FINS DEVELOPMENT LTD AND ANOTHER v. TANG YUEN TING

HCA 542/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 542 OF 2009

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REASONS FOR JUDGMENT

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1.  In this action, the Plaintiffs sued the Defendant in respect of three sums of money which had been paid into the Defendant’s bank account by way of cheques issued by them. The particulars of the three sums are,

(a) $1 million under cheque No. 249509 issued by the 1^st Plaintiff on 23 September 2004;

(b) $1 million under cheque No. 249511 issued by the 1^st Plaintiff on 17 October 2004;

(c) $1.7 million under cheque No. 326048 issued by the 2^nd Plaintiff on 2 February 2005.

2.  The trial took place on 21 February 2011.  On 16 March, I dismissed an application by the Plaintiffs to re-open the case and the claims of the Plaintiffs.  The following are my reasons.

3.  The Plaintiffs said the cheques were issued under these circumstances.  The Defendant was a senior business manager of Hantec International Limited [“Hantec”]. She also held herself out to be a representative of Cosmos Hantec Investment (NZ) Limited [“Cosmos”].  The 2^nd Plaintiff was a subsidiary of a mainland listed company called Jingwei Textile Machinery Company Limited [“Jingwei”]. The company is also listed in Hong Kong.  In 2001, it set up the 2^nd Plaintiff in Hong Kong to conduct trading activities here.  The person in charge was Yao Hong [“Yao”].  The 1^st Plaintiff was a company set up by the trading partners of Yao.  Though 2 cheques were issued by the 1^st Plaintiff, Yao told the court that the fund actually came from the 2^nd Plaintiff.

4.  Yao said the 2^nd Plaintiff wanted to engage into foreign exchange trading activities.  After he came to know the Defendant, he set up accounts with Cosmos and conducted trading with funds from the 2^nd Plaintiff. However, the relevant accounts were not held in the name of the 2^nd Plaintiff. Instead they were held in Yao’s name and in the name of his colleague called Shi Jian [“Shi”].

5.  Transactions were, according to Yao, executed by the Defendant.  He said she could place orders without consulting him though there were some discussions with him in some cases.  He explained that this was due to his lack of experience in foreign exchange investment and he trusted the Defendant by reason of the fact that she worked for Hantec which, according to Yao, was rather well known in Hong Kong.

6.  The arrangement, Yao said, with the Defendant was that he would put the accounts in fund from time to time when demanded by her.  The trading volume in these accounts were quite substantial.  However, most of the time they suffered losses.  According to Yao, the 2^nd Plaintiff had suffered losses in the tune of $10 million in such activities.

7.  Because Yao did not know English, he would usually leave the names of the payee blank in the cheques he gave to the Defendant.  He entrusted her to fill in the name of Cosmos for depositing the same into its bank account as credit to the foreign exchange trading accounts of him and Shi.

8.  The first cheque was issued when Yao was about to go back to the mainland for holiday in October 2004.  Yao said the Defendant asked him to give her a cheque to put the two Forex trading accounts in fund in case there was a need to cover for losses whilst he was away.  He therefore gave her the cheque No. 249509 in the sum of $1 million.

9.  The second cheque was issued when Yao had to go away for overseas business in October 2004.  The Defendant again asked him for contingent fund to cover potential trading losses in those accounts.  He gave her cheque No. 249511.

10.  The third cheque was issued in similar circumstances when Yao went away for Chinese New Year holiday.  He said the Defendant proposed a sum of $2 million and he was only willing to give her a cheque of $1.7 million.  That was cheque No. 326048.

11.  Subsequently, it was discovered by the Plaintiffs that the cheques were deposited into the Defendant’s personal account instead of the bank account of Cosmos for the credit of the Forex trading accounts of Yao and Shi.  By this action, they seek to recover the money from the Defendant.

12.  It is important to note how the Plaintiffs’ causes of action are pleaded in the Statement of Claim indorsed on the Writ issued on 24 February 2009. Even though the claims were for money had and received (paras. 12 and 13 of the Statement of Claim), the only factual basis pleaded to support the claims is the alleged breach of instructions by the Plaintiffs as to how the cheques should be used (paras. 6 to 11).

13.  In the Defence filed on 27 March 2009, the Defendant disputed the instructions given by the Plaintiffs as to how the cheques were to be used.  The Defendant said that Yao instructed her to fill in her name as the payee on the cheques and then to deposit part of the money into the trading accounts and to give the balance in cash to Yao for his own use.  She said she had complied with Yao’s instructions.

