CHUN MAN TIMBER DEVELOPMENT LTD v. KWAN CHIA CHENG

HCA 2531/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2531 OF 2002

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HCA 4091/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4091 OF 2003

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(HCA 2531/2002 and HCA 4091/2003 are heard together pursuant to the order of Master Roy Yu dated 19 October 2006)

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J U D G M E N T

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INTRODUCTION

1.  This is a trial of two actions heard together.  These actions arose out of a family dispute between the father, Mr Fu Chi Shui (“Father”) on the one side and his daughter, Mrs Kwan Sai Jean (“Mrs Kwan”) and son-in-law, Mr Kwan Chia Cheng (“Mr Kwan”) on the other.  The Father and his wife (“Mother”) have three sons, namely Mr Foo Sai Lung Robert, Mr Fu Sai Piu Joseph (“Mr Fu”), Mr Fu Sai Wai, and a daughter,i.e. Mrs Kwan. 

2.  The first action in time, which I call the “Main Action” is HCA 2531 of 2002.  The plaintiff in the Main Action is Chun Man Timber Development Limited (俊文木業發展有限公司)(“Chun Man”) which was a company incorporated by the Father in 1996.  It is controlled and operated by the Father, the Mother and Mr Fu.  The Father, the Mother, Mr Fu and Mr Kwan were directors of Chun Man at the material time.  Mr Kwan is the defendant in the Main Action.  The second action, which I call the “Share Action” is HCA 4091 of 2003.  The plaintiffs in the Share Action are Mr and Mrs Kwan, while the defendant is the Mother.

Background

3.  The Father started his furniture business in late 1960 in Canton Road in Tsimshatsui, trading under the name of Carlton Furniture Company (瑞生傢俬).  The business was incorporated in 1973 under the name of Carlton Furniture Company Limited (瑞生傢俬有限公司).  Initially, the Father was assisted by the Mother and his four children.  Subsequently, Mr Foo Sai Lung Robert and Mr Fu Sai Wai migrated to the United States.  In 1984, Mrs Kwan also went to the United States, leaving Mr Fu as the only child helping in the family business.  The business prospered and expanded.  By 1995, the Father became a very rich businessman.  He has a number of companies through which he owned properties and operated his furniture business.  The annual business turnover exceeded $180 million.  His group of family companies includes Carlton Furniture Company Limited and the associated Carlton group of companies (“Carlton Group”), Quick Glory Development Limited (“Quick Glory”) and Kinetic Energy Company Limited (“Kinetic Energy”).  In addition, the Father has two furniture factories in Dongguan in the People’s Republic of China (“PRC”), namely,Dongguan Qishi Arts Furniture Factory (東莞企石工藝傢俬廠) and Dongguan Sam Sing Furniture Company Limited (東莞三星傢俬有限公司) (“Sam Sing”). 

4.  The first of the series of events which led to the dispute was a happy one when Mrs Kwan who had settled in the United States visited her parents in Hong Kong in June 1995.  At the time, the Father had imported a large quantity of timber which exceeded the requirement of his furniture business and he began to diversify into timber trading.  The idea was to incorporate a company in Hong Kong for the purpose of importing timber from overseas for its retail arm in China so as to tap the resource of the PRC market.  The Father discussed his business plan with the daughter on that happy occasion.  What was discussed and the outcome of the series of discussion are in dispute.  The retail arm, Zhongshan City Sam Hing Timber Company Limited (中山市三興木業有限公司) (“Sam Hing”) was incorporated in Zhongshan on 15 August 1995, followed by the incorporation of Chun Man in Hong Kong six months later on 22 February 1996.  There is no dispute that on 22 June and 18 September 1995, the Kwans remitted a total of US$500,000 to the Fus.  The two camps are in dispute as to whether those remittances were the Kwans’ capital contribution to Chun Man or were loans to the Father which were subsequently repaid.  The Fus took charge of Chun Man in Hong Kong, while Mr Kwan was solely in charge of Sam Hing in Zhongshan. Chun Man sourced and purchased timber from overseas for importation to Sam Hing via intermediary state-owned corporations.  Chun Man’s purchases were financed by banking facilities of Chun Man and other family corporations of the Father.  The timber was sold in the PRC and the proceeds remitted to Chun Man, which were used to repay the bank loans.  The two camps are in dispute as to the mode of business operation between Chun Man and Sam Hing.

5.  All went well until 2000 when disputes erupted between Mr Fu and Mr Kwan over the operation of the business.  Mr Kwan complained about the quality and price of the timber sourced by Mr Fu.  He also complained about being excluded by Mr Fu from participating in exploitation rights in a forest in Indonesia and from two property transactions in Hong Kong.  The Fus complained that Mr Kwan did not repatriate or account for the proceeds of sale of the timber to Chun Man.  As a result, Chun Man had cash flow problem.  On 3 September 2001, the Father wrote to Mr Kwan demanding him to take steps to settle the payment for the timber imported by Chun Man for Sam Hing and instructed that the outstanding sum due under the banking facilities granted by Hang Seng Bank Limited to Chun Man be converted into a fixed term loan repayable by twelve monthly instalments.  This was to impose greater financial discipline in the operation of Chun Man and Sam Hing.  Mr Kwan agreed, but the arrears remained uncleared.

6.  The business of Sam Hing began to wind down in early 2002.  By then, Sam Hing had failed to account to Chun Man for over HK$24 million in value of timber delivered and proceeds of sale.  Then two events occurred.  On 5 February 2002, Mr Kwan applied to the Administration for Industry and Commerce of Zhongshan (中山市工商行政管理局) to replace the legal representative and shareholders of Sam Hing appointed by the Father with nominees of his own and claimed ownership of Sam Hing. On the following day, he also applied to the Zhongshan Land and Resources Bureau (中山市國土資源局) for replacement land use licence and real estate licence in respect of the land and building of Chun Man in Zhongshan.  Both applications were approved, unknown to the Fus at the time.  The dispute between the parties is whether Mr Kwan was entitled to keep the licences as security for the purchase price of the land and construction cost he paid and whether he honestly thought he had lost the licences or that it was part of his dishonest design to appropriate the land and building belonging to Chun Man.

7.  In April and May 2002, Sam Hing remitted a total of RMB 22,556,716.31 by five remittances, including two to K & F International Trading Co, which were apparently not related to the business of Sam Hing.  K & F International Trading Co is a company registered in the United States owned by Mr and Mrs Kwan.  Then the dispute between the Fus and Kwans came to a dead lock on Mother’s Day on 12 May 2002, when Mr and Mrs Kwan telephoned the Father and Mother from the United States and told them to stop demanding repatriation of the proceeds of sale to Chun Man.  This sparked a series of litigation commenced by the Fus against Mr Kwan in China and Hong Kong. 

8.  On 29 June 2002, the Fus commenced the Main Action in Hong Kong seeking an account from Mr Kwan for the proceeds of sale in respect of fifteen consignments of timber and a declaration that Chun Man is entitled to trace and/or charge the two remittances to K & F International Trading Co.  In November 2003, the Kwans instituted the Share Action seeking a declaration that they are the beneficial owners of 50% of the shares of Chun Man.

9.  The Fus also commenced parallel actions in the PRC in June 2002.  The Fus caused the three shareholders of Sam Hing nominated by the Father, namely Mr Yeung, Mr Yiu and Mr Mok, to take out proceedings in the Zhongshan People’s Court (中山市人民法院) against Mr Kwan and his nominee shareholders for conversion of the shares in Sam Hing.  However, the Zhongshan Municipal Intermediate People’s Court (中山市中級人民法院) considered Fus’ complaint involved a criminal element.  It caused the Zhongshan People’s Court to search the office of Sam Hing and seize all its books and records on 24 June 2002 while Mr Kwan was visiting his family in the United States.  The Zhongshan Municipal Intermediate People’s Court then referred the case to the Zhongshan Public Security Bureau (中山市公安局) (“PSB”) for investigation.  In 2003, the PSB instructed Sam Hing’s auditor, Zhongshan Promise Certified Public Accountants (中山市成諾會計師事務所有限公司) (“Promise”), to examine the accounts of Sam Hing and provided Promise with 15 volumes of 25 books (15卷25册) seized from Sam Hing for the purpose of the examination.  Miss Zhou Min of Promise prepared two judicial audit reports (司法審計報告) (respectively the “Judicial Audit Report” and the “Supplemental Judicial Audit Report”, collectively the “Reports”).

10.  Subsequently, the Fussucceeded before the relevant bureau and courts in the PRC in restoring Sam Hing’s title to the land and building in the PRC and in reinstating the legal representative and shareholders of Sam Hingnominated by the Father. 

The parties’ case

11.  The Father’s case is that he provided the capital for Chun Man which was intended to be a gift in equal shares to his two grandsons, Mr Fu’s son and Mr Kwan’s son.  Half of the shares of Chun Man are held on trust for Mr Fu’s son by Quick Glory.  The other half of the shares are held on trust for Mr Kwan’s son initially by the Mother and now by Kinetic Energy.  The Kwans’ case is that they contributed to the share capital of Chun Man and the Mother held 50% of the shares in Chun Man on their behalf and not as trustee of a gift for their son.  This forms the Kwans’ basis in the Share Action.  Kinetic Energy is not a party to the Share Action but has agreed to abide by the decision of this Court as to the beneficial ownership of the shares in Chun Man which it holds.

12.  The Father’s further case is that in addition to providing the share capital for Chun Man, he also funded and set up Sam Hing which he injected into Chun Man as its wholly own subsidiary and retail arm in the PRC and that Mr Kwan was employed by Chun Man to supervise and manage Sam Hing.  Though the importations of timber by Sam Hing from Chun Man were recorded as purchases, they were not genuine arm’s length purchases, the timber was held by Sam Hing for sale on behalf of Chun Man as an integral part of one business.  Thus, Mr Kwan was under a duty to account to Chun Man for the proceeds of sale and the stock of timber in Sam Hing.  Mr Kwan’s case is that he is the true and sole owner of Sam Hing which he set up with his own funds and that Sam Hing traded on its own independent of Chun Man.  He denies that he was employed by Chun Man to supervise and manage Sam Hing.

13.  The Fus’ claim in the Main Action is for an account and damages for breach of employment agreement and fiduciary duty as director of Chun Man for failing to repatriate or account for the proceeds of sale of the timber to Chun Man.  Mr Kwan’s initial defence filed in October 2003 was one of non-admission.  In his amended defence filed in October 2005 two years later, he put Chun Man to strict proof of the importation of the timber and non-payment and of the six remittances.  At trial, Mr Kwan admitted receiving the consignments of timber but claimed that Sam Hing had paid for some of the timber and the rest had been shipped to Sam Sing which is a furniture manufacturing factory in Dongguan belonging to the Father’s group of companies.  He also admitted making the five disputed remittances from Sam Hing but claimed that the remittances were either to meet the expenses of Sam Hing or his own funds as he was the sole owner of Sam Hing.

The issues

14.  At the conclusion of the trial, the focus of the Fus’ case shifted from Mr Kwan’s duty to render an account for the proceeds of sale of the fifteen consignments to an account for the five disputed remittances.  The Fus’ case is based on Mr Kwan’s breach of fiduciary duty as an employee and/or a director of Chun Man.  The factual issues are:

(1)	who provided the share capital for Chun Man;
(2)	who provided the share capital for Sam Hing;
(3)	whether Mr Kwan was a director and/or an employee of Chun Man with responsibility for supervision and management of Sam Hing;
(4)	whether at the time when the five remittances were made by Sam Hing in April and May 2002, Sam Hing was under an obligation to repatriate to Chun Man substantial sums of money as a result of previous supply of timber by Chun Man, irrespective of whether in the capacity as a purchaser of the said timber under arm’s length transactions or as the wholly owned subsidiary of Chun Man; and
(5)	whether Mr Kwan was in breach of fiduciary duty owed to Chun Man and/or Sam Hing.

The disputes between the parties are purely factual.  They have to be resolved on my finding of fact and credibility of the parties’ witnesses. 

15.  The legal principles involved are trite principles on which counsel of both parties have no disputes.

Credibility of witnesses

16.  The Fus and the Kwans respectively called ten and four factual witnesses.  Except for Miss Zhou, Mr Leung Shi Ho and Mr Foo Sai Lung Robert, all the other witnesses were not straight forward witnesses.  They have something to hide one way or the other and are selective in telling the truth.  The assessment of their credibility is particularly difficult.  My assessment is based on incontrovertible documents and inherent probability in the light of the totality of the evidence.  The following is a summary of my assessment of the credibility of the witnesses.  Further reasons for the assessment can be found in my analysis of the evidence. 

17.  Mr Fu Chi Shui (The Father)(傅繼瑞) - The Father is now 77 years old.  He impressed me as a very authoritative father.  He is the head of the family and has built wealth for the family.  He is a very shrewd, capable and successful businessman.  Despite his old age, he gave evidence in a cogent and consistent manner.  I consider his evidence satisfactory, except in respect of the purpose for the US$500,000 remittance by the Kwans, which to some extent is contradicted by the incontrovertible trust deeds.  

18.  Madam Tung Shuet Yick (The Mother)(董雪憶) - The Mother is now 75 years of age.  She participates in the management of the family business and is in control of the accounts.  She has demonstrated ability beyond that of an ordinary housewife of her age.  She did not dispute the collateral matters put to her, for which I give her credit.  However, on the issue of the beneficial ownership of the shares in Chun Man which is the most crucial part of her evidence, she is contradicted by the two trust deeds she executed in favour of the Kwans.  Though in effect, whether the shares were held on trust for Mr and Mrs Kwans as alleged by the Kwans or for their son as the Mother alleged makes no difference to her, the circumstances surrounding the execution of the two trust deeds are such as to render her evidence inherently incredible.  Her evidence that she received what were recorded in the accounts of Chun Man as Mr Fu’s remunerations as director of Chun Man and as overseas travelling expenses is also incredible.  I can think of no discernable reason for that evidence except to conceal the nature of the receiptsbeing dividends to the Kwans or to corroborate Mr Fu’s evidence which she heard in Court.  I do not believe her above evidence.  Other than those blemishes, I consider her credible and accept her evidence.

