The Commissioner of Customs and Excise v. King Regent Technology Ltd. and Another

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Miscellaneous Proceedings No. 782 of 1999

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Judgment

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1. On 30th April 1998, a team of customs officers raided the first respondent's premises where they found and seized among other things pirated video CD's and machines representing four set of production lines of video CD's ( "the Machines"). The Commissioner of customs and Excise ("the Commissioner" ) is seeking an order to forfeit the Machines or alternatively to impose conditions for the return of same to their owner. There is no dispute that the Machines are liable to forfeiture and that the second respondent ( "Golden Time") is the owner of the Machines. The remaining issues are whether the Machines should be forfeited or returned to Golden Time and if the latter, what conditions if any should be imposed.

2. I am indebted to Mr. Macrae, counsel for Golden Time for its thorough and careful analysis of the case law on these forfeiture proceedings. No doubt the court has unfettered discretion in these matters. The degree of complicity and culpability of the owner must be considered in all cases. Equally, I accept the submission of Mr. FitzPatrick, counsel for the Commissioner, that all circumstances must be looked at in particular those surrounding the offences giving rise to liability for forfeiture. There must be some special circumstances to justify outright forfeiture against the right of the owner.

3. The interest and rights of Golden Time can be identified with those personal to one Mr. Lam, its director and majority shareholder. The Machines cost tens of millions. Mr. Lam claimed he was innocent in making the investment in the Machines. It was contended on his behalf that he had no continuing duty to supervise the lawful use of the Machines after leasing them to King Regent or, if he had such continuing duty, he had reasonably performed it.

4. Mr. Lam explained why he financed the purchase and leased them to the first Respondent (" King Regent"), a shelf company with no assets. He and Mr. Chau had known each other for quite some time. They came together for a joint venture to make video CD's. Mr. Lam would contribute 65% of the capital and Mr. Chau 35%. Two production lines were intended to be acquired initially for the joint venture. After the down payment was made for their purchase, Mr. Chau failed to come up with the capital he promised Mr. Lam. It was then too late for Mr. Lam to retract his investment. The initial arrangement was then altered. Fresh agreement was reached so that Mr. Lam would provide for the whole of the purchase price of the production lines which were then leased to King Regent together with the industrial premises to house them. Mr. Lam further explained that the new arrangement would suit him better because he would not have to spend time running the new business venture. The purchase money came from another successful and reputable limited company which was controlled by Mr. Lam. In order not to risk the good name of that company Golden Time was set up to own the two production lines. The business of making video CD's proved profitable in the first few months and another two production lines were then bought and leased in the same manner as the first two had been. The monthly rental for these four production lines, i.e. the Machines, together with the premises to house them were then increased to $950,000.

5. Mr. Lam on a few occasions visited the premises and saw some documents purported to be copyright authorisation from a company named Venus. He admitted he did not know much about copyright authorisation matters. Mr. Chau claimed that he did not appreciate the prevalence of the copyright offences and he trusted Mr. Chau who assured him his operation was to be legal. It was also argued that he also took the precaution inserting a clause in the lease prohibiting illegal use of the Machines. Mr. Macrae argued that Mr. Lam had no continuing duty to supervising the use of the Machines and the circumstances under which the Machines were leased to King Regent showed that Mr. Lam was a wholly innocent party or at least his culpability or complicity in the offences did not justify forfeiture of the Machines. In any event, it was also argued that Mr. Lam had no right to interfere with the quiet enjoyment of King Regent.

6. Of the 1.6 million video CD's seized over 400,000 copies had been proved to be infringing copies, but the rest, had not been proved to be infringing copies. Mr. Macrae submitted that the latter must be presumed to be authentic as was done in the criminal proceedings. In the opinion of the trial judge, the presence of these "authentic" copies made the offences more serious as King Regent and Mr. Chau had used them to masquerade the illegal operation . Mr. Macrae therefore argued that Mr. Lam could not have discovered with reasonable diligence on his part the illegal operation because of Mr. Chau was masquerading. It is not in dispute that in forfeiture proceedings, this court can use the findings at the criminal trial in the exercise of its discretion. However in these forfeiture proceedings the party who seeks to rely on a certain fact bears the burden of proving it on the balance of probabilities. At the criminal trial, the prosecution has the burden of proving the copies are infringing and those copies which cannot be so proved of course were presumed by the trial judge to be authentic. There was no proof put forward by the defence at the criminal trial or in these forfeiture proceedings that the other copies were authentic. The conclusion I draw in this regard is that those other copies were either authentic copies or infringing ones and whether or not they were infringing copies or otherwise Mr. Lam had not taken any steps to ascertain their status. The precaution he took is merely the words of general assurance of Mr. Chau whom he trusted.