14.  In the Reply of 8 April 2009, the Plaintiffs joined issues with the Defendant as to the disputes over the instructions given by Yao.  The Plaintiffs also denied that the Defendant had given cash to Yao for his own use.

15.  The witness statements filed by the parties proceeded along the same lines as adopted in their respective pleadings.  In her witness statement of 9 September 2009, the Defendant set out in para. 7 the sums she had paid into the trading accounts regarding cheque No. 249509.  She listed out 4 instances where sums were deposited into those accounts.  The total adds up to $790,000.  She said she paid the balance of $210,000 in cash to Yao.  Regarding the other two cheques, she said she had paid the money to Yao in cash after she deposited the cheques into her account and withdrew the money from her account.

16.  At para. 10 of her witness statement, the Defendant said even though the cheques were issued by the Plaintiffs, she understood that the money were to be used for the personal benefit of Yao and Shi and she had no dealings with the Plaintiffs.

17.  In his supplemental witness statement of 13 January 2011, Yao admitted that in respect of cheque No. 249509, out of the four instances referred to in the Defendant’s witness statement, three sums were deposited into the trading accounts.  However, he disputed the fourth one, viz. a sum of $200,000 allegedly paid into the trading account of Yao on 23 September 2004.

18.  In his original witness statement, Yao had already denied receiving cash from the Defendant.

19.  Hence, the two main issues as emerge from the pleadings and witness statements are,

(a) What instructions were given to the Defendant regarding the three cheques?

(b) How did the Defendant deal with the money?

20.  Before the case came to trial, upon the petition of someone else, the Defendant was made bankrupt in HCB 2421 of 2010 on 26 May 2010.  Thereafter, she lost interest and locus in defending the action.  Before the pre-trial review, the Defendant wrote to this court in a letter of 28 December 2010 indicating that she decided she would not attend the trial and she would respect the court’s judgment in the matter.  In a letter dated 30 December 2010, the court reminded her that if she did not attend the trial, her statement and pleadings cannot be treated as evidence.

21.  The Defendant did not attend the trial which took place on 21 February 2011.  Accordingly what was said in her witness statement cannot be regarded as evidence.

22.  After the bankruptcy of the Defendant, the Plaintiffs obtained the consent of the Official Receiver as the Provisional Trustee of the estate of the Defendant to proceed with the action on condition that no judgment or order obtained by them shall be enforced against the Defendant without the leave of the court.  A consent order to such effect was made on 12 November 2010.

23.  Mr Tse explained to this court at the pre-trial review on 7 January 2011 that whilst the Plaintiffs appreciated they might not be able to recover anything from the Defendant in view of her bankruptcy, they wished to obtain a determination by this court as regards what had actually happened, viz. as between Yao and the Defendant which version of events the court would believe. The purpose was to facilitate the Plaintiffs in accounting to the shareholders of Jingwei.

24.  At the trial, this court heard evidence from Yao.  As mentioned, the Defendant was absent and there was therefore no evidence from her.  In such circumstances, the court can only assess the credibility of Yao by reference to his own evidence and the documentary evidence placed before the court.  The court should also have regard to inherent probabilities.

25.  Having given careful consideration to the matter, I am not satisfied that Yao told this court the truth regarding the two main issues identified above.  I do not find him to be a credible witness.

26.  In his evidence, he told the court he started to conduct Forex trading in these accounts since February 2004.  However, the documentary evidence shows that Yao’s trading account was opened in June 2003 and there were transactions since 27 June 2003.  Shi’s account was opened in September 2003 and there were transactions since 10 September 2003.  When these were put to Yao, he admitted that his account was opened in June 2003 but he maintained that there had not been any activity prior to February 2004 since he did not have any money to invest at that time.

27.  The statements in respect of these trading accounts showed substantial activities in the accounts from their respective opening dates to February 2004. Substantial funds were deposited into the accounts as the trading activities during this period had resulted in losses.  Yao claimed that he was ignorant of these activities and the deposit of funds into these accounts during this period.  I do not find that credible.  To start with, I could not understand why he and Shi would open accounts if there was no intention to commence trading.  Further, there was no explanation as to why funds from somebody else would be deposited into their accounts to cover trading losses in these accounts.