19.  Mr Fu Sai Piu (Mr Fu)(傅世彪) - Mr Fu is not an impressive witness.  He is not very assertive.  He did not dispute many of the collateral matters put to him.  He was evasive about having received remunerations and overseas expenses from Chun Man.  He said he did not know what he received from Chun Man but simply received what his parents gave him.  I find that something very odd for a man of his age and position in Chun Man and in the family business to say.  He was probably concealing the truth that the remunerations and overseas expenses were dividends from Chun Man.  I find him evasive and selective in telling the truth.  However, his evidence in respect of the operation of Chun Man and the nature of its relationship with Sam Hing is supported by contemporaneous documents.  I accept those aspects of his evidence. 

20.  Mr Foo Sai Lung Robert(傅世龍) - Mr Foo Sai Lung Robert came to know Mr Kwan as a cook in the restaurant where he worked while he was in the United States.  He said that Mr Kwan was not a man of means at the time he introduced Mr Kwan to his sister.  But he did not argue if Mr Kwan subsequently had a business of his own.  His evidence is not controversial but is totally irrelevant.

21.  Miss Zhou Min(周敏) - Miss Zhou is a certified public accountant in the PRC employed by Promise.  She was sincere and gave evidence in a straight forward, unbiased and responsible manner.  She demonstrated good knowledge in accounting.  Her evidence was cogent and makes sense.  Her answers under cross-examination were spontaneous.  She was not shaken in cross-examination.  I accept her evidence. 

22.  Mr Xin Guanlun(辛觀倫) - Mr Xin was the factory manager of Sam Hing.  He applied to the Administration for Industry and Commerce of Zhongshan to replace Mr Yeung as legal representative and shareholder of Sam Hing.  He took side with Mr Kwan in resisting the PRC proceedings instituted by the Fus.  He made statements in support of Mr Kwan’s claim to be the sole owner of Sam Hing.  When Sam Hing ceased operation after the search and seizure by the Zhongshan People’s Court, he worked for Zhongshan City Man Shing Trading Company Limited (中山市文盛貿易有限公司) (“Man Shing”) which is a company beneficially owned by Mr Kwan and whose shareholder and legal representative are relatives introduced by him to Mr Kwan.  He admitted that he took the former stance out of financial motive.  He said that now his conscience had driven him to tell the truth.  Hence, he deflected from the Kwans’ camp to join the Fus’.  He was a dangerous witness.  However, when his evidence is tested against the incontrovertible documents and the totality of the evidence, I am satisfied that he is a truthful witness.  I accept his evidence.

23.  Mr Yeung Kwai Ping(楊桂平), Mr Yiu Chun Hung(姚進洪) and Mr Mok Yui Piu(莫銳彪) -They are shareholders of Sam Hing nominated by the Father.  They have all given inconsistent evidence in the proceedings before the Administration for Industry and Commerce of Zhongshan which they now admit was false.  They have demonstrated propensity to tell lies to suit the convenience of their employer.  However, when their evidence is tested against the incontrovertible documents, I am satisfied that they are telling the truth in the proceedings now before me.  I accept their evidence.

24.  Mr Leung Shi Ho - Mr Leung was an accountant of Messrs Yau & Leung Certified Public Accountants who prepared the audited accounts of Chun Man. His evidence is not controversial.

25.  Mr Kwan Chia Cheng (Mr Kwan)(關家澄) - Mr Kwan is an experienced and intelligent businessman.  However, he demonstrated insincerity in the conduct of this litigation and a total lack of good faith in his defence.  He had never disclosed his real defence.  His defence filed in October 2003 was one of non-admission.  Then two years later, in his amended defence filed in October 2005, he pleaded eighteen payments and put Chun Man to strict proof of the importation of timber and non-payment and of the six remittances.  He also pleaded that Sam Hing acted as nominal purchaser in transactions between Chun Man and other third parties but without disclosing the identity of the third parties.  He did not admit receipt of the fifteen consignments by Sam Hing until some time after Mr Fu gave evidence producing the value added tax (“VAT”) certificates issued by the customs authority of the PRC in respect of ten of the fifteen consignments.  He offered a number of conflicting explanations as to why Sam Hing did not owe Chun Man any money arising out of the supply of timber or why he did not owe any obligation to cause Sam Hing to pay.  These included the allegation that in the majority of cases the actual cost of the timber to Chun Man was lower than the invoiced price, which included the VAT imposed by the customs authority.  Such assertion was never substantiated by evidence or other witnesses.  At trial, he ambushed the Fus by a new defence of “chao chang”(走賬) (skipping account) in relation to three of the five disputed remittances and new evidence of the existence of a second set of accounts evolved.  This new defence and new evidence go beyond the scope of his pleaded defence and are not covered by his witness statements.  His evidence bears the hallmark of recent concoction.

26.  When considered in its totality, his case is just incredible.  Having rejected his evidence that he contributed to the capital of Sam Hing and that Sam Hing was a company belonging to him (see paragraph 77 below), his defences are nebulous.  His explanations why he applied for replacement land use licence and real estate licence and for changing the legal representative and shareholders of Sam Hing only stand as evidence of his greed and motive in trying to appropriate Sam Hing which never belonged to him and explain why he emptied the coffers of Sam Hing by making the five remittances.  He is an utterly unreliable witness.  I reject almost the entirety of his evidence.

27.  Mrs Kwan Sai Jean (Mrs Kwan)(傅世珍) - Mrs Kwan’s performance under cross-examination was surprisingly abrasive and hostile.  But I do not weigh that against her as she might feel provoked by counsel’s question about her marriage.  She felt she had been paid less than a proper salary for her fourteen years’ service in the family business which also deprived her of the chance of finding a husband.  Hence, she went to the United States at the age of twenty-eight to hunt for one.  She married Mr Kwan after a few months through the introduction of Mr Foo Sai Lung Robert.  She said Mr Kwan loved and cared for her.  She demonstrated animosity against Mr Fu for she said while she had no objection to contribute to the family business she saw no reason to do so for the benefit of Mr Fu.  This was probably the thorn which had always existed between the two siblings and which eventually drove them to the extreme when Mr Fu excluded Mr Kwan from the investment in forest exploitation rights in Indonesia and the property investments in Hong Kong.  The crucial part of her evidence is about the purpose of the US$500,000 remittance.  Essentially, based on the two trust deeds executed by the Mother, I accept that evidence.  I also accept her evidence about the meeting at the restaurant of the health club when the Father expressed his intention of distributing his wealth to his children and making a gift of US$1.5 million to her.  But most of the rest of her evidence is really hearsay from what she was told by Mr Kwan, in whom she reposed great trust and confidence.  But, Mr Kwan, as I have found, is a person of no credibility.  That part of her evidence has been tinted by the dishonesty of her husband.  I give no weight to those evidence.

28.  Miss Cheng Liqiong(成麗琼)and Miss Li Xianping(李向萍) - They were former employees of Sam Hing.  They had no idea of its inception history and believed Mr Kwan was its sole owner.  Probably because of that belief they felt they owed him allegiance and tailored their evidence to suit Mr Kwan’s case.  Both of them gave very short and similar statements.  But their evidence went far beyond the scope of their witness statements.  They were uncertain in their evidence under cross-examination.  I consider their evidence as bald assertions and recent concoctions.  I give no weight to their evidence.

PRC expert opinion on the Reports

29.  At the interlocutory stage, Chun Man issued a summons seeking leave to adduce PRC expert opinion on the legality and legal effect of the Reports prepared by Miss Zhou.  I granted leave for expert evidence to be adduced and each side called one legal expert in PRC law.

30.    The Reports were prepared by Miss Zhou, who is a certified public accountant in the PRC.  The Reports were commissioned by the PSB pursuant to articles 42 and 119 of the Criminal Procedure Law of the PRC《中華人民共和國刑事訴訟法》.  The cost of preparation of the Reports were paid by Chun Man.  The copy of the Reports contained in the trial bundleswere allegedly obtained from the PSB.  The Kwans disputed the authenticity of the Reports.  According to Fus’ legal expert in PRC law, who is a practising lawyer of the Guang Dong Wei Guo Law Firm, he was given a copy of the Reports by Mr Albert Lee who was a manager of Chun Man and Mr Lee told him that the copy of the Reports were obtained from the PSB.  At the office of Promise, he was shown by Miss Zhou the office copy of the Reports and the letter of instruction from the PSB.  He verified the copy of the Reports given to him by Mr Lee against Miss Zhou’s office copy and was satisfied with the authenticity of the copy given to him by Mr Lee.  That is evidence of fact and not of PRC law.  Presumably, the purpose of that evidence is to prove authenticity of the copy of the Reports in the trial bundles and to make good the missing link in the evidence as Mr Lee was not going to be called.  However, as Miss Zhou,who prepared the Reports and gave evidence in this Court, produced the office copy of the Reports and confirmed that the copy in the trial bundles was a true copy of the Reports she sent to the PSB.  There could now be no dispute as to the authenticity of the Reports.  The evidence relating to the copy of the Reports supplied by Mr Lee is redundant.

31.  The focal point of dispute between the legal experts of both sides is whether the Reports are inadmissible because they were not lawfully obtained in accordance with the laws and regulations in the PRC.  The Fus’ legal expert evidence is that the PSB was investigating into an economic crime relating to Sam Hing.  In the course of investigation, the PSB had to engage accounting experts in conducting audit examination of the financial matters directly related to a suspected economic crime.   Hence, he was of the opinion that Promise was lawfully commissioned by the PSB to perform the judicial audit examination pursuant to articles 42 and 119 of the Criminal Procedure Law of the PRC and the audit examination reported therein was performed pursuant to article 9 of General Provisions on the Procedures for Judicial Authentication (For Trial Implementation) 《司法鑒定執業分類規定(試行)》.  According to article 50(5) of the Provisions on the Procedures for the Handling of Criminal Cases by Public Security Organs《公安機關辦理刑事案件程序規定》(“Criminal Procedure Regulations”), the conclusion of the Reports is a forensic conclusion (鑑定結論) which is one of the seven classes of evidence stated in article 9.  He was of the opinion that the disclosure of such evidence, not being national secret, is not prohibited by articles 52 and 241 of the Criminal Procedure Regulations or article 121 of the Criminal Procedure Law of the PRC.

32.  The expert called by the Kwans is a practising lawyer of the Guangdong Zhong Yuan Law Firm.  In essence, this expert said that as the audit examination was part of the PSB’s investigation into a crime, pursuant to articles 52 and 187 of the Criminal Procedure Regulations it is a secret which is not disclosable to anybody other than the investigation officers while investigation or decision to transfer the case for further processing by the procuratorate is still pending.  He said that he was informed by an officer of the PSB that the PSB had not concluded the investigation.  He submitted that the Reports constituted information on the technique of investigation in order to obtain evidence of commission of crime (獲取犯罪證據的技術偵查措施) within the meaning of article 52 of the Criminal Procedure Regulations.  Hence, he was of the opinion that the disclosure of the Reports, whether by Promise or by the Fus, was unlawful.  He also relied on article 114 of the Criminal Procedure Law of the PRC in further support of his argument. 

33.  I think that opinion is rather strained.  But in view of the state of the evidence, I do not think expert evidence relevant or necessary. Whether the Reports were obtained unlawfully or whether disclosure of the Reports would be in breach of any law and regulations of the PRC is immaterial.  The question of admissibility of evidence is to be determined by the law of the forum trying the case in which the evidence is adduced.  As a matter of Hong Kong law, any evidence which has probative value bearing on the issue to be adjudicated is admissible.  But the court has discretion to exclude evidence obtained unlawfully so as to protect the integrity of its judicial process in case where it is unfair to rely on such evidence or where its prejudicial effect outweighs its probative value: see Kuruma v The Queen [1955] AC 197 and Jones v University of Warwick [2003] 1 WLR 954.  The burden is on the party resisting admissibility of the evidence to persuade the court to exclude the evidence.  No argument has been advanced that there was any infringement of the fundamental human rights by admission of the Reports.  The Reports had been disclosed to Mr Kwan more than two years ago.  Mr Kwan had ample opportunity to obtain evidence to challenge the contents of the Reports and prepare his defence.  He chose not to.  In Court, he argued that he was prejudiced in his defence as he was deprived of other documents seized by the Zhongshan People’s Court.  This is only a question of weight which I shall consider in the totality of Miss Zhou’s evidence.  Of course, any evidence adduced by the opponent is prejudicial and adverse to the other party, but that is not the prejudice which the Court should be concerned.  Rather, they indicate the probative value which bears on the relevant issues.  Miss Zhou who prepared the Reports was available in Court to give first hand evidence on her examination of the 15 volumes of 25 books seized from Sam Hing, how the Reports were prepared and the basis of her conclusion.  I am satisfied that there is no prejudice in admitting the Reports into evidence.  The Reports are admissible as evidence in accordance with our rules of evidence.  In her evidence in Court, Miss Zhou adhered to the Reports.  This Court would have to consider the Reports as part of Miss Zhou’s evidence and assess the weight to be attached to them just as it would consider and assess any other pieces of evidence. 

The facts

34.  I have briefly outlined the factual background in paragraphs 3 to 13.  In this part of the judgment, I shall deal with the material factual issues in dispute.  But before dealing with those issues, I shall first consider three collateral matters which are not central to the dispute but which set the scene in which the subsequent material factual issues arose.  Those collateral matters are Mr Kwan’s complaint about the quality and price of the timber purchased, his being excluded from property investments and his being excluded from the exploitation rights in a forest in Indonesia.  To a small degree, my finding in those collateral matters damaged the credibility of the Father, Mr Fu as well as Mr Kwan.  Those collateral matters show that the Fus did not intend to allow the Kwans to participate in their family business beyond the timber retail business in China.  However, the Kwans have expected more. 

