Kong, I also ran business in China namely transportation of crude oil and natural gas by pipeline though one Xinjiang Xinmex Oil-Pipeline Company Limited (‘Xinmex’) and production of electronic products through Shenshen Caixing Electronics Company Limited (‘Caixing’).
	4.	Both Xinmex and Caixing are companies incorporated in China and I am the 80% shareholder of Xinmex and 90% shareholder of Caixing.  Further I am also the controlling director and person in charge of Xinmex and Caixing.
	5.	Throughout years of hard works and operations, both Xinmex and Caixing have been making excellent profits.  From these profits I was able to establish the plaintiffs and its respective business in Hong Kong.
	6.	As the operation and management of Xinmex and Caixing took the major part of my working hours, I spent most of my time in China.  Therefore and although I was the controlling director and person in charge of the Plaintiffs, I had to delegate the control of the Plaintiffs to someone in Hong Kong whom I could trust to execute the trading policies and directions of the Plaintiffs which from time to time were decided by the plaintiffs’ board of directors in China.  The 1st Defendant was the chosen one to fulfill these tasks.
	7.	I came to know the 1st Defendant in 1998.  In September 1999, the 1st Defendant was appointed by me as the assistant general manager to be fully in charge of the Plaintiffs’ operation in Hong Kong.  In this respect, the 1st Defendant was given full autonomy in respect of the Plaintiffs’ operation in Hong Kong under the expectation that he would exercise such powers at his utmost good faith to the plaintiffs.  To facilitate the Plaintiffs’ operation and to make good my aforesaid absence in Hong Kong, the 1st Defendant was also authorized to make decisions on his own within the limit of the Plaintiffs’ trading policies and directions aforesaid, and to operate various bank accounts of the plaintiffs in Hong Kong.
	8.	On or about 29 September 1999, Xinmex, Caixing and the Plaintiffs have decided to transfer a large sum of money from China to the Plaintiffs in Hong Kong as investment (Annexure 2).  In this respect and as the actual person in charge of the plaintiffs in Hong Kong, the 1st Defendant suggested that he could arrange a PRC company to receive the aforesaid amount in RMB from Caixing and at the same time, this PRC company will arrange for the equivalent of Hong Kong dollars to be deposited into the plaintiffs’ bank accounts in Hong Kong.
	9.	The 1st Defendant’s suggestion was accepted and approved by Xinmex, Caixing and the plaintiffs in China.  Therefore on divers dates between October 1999 and February 2000, a total sum of RMB72,601,500.00 was so converted into Hong Kong currency in the sum of HK$63,338,216.00 (Annexure 3) and was then transferred to Hong Kong.”

15. Annexure 2 that Mr Sun referred to above is the minutes of a directors meeting of one of the plaintiffs’ group of companies dated 29 September 1999.  In Part 4 of the minutes, Mr Sun was asked as director to handle the group’s investments in Hong Kong and to implement the listing of one of the group companies in Hong Kong.  The capital required for such listing in the sum of HK$40 million would be raised by the board of directors.  On the face of it, it is not directly relevant to the Sums.  I am not going to attach any weight to it.

16. Annexure 3 is however more telling.  It included a summary of the 14 instalments deposited into the 1^st defendant’s bank account between 27 October 1999 and 14 February 2000 by one Tin Kwong (Canada) Company Limited, a company owned by Mr Sun.  This summary was prepared by the 1^st defendant.  The other documents included in Annexure 3 are applications made by Caixing to a bank in the Mainland for moneys to be transferred to another company in Shenzheng.  They showed the source of the Sums, which is Caixing.

17. The defendants’ case on ownership of the Sums is not borne out by any documentary evidence.  Quite to the contrary, the above documentary evidence in Annexure 3 is fatal to their case.  The summary, which the 1^st defendant prepared, did not refer to Mr Sun as the owner.  Caixing’s applications to the bank clearly showed that the Sums did not belong to Mr Sun as alleged.  The defendants have not offered any explanation at all on these documents.

18. In fact, the defendants’ case of ownership is premised on the mere assertion that it was Mr Sun “who could foretell [him] as to when the money would come and where the money should go] : see paragraph 3 of the Affirmation.  This assertion, even if true, does not assist the defendants.  For Mr Sun, as the general manager of the plaintiffs, was obviously in a position to give such directions to the 1^st defendant, his subordinate.

19. I am fully aware of the fact that the plaintiffs have not produced any further documentary evidence to prove ownership of the Sums.  But it is capable of being supported by the documentary evidence available, which is not challenged.  I am also aware of the fact that Mr Sun’s evidence in certain aspects is not entirely satisfactory.  But those matters are minor and, in my view, do not affect the veracity of his evidence on the issue of beneficial ownership of the Sums.

20. For the above reasons, I am satisfied that on a balance of probabilities that the Sums belonged to the plaintiffs beneficially and I so find.

21. That disposes of the central issue.

The 1^st defendant’s duties

22. I next turn to another general issue, which is this.  Did the 1^st defendant hold the Sums as a trustee for the plaintiffs?

23. The 1^st defendant accepted that he did owe a legal duty to Mr Sun who, on his case, was the beneficial owner of the Sums, to explain their whereabouts.

24. I have already found that the Sums belonged to the plaintiffs beneficially.  On the evidence before me, it can be hardly disputed, and I so find, that the 1^st defendant received the Sums on behalf of the plaintiffs.  Thus, I find that the 1^st defendant did hold the Sums as trustee for the plaintiffs and owed them fiduciary duties as contended by them.

The 1^st Sum

25. Having disposed of the general issues, I now consider the 1^st to 4^th Sums individually.  I will begin with the 1^st Sum.

26. The 1^st defendant made the payment into court after the plaintiffs had commenced this action.  He did it because he did not accept that the money belonged to the plaintiffs.  This is his only defence.