28.  Yao said he did not get these statements from the Defendant and these statements were only obtained through solicitors after litigation.  He said she only showed him some internal documents from time to time (after he started trading in February 2004) to support her claims that he needed to deposit money to cover losses.  He said he kept no records about the trading activities and he only had records as to payments made by the Plaintiffs.  I have no hesitation in saying firmly that this is utterly incredible.  Yao said at para. 25 of his witness statement of 24 August 2009 that he was a professional in the area of finance and he was responsible for the audit on the listing of the company.  Since he was conducting the Forex trades on behalf of the Plaintiffs, he certainly appreciated that he should keep proper records of such investment. It is elementary that proper statements of accounts should be obtained and kept in the files.  He also told this court that at the material time he was responsible for book-keeping in the 1^st Plaintiff.  Bearing in mind the duration when trading activities had been conducted as reflected in the statements, even assuming in Yao’s favour that his trading started only in February 2004, it is incredible that he would continue to trade in the accounts without obtaining proper statements.

29.  I also find it hard to believe that Yao was willing to put funds into the accounts to cover perennial losses.  According to the statements, there were trading activities in these accounts from June 2003 (in Shi’s account since September 2003) up to May 2006.  The trading activities always resulted in losses.  If, as claimed by Yao, the Defendant made all the decisions regarding these trades, I find the so-called trust placed by Yao upon her to be inexplicable.  It is inherently improbable that an investor would trust a broker whose decisions occasioned perennial losses to the investor.  This is particularly so when one is investing with the funds of a listed company.

30.  In respect of the three cheques in question, they were issued at different times.  There was ample time between the issue of each cheque for Yao to check whether the Defendant had used the money in accordance with his instructions.  Yao said he met the Defendant on 12 October 2004 and she told him the $1 million (from cheque No. 249509) had been used to cover trading losses and she account for the same by reference to some internal documents.  However, he was unable to produce the internal documents.  He explained that she had promised to give him a complete set of accounts.  But, according to him, she did not do so.  Yet he was happy to issue the second cheque and history repeated itself.  He met the Defendant on about 20 October and she again told him the $1 million in the second cheque was used up to cover losses.  Again she showed him internal document but this time she did not give it to him.  Despite her failure to honour her promise to give him account statements, he was happy to issue the third cheque a few months later.  Again he did not get any document from the Defendant to account for how the $1.7 million was used.

31.  It should be apparent to Yao in October 2004 that there was something wrong if what he told this court were true.  However, he acted as if everything was in order.  He continued to issue cheques to the Defendant and he continued to conduct Forex trading through her in the accounts.

32.  I am driven to reject the evidence of Yao as I do not find him to be an honest and reliable witness.

33.  This means that, even without consideration of the defence case, the Plaintiffs failed to establish the instructions given by Yao to the Defendant as to how the three cheques should be used and the breach of such instructions by the Defendant.

34.  After the trial has been concluded, the Plaintiffs applied by a summons on 28 February 2011 for leave to re-open the case to adduce further evidence and for leave to amend the Statement of Claim to plead an alternative claim that the cheques were given by Yao to the Defendant improperly in breach of the Plaintiffs’ company policy and in breach of Yao’s fiduciary duties towards the Plaintiffs.  The Plaintiffs seek to advance a claim against the Defendant based on knowing receipt and/or dishonest assistance.

35.  Whilst I accept that the court does have the jurisdiction to grant leave to re-open a case after the conclusion of trial, such leave should only be granted in exceptional circumstances (see Charlesworth v Relay Roads Ltd [2000] 1 WLR 230).  Like Sir Christopher Slade in Stewart v Engel [2000] 3 All ER 518, I do not think the Civil Justice Reform has abrogated this jurisdiction.  For present purposes, I am happy to adopt the following observations of Rix LJ in Noga v Abacha [2001] 3 All ER 513 at paras. 42 and 43 as regards the threshold which has to be satisfied,

“Of course, the reference to exceptional circumstances is not a statutory definition and the ultimate interests involved, whether before or after the introduction of the CPR, are the interests of justice. On the one hand the court is concerned with finality, and the very proper consideration that too wide a discretion would open the flood gates to attempts to ask the court to reconsider its decision in a large number and variety of cases, rather than to take the course of appealing to a higher court. On the other hand, there is a proper concern that courts should not be held by their own decisions in a straight-jacket pending the formality of the drawing up of an order …

Provided that the formula of ‘exceptional circumstances’ is not turned into a straight-jacket of its own, and the interests of justice and its constituents as laid down in the overriding principle are held closely to mind, I do not think that the proper balance will be lost.  Clearly, it cannot be in every case that a litigant should be entitled to ask the judge to think again.  Therefore, on one ground or another the case must raise considerations, in the interests of justice, which are out of the ordinary, extraordinary or exceptional.  An exceptional case does not have to be uniquely special.  ‘Strong reasons’ is perhaps an acceptable alternative to ‘exceptional circumstances’.  It will necessarily be in an exceptional case that strong reasons are shown for reconsideration.”