Complaint about quality and price of the timber purchased

35.  According to Mr Kwan,Sam Hing imported 2,000 to 3,000 cubic metres of Brazilian ‘fa lei’ timber from Chun Man.  The timber was purchased from a Frenchman, Mr Michel Maillou, who had long-term business relationship with the Fus.  Mr Kwan complained about the quality of the timber.  He said that after inspecting the timber stored in Ying Wui Saw Mill in China with Mr Fu and Mr Maillou, Mr Maillou agreed to make compensation for the poor quality of the timber after his return to France.  However, Mr Fu declined to follow up with the matter of compensation on the excuse that Mr Maillou’s only son died in a motor-cycle accident.  Mr Kwan felt that the interest of Chun Man or Sam Hing was being compromised.  Mr Fu’s evidence is that the incident occurred in March 2002.  At the time, Sam Hing’s payment for timber, including those from Mr Maillou’s, was in arrears.  Mr Fu was informed of the death of Mr Maillou’s only son.  He telephoned Mr Kwan and asked if Mr Kwan could accelerate payment for Mr Maillou’s consignments of timber as Mr Maillou was a businessman of honour and had made deliveries even when supply of timber was short.  But Mr Kwan refused.  At the time, Sam Hing was in arrears by as much as HK$24 million.  Probably, Mr Maillou’s consignments had not even been paid.  The question could not have been one of claiming compensation from Mr Maillou, but rather payment or part payment for the consignments after deducting compensation for defective products.  Mr Fu’s evidence is consistent with Mr Kwan’s attitude of not paying for the timber and that Sam Hing was owing substantial sums to Chun Man.  I accept Mr Fu’s evidence.  This finding is not only of a difference in management decision making, but indicates the lack of sincerity in Mr Kwan’s evidence which damages his credibility.

The Lockhart Road and Happy Valley property transactions

36.  It is the evidence of the Kwans that at some stage during the course of the joint venture, an agreement was reached to use the profit of Chun Man to invest in real property jointly with a Mr Leung of Jones Lang, a renowned property agency.  Mr Kwan, Mr Fu and Mr Leung viewed a commercial property in Lockhart Road.  It was rented to a Korean restaurant and Red House Night Club.  The rental income exceeded the mortgage payment.  The property was subsequently acquired by an associated company of the Fus for about HK$10 million but not by Chun Man.  For about ten months, the Mother deposited the surplus rental income from the property into her joint bank account with Mrs Kwan.  Then the Fus decided to exclude the Kwans from that investment and the deposits ceased.  Similarly, Mr Kwan, Mr Fu and Mr Leung viewed a ground floor shop in Happy Valley which was subsequently acquired by another associated company of the Fus.  But the Kwans were also excluded from that investment.  The Father, the Mother and Mr Fu were equivocal about these investments.  In general, they alleged that the parties did not reach any binding decision to purchase the property.  However, the Mother did not deny that she had deposited the surplus rental in respect of the Lockhart Road property into her joint bank account with Mrs Kwan.  The statement of account as at 31 May 2000 signed by Mr Fu and Mrs Kwan also indicated some reference to the two properties (see paragraphs 53 and 54). 

37.  On this issue, I have no doubt that the Kwans’ account is closer to the truth.  I find that the Kwans and Fus had reached agreement to invest the profits of Chun Man in real property and caused the two properties to be purchased by associated companies of the Fus but subsequently excluded Chun Man and effectively the Kwans from the investments.  My finding here is damaging to the credibility of the Father and Mr Fu.  This incident shows that the Fus had second thoughts as to the extent to which they would permit the Kwans to participate in their family business.  This perhaps sowed the seed of discontent in the Kwans.

Investment in forest exploitation rights in Indonesia

38.  According to Mr Kwan, he and Mr Fu went to Singapore to meet a person by the name of Ah Kim to discuss about acquiring a forest in Indonesia for timber exploitation.  But subsequently, Mr Fu excluded him from the project.  I accept Mr Kwan’s evidence.  This finding does no damage to Mr Fu’s credibility as the allegation was not refuted by Mr Fu.  The incident shows that it may well be that Mr Fu, and perhaps with the consent of the Father, was not prepared to allow the Kwans to participate as fully in their family business as the Kwans would have hoped for.  This is another cause of discontent for the Kwans.  But it has no impact on the credibility of the Father, the Mother and Mr Fu.

39.  I now turn to the more critical factual issues.

Kwans’ remittance of US$500,000  -  capital or loan

40.  The Kwans’ case is that Chun Man was set up as a 50-50 joint venture in timber business between the Kwans and the Fus with half of the shares in Chun Man being held by the Mother on trust for their benefit.  Pursuant to the joint venture agreement, they remitted US$350,000 on 22 June 1995 and US$150,000 on 18 September 1995 to the Fus as their share of the capital for the joint venture.  The Fus did not dispute the US$500,000 remittance.  They said that Mrs Kwan offered the money as a short- term loan or “comfort capital” to assist them in the purchase of three consignments of timber.  They denied having entered into any joint venture agreement with the Kwans.  The Mother’s case is that the Father provided the capital for setting up of Chun Man as well as Sam Hing.  It was the Father’s intention to make a gift of Chun Man to his two grandsons, i.e. the child of Mr Fu and the child of Mr and Mrs Kwan, when they reach the age of twenty-five.  Thus, half of the shares in Chun Man are held by Quick Glory on trust for Mr Fu’s son and half of the shares were held by the Mother with Mrs Kwan and later Mr and Mrs Kwan as intermediate trustees for the benefit of their son.  Both Mr and Mrs Kwan were not intended to have any beneficial interest in the shares of Chun Man.

41.  The following is common ground.  Chun Man was incorporated on 22 February 1996.  The name of Chun Man originated from the first names of Mr Fu’s son and Mr Kwan’s son.  The authorised share capital of Chun Man was HK$1 million divided into 10,000 shares of HK$100 each.  5,000 shares were issued as fully paid and registered in the name of Quick Glory while another 5,000 shares were issued as fully paid and registered in the name of the Mother.  By a trust deed dated 12 March 1996 (“First Trust Deed”) and an undated instrument of transfer executed by the Mother, the Mother declared that she held the 5,000 shares in Chun Man as trustee for Mrs Kwan and agreed to transfer and deal with the shares as directed by Mrs Kwan.  On 16 April 1996, the Mother executed another trust deed (“Second Trust Deed”) declaring that she held the shares on trust for both Mr and Mrs Kwan.  On 20 August 2004, the Mother assigned the 5,000 shares to Kinetic Energy subject to the same trust. 

42.  According to Mrs Kwan, on an occasion during her visit in June 1995, the Father, the Mother, Mr Fu and she had a meeting in the restaurant of a health club in Kwai Fong of which Mr Fu was a member.  The Father and Mother told her that they were getting old and intended to distribute their wealth among their children.  They said that they would give her US$1.5 million as a reward for her many years of service in the family business for which she had not received a proper salary.  The money was for her to invest in property in Hong Kong as the parents believed that the property market would fall before 1997 and it would be a good time to invest in real property.  They also indicated that they would give US$2 million to each of their sons.  Then they said that they had imported three consignments of timber and suggested to have a joint venture with her in the timber business.  After discussion with Mr Kwan who was then in Nanhai in China, Mrs Kwan accepted the offer.  In the course of further discussion, it was agreed that the capital contribution by each side was HK$4 million.  The Kwans made the two remittances totalling US$500,000 as their contribution to the capital for the joint venture in timber business.

43.  The Father, the Mother and Mr Fu had no recollection of the alleged meeting in the restaurant.  The Father agreed that there was some conversation about Mrs Kwan’s contribution to the family business and about giving her US$1.5 million.  But the last part of his evidence is equivocal as he added that Mrs Kwan had to make herself worthy of the gift (爭氣), implying that the gift was conditional.  The Mother was not cross-examined on this issue.  Mr Fu could not recall there was such a meeting.  He admitted that his parents had mentioned to him about distribution of their wealth on another occasion.  He said he unwittingly disclosed that to Mrs Kwan and was reprimanded by his parents.  I prefer the evidence of Mrs Kwan.  Her account is more specific and precise.  She probably had a better recollection of the occasion as the promise of a gift of that value would probably have burnt a deep impression in her memory during those few days of her visit.  It is common ground that a gift of US$ 1.5 million for Mrs Kwan had been mentioned.  Hence, I think the difference in the evidence among the four of them was due to their failure in recollecting details and not attributable to dishonesty on their part.  But the Father’s expressed intention of making a gift of US$1.5 million to Mrs Kwan has some bearing on the evidence of the two camps as regards the purpose of the US$500,000 remittance by the Kwans.

44.  According to Mrs Kwan, after Chun Man was incorporated, she received a copy of the First Trust Deed.  She was not satisfied that she was the only named beneficiary in the deed.  She talked with the Mother and asked for Mr Kwan’s name to be included and agreed to have the stamp duty deducted from her joint bank account with the Mother.  About a month later, the Second Trust Deed was executed.  This is a significant piece of evidence.  If the shares in Chun Man was intended as a gift to her son, Mrs Kwan’s name would not have appeared as beneficiary in the First Trust Deed.  The Mother’s explanation is that as the grandson was not of age, she thought it more appropriate to have the shares held on trust for Mrs Kwan who would then hold them on trust for her son.  That would defeat the purpose of the trust.  If the Kwans had not contributed to the share capital of Chun Man, Mrs Kwan would not have the bargaining power to demand for the shares to be held on trust for her and Mr Kwan jointly.  It would otherwise have been entirely a matter of the discretion of the donor of the gift to decide who should be the beneficiary of his bounty.  I reject the Mother’s explanation as devoid of common sense. 

45.  Very curiously, no one knows where the originals of the Second Trust Deed and transfer form are.  Mr Fu admitted that he instructed the company accountant, Messrs Leung Wan & Co, to incorporate Chun Man.  He said that those documents were probably with the accountant.  On the other hand, Mrs Kwan had asked his solicitors to obtain the documents from the accountant so as to effect the transfer but that attempt failed.  If Mrs Kwan had the documents, the Share Action would have been an unnecessary waste of costs.  She could have produced the signed transfer form and demanded to have the shares registered in the joint names of herself and Mr Kwan.  I think the likelihood is that the documents were being withheld by the Fus who had second thoughts about the whole transaction since the dispute began.  This casts doubts on the credibility of the Father, the Mother and Mr Fu.

46.  The Fus’ evidence that the Kwans’ US$500,000 remittance was a short-term loan is also inherently incredible.  The objective fact is that the Kwans did not have ready cash of US$500,000 to remit the entire sum to the Fus in June 1995.  Hence, two remittances were made.  At the time, Mrs Kwan owed her brother, Mr Fu Sai Wai, US$200,000.  It is unlikely that they would have offered the loan to the Father when they were still in debt.  On the other hand, the Father was a very rich and successful businessman with annual business turnover of over $180 million.  Even if he did not have ready cash for the purchase, he could have no difficulties in obtaining credit at a small cost.  There was no need for him to borrow from Mrs Kwan who was then indebted to her brother in the amount of US$200,000.  It is not credible under the circumstances that the Father would have accepted the loan to save himself a small business cost at the expense of his daughter.  The likelihood is that the remittances were intended as capital for a joint venture in timber business as alleged by Mrs Kwan.

47.  The Fus’ evidence is that the Kwans’ US$500,000 remittance were short-term loans and the loans were repaid by two instalments in 1996.  There is no dispute that the Mother remitted US$300,000 to Mrs Kwan on 11 March 1996 and US$200,000 to Mr Fu Sai Wai on 1 April 1996, making up a total of US$500,000 which matched the money remitted to them by Mrs Kwan.  Mr Yau, counsel for the Fus, submits that the date of the two remittances were more consistent with repayment of a short-term loan than with a gift for purchase of property before 1997.  There is some force in that argument.  However, I think the dates of the Mother’s remittances were equally consistent with the account of both sides as the idea was for Mrs Kwan to enter the property market before 1997 and there is no evidence as to when precisely the Father would wish Mrs Kwan to enter the property market. 

48.  Mrs Kwan’s evidence is that the remittances of US$300,000 to her and US$200,000 to Mr Fu Sai Wai to settle her debt were part of the US$1.5 million promised to her at the meeting in the restaurant of the health club in June 1995.  She replied under cross-examination in a very hostile manner that she was still crazily waiting till her or her parents’ death for the balance of US$1 million.  Mrs Kwan was searchingly cross-examined and criticised on her witness statement in which she denied knowledge of the above remittances by the Mother. But, at the commencement of her evidence in chief, she amended her witness statement to the effect that her denial referred to her knowledge of the remittance to Mr Fu Sai Wai as her Mother’s repayment of the debt on her behalf.  She admitted that she owed Mr Fu Sai Wai US$200,000 and that Mr Fu Sai Wai confirmed to her that the debt had been settled.  On the other hand, under cross-examination, the Mother said that the US$200,000 was Mr Fu Sai Wai’s and so she paid it to him.  The Mother would not have said so, if in her mind she was repaying Mrs Kwan’s short-term loan.  It is more likely than not that the Mother was exercising her discretion in distributing her bounty to appropriate Mrs Kwan’s share to Mr Fu Sai Wai to discharge Mrs Kwan’s debt.  I accept Mrs Kwan’s explanation that the mistake in her witness statement was due to a misunderstanding on her part.  I find that Mrs Kwan understood the US$200,000 remittance to Mr Fu Sai Wai by the Mother was intended as her parents’ gift to her which was applied towards discharging her debt to her brother.  I find that the Mother’s two remittances of US$500,000 to Mrs Kwan is more consistent with their nature as a gift as promised during the meeting at the restaurant of the health club than as a repayment of the alleged short-term loans. 

49.  There are three other pieces of documentary evidence which shed light on the true nature of the relationship between the Kwans and Fus in relation to Chun Man.  Firstly, in December 1995, Mr Fu and Mr Kwan were negotiating for the purchase of a piece of land in Dai Chong County in Zhongshan to be owned by them jointly.  On 14 December 1995, prior to the incorporation of Chun Man, Mr Fu wrote to Mr Kwan as follows:

「	95年12月14日
	家澄
	請查收轉讓土地協議樣做。
	其中乙方可改為：傅世彪及關家澄所指定的香港註冊公司。在做土地證之前我想安排同一間獨立的香港公司股權，由阿媽代表你們擁有一半(她會簽回代理書及空白的轉股表交給世珍保管)另一半由快佳利發展擁有。長遠計手續及股份要攪得清清楚楚，阿媽做你與世珍的代理人是為了繳稅方便。簽文件給世珍拿着是手續清楚。
	其他的協議內容例如付款方式、土地價格等則按實際情況定出條件。」

50.  Even though this letter was written after the Kwans had remitted US$500,000 to the Fus and the letter was not written by the Mother, it clearly reflected the common intention of the parties just before the incorporation of Chun Man.  Impliedly, Mr Fu was suggesting to Mr Kwan that the land to be purchased in their joint names was to be held by a Hong Kong company in equal shares.  That company to be incorporated was to be held by the Mother and Quick Glory equally.  The Mother was to hold 50% of the shares in that company on behalf of Mr and Mrs Kwan.  The Mother would sign a power of attorney and a share transfer form in blank which were to be kept by Mrs Kwan.  The purpose was for tax convenience.  This letter precisely reflects and explains what indeed occurred.  Chun Man was subsequently incorporated.  50% of the shares were held by Quick Glory and 50% by the Mother.  In the letter of instruction to his accountant dated 1 February 1996, Mr Fu instructed that 50% of the shares in Chun Man was to be held on trust by the Mother for Mrs Kwan.  Accordingly, the Mother executed the First Trust Deed declaring a trust of 5,000 shares in Chun Man for Mrs Kwan.  That was a deviation from their original intention as expressed in this letter.  Then at the request of Mrs Kwan, the Mother executed the Second Trust Deed declaring that she held the 5,000 shares on trust for Mr and Mrs Kwan jointly.  The letter made no mention of the intention of making Chun Man a gift to the two grandsons.