27. Now that I have found in favour of the plaintiffs on ownership, there is no defence in respect of the 1^st Sum.  I find that the 1^st defendant is liable for it.  (I have been asked by the parties not to make any order for payment out.)

The 2^nd Sum

28. The 1^st defendant’s defence is that the money was paid to Mr Tam pursuant to Mr Sun’s oral instructions, which Mr Sun denied.

29. The 1^st defendant’s case is nothing but a bare assertion.  He has failed to explain in the Affirmation the circumstances under which Mr Sun had allegedly instructed him to do so.  Further, his case is contradicted by his own documents.  According to the relevant bank records for the bank drafts referred to in the Affirmation, the payee of these payments was the 1^st defendant himself.  The 1^st defendant has not explained why that was the case.  His defence must fail.

The 3^rd Sum

30. The 3^rd Sum arose from an arrangement for trading in securities reached between Mr Sun and the defendants in or about December 1999.  The plaintiff’s case is this.  A securities account with Okachi was opened in the name of Ms Pui (“Ms Pui’s Securities Account”).  Ms Pui was however a nominal owner only, holding the securities and proceeds arising from the trading for the plaintiffs.  The 2^nd defendant was to monitor and control the sale and purchase of securities through Ms Pui’s Securities Account.  Ms Pui opened a bank account in her name.  Proceeds from her Securities Account with Okachi could then be transferred into it.  Ms Pui had pre-signed a book of 25 blank cheques.  She then passed the cheques to the 2^nd defendant so that the proceeds deposited in her bank account could be withdrawn by the 2^nd defendant and then re-invested into either Ms Pui’s Securities Account or the trading account opened in the name of Mr Sun with Okachi or to be paid into the plaintiffs’ bank accounts.  The tenor of the evidence of Mr Sun and Ms Pui is that the 1^st defendant was also involved in the trading through Ms Pui’s Securities Account.  I will call this the Arrangement below.    

31. The defendants’ case on the Arrangement did not differ from the plaintiffs except on two aspects.

32. First, Mr Sun had agreed that he would bear all the losses and the defendants would be entitled to half of the profits generated from such trading activities.  This Mr Sun denied.

33. Second, the trading through Ms Pui’s Securities Account was made on behalf of Mr Sun and not the plaintiffs.  This point must fail in light of my finding on the Sums’ ownership. 

34. The plaintiffs’ version of the events is supported by the evidence of Mr Sun and Ms Pui, which I accept.  I therefore find in favour of the plaintiffs on the Arrangement.  I further find that the defendants could not dispose of the moneys with Ms Pui’s Securities Account or her bank account to benefit themselves.  The 1^st defendant must hold those monies as trustee for the plaintiffs and account for the same.  (The 2^nd defendant was similarly under such duties.  But this is not the plaintiffs’ pleaded case.  In the absence of a proper plea, her liability cannot be founded on breach of such personal duties of hers.)  Given her involvement in the Arrangement, the 2^nd defendant was no doubt fully aware of the 1^st defendant’s said duties.  In dealing with the plaintiffs’ monies involved under the Arrangement, she would be liable if she knowingly assisted in the 1^st defendant’s breach of such duties.

35. The moneys comprising the 3^rd Sum were paid out from Ms Pui’s bank account by cheques, which she passed to the 2^nd defendant under the Arrangement.  A breakdown appears below:

	Date	Cheque No.	Payee	Amount (HK$)
(1)	25/3/00	092176	The 2nd defendant	297,704.68
(2)	28/3/00	092177	The 2nd defendant	464,650.78
(3)	1/4/00	092180	The 2nd defendant	184,266.65
(4)	2/4/00	092181	The 2nd defendant	92,630.97
(5)	5/4/00	092162	The 2nd defendant	385,466.23
(6)	5/4/00	092184	The 2nd defendant	92,691.60
(7)	7/4/00	092183	The 2nd defendant	674,317.33
(8)	22/5/00	092188	The 2nd defendant	25,000.00
(9)	29/5/00	092190	Okachi	2,523.22
(10)	30/5/00	092191	The 1st defendant	46,000.00
(11)	23/6/00	092195	Okachi	104,000.00
			Total	HK$2,369,251.46

36. On the evidence before me, the payments made to the 1^st and 2^nd defendants personally are clearly not justified.  The 1^st defendant had acted in breach of his duties towards the plaintiffs.  The 2^nd defendant, I find, must have known that such payments were not permissible under the Arrangement.  She had thereby knowingly assisted in the 1^st defendant’s breach of his fiduciary duties.  They were liable to account for the same.

37. As to the two payments made to Okachi, there is no evidence to show that they went back to the account of Ms Pui or Mr Sun.  The defendants have not explained further their whereabouts.  The 1^st defendant is obviously in breach of his duties.  The 2^nd defendant must have knowingly assisted him in this regard.  Both of them are thus liable to account.

The 4^th Sum

38. This also arose out of the Arrangement.  The defendants’ defence is that those shares were purchased in the 2^nd defendant’s name for HK$1,451,726.66.  The plaintiffs’ evidence, which I accept, is that the 2^nd defendant had not been authorised to do so.  Thus the defendants are liable.

Conclusion

39. For the above reasons, I will enter judgment against the defendants as follows :

(1)	As against the 1st defendant for :
	(a)	HK$1,309,659.89;
	(b)	HK$ 1,700,150.00.
(2)	As against both the 1st and 2nd defendants for :
	(a)	HK$2,369,251.46;
	(b)	HK$1,451,726.66.

40. The above sums will carry interest at the judgment rate from the date of writ until payment.

41. I will also make an order nisi that the plaintiffs shall have the costs of this action, to be taxed if not agreed.