36.  That was said in the context of an application to invite the court to reconsider after judgment had been handed down on the basis that the judge had ignored binding authority and the decision was flawed as a result.  Thus, the application did not involve the amendment of pleadings and re-opening of the evidence.  On the other hand, in the present case, if I were to accede to the Plaintiffs’ application, the Defendant must be given the opportunity to respond to the amended Statement of Claim and the new evidence, if she so wishes.

37.  In Hong Kong, we do not have overriding objectives under our Civil Justice Reform.  Instead, under Order 1A, the court is required to give effect to the underlying objectives set out in Rule 1 when it exercises any of its powers (whether under its inherent jurisdiction or given to it by the rules or otherwise).  This must include the exercise of its discretion in hearing an application to re-open the case after trial.  Rule 2(2) further provides that in giving effect to the underlying objectives, the court shall always recognize that the primary aim is to secure the just resolution of the dispute in accordance with the substantive rights of the parties.

38.  An important feature in the present case is the bankruptcy of the Defendant and the stance of the Official Receiver.  By reason of the bankruptcy, the Plaintiffs accepted it is unlikely that they could recover anything from her or her estate.  This is confirmed by the Official Receiver.  Thus, the purpose of the Plaintiffs in pursuing this application is not for the recovery of the money.  Further, the bankruptcy of the Defendant also means that she lost interest in the case and this court did not have the benefit of her evidence at the trial.  Whatever conclusion the court may come to in this judgment is therefore handicapped in that I have only heard one side’s evidence. 

39.  Mr Tse submitted that as subsidiaries of Jingwei, the Plaintiffs have a duty to its shareholders to clarify whether the money in question was misappropriated.  As such, counsel submitted that the present action is not only a personal battle between Yao and the Defendant.

40.  With respect, that submission proceeds on a misconception as to the function of the court.  It has to be appreciated that under our civil justice system, in an ordinary civil action as in the present case the court does not play an inquisitorial role and the decision of the court only binds the immediate parties to the action.  The court would not embark upon its independent inquiry and it would only act upon the evidence placed before it.  In the present context, I can understand that there are questions which a shareholder of Jingwei may legitimately seek an explanation from its management with regard to the three sums of money in question.  But these might not be questions that the court can answer satisfactorily in the context of this trial, particularly in the light of the absence of the Defendant at the trial.  For example, one might query why the subsidiaries had to engage in Forex trading in accounts held by Yao and Shi and whether such transactions were properly authorized.  Yao is not a defendant in the action and it would be inappropriate for this court to embark on such investigation.

41.  It has to be firmly stated that it is not the function of this court to arrogate itself to be an inspector for the company.  If the management of Jingwei wishes to present a proper report to the shareholders, they should instruct a reputable accountant firm to undertake the necessary investigation and prepare a report on the same.  In the process, the accountant can take into account what this court said above regarding the credibility of Yao.

42.  In this action, the court only concerns with the resolution of the dispute between the Plaintiffs and the Defendant by reference to the issues raised in the pleadings.  If an issue has not been raised in the pleadings, no matter how important it might be to the shareholders of Jingwei, it is not the business of this court to look into the same.

43.  Bearing in mind the lack of participation by the Defendant in the trial and the unsatisfactory nature of the Plaintiffs’ evidence, it is difficult to see how the shareholders can expect more from the judgment of this court other than what has already been set out above. 

44.  In the proposed new witness statement of Li Bao Zhi, the representative of the Plaintiffs expressed the wish that the court could find out as between Yao and the Defendant who had actually taken away the money.  Given the adversarial nature of the trial and the lack of interest of the Defendant in the action, and the unsatisfactory nature of Yao’s evidence, this court cannot come to any conclusion on this issue.  Mr Li also invited the court to render a judgment to the effect that the money of the Plaintiffs was misappropriated.  But the court will not issue a judgment in vacuum.  A judgment has to be based on a finding as to the liability of the party in question.  If the court is not satisfied with the liability of the Defendant, it is obliged to enter a judgment in favour of the Defendant and the action has to be dismissed even though the Plaintiffs may have a good claim against somebody else.