51.  The second piece of documentary evidence is the Father’s personal letter dated 18 May 1999 to Mrs Kwan.  In that letter, the Father talked about his and the Mother’s health and their inconvenience in travelling to the United States.  He referred to his earlier mention about a deposit of HK$3 million which would mature on 3 June 1999 and which he would wish to make a gift to Mrs Kwan to improve the quality of life of her family.  It is common ground that the money was subsequently remitted to Mrs Kwan.  Mrs Kwan said that the money was dividend from Chun Man and the purpose of the Father’s letter was to dress it up as a gift so as to reduce her tax liability in the United States.  This is precisely the very purpose of the trust as stated in Mr Fu’s letter to Mr Kwan mentioned in paragraph 49. 

52.  The Father was equivocal about his letter of 18 May 1999 in his evidence-in-chief, but under cross-examination, he frankly admitted that the money was dividend of Chun Man.  Mr Fu was directionless under cross-examination.  He was evasive as to whether the purpose of describing the money as a gift was to reduce Mrs Kwan’s liability to United States tax.  He said that the letter was drafted by Mrs Kwan or that she coached the Father into writing the letter.  If the money was truly a gift to Mrs Kwan, Mr Fu would not have said that Mrs Kwan coached the Father into writing that letter.  He could have admitted that it was a gift in a straight forward and spontaneous manner.  If the Kwans had not provided the capital of Chun Man, there was no reason why the Father would give Mrs Kwan the HK$3 million which the Father said was dividend of Chun Man.  If 50% of the shares in Chun Man were held on trust for Mr Kwan’s son, the Mother should have held the dividend also on trust for the grandson without paying the money over to Mrs Kwan.  From the evidence of the three of them, it is only too clear that the money was dividend from Chun Man and that the Kwans had contributed to the share capital of Chun Man. 

53.  The third piece of documentary evidence is a document titled “as at 31 May 2000” signed by way of confirmation by Mr Fu and Mrs Kwan dated 6 January 2001.  The document is of the nature of a statement of account of a business as at 31 May 2000.  It stated the value of the asset of Sam Hing and Chun Man.  It referred to deductions for two dividend payments of HK$3 million each, the value of an investment in Lockhart Road and the value of an investment in Happy Valley.  The net figure in that statement of HK$5,202,588.37 was described as the amount which the Carlton Group should pay out.  There is no dispute that the HK$3 million mentioned in this statement of account is the same money mentioned by the Father in his letter of 18 May 1999.  This statement of account supports the conclusion that the money referred to in the Father’s letter was dividend from Chun Man.

54.  According to Mrs Kwan, Mr Fu presented her with the document and asked her to sign when he visited her in the United States.  According to Mr Fu, the document was prepared by Mrs Kwan who asked him to sign when he visited her.  It is a little curious that when Mr Yau cross-examined Mrs Kwan on the document, he put to her that the document was faxed to her by a staff of Chun Man which is inconsistent with Mr Fu’s evidence.  It is also curious that the Fus’ case in respect of the HK$3 million as put to Mr Kwan during cross-examination is that it was Sam Hing’s profits taken back to Hong Kong for distribution.  Quite apart from the total absence of evidence to that effect, it is difficult to see how the Kwans could have been entitled to a 50% share of Sam Hing’s profit without having 50% interest in Chun Man, if on the Fus’ case Sam Hing is a wholly owned subsidiary of Chun Man.  I think Mr Fu has embarrassed his counsel by changing his evidence and his counsel was confused by his inconsistent instructions.  I accept Mrs Kwan’s evidence.  It is unlikely that she could have had all the detailed information to prepare the statement of account while she was in the United States.  This finding is not crucial.  Whoever prepared that statement of account and whether it was faxed from Chun Man is immaterial.  The important fact is that the statement of account was signed and confirmed by Mrs Kwan and Mr Fu.  The statement of account acknowledged that Chun Man had distributed dividend in two sums of HK$3 million, one of which was given to the Kwans.  There are only two shareholders in Chun Man, Quick Glory and the Mother who held the shares on trust for Mr and Mrs Kwan.  Mr Fu and Mrs Kwan who signed in confirmation of the statement of account must be the ultimate beneficiaries of the shares in Chun Man and the dividends.  The dividend must also be the same HK$3 million referred to in the Father’s letter of 18 May 1999.  If the shares of Chun Man were held on trust by the Mother for the son of Mr and Mrs Kwan, there was no need to seek Mrs Kwan’s confirmation of the statement of account and similarly Chun Man would not have distributed the dividend to Mr and Mrs Kwan.  The dividend would have been kept by the Mother on trust for Mr Kwan’s son.  The distribution of the dividend and the confirmation of the statement of account point strongly the inference that the Kwans had contributed to the capital of Chun Man.

55.  Two other equal sums of $202,850 were recorded in the accounts of Chun Man as having been received on 8 June 2001 by the Mother, one for herself and one for Mr Kwan as overseas expenses and retained profits.  The Mother denied that it was bonus or dividend distributed by Chun Man.  The fact that one sum was recorded as Mr Kwan’s overseas expenses and retained profits suggests that Mr Kwan was participating in the profits of Chun Man.  The other identical sum received by the Mother must also be a payment of similar nature.  Those payments by Chun Man and their receipts by Mr Kwan and the Mother is consistent with the Kwans’ and the Fus’ participation in Chun Man as a 50-50 joint venture.

56.  Both Mr Kwan and Mr Fu are not credible witnesses.  They made accusations against one another and were selective in telling the truth.  I find that the Father and the Mother were evasive on this issue.  Even after allowing for their old age, I consider them incredible.  Though Mrs Kwan demonstrated animosity and hostility towards her parents and Mr Fu, in the light of the incontrovertible documents and the totality of the evidence, her evidence is the only one that makes sense.  Her evidence is cogent and spontaneous.  I accept the evidence of Mrs Kwan.  She was on good terms with her parents back in 1995.  The Father has ten grandsons, may be fewer at the time.  It remains unexplained why he should make a gift of Chun Man to these two grandsons in preference to the others.  At the time, the Father was very rich and doing very well in his business.  He did not need any loan from Mrs Kwan to save himself a small interest and bank charges.  The remittances by the Kwans were more consistent with their nature as capital contribution than as loans.  The US$500,000 remittance by the Mother to Mrs Kwan and to Mr Fu Sai Wai to discharge Mrs Kwan’s loan to her brother were more consistent with their nature as gifts of the parents, though the amount was short of what had been promised. 

57.  At the time, Mr Fu was the only son in Hong Kong.  The Father’s other three children and their families had settled in the United States.  At the time, money was in abundance, business was promising, opportunities were plenty, minds were at ease and hearts were affectionate.  The thought of giving a small slice of this new business prospect to the daughter to entice her and her family back to Hong Kong or to visit her parents in Hong Kong more frequently in their old age is not at all an unattractive proposition.  This is especially so as Mr Kwan was then operating a motor-car spare parts business in his native city in Nanhai. 

58.  I find that the 5,000 shares held by the Mother and then by Kinetic Energy were not a gift to the son of Mr and Mrs Kwan but trust property held for the benefit of Mr and Mrs Kwan by reason of their investment in Chun Man.

Ownership of Sam Hing

59.  It is common ground that Sam Hing was incorporated in Zham Heung Town in Zhongshan on 11 August 1995 under the name of Zhongshan City Sam Hing Furniture Company Limited (中山市三興木材傢俬有限公司).  It operated through a branch office in Zhongshan Harbour.  On 15 January 1998, it was moved from Zham Heung Town to Zhongshan Harbour and re-named as Zhongshan City Sam Hing Timber Company Limited (中山市三興木業有限公司).  At the time of incorporation, the legal representative was Mr Yeung and the shareholders were Mr Yeung, Mr Mok and Mr Yiu. 

60.  The Fus’ case is that Sam Hing was set up by the Father who provided the capital and it was subsequently injected into Chun Man as its wholly-owned subsidiary.  The Kwans said that the joint venture in timber business between the two camps was limited to the operation of Chun Man in Hong Kong.  His case is that Sam Hing was solely owned by him and operated in the PRC independently of Chun Man.  Sam Hing purchased timber from Chun Man as well as from other suppliers on its own account.  He did not dispute that the Father provided RMB 300,000 for depositing with a credit union (信用合作社) in Zham Heung Town as capital of Sam Hing for the purpose of enabling the authorities to verify the capital investment (驗資).  The Father further injected another amount of RMB 200,000 in 1999 as additional capital.  But Mr Kwan claimed that the two sums were part of the US$500,000 which Mrs Kwan remitted to the Fus.

61.  The circumstances of setting up of Sam Hing according to the Fus were as follows.  The Fus had in mind importing timber for sale in the PRC.  The importation had to be done through state corporations as intermediaries which would then sell the imported timber to a retail arm in the PRC.  Chun Man was set up to source and supply timber and Sam Hing was set up as the retail arm of Chun Man in the PRC. 

62.  In May 1995, which was before the joint venture was discussed with Mrs Kwan, the Father and Mr Fu had a meeting with four of their trusted staff in the factory in Qishi in Dongguan: Mr Yeung, Mr Mok, Mr Yiu and Mr Yiu Mei San.  The Father disclosed to them his plan of setting up a timber trading company in Zhongshan.  The Father would provide the capital for the company and invited them to be his nominated shareholders in the company.  They agreed.  Sam Hing was then incorporated on 11 August 1995.

63.  Pursuant to the agreement, Mr Yeung entered into a lease agreement with Ngai Fung Crafts Factory in Zham Heung Town for the lease of its factory premises as the office of Sam Hing.  The agreement was dated 29 May 1995 for a term of three years commencing from 1 June 1995.  Mr Yeung, Mr Yiu and Mok all obtained a Temporary Resident Permits from the authority to enable them to move from their permanent residence in Dongguan to Zham Heung Town.  That was a residence requirement for shareholders of companies incorporated in Zham Heung Town.  The permits show their address was Ngai Fung Crafts Factory and the permits were effective from 1 June 1995.  Those permits and the lease are of particular evidential value to the Fus’ case.  The permits, in particular, are official documents and their contents could not have been forged.  They support the evidence of the Father, Mr Yeung, Mr Yiu and Mr Mok about setting up Sam Hing.  Those incontrovertible documentary evidence firmly locked the date of the discussion about setting up Sam Hing and the lease of the factory premises to a date before 29 May 1995, a date when the Kwans, even on their own evidence, could not have any idea whatever about setting up Sam Hing.  Subsequently, the lease was cancelled when Mr Fu found a more suitable accommodation in Zhongshan Harbour.

64.  In contrast, Mr Kwan’s evidence is that he was in Nanhai in mid June 1995 when Mrs Kwan informed him of the business proposal and he drove from Nanhai to Zham Heung Town to meet the Father in July 1995.  He consulted the then Vice-Town Governor of Zham Heung Town, Mr Tse, about investment procedures and offered to set up Sam Hing with Mr Tse’s daughter as legal representative or shareholder.  Mr Tse declined the offer and introduced him to Mr Xin whom Mr Kwan subsequently employed as manager of Sam Hing.  Then in consultation with Mr Fu, he appointed Mr Yeung, Mr Yiu and Mr Mok as nominee shareholders of Sam Hing.  Mr Kwan produced a statement from Mr Tse corroborating his evidence.  He also produced a statement from Mr Jiang of Ngai Fung Crafts Factory alleging that the lease was a sham as Sam Hing never took possession of the premises and never operated there.

65.  Mr Xin was called by the Fus to rebut Mr Kwan’s story.  According to Mr Xin, he was introduced by the Vice-Town Governor of Zham Heung Town to the Father.  He was then employed by the Father as the manager of Sam Hing.  He located an office in Zhongshan Harbour for Sam Hing and arranged for its decoration.  He said that all those events occurred before Mr Kwan was first introduced to him by the Father and took over management of Sam Hing.  I am conscious of the readiness of witnesses from the PRC who were called by the Fus to tell lies.  In particular, Mr Xin, Mr Yeung, Mr Yiu and Mr Mok had all given false evidence in the bureaus and courts in the PRC in connection with this matter.  Mr Chan SC, counsel for the Kwans, suggests that Mr Xin was under great pressure from the PSB and the Fus to lie.  I treat their evidence with grave suspicion.  Mr Xin, who was once in the Kwans’ camp and had attempted to replace Mr Yeung as the legal representative of Sam Hing, had been sued by the Fus in the PRC.  He has now turned over to the Fus’ camp giving evidence against Mr Kwan.  But, on a proper analysis of all the evidence and the incontrovertible documentary evidence, I am driven to the conclusion that Mr Xin, Mr Yeung, Mr Yiu and Mr Mok are telling the truth.  Their evidence supports the case of the Fus.  I reject his evidence.

66.  Mr Jiang’s evidence appears to be damaging to the credibility of Mr Yeung.  However, on a proper analysis of their evidence, it is not.  The Fus and their witnesses never asserted that Sam Hing operated at the premises of Ngai Fung Crafts Factory.  The lease was just as a convenient document to facilitate incorporation of Sam Hing before a proper address was found.  It does not damage the credibility of Mr Yeung.  As I have indicated, the Temporary Resident Permits of Mr Yeung, Mr Yiu and Mr Mok prove conclusively the time when the setting up of Sam Hing was first discussed by the Fus and the time when the lease agreement with Ngai Fung Crafts Factory was signed.  Mr Jiang’s and Mr Tse’s evidence that Mr Kwan was the owner of Sam Hing are bald assertions not supported by any objective facts.  I give no weight to their evidence.