7. Looking at the circumstances under which the Machines came to be leased to King Regent as related by Mr. Lam, no reasonable precautions have been taken by him to safeguard his investment or the risk of forfeiture of the Machines. If he had disclosed all facts leading to his very important decisions to invest in a field of business to which he and his partners had no experience, he was reckless. There was no business plan at all submitted by Mr. Chau. Mr. Lam was simply satisfied with the assurance of profitability of the business given by Mr. Chau in their discussion. No details about the discussion had been given. He did not engage the service of professionals to assist him to appraise the viability and feasibility of entering into this field of business in which he and his partner were total strangers. No explanation was given as to how he arrived at the decision to lease the Machines to a shelf company with no assets except that which can be summarised in a few words, namely that he trusted his friend Mr. Chau. At no stage either before or after leasing the Machines did he enquire about the identities of the clientele of Mr. Chau. The insertion in the lease agreement prohibiting the illegal use of the Machines can hardly be described as a precaution, let alone a reasonable precaution. No one can reasonably expect a mere contractual obligation provided by such a prohibition cause in the lease would deter someone using the Machines to commit offences carrying huge profits. If Mr. Lam had any serious thought of safeguarding his interest intending to supervise the use of the Machines, he could have easily inserted an appropriate clause in the lease reserving to himself the right to supervising the use of Machines. Yet it was contended on his behalf that he could not have exercised more diligence than that he had shown because he could not interfere with the quiet enjoyment of the Machines. The facts before me show that Mr. Lam had no intention to supervise the proper use of the Machines. What he had done was merely to steer himself clear of any risk of being prosecuted for copyright offences should these offences be committed by Mr. Chau.

8. Mr. Macrae drew my attention to the probability that the operation of Mr. Chau may have started legally and remained so for some time before it was contaminated. It was therefore argued that as Mr. Lam had no continuing duty to supervising the use of the Machines, he was innocent or his culpability should be low. However as I have found he had not shown anything that had convinced him it would be a profitable investment in a legal operation. To say the very least he simply would not care if the operation would be legal or would become illegal in part or not and what he wanted was to protect himself from prosecution. I do not need to decide whether he had a continuing duty to supervise the use of the Machines. All circumstances must be looked at. For instance momentary lapses of supervision might in some cases excuse the owner and make it not fair to make a forfeiture order.

9. The offences King Regent and Mr. Chau committed using the Machines are serious. The liability for the equipment to be forfeited is a very effective deterrent to potential offenders. These equipments are very expensive. Even potential offenders who can afford to use his own money to purchase the necessary equipment would think twice before offending. In the instant case Mr. Chau would not have committed the present offence without the financial support of Mr. Lam. The conclusion I draw from the evidence before me is that the complicity of Mr. Lam in the offences is of a very high degree. It would not be an overstatement that Mr. Lam facilitated the commission of the present offences. If Mr. Chau or King Regent were the owners of the Machines, forfeiture order would have been most appropriate. No question of unfairness to Mr. Lam would have arisen if the Mr. Chau or King Regent was in good financial standing to compensate Mr. Lam for the forfeiture of the Machines. That Mr. Chau or King Regent would not be able to compensate Mr. Lam had been known and obvious. For no good reasons Mr. Lam took the risk. For all these reasons especially his high degree of complicity from the beginning, I should exercise my discretion to forfeit the Machines and I so order. Parties indicated they wish to be heard on the question of costs. In case they change their mind, I now make an order nisi for costs to be made absolute in 6 weeks that Golden Time do pay the costs of the Commissioner.