45.  Mr Tse urged this court to consider giving a judgment on the basis that the Defendant was in any event liable to the Plaintiffs by reason of dishonestly assisted in the wrongful appropriation of the money and/or dishonest knowing receipt of the same.  I do not think this course is open on the existing pleadings.  To allow such contention to be advanced, it must be premised on Yao acting as the primary culprit in the misappropriation of the money.  Further, there are questions of facts which have to be resolved before I can conclude that the Defendant is liable on this basis.  The Defendant must be given an opportunity to respond to Mr Tse’s contentions in his written submissions that,

(a) The Defendant should have known that the only reason why the Plaintiffs entrusted the money to her was because she was a broker of Cosmos; and

(b) There was no reason why the Defendant would believe the money belonged to Yao.

If I were to allow the argument to be run by re-opening the case and granting leave to amend, more costs would have to be spent by the Plaintiffs as further hearings would be required.  Further, it would also mean that more judicial resource has to be deployed for the case.

46.  Given the Plaintiffs’ acknowledgement that there is no prospect of recovering the money from the Defendant, I do not see how one can justify the spending of more costs and resources on this piece of litigation.  After all, as explained earlier, whatever conclusions the court may arrive at in this trial would be subject to the handicap of not having the benefit of hearing both parties.

47.  Moreover, there is no satisfactory explanation from the Plaintiffs as to why they failed to advance the alternative case (as set out in the proposed amendments) in their original pleadings and to include the proposed additional evidence at the trial.  Counsel submitted that before the trial the Plaintiffs considered such a course to be unnecessary because they regarded there was no dispute by the Defendant that the money was misappropriated by her in putting the same into her personal account.  The Plaintiffs were therefore only concerned to prove that the Defendant did not hand the money to Yao.  Yao was the only witness called by the Plaintiff because he was the one who handled the dealing with the Defendant and it was the policy of the Plaintiffs that the person who made the mistake should be responsible to recover the money.  The Plaintiffs were of the view that the calling of other evidence would simply waste the court’s time.  Counsel also said that the Plaintiffs did not expect the court to find Yao to be incredible.

48.  I regret I do not find such explanation acceptable.  First, it is not correct to say the Defendant did not dispute that putting the money into her bank account was misappropriation.  All along, she said she was acting in accordance with the instructions of Yao.  As analysed above, one of the main issues as emerged from the pleadings and witness statements is what were the instructions given by Yao to the Defendant regarding the three cheques.  There was no basis for the Plaintiffs to assume that the Defendant accepted her depositing the money into her account was misappropriation.  Thus, it was wrong for the Plaintiffs to assume that the only issue at the trial was whether the Defendant handed the money to Yao.

49.  Second, I fail to see how the Plaintiffs could assume that the court must accept Yao as a credible witness.  As discussed above, Yao’s version of events is inherently incredible and there are questions crying out for explanation.

50.  Third, as I said in the course of submissions, those advising the Plaintiffs had a duty to consider the adequacy of the evidence instead of blindly following the company’s decision to have Yao as the only witness by virtue of the policy that requires the one who made the mistake to shoulder the responsibility to recover the money.  Had proper and careful consideration been given to the evidence supporting the Plaintiffs’ case, it would not be too difficult to appreciate that Yao’s evidence might not be accepted by the court.

51.  To allow the Plaintiffs to re-open the case and to amend the Statement of Claim at this late stage will tantamount to a second bite of the cherry.  It would be inconsistent with the underlying objectives in Order 1A to permit such an exercise in the circumstances of this case, particularly in the light of the futility of it in terms of the lack of prospect of recovering the money from the Defendant in any event and the lack of utility of a judgment pronounced on the basis of the evidence from one side only.  As I said in the course of Mr Tse’s submissions, there is nothing to stop the management of Jingwei to seek a counsel opinion on the merits of a case of misappropriation based on the alternative claim and rely on that for the purpose of accounting to its shareholders.

52.  On the whole, I am not satisfied that there are strong reasons warranting leave to be granted to re-open the case.  The summons of the Plaintiffs was dismissed with costs accordingly.

53.  It follows from my rejection of the evidence of Yao that the Plaintiffs cannot succeed on their pleaded claims against the Defendant.  The action was dismissed with costs.