67.  Mr Kwan’s evidence about the timing of the setting up of Sam Hing betrayed him.  This is not a case of testing one’s memory about when something happened more than ten years ago.  I cannot in any fairness tie Mr Kwan to his evidence that he drove to Zham Heung Town to see the Father in July 1995.  However, that incident could only have occurred some time after June 1995 when Mrs Kwan visited her parents.  From the Temporary Residence Permits and the lease agreement, it is beyond dispute that the Fus had already planned setting up Sam Hing in May 1995 before the Kwans even became involved in the joint venture.  Though Sam Hing was only incorporated on 11 August 1995, as early as May 1995 the Fus had gone to the length of arranging for the three nominee shareholders to apply for the Temporary Residence Permits and arranging a bogus lease from Ngai Fung Crafts Factory in preparation for setting up Sam Hing in Zham Heung Town.  In the circumstances, Mr Kwan’s evidence could not be true and it is hardly credible that the two camps could have gone to the details as alleged by Mr Kwan of agreeing to setting up Chun Man in Hong Kong to be owned jointly by the two camps and setting up Sam Hing to be owned solely by Mr Kwan when the discussion about the joint venture just began in mid June 1995.  On the timing of the setting up of Sam Hing alone, it is manifestly obvious that Mr Kwan’s case is a poorly concocted one.

68.  A very important piece of objective evidence is the mode of business between Chun Man and Sam Hing.  It is not disputed that Chun Man traded almost solely with Sam Hing.  On the other hand, Mr Kwan was quite unable to show he had any significant suppliers of timber other than Chun Man.  This clearly shows that Sam Hing was part of the joint venture.  It does not make any business sense for the Fus to set up Chun Man in Hong Kong solely to sell timber to Sam Hing with only a 4% mark up.  It would only make business sense for Chun Man to have a corresponding retail arm in the PRC so as to tap the ultimate profit of the re-sale of timber in the PRC.  I find that Sam Hing was intended to be the retail arm of Chun Man in the PRC and an integral part of the joint venture.

69.  The credit given by Chun Man to Sam Hing also speaks for itself.  The outstanding purchase price due to Chun Man exceeded HK$24 million as at 31 March 2002 according to the audited accounts of Chun Man or exceeded RMB 26 million (equivalent to HK$24 million) as at 31 December 2001 according to the audited reports of Sam Hing.  The timber was supplied on credit from Chun Man without any form of security.  The registered capital of Sam Hing was only RMB 500,000.  No supplier on arm’s length basis would have allowed such a level of credit without any security.  On the other hand, the purchases by Chun Man from its various sources were financed by letters of credit issued by Chun Man and other corporations of the Father.  Furthermore, there were numerous faxes in which Sam Hing reported its particulars of sales to Chun Man.  These were trade secrets which Sam Hing could have no reason to disclose to Chun Man if it was not an integral part of Chun Man. 

70.  The assets of Chun Man and Sam Hing were dealt with together in the statement of account as at 31 May 2000 acknowledged by Mrs Kwan and Mr Fu on 6 January 2001.  This is clear evidence that in their minds, the two companies were an integral part of the joint venture from which they drew their share of dividend.  The way the business in the two companies were handled, the reporting by Sam Hing of its sales to Chun Man and remittance of the proceeds of sale before the present dispute all point to the inference that the two companies are parts of an integral whole. 

71.  Mr Chan SC argues to the contrary by relying on the fact that Sam Hing was never shown in the books of Chun Man as its subsidiary.  There is some force in that argument.  But I think the evidence that Sam Hing was an integral part of the business of Chun Man and its subsidiary is overwhelming.

72.  As for the issue of who provided the RMB 300,000 as initial capital for Sam Hing in 1995 and the additional capital of RMB 200,000 in 1998, it is common ground that the RMB 300,000 was taken out from a safe in the Father’s furniture factory in Dongguan and then taken to Zham Heung Town while the additional capital of RMB 200,000 was taken from the funds of Sam Hing.  Mr Kwan’s evidence is that the two sums were part of the US$500,000 which Mr and Mrs Kwan remitted to the Fus and Mr Kwan asked the Father to deduct the two sums from the US$500,000 remittance.  Mr Kwan’s case in respect of the additional capital of RMB 200,000 is inconsistent with Miss Cheng’s evidence that the money was from the account of Sam Hing and with his own case that Sam Hing was owned by him.  The Father denied having any such agreement.  Mr Kwan also said that he went with the Father, Mr Fu and the three nominee shareholders to the credit union to deposit the first sum of RMB 300,000.  But, Mr Yeung, Mr Yiu and Mr Mok all denied having been to the credit union to make the deposit.  That divergence is not of significance.

73.  Mr Chan SC seeks to rely on the Reports in which Promise asserted that Mr Kwan provided the capital for Sam Hing.  That statement was based on the accounting record of Sam Hing which had no bearing to the underlying fact.  Mr Chan SC also relies on Miss Cheng’s evidence that the additional capital of RMB 200,000 was provided by Mr Kwan.  That was based on the fact that the money was taken from the funds of Sam Hing and her belief that Mr Kwan was the sole owner of Sam Hing.  There is no basis for her belief.  I give no weight to those evidence.  

74.  I have found that Chun Man is a 50-50 investment between the Kwans and the Fus with the Kwans contributing US$500,000 as their share of the capital.  If RMB 500,000 had been taken out from the said remittance of US$500,000, there must be some record or note to that effect so that the Fus could have some idea of the amount of capital they had to match and the Kwans could have some evidence of their ownership in Sam Hing.  This is particularly the case for Mrs Kwan who is a very careful person.  She had meticulously kept all the record of payment of salaries she made to Mr Fu in connection with his immigration matters in the United States.  But there is no account from the two camps as to how the Kwans’ remittance of US$500,000 was accounted for.  There is no evidence from the Kwans about any agreement to split the US$500,000 remittance first into two portions, including one of RMB 300,000 as Mr Kwan’s personal investment in Sam Hing and then a further split of the remaining portion after three years into yet another two portions including one of RMB 200,000 for further capital injection into Sam Hing.  On the other hand, it is Mrs Kwan’s evidence that the capital was agreed to be HK$4 million (though that was slightly more than US$500,000).  This is in head-on contradiction of Mr Kwan’s evidence that the two sums of RMB 300,000 and RMB 200,000 were taken out from the said US$500,000 remittance.  If the husband and wife cannot be consistent on such an important matter which forms the central pillar of their case, I am all the more bound to reject Mr Kwan’s evidence.  I find Mr Kwan’s evidence a conveniently made up concoction. 

75.  Mr Kwan produced receipts of expenses he incurred in connection with setting up of Sam Hing as evidence that he was the sole owner of Sam Hing.  Some of those receipts were for very minor expenses such as toll charges and gas for his car, which he said was recently recovered by his driver from some old possession under his bed.  Those receipts appear to me to have been used or were kept for the purpose of claiming reimbursements from Sam Hing.  He also produced a note from Mr Huang Tongshun, Sam Hing’s first accountant, acknowledging that Mr Kwan had paid the deposit and decoration expenses for Sam Hing’s office in Zhongshan Harbour.  But the note also stated clearly that Mr Kwan had been reimbursed by Sam Hing.  He also produced another note from the accountant showing that he had deposited money into Sam Hing.  It was not a significant amount.  I do not consider those documents conclusive as to Mr Kwan’s ownership in Sam Hing.  They were probably documents used for the purpose of making reimbursements.  I give no weight to those documents. 

76.  I have rejected the Fu’s evidence that the Kwans’ US$500,000 remittance were short-term loans.  To some extent that damages the credibility of the Father, the Mother and Mr Fu which may have a bearing on the issue as to the ownership of Sam Hing.  However they had, at least, the honesty to say that 50% of the shares in Chun Man are held on trust for the Kwans’ son.  They are not attempting to claim those shares for themselves.  Their action is understandable in view of what Mr Kwan did to Chun Man and Sam Hing.  But Mr Kwan dishonestly and conveniently alleged that he provided the capital for Sam Hing in order to make a claim for the entire ownership of Sam Hing.  The rest of the evidence which unfolds reveals nothing but his dishonesty in taking over Sam Hing as his own by replacing the nominee shareholders of Sam Hing appointed by the Father by those of his own, attempting to obtain replacement land use licence and real estate licence of the land and building belonging to Chun Man and remitting the funds of Sam Hing to his own company.  Mr Kwan’s dishonesty was far beyond compare.  He was a ruthless liar. 

77.  On the ultimate analysis, the evidence on this issue is so overwhelming and compelling that I have to accept the Father’s and his witnesses’ evidence.  Mr Kwans’ evidence is just an insult to common sense.  It also shows how desperate he was in building up a case which he knew is hopeless and untrue.  Accordingly, I find that Sam Hing was set up by the Father.  It was then injected into Chun Man as its subsidiary.  Chun Man and Sam Hing together form an integral whole which is the subject matter of the joint venture between the Fus and the Kwans.  Though the capital of Sam Hing was provided by the Father, it was actually part of the Fus’ contribution to their share of the capital for the joint venture.

Whether Mr Kwan was a director and/or an employee of Chun Man with responsibility for the management and operation of Sam Hing

78.  The Fus’ case is that Mr Kwan was appointed as a director of Chun Man on 26 March 1997 until his removal on 12 December 2003.  Mr Kwan admitted his appointment as a director of Chun Man but disputed the validity of his removal on 12 December 2003.  He further averred that he was just a nominal director and that he did not participate in the management or operation of Chun Man.  He said that his appointment was to reflect his beneficial interest in Chun Man.  His defence is rather nebulous.  I assume he intended to argue that he owed no fiduciary duty to Chun Man.

79.  Mr Kwan signed as director and approved at least the audited financial statement of Chun Man for the year ending 31 March 1999.  He explained that he signed because he was told to do so by the Mother.  I think that defies common sense and reality.  On any view, Mr and Mrs Kwans, whether by themselves or by their son, own 50% of the shares in Chun Man.  It is natural for Mr Kwan to be concerned in the proper management of Chun Man.  Even on his evidence, he participated in significant business decisions of Chun Man.  He also signed in his capacity as the general manager of Chun Man on the letter written to him by the Father on 3 September 2001.

80.  I have no doubt on the Father’s evidence that he placed Mr Kwan in the driving seat of Sam Hing and introduced him to his staff as the manager of Sam Hing.  The minutes of Chun Man shows that a resolution was passed by the board of directors on 6 March 2001 to pay the Mother and Mr Kwan remunerations in the sum of HK$40,000 per month for their management responsibility in Sam Hing.  The amount was increased to $80,000 with effect from 1 January 2002 by a board resolution of 5 February 2002.  The resolutions were passed by the Father, the Mother and Mr Fu in the office of Chun Man in Hong Kong.  Though Mr Kwan was not a party to the resolution and denied knowledge of the resolution, he did not dispute receipt of the remunerations.  Mr Kwan was stationed full time in Sam Hing.  The payments by Chun Man and the receipts by Mr Kwan are consistent with the Fus’ case that Mr Kwan was a director and/or an employee of Chun Manwith responsibility for the management of Sam Hing.

81.  In 2005, Mr Kwan was sued by Chun Man in the Zhongshan Municipal Intermediate People’s Court for wrongfully leasing Chun Man’s property in Dai Chong County without authority.  One of his defences was that he was a shareholder and director of Chun Man authorised to deal with Chun Man’s property.   It lies ill in his mouth to deny any participation in the affairs of Chun Man. 

82.  I have no hesitation in finding that Mr Kwan was at the material times a director and an employee of Chun Man with full and specific responsibility for the management and operation of Sam Hing and he had knowledge of the nature ad scope of his appointment.  I am also satisfied that at the material time he participated in the affairs of Chun Man in that capacity and had control and management of Sam Hing on behalf of Chun Man.  I find that he owed fiduciary duty to Chun Man and Sam Hing, in particular to account for the proceeds of sale and the stock of timber.

Changing the shareholders and legal representative of Sam Hing

83.  It is common ground that when Sam Hing was incorporated Mr Yeung was registered as its legal representative and the three shareholders were Mr Yeung, Mr Yiu and Mr Mok.  Mr Kwan caused his factory manager, Mr Xin, to apply to the Administration for Industry and Commerce of Zhongshan on 5 February 2002, to have the legal representative of Sam Hing replaced by Mr Xin and to have the shareholders replaced by Mr Xin and Mr Huang Guofui.  The changes were approved by the Administration for Industry and Commerce of Zhongshan on 8 February 2002.  Then on 9 June 2002, at the instruction of the Fus, Mr Yeung, Mr Yiu and Mr Mok took out proceedings in the Zhongshan People’s Court ((2003) 中中民–初字第3號) against Mr Xin and Mr Huang for conversion of the shares of Sam Hing.  Mr Kwan was a third party to the action.  The Zhongshan People’s Court considered the matter was not an economic dispute but a case of suspected economic crime.  It dismissed the action and referred the matter to the PSB for investigation.  Mr Xin, Mr Huang and Mr Kwan appealed, but their appeal was dismissed with costs by the Guangdong Province Higher People’s Court ((2003) 粵高法立民終字第73號).  As a result, the Zhongshan Municipal Intermediate People’s Court seized certain books and records of Sam Hing.  Eventually, by a decision dated 23 November 2004, the Administration for Industry and Commerce of Zhongshan set aside its order dated 8 February 2002 in respect of the change of legal representative and shareholders of Sam Hing (工商中山企撤字 [2004] 第001號).  This effectively restored Mr Yeung as the legal representative and Mr Yeung, Mr Yiu and Mr Mok as the shareholders of Sam Hing.  Mr Xin and Mr Huang appealed against the decision of the Administration for Industry and Commerce of Zhongshan by way of judicial review to the Zhongshan People’s Court ((2005) 中法行初字第12號).  The appeal was also dismissed with costs. 

84.  There is no dispute that Mr Yeung, Mr Yiu and Mr Mok were nominee shareholders of Sam Hing.  The only dispute is whether they were nominees of the Father or of Mr Kwan.  Mr Kwan’s case is that Mr Yeung, Mr Yiu and Mr Mok were appointed by him at the suggestion of Mr Fu.  Then, as they lived and worked in Dongguan, they indicated reluctance to continue with their role as nominee shareholders of Sam Hing which was situated in Zhongshan and asked to be released of their responsibilities with Sam Hing.  Hence, he arranged to have them replaced by Mr Xin and Mr Huang.  The three nominees were unanimous that they were appointed by the Father pursuant to a meeting in the Father’s furniture factory in Dongguan in May 1995.  They denied signing their names or authorising their names to be signed on their behalf on the amendment to the articles of association of Sam Hing and shareholders’ resolution to change the shareholders of Sam Hing to Mr Xin and Mr Huang.  

85.  The Fus’ case is supported by the evidence of the Father, Mr Fu, Mr Yeung, Mr Yiu, Mr Mok and Mr Xin.  Mr Kwan’s case is only supported by his own evidence, the statements of Mr Jiang and Mr Tse.  Mr Xin, who used to be in the Kwans’ camp in the PRC proceedings, has turned over to the Fus.  His evidence is contrary to Mr Kwan’s.  All the witnesses were selective in telling the truth.  I have found the Father and Mr Fu incredible in relation to their evidence as to the nature and purpose of the US$500,000 remittance.  The Fus’ other witnesses have all been shown to have given inconsistent and untrue evidence in the PRC proceedings in court or before the Administration for Industry and Commerce of Zhongshan at some stage.  They have demonstrated their readiness to achieve results by giving false testimony.  On the other hand, I have also found Mr Kwan incredible, save as to the nature and purpose of the US$500,000 remittance.  

86.  Mr Xin, in particular, is a deflected witness.  He introduced his nephew and cousin to Mr Kwan for them to be appointed as the legal representative and shareholder respectively of Man Shing of which Mr Kwan is the beneficial owner.  He joined Man Shing after Sam Hing closed down and transferred the remaining stock of Sam Hing to Man Shing.  He resisted the Fus’ action in relation to the conversion of the shares in Sam Hing.  He appealed against the decision of the Administration for Industry and Commerce of Zhongshan and the Zhongshan People’s Court in restoring the legal representative and shareholders of Sam Hing nominated by the Father.  He wrote a note certifying that Mr Kwan was the founder and sole owner of Sam Hing.  He admitted that he signed witness statements prepared by Mr Kwan’s lawyer which he knew were untrue.  He also admitted that he heard evidence purportedly made by him in court in the PRC which he knew was untrue.  He said that he wrote statements for Mr Kwan after he was promised RMB 100,000, but Mr Kwan did not honour his promise.  Now, he turned himself over to the Fus and supported the evidence of the Fus.  This time, he signed a witness statement prepared by the Fus’ lawyer.  He said that he was tricked by Mr Kwan into agreeing to be the legal representative and shareholder of Sam Hing.  He said that he came to know about the truth after he had discussions with the staff of Chun Man and came to realise that Sam Hing had not paid for the timber.  Under cross-examination, he was asked about a tea meeting with Mr Huang after he had deflected and agreed to give evidence for the Fus.  He denied it was a pre-arranged meeting with Mr Kwan.  He said that he had arranged to have tea with Mr Huang that morning, but Mr Kwan turned up impromptu.  Mr Kwan then showed Mr Xin the note that he wrote certifying Mr Kwan was the founder and sole owner of Sam Hing and suggested to him that it would be problematic for him to give evidence.  Mr Xin replied that he was forced and paid by Mr Kwan to write the note.  Mr Kwan then asked him if there was any way out and suggested to negotiate.  Mr Xin declined and left the meeting.  Mr Xin said that he was driven by his conscience to tell the truth now.

87.  When the evidence of all the witnesses are tested against the timing of the setting up of Sam Hing, the lease agreement in respect of the premises of Ngai Fung Crafts Factory and the Temporary Residence Permits of Mr Yeung, Mr Yiu and Mr Mok, there could be no doubt that the evidence of the Fus’ witnesses is closer to the truth and the evidence of Mr Kwan is to be rejected.  Mr Kwan’s motive is clear.  He was trying to appropriate Sam Hing to himself when his dispute with the Fus was heightening.  He knew the end of the joint venture was in sight and attempted to secure Sam Hing to himself.

Obtaining replacement land use licence and real estate licence

88.  This is not a material but a collateral issue in this dispute, which is relevant only for assessing credibility of the witnesses. 

89.  Prior to the incorporation of Chun Man, Mr Fu and Mr Kwan entered into a sale and purchase agreement on 12 December 1995 to purchase a piece of land in Ma Hang Lot in Dai Chong County at a price of RMB 1.6 million.  The land was intended for the use of the joint venture.  A land use licence (國有土地使用證) was subsequently issued to Chun Man in September 1996.  On 2 November 1998, Chun Man applied for a real estate licence (房地產權證) in respect of a new building to be erected on the land.  The real estate licence was issued to Chun Man on 8 February 1999.  The above facts are not disputed by Mr Kwan.  The Fus’ case is that the land and building belong to Chun Man.  But, Mr Kwan claimed that the land was jointly purchased by him and Mr Fu and he provided the full purchase price but Mr Fu refused to contribute his share of the purchase price.  He further claimed that he had also paid for the construction cost for the building of RMB 1.152 million.  He said as a result there was a mutual understanding that the two licences were to be kept by him as security.

90.  Mr Kwan’s case is built on two receipts in respect of down payments in the total amount of RMB 460,000 and the various receipts for building materials and construction cost.  The receipts for the down payments show that the parties who made the remittances were the Father, Mr Fu and Mr Kwan and identified Chun Man as the investor.  Mr Kwan’s possession of the various other receipts could be readily explained as he was the only director of Chun Man stationed in Zhongshan who had to deal with matters relating to the land and building of Chun Man.  Thus, those receipts are equally consistent with the case of the two parties. 

91.  There is no dispute that the Fus were very resourceful and had two furniture factories in Dongguan from which the funds for setting up Sam Hing was obtained.  On the other hand, on Mr Kwan’s evidence, he did not even have RMB 300,000 to pay for the capital investment of Sam Hing and had to ask the Father to provide the funds by deducting from his US$500,000 remittance.  At the same time, the Kwans were indebted to Mr Fu Sai Wai in the amount of US$200,000.  I do not think it is likely that Mr Kwan could at that time have available RMB 1.6 million to pay the purchase price for the land.  Furthermore, the land was subsequently registered under the name of Chun Man.  There is no reason why having contributed US$500,000 to the share capital of Chun Man, Mr Kwan should further contribute the land to Chun Man. 

92.  On the other hand, Sam Hing’s ledger shows that Sam Hing paid Quick Glory RMB 820,000 to reimburse the Fus for the purchase price of the land.  This shows there is absolutely no truth in Mr Kwan’s evidence that Mr Fu did not pay his 50% share of the purchase price of the land.  The incontrovertible evidence is that the Fus had paid more than 50% of the purchase price of the land and had been reimbursed from Sam Hing.  As Sam Hing was a wholly owned subsidiary of Chun Man, more than half of the purchase price was in effect paid by Chun Man.  This supports the Fus’ case that the land was purchased by Chun Man.  But, beyond the two receipts for down payment, Mr Kwan was unable to produce any documentary evidence of his having paid the balance of the purchase price in support of his case.  I accept Mr Fu’s evidence that he and Mr Kwan were named as joint purchasers because at the time Chun Man was not yet incorporated.  Mr Kwan was the only director of Chun Man stationed in the PRC.  Before the relationship between the two camps broke down, Mr Kwan was obviously entrusted with the obligation as a director of Chun Man to deal with matters relating to the land and the building.  He conveniently took advantage of that to make a false claim that he held the two licences as security for the purchase price of the land and construction cost of the building he paid.  I reject in total his evidence on this issue.  I find that the purchase price for the land as well as the construction cost were from the funds of Sam Hing or Chun Man.  I also accept Mr Fu’s evidence that the two licences were all along kept in the office of Chun Man.

93.  On 6 February 2002, that is on the day following his application to change the legal representative and shareholders of Sam Hing, Mr Kwan applied on behalf of Chun Man to the authority for replacement licences.  He produced an authorisation signed by himself on behalf of Chun Man to process the application. He obtained the replacement licences.  When cross-examined as to why Chun Man was able to produce the original licences, Mr Kwan put forward a theory that the licences were all along kept in the office of Sam Hing but he thought they had been lost when he was moving his home and hence he applied for replacements.  He went on with his theory that the Fus somehow obtained the licences from the Zhongshan People’s Court or from Sam Hing’s office while he was in the United States.  While claiming an honest intention in obtaining the replacement licences, Mr Kwan contested Chun Man’s action against him and the tenant in possession of the land and building (廣東省中山市人民法院 (2005) 中法民–初字第36號).  The Zhongshan People’s Court held that the tenant was led into possession of the land and building by reason of the replacement licences in Mr Kwan’s possession.  It dismissed the action against the tenant with costs against Mr Kwan and ordered Mr Kwan to surrender the replacement licences to Chun Man.  Mr Kwan appealed to the Zhongshan Municipal Intermediate People’s Court ((2005) 中中法民–終字第694號).  His appeal was also dismissed.  But he never surrendered the replacement licences. 

94.  While these proceedings in the PRC have no bearing on the present action, they reflect Mr Kwan’s dishonest intention in trying to appropriate property of Chun Man.  As the evidence unfolds, Mr Kwan leased the land and building to a third party for his own benefit.  The evidence presented by Mr Kwan also shows how ready he was in concocting his case with documents of Sam Hing to which he had access.  This damages his overall credibility.

The 15 volumes of 25 books (Exhibits P-3 to P-27)  -  authenticity

95.  Miss Zhou’s conclusions in the Reports were based on her examination of the 15 volumes of 25 books of accounts seized by the Zhongshan People’s Court.  Mr Kwan challenged the authenticity of those documents.  In addition, he alleged that they were not the complete records of Sam Hing and that Sam Hing had kept a second set of accounts.

96.  It is common ground that the Zhongshan People’s Court searched the office of Sam Hing on 24 June 2002 and seized all its accounting records.  The Zhongshan Municipal Intermediate People’s Court then forwarded the originals of the accounting records to the PSB for investigation and kept a set of photocopies.  The copies of the 15 volumes of 25 books of Sam Hing’s financial records produced in Court, i.e. Exhibits P-3 to P-27, are photocopies taken by the Fus’ legal expert from photocopies of the originals kept by the Zhongshan Municipal Intermediate People’s Court.  Miss Zhou confirmed that Exhibits P-3 to P-27 are identical to the records which she was given by the PSB to examine for the purpose of preparing the Reports.  Each volume refers to one book of accounts of a particular description.  There was no real challenge by Mr Kwan or his witnesses that Exhibits P-3 to P-27 are not genuine photocopies.  Accordingly, I am satisfied as to their authenticity.

97.  Mr Chan SC drew my attention to the fact that in relation to certain years, certain items of the records were missing.  However, as the accounts invariably set out the closing balance of the previous year which was brought forward as the opening balance in the accounts of that particular year, the missing items do not preclude the Court from forming a view of the opening and closing balance of the previous year in respect of the missing items.  Having read the Reports, perused Exhibits P-3 to P-27 and considered Miss Zhou’s evidence, I am satisfied that the missing items did not preclude Miss Zhou from reaching the conclusions she made in the Reports.

Whether Sam Hing had kept a second set of accounts

98.  It is Mr Kwan’s case that Sam Hing had kept two sets of accounts.  The 15 volumes of 25 books formed the external set of accounts for inland revenues and other official purposes.  They were not the true accounts of Sam Hing.  In addition, Sam Hing also kept a second set of accounts.  This was the internal set of accounts which was the true accounts of Sam Hing.  The internal set of accounts recorded the true transactions of Sam Hing.  Cash transactions for tax evasion purposes were entered into this set of accounts but not in the 15 volumes of 25 books.  Mr Kwan could not produce the internal set of accounts.  He said that the internal set of accounts was missing after the search and seizure by the Zhongshan People’s Court.  Mr Kwan therefore argued that he was unable to properly present his defence without the internal set of accounts and that production of the Reports is prejudicial.

99.  The receipt issued by the Zhongshan People’s Court showed that four boxes of documents had been seized from the office of Sam Hing.  According to Mr Kwan and his witnesses, virtually every document had been seized.  If so and if indeed a second set of accounts had been kept in the office of Sam Hing, it would have been seized as well.  If there was a second set of accounts which had been seized by the Zhongshan People’s Court, I would be very surprised that it would not have been forwarded to the PSB for investigation into the suspected economic crime.  I would also be very surprised that the PSB would not have shown it to Promise for the purpose of preparing the Reports as that set of accounts would point to some economic criminal activities.

100.  The 15 volumes of 25 books were disclosed to Mr Kwan’s solicitors as early as 16 February 2006.  It took them ten months until December 2006 to issue a notice refusing to admit the authenticity of those documents.  Furthermore, it was only at trial another year later that this defence of another set of phantom accounts is raised.  This defence was not pleaded and the evidence was not covered in any witness statements or affirmations of Mr Kwan or of his witnesses.  These circumstances alone cast serious doubts on the genuineness of the defence. 

101.  The way in which the evidence of the existence of the internal set of accounts was presented at trial by Mr Kwan is very suspicious.  It was first raised by Mr Kwan in terms of there being a possibility of there being two sets of accounts.  It was then fully developed by his witnesses, Miss Cheng and Miss Li.  On Mr Kwan evidence, he was the sole owner of Sam Hing.  On the fact, there is no dispute that he had total control and management of Sam Hing.  If two sets of accounts were kept in Sam Hing, one for the purposes of dealing with revenue and other government department; and another genuine set of accounts, it is just impossible that Mr Kwan could not have been more definite in his evidence.  Mr Kwan should be more concerned about the keeping and safe custody of the internal set of accounts.  It must be in his highest interest to review the internal set of accounts every now and then so as to update himself as to who his debtors were, the amount of cash generated from the cash transactions which were not reflected in the 15 volumes of 25 books, the amount of accounts receivable, the true level of his stock and his true profit and loss.  It is not uncommon for a business to keep two or more sets of accounts for different purposes including tax evasion.  Even if Mr Kwan had left it to his staff to keep the two sets of accounts, if indeed there was a second set of accounts, he could have positively said so in his evidence instead of calling it a possibility.  Mr Kwan was just raising a defence which he did not wish to be cross-examined on as such cross-examination could easily destroy his credibility.  This reflects a lack of good faith in his evidence.

102.  The way in which the evidence relating to the internal set of accounts was introduced by Miss Cheng and Miss Li was also very suspicious.  Miss Cheng was a former accountant of Sam Hing between 1996 and 2002.  She had no idea of the early history of Sam Hing.  She joined Man Shing after the search of Sam Hing by the Zhongshan People’s Court.  She thought Mr Kwan was the owner of Sam Hing but not the owner of Man Shing.  She may genuinely have no knowledge of those matters.  I do not weigh that against her.  She gave a very short witness statement to the above effect and on some non-controversial matters.  But, in her evidence in Court, she volunteered evidence that Sam Hing had two sets of accounts for tax evasion purposes and that the 15 volumes of 25 books did not reflect the true financial position of Sam Hing.  Such evidence went far beyond the scope of her witness statement.  If the purpose of calling Miss Cheng as the former accountant of Sam Hing was to give evidence on the second set of accounts kept by her, there is no reason why there was not the slightest mention of such evidence in her witness statement which was prepared as recent as August 2006.  This casts a grave doubt on the truthfulness of her evidence.

103.  Miss Cheng said that there were deliveries made to Sam Sing in 2001 and 2002 but agreed that those transactions were not recorded in the 15 volumes of 25 books but in the internal set of accounts.  She said that no invoices were issued in respect of the shipments or sales to Sam Sing because if invoices were issued, Sam Sing had to pay 13% VAT.  But according to Miss Zhou, whose evidence on tax matters I have no doubt, upon a resale, Sam Hing would be refunded any VAT it paid for the import from the VAT collected from the resale to Sam Sing.  Even on Miss Cheng’s own evidence, no VAT would be payable if the sale was below import price.  Miss Cheng simply failed to explain how by not issuing invoices, tax could be saved or avoided.  If the sale was at a profit and by way of cash, some VAT could be evaded.  But that is not consistent with Mr Kwan’s defence of Sam Hing being a nominee importer.  Miss Cheng’s evidence about the second set of accounts is incomprehensible.  I can think of ways in which a second set of false accounts could help to evade tax under certain designs.  But Miss Cheng just failed to explain how it would work in the circumstances of the present case.

104.  Miss Cheng also referred to what appeared to be monthly records of timber delivered to Sam Hing for the period from January to August 1998.  She said that those records formed part of the internal set of accounts and were genuine.  Assuming they were genuine records, it does not necessarily follow that they are part of the internal set of accounts.  I even wonder why Mr Kwan or his witnesses could have retained records back in 1998 but could not produce any record for 2001 or 2002.  In any event, the deliveries to Sam Sing in 1998 are not relevant in the present dispute.  I am only able to discover one sale to Sam Sing in 2001 and 2002 from the tables prepared by Miss Zhou based on the 15 volumes of 25 books of Sam Hing.  I do not find Miss Cheng credible.

105.  Miss Li was employed by Sam Hing between 1995 and 2002 as a stock-keeper of Sam Hing.  She believed Mr Kwan was the owner and the person solely in charge of Sam Hing.  She gave a very short witness statement to the above effect and on some non-controversial matters.  Her witness statement was similar to Miss Cheng’s.  In her evidence in Court, she said that Sam Sing was a major client of Sam Hing.  A lot of the timber was shipped to Sam Sing.  Between January and June 2002, there was timber shipped to Sam Sing every month.  She said that there were numerous shipments and those shipments were fully documented, but those documents were missing after the search and seizure by the Zhongshan People’s Court.  Then she volunteered evidence about the second set of accounts.  She said there were two sets of accounts and two sets of inventory records which were different.  One set was the external set of accounts for inland revenues purposes and one set was the internal set of accounts for Sam Hing’s internal purposes.  But she could hardly tell what the internal set of accounts comprised of.  She could not explain why the fifteen consignments of timber were recorded in the 15 volumes of 25 books as having been sold to customers other than Sam Sing when on her evidence a substantial portion of the fifteen consignments were shipped to Sam Sing. 

106.  She said that the stock level recorded in the two inventory records were different.  But she agreed that the opening stock level of the two sets of inventory records were the same and the incoming stock recorded were also the same.  She also agreed that all stock had been sold.  In the circumstances, the only difference between the two sets of inventory records would be the particulars of the purchasers and the quantities of the individual purchases.  If there were two sets of accounts and the external set of accounts were false, then the fictitious purchasers named in the external set of accounts would have to pay VAT to save the tax liability of the genuine purchasers in the internal set of accounts.  Her evidence does not make sense.  Besides, she has utterly failed to explain how the internal set of accounts and the internal inventory records helped to avoid tax, whether for Sam Hing or for Sam Sing.  Her evidence about the second set of accounts was confusing and outside the scope of her witness statement. 

107.  Miss Cheng’s and particularly Miss Li’s evidence were clear ambush on the Fus’ case.  Mr Chan SC has cross-examined Miss Zhou on the defence of “chao chang”.  Yet, Miss Cheng’s and Miss Li’s witness statements contained not the slightest mention of this defence.  Their witness statements were brief and contained non-controversial matters.  But both of them departed from their witness statements and proffered evidence of “chao chang” which was very important to the defence.  If that was the real purpose of calling those two witnesses, one would expect at least some mention of a second set of accounts in their witness statements.  Mr Yau applied for leave to produce documents for the purpose of cross-examining Miss Li on the matters not disclosed in her witness statement.  I allowed him to produce whatever documents then available in Court but disallowed his application for adjournment to produce further documents mainly because it would serve no purpose as Miss Li, a resident in the PRC, indicated that she would not be able to attend Court after the adjournment for further cross-examination.  In any event, I do not accept her evidence.

108.  On this issue, I find that Mr Kwan is evasive.  His evidence of a second set of accounts is not genuine.  I find that Miss Cheng and Miss Li were just told to parrot false evidence.  I disbelieve their evidence about the existence of the second set of accounts or internal set of accounts and about the many shipments of timber to Sam Sing during 2001 and 2002.  

Miss Zhou’s analysis of the 15 volumes of 25 books of Sam Hing

109.  Promise was commissioned by the PSB to prepare a judicial audit report on Sam Hing on five specific issues, including, firstly, the whereabouts of the sixteen consignments of timber imported by Sam Hing in 2001 and 2002 and the payments by Sam Hing for the timber (term of reference 2), and secondly, the inventory kept in respect of the timber, the sale of the timber, the receipt of the proceeds of sale and the whereabouts of such proceeds (term of reference 3).  Then on the recommendation of Promise, the PSB further commissioned Promise to investigate into the six remittances made by Sam Hing in 2002.

110.  In respect of the matters stated in the above two terms of reference, Miss Zhou conducted a full examination of the documentations relating to the sixteen consignments by examining the 15 volumes of 25 books of Sam Hing’s financial records.  One of the consignments was shipped to World Timber Company Limited, leaving fifteen consignments to Sam Hing which formed the subject matter of the Main Action.  Miss Zhou was able to identify the documentations in the 15 volumes of 25 books in respect of the fifteen consignments of timber shipped by Chun Man to Sam Hing.  The receipts of the fifteen consignments had been properly entered into the books of Sam Hing. 

111.  Miss Zhou was also able to identify inventory records and the documentations relating to the sale of timber to clients of Sam Hing from the 15 volumes of 25 books.  From those records, she prepared tables in respect of each type of timber showing the opening stock level, the incoming stock from the fifteen consignments, and particulars of the various sales including identities of the purchasers and quantities.  Those tables show that apart from a quantity of 145.3 cubic metres of timber which had been written off and reported to the customs authority of Zhongshan Harbour, all the timber in stock had been sold.  The detailed particulars which Miss Zhou was able to extract from the 15 volumes of 25 books show that the sales recorded therein could not have been fictitious.

112.  Miss Zhou found that between January 2001 and May 2002, Sam Hing made twenty-six remittances out of the PRC.  Chun Man acknowledged receiving twenty of those remittances.  Miss Zhou made further investigations into the six questionable remittances and confirmed that one of those remittances had also been received by Chun Man but not the other five.  I shall revert to this aspect of her evidence under a separate subheading later.

Whether the fifteen consignments of timber had been delivered to Sam Hing

113.  It is the Fus’ case that timber, including the fifteen consignments under the fifteen invoices, had been supplied by Chun Man to Sam Hing but Sam Hing failed to repatriate the proceeds of sale of the timber to Chun Man.  On Chun Man’s case, the timber was not sold to Sam Hing at arm’s length transactions.  Rather, the timber was shipped to Sam Hing for sale on Chun Man’s behalf.  The invoice price of the various consignments was entered into the books of Sam Hing as the cost of timber for accounting purpose only.  In all probability, the cost of timber thus entered into the books of Sam Hing would be different from the proceeds of sale by Sam Hing.  Chun Man is not claiming for the purchase price of the fifteen consignments of timber.  Chun Man seeks an account of what happened to the timber.  If the evidence so supports, Mr Kwan can legitimately give an account in which the value of the timber in stock and proceeds of sale is lower than the invoice price of the timber entered into the books of Sam Hing. 

114.  Mr Kwan put Chun Man to strict proof of the delivery under the fifteen consignments.  After being shown ten of the VAT certificates, he did not really dispute receipt of the fifteen consignments.  However, Mr Chan SC argues that Chun Man offered no evidence on the actual cost of the timber to Chun Man and that seven of the fifteen invoices do not appear in the accounts of Chun Man.  Presumably, Mr Chan SC is persisting in his dispute as to delivery of the fifteen consignments.  As for his complaint of lack of evidence on the actual cost of the timber to Chun Man, Chun Man does not dispute that the invoice price may not be the same as the actual cost.  But in view of the nature of remedy sought, the actual cost is not relevant.

115.  Mr Chan SC submits that the source documents in support of the deliveries were with Sam Hing, but as a result of the Fus’ action in the PRC, Sam Hing’s business records are no longer available.  He then argues that the best proof is Chun Man’s own accounts.  But seven of the fifteen invoices are not shown in the current account ledger of Sam Hing with Chun Man.  He therefore submits that the absence of seven invoices supports Mr Kwan’s evidence that most of the timber under the fifteen consignments were taken to Sam Sing.  He further draws support for this submission from the evidence of Miss Cheng and Miss Li.  Chun Man does not rely on its own ledger.  It remains unexplained why those seven earlier invoices were not entered into the ledger but the later eight invoices were.  I would place more reliance on the records of Sam Hing.  I have tediously gone over the 15 volumes of 25 books of Sam Hing.  I find that the timber under all the fifteen consignments were properly referenced and entered into the 15 volumes of 25 books.  The reference number, date of delivery, invoiced value, quantity and type of timber as entered in the books of Sam Hing matched with those on the invoices.  If no timber had been delivered to Sam Hing, it is inconceivable why Miss Cheng would have entered sales records, which must be fictitious, into the books of Sam Hing.  Despite the inadequacy of Chun Man’s record, I am satisfied that the timber under the fifteen invoices had been delivered to Sam Hing.

Whether Sam Hing was under an obligation to repatriate substantial sums of money to Chun Man in April and May 2002

116.  On my finding of fact, Sam Hing is a wholly owned subsidiary of Chun Man and that the consignments of timber delivered to Sam Hing were held on behalf of Chun Man for sale in the PRC.  The timber or the proceeds from sale of such timber were property of Chun Man.  In general, a subsidiary must act according to the direction of its parent company.  Sam Hing must be under an obligation to repatriate substantial sums of money to Chun Man if it was in possession of such cash and was so directed by Chun Man.  This is particularly the case if money is due to or held on behalf of Chun Man.  There is no doubt that substantial quantities of timber had been supplied to Sam Hing and not paid or accounted for.  There is also no doubt that Chun Man had repeatedly demanded repatriation of the proceeds of sale.  On 3 September 2001, the Father and Mr Fu wrote to Mr Kwan directing that the debts due to Chun Man be cleared within one month.  Though there was no reference to the debts due from Sam Hing to Chun Man, that is implicit from the context of the letter as the Father was referring to the business between Chun Man and Zhongshan where Sam Hing was situated.  The repayment of the debts due from Sam Hing was to enable Chun Man to repay the banking facilities used in supplying the timber to Sam Hing.  Mr Kwan signed a copy of that letter acknowledging his consent to the directions.  There is no doubt that Sam Hing was under an obligation to repatriate proceeds of sale of the timber supplied by Chun Man. 

117.  Mr Kwan sought to dispute Sam Hing’s liability.  He evidence is that though the timber were delivered to Sam Hing, significant quantities were subsequently shipped to Sam Sing without being paid for.  Hence, Sam Hing was not required to pay for the full value of timber imported.  Mr Kwan also suggested the possibility of a second set of accounts which recorded the true transaction of Sam Hing and which were probably seized by the Zhongshan People’s Court or somehow lost during the search.  He relied on Miss Cheng and Miss Li to further develop this line of defence.  I have rejected those evidence.  Furthermore, such defence simply could not stand in the face of the tables prepared by Miss Zhou.

118.  Mr Chan SC challenges if the timber represented by the first seven invoices had indeed gone into the stock of Sam Hing.  The value of timber under those invoices amounted to US$2,382,770 or 73.89% in value of the fifteen invoices.  I have rejected that submission in paragraph 114.  Despite the inadequacy of Chun Man’s record, I am satisfied that the timber under the fifteen invoices had been delivered to Sam Hing.

119.  Mr Chan SC also argues that in 80% of the consignments, the customs price which became the invoice price was higher than the actual cost of the timber to Chun Man by 20% and did not correctly reflect the value of the timber held by Sam Hing.  He suggests that a reduction of the value of the timber delivered during the period from 17 April 2001 to 23 May 2002 by 16%.  I think invariably the customs price and the invoice price were the same or nearly the same.  On one occasion, the customs price was even lower than the invoice price.  But I do not think any adjustment necessary.  In any event, Chun Man is seeking an account.  Any difference between the customs price and actual cost of the timber to Chun Man could be resolved during that process, if an account is to be rendered.

120.  Mr Chan SC also refers to Mr Yiu’s evidence that Mr Kwan had deposited RMB 800,000 into Mr Yiu’s personal saving account on 28 January 2002, which according to Mr Yiu was remitted to Chun Man or the Fus.  On Mr Yiu’s evidence, this amount should have been debited against the current account of Sam Hing with Chun Man but it was not.  I believe this amount must have, somehow, been taken care of in the audited accounts of Chun Man, but not that of Sam Hing because of the different accounting periods.  However, I am prepared to take this amount into account for the present purpose.  

121.  As to the question whether there was an obligation to repatriate substantial amount to Chun Man, a convenient and reliable starting point is the financial statement of Chun Man and Sam Hing in 2001 and 2002 which had been prepared by the accountants of the two companies and approved by their auditors.

122.  According to the auditor’s reports of Chun Man, prepared by Messrs Yau & Leung Certified Public Accountants, the amount of debt due from Sam Hing as at 31 March 2001 was HK$15,001,676 and that as at 31 March 2002 was HK$24,461,775.  This evidence is not contradicted by Mr Kwan.  Mr Chan SC queries the correctness of an amount of HK$6,367,447 entered in the current account ledger of Sam Hing with Chun Man as funds paid to Sam Hing on 31 December 2001.  I have no reason to doubt the correctness of the audited accounts for the year ending 31 March 2002.  It must have taken the above amount into account.  However, after 31 March 2002, Sam Hing made two further payments to Chun Man in the amount of HK$1,186,986 on 22 April 2002 and HK$740,362 on 23 May 2002.  After allowing for those two payments, the amount due from Sam Hing as at 23 May 2002 based on Chun Man’s account was HK$22,534,427.

123.  Based on Chun Man’s current account ledger with Sam Hing, a larger amount was due from Sam Hing.  The ledger shows an opening balance of HK$15,001,675 as at 1 April 2001 as confirmed by the auditor’s report.  Between 1 April 2001 and 23 May 2002, there were various importations of timber of the value of HK$58,620,810 and payment to Sam Hing in the amount of HK$6,367,447.  During the same period, there were funds received direct from Sam Hing in the amount of HK$7,977,506 and funds received from Sam Hing via the intermediary in the amount of HK$42,701,800.  After taking all those payments and receipts into accounts, the amount due to Chun Man as at 23 May 2002 was HK$29,310,626.  During the same period, a total amount of HK$1,525,700 was paid to Mr Fu and Mr Kwan.  If this amount is set off against money due from Sam Hing, the net amount due from Sam Hing as at 23 May 2002 prior to the remittance of US$95,000 to Chun Man was HK$27,784,926.  If the value of the seven invoices not entered into the ledger are added to this amount, instead of subtracted from it as suggested by Mr Yau, the amount due to Chun Man would be over HK$50 million.  I ignore this figure as being out of line.

124.  On the other hand, a lesser amount could be arrived at based on Sam Hing’s accounting reports.  The accounting reports of Sam Hing for the calendar year 2000 and 2001 had been prepared by Sam Hing’s accountant and audited by Promise.  In the audit reports of 2000 and 2001, Promise stated that the accounting reports prepared by Sam Hing were in accordance with the requirements of Enterprise Accounting Standard 《企業會計準則》 and that they fairly reflected the financial status of Sam Hing for those two years.  According to Sam Hing’s accounting reports, the balance in the accounts payable to Chun Man as at 31 December 2000 was RMB 17,677,698 while that as at 31 December 2001 was RMB 26,388,806.  Those accounting reports were prepared by Sam Hing while Mr Kwan was in control and are not controvertible.  Between 1 January and 23 May 2002, there were three consignments of timber received by Sam Hing in the total value of RMB 2,361,790 and three payments made to Chun Man in the total amount of RMB 9,094,875.  In his evidence, Mr Kwan also referred to a payment to Chun Man of US$500,783 which was recorded in the books of Sam Hing as a remittance of RMB 4,148,442.  He also claimed another payment of HK$254,894.  But that payment is not documented and should not be taken into accounts.  Allowing for those receipts and payments and the RMB 800,000 paid to Mr Yiu for remittance to Chun Man or the Fus, the amount owing to Chun Man as at 19 April 2002 was RMB 14,707,279 which was equivalent to HK$13,832,314.

125.  A fourth and simpler approach is to assume the five disputed remittances were money due to Chun Man.  Those remittances had been booked in Sam Hing’s accounts as repayments to Chun Man.  This must be taken as recognition by Sam Hing of its liability to Chun Man.  The total amount under those five remittances was RMB 22,556,716 which was equivalent to HK$21,214,773.

126.  Thus, whichever approach one takes, there is no doubt that substantial amount to the tune of between HK$13.83 and HK$21.21 million was due from Sam Hing to Chun Man in April and May 2002 when the five disputed remittances were made.

The five disputed remittances by Sam Hing

127.  I now revert to Miss Zhou’s evidence in respect of the five disputed remittances made by Sam Hing in April and May 2002.  All remittances out from the PRC had to be made via a state-owned intermediary.  Miss Zhou discovered the following five remittances which were made by Sam Hing but not received by Chun Man:

(1)	On 8 April 2002, US$546,175.75, equivalent to RMB 4,523,588, was remitted to K & F International Trading Co;
(2)	On 29 April 2002, US$550,000, equivalent to RMB 4,557,625, was remitted to K & F International Trading Co;
(3)	On 21 May 2002, RMB 4,270,775.49 had been transferred to the intermediary for remittance to Chun Man, but was subsequently returned to Sam Hing and distributed to fourteen clients of Sam Hing;
(4)	On 27 May 2002, RMB 4,495,588.79 had been transferred to the intermediary, but was subsequently returned to Sam Hing and transferred to Man Shing; and
(5)	On 3 June 2002, RMB 4,709,138.65 had been transferred to the intermediary, but was subsequently returned to Sam Hing which was then paid out to five different recipients.

128.  In respect of the first two remittances, Mr Kwan’s evidence is that they were deposits placed by other customers of Sam Hing in 2002 for purchasing timber for making kitchen cabinets.  The names of those customers were Tin Lung and Yuen Tai.  But their names were not found in the list of customers of Sam Hing’s prepayment accounts for the year 2002.  Mr Kwan said there were documents in support of those transactions, but he never produced them.  Mrs Kwan said adamantly that she had kept those documents but was never asked by Mr Kwan to produce them.  Mr Kwan is represented by a competent legal team led by senior counsel.  His legal team could not have overlooked such elementary matters.  I do not accept the evidence of Mr and Mrs Kwan.  Even their evidence, those deposits were received by Sam Hing.  In the absence of a reasonable explanation, his remittance of those funds out of Sam Hing is clear breach of fiduciary duty as director and employee of Chun Man with specific responsibility for the management and operation of Sam Hing.  He has a duty to account for those remittances.

129.  As for the other three remittances, they were booked in the accounts payable to Chun Man as payment of timber due to Chun Man.  The monies were transferred to the intermediary for remittance to Chun Man.  For reasons best known to Mr Kwan, which still remains unexplained, it was recalled and returned to Sam Hing’s banking account on the same day.  They were then paid out for purposes which apparently were not related to the business of Sam Hing or of Chun Man.

130.  The amount of RMB 4,270,775.49 under the third remittance was recalled but not brought back to the accounts payable with Chun Man.  Instead, it was booked to the accounts of prepayments (預收帳款) of fourteen customers.  According to Miss Zhou, again whose evidence I have no doubt, such accounting procedures were irregular.  Anyone could have understood that the effect of those transactions is to use Sam Hing’s money to pay Sam Hing’s debtors and to dress it up as payment to Chun Man.  The vexed question is where have the money and the receivables from the fourteen customers actually gone.

131.  Through Miss Cheng, Mr Kwan further raised the defence of “chao chang”.  His defence is that because there were substantial shipments of timber from Sam Hing to Sam Sing, Sam Sing owed substantial debt to Sam Hing.  As Sam Sing is a member of the Fus’ group of company, Sam Hing was entitled to set off what was due from Sam Sing against what Sam Hing was obliged to pay Chun Man.  After consulting someone at Tit Shing Certified Public Accountants, Miss Cheng engaged “chao chang” to reduce the debts owed to Chun Man.  This defence has not been pleaded.  Having rejected Mr Kwan’s, Miss Cheng’s and Miss Li’s evidence that there were substantial shipments of timber to Sam Sing in 2001 and 2002 and that there were two sets of accounts, this defence cannot even get off the ground. 

132.  Miss Zhou has dealt with this defence very ably in her evidence under cross-examination.  She said it was legitimate to set off debts among three parties (三角債), provided that the parties consent to the set off.  But she said “chao chang” is an irregular accounting practice for illegitimate purposes.  It involved two conditions.  Firstly, there was creation of a fictitious business transaction.  Secondly, there was a clear object of using the fictitious transactions to balance the accounts.  But “chao chang” can hardly be a defence, unless the fictitious transaction can somehow be justified.  Miss Zhou is a certified public accountant.  I accept her evidence. 

133.  On the facts, it is at once apparent that this is not a case of setting off debts among three parties.  While Sam Sing is a subsidiary of a member of the Carlton Group or a member of the Fus’ group of companies, it is not a subsidiary of Chun Man and Chun Man is not member of the Carlton Group.  Thus, Sam Hing could not set off what was due to it from Sam Sing against what was due from Sam Hing to Chun Man, unless there was a tri-partite agreement.  There was none.  Furthermore, this defence could not be raised at all because Sam Hing’s money was not used to pay Sam Hing’s debt but was used to pay Sam Hing’s fourteen debtors who should in fact be paying Sam Hing.  There was nothing to be set off.  It is also immediately apparent that Miss Cheng was setting up fictitious transactions, i.e. the shipments of timber to Sam Sing, for the purpose of reducing the debts owed to Chun Man.  The alleged shipments to Sam Sing cannot be proved.  They were fictitious and there is no justification for those fictitious transactions. 

134.  I think this defence, apart from being a concocted defence, is an impromptu and not properly staged defence.  On the face, using Sam Hing’s money to discharge the liability of Sam Hing’s debtor to Sam Hing is a clear breach of fiduciary duty.  Mr Kwan is obliged to give an account in respect of this remittance.

135.  The fourth remittance was recalled and the money was transferred to Man Shing.  There is nothing in the 15 volumes of 25 books of Sam Hing showing that Man Shing was its creditor.  On the contrary, Man Shing was one of Sam Hing’s customers.  The accounts show that Man Shing was indebted to Sam Hing in the amount of RMB 588,000.15.  Furthermore, according to Mr Xin, Man Shing was a company incorporated in the PRC and beneficially owned by Mr Kwan.  He also said that after the search of Sam Hing by the Zhongshan Pople’s Court, the remaining stock of Sam Hing was transferred to Man Shing.  I have no doubt in Mr Xin’s evidence.  But, even without Mr Xin’s evidence, the circumstances were such that Mr Kwan is obliged to give an account of this remittance.

136.  Likewise, the fifth remittance was recalled and paid back to Sam Hing.  It was then split into five payments.  RMB 2 million was paid to Man Shing; RMB 1 million was paid to Zhongshan City Sam Hing Sawing Mill (中山市大涌三興鎅木厰) and RMB 800,000 was paid to Miss Cheng.  The balance of about RMB 900,000 was withdrawn in two sums allegedly as standby cash for Sam Hing.  Those transactions are equally distressing.  The payment of RMB 2 million to Man Shing clearly calls for explanation.  As for the payments to Miss Cheng, she explained that they were applied towards payment of pier charges, storage charges and return of deposits.  But she could refer to no documentary evidence in support.  She could not explain why those large payments were not made through banks as it used to in the past.  The two withdrawals for standby cash were also exceptional in the accounts of Sam Hing.  The circumstances surrounding this remittance is also suspicious and calls for an account.

137.  There is no dispute that the five remittances were made using the funds of Sam Hing and that Mr Kwan was in charge of Sam Hing at the time the remittances were made.  On the books of Sam Hing, they were dressed up as payment of money due to Chun Man.  But they were not actually remitted to and received by Chun Man.  The circumstances surrounding the appropriation of those funds were suspicious and called for explanation.  I am not satisfied with the explanations given to me by Mr Kwan and his witnesses in Court.  Accordingly, I order that Mr Kwan shall give an account of those five remittances.

Conclusion

Main Action

138.  I find that Sam Hing is a wholly owned subsidiary of the Plaintiff.  It is not a company solely owned by the Defendant.  I find that the Defendant was at the material time a director and an employee of the Plaintiff with responsibility for the management and operation of Sam Hing.  Accordingly, he owed fiduciary duty to both the Plaintiff and Sam Hing.  I further find that the Defendant was in breach of his fiduciary duty by causing the five remittances to be made which were then appropriated for purposes other than legitimate purposes of Sam Hing. 

139.  This is a bad case of breach of fiduciary duty.  The Defendant had premeditated siphoning off the assets of Sam Hing and succeeded in doing so.  The possibility of a full recovery of the depleted assets by the Plaintiff is low.  In the Share Action, I find in favour of the Defendant.  Kinetic Energy is holding 50% of the shares in the Plaintiff on trust for the Defendant and his wife.  In the circumstances, it is appropriate to have the Defendant’s beneficial interest in the shares in the Plaintiff charged for payment of the depleted assets.  I find that the Defendant conducted his defence in bad faith.  The Plaintiff is entitled to have his costs on indemnity basis.

140.  Accordingly, I grant the Plaintiff the following relief:

(1)	an order that the Defendant shall render a true and full account of Sam Hing, including all proceeds of sale of timber, the funds appropriated under the five disputed remittances and the stock of unsold timber;
(2)	an order that the Defendant shall pay such sum as found due to the Plaintiff after rendering of the account including interest from 29 June 2002;
(3)	a declaration that the Plaintiff is entitled to trace the funds of Sam Hing appropriated under the five disputed remittances and to impose a charge on the said funds or properties acquired by the said funds;
(4)	a charge on the beneficial interest of the Defendant in respect of the 5,000 shares in the Plaintiff held by Kinetic Energy Company Limited for payment of any amount found due to the Plaintiff after rendering of account, including interest and costs of this Action; and
(5)	a costs order nisi that the Defendant shall pay the Plaintiff’s costs on an indemnity basis, with certificate for two counsel.

I invite the parties for further submission as to the precise terms of the order sought and directions for the further conduct in rendering the account.

Share Action

141.  I am satisfied that the Plaintiffs had contributed US$500,000 to the share capital and working capital of Chun Man and are the beneficial owners of the 5,000 shares in Chun Man now held by Kinetic Energy.  I therefore make a declaration to that effect.  In the Main Action, I order that their beneficial interest in the said shares shall stand charged for payment of any amount found to due to Chun Man after taking of accounts.  In the circumstances, I am not going to order the transfer of the shares in Chun Man to the Plaintiffs. 

142.  I also make a costs order nisi that the Defendant shall pay the Plaintiffs’ costs on party and party basis with certificate for one counsel.