BILATERAL TIMEPIECES CO LTD v. SHEE YIU KWONG

1990, No.A4370

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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REASONS FOR JUDGMENT

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1. This is a claim by the plaintiff company against its former managing director, the defendant herein, for the recovery of company funds misappropriated by the defendant during his term of office, or alternatively for money had and received by the defendant for the use of the plaintiff. The trial lasted two days and judgment was pronounced in favour of the plaintiff on 7th October 1992 with reasons reserved. I now hand down reasons for the judgment.

2. The plaintiff's case against the defendant is a simple one, and the evidence adduced by the plaintiff is not really challenged by the defendant. It is not disputed that between September 1984 and June 1986 a total sum of $484,354.40 was paid into the plaintiff's account at the Hang Seng Bank under 131 cheques drawn by various companies and individuals. It is also not challenged that corresponding sums totalling $484,354.40 were credited to the defendant's director's current account in the plaintiff. On every occassion of the 131 transactions, a sum identical to the amount of the cheque paid in would be credited into the defendant's said current account immediately upon receipt of the cheque by the plaintiff, often on the same day of such receipt. These corresponding credit entries in the defendant's current account was initially described as "loan from Mr Shee", then as "Hang Seng Bank - current", "Hang Seng Bank - deposit" or simply as "Hang Seng Bank". The plaintiff's present director, Franklin Chan, who took over from the defendant after he was forced out of the board of the plaintiff in 1988, said he had conducted a special audit of the defendant's current account and discovered the existence of these transactions. He said he was unable to find from the company documents and books any authorisation for the said credit entries in the defendant's current account. He said the plaintiff only conducted investigation as to why the corresponding credit entries were made in relation to one or two cheques, and concluded that all the entries were unauthorised. The drawer of one cheque, Ho Ying Poon (PW2), said the cheque was paid to the plaintiff in payment for his subscription of shares in the plaintiff. Like all other cheques, a corresponding credit entry for the same amount of $60,000 was made in the defendant's current account for this cheque.

3. The defendent originally raised the defence that the credit entries which corresponded to the sums under the various cheques that were made out to the plaintiff by the said companies and individuals were in fact payments made in respect of the defendant's private sale of surplus products of the plaintiff which was authorised by the plaintiff's board. It was the defendant's case that the said cheques were for settlement of the price of the defendant's said private sales which were mistakenly made out in favour of the plaintiff by the purchasers. In consequence of such mistakes, it was arranged to have identical sums credited to the defendant's current account. However, subsequent to a failure by the defendant to give particulars of this plea of mistake pursuant to two orders of the court, the said defence was abandoned in its entirety. The Amended Defence merely denies the claim and put the plaintiff to strict proof.

4. Mr Mayne for the defendant did not put it to the plaintiff's managing director that he was wrong in alleging that the credit entries were unauthorised. Neither did the defendant call any evidence to explain or justify the basis for such credit entries. Mr Mayne criticised the plaintiff's lack of thorough investigation of the basis of the said credit entries and the accounting practice in respect of all directors at that time. He said in the absence of such investigation it is unjust for the plaintiff to jump to the conclusion they did and made the accusations against the defendant. It is submitted by him that there may be various legitimate reasons for the said credit entries. He said one should treated the payment in of the said cheques separately from the said credit entries though the amounts in both are identical. He said once the plaintiff received the money under the cheques they become company funds, and it is entirely a matter between the plaintiff and its directors as to how company funds should be dealt with as between themselves. He said the evidence merely discloses a crediting of funds into the defendant's current account and no further. He submitted that there is no evidence to justify any inference that such crediting was wrongful.

5. I cannot agree that the said credit entries should be viewed in isolation from the said cheques. The fact that identical amounts were involved in the cheques and the credit entries, and the proximity in time between the date of the cheque and the making of the entry in the current account provided the nexus between the two. There is no evidence that apart from the said cheques, any consideration was provided by the defendant for the said credit entries. Taken together they give rise to a prima facie inference that the cheques were treated by the book-keeper as the basis for making the said credit entries in the defendant's current account. In the absence of any explanation from Miss Tam who was the book-keeper at the material time, or from the defendant, or any other evidence explaining the basis for the said credit entries, the said prima facie inference becomes the only inference that can reasonably be drawn from the undisputed facts. Any other inference would be perverse and speculative. Thus, the inference to draw is that the credit entries were made on the basis of the said cheques and that the money from the cheques were either credited into the defendant's current account, or that the money were treated as if they were payments made by the defendant to the plaintiff (whether as a loan or otherwise). Either way the money from the cheques, which were made payable to the plaintiff, were transformed into money to the credit of the defendant in his current account.

6. On the face of the cheques, all the drawers are either companies, or individuals other than the defendant. There is no evidence, nor any suggestion from the defendant's pleadings or other documents before the court that any of the said company drawers, which are either corporations or firms, has any connection with the defendant. There is not the slightest hint that any of the said drawers was making payment on behalf of the defendant under those cheques. On the contrary, the only cheque that was explained before the court was for payment to the plaintiff for the allotment of shares to the drawer. All the cheques were made out to the plaintiff (save the one relating to the said allotment of shares). The only reasonable inference open to the court in the circumstances is that the cheques were drawn by the said drawers for payment to the plaintiff. It is not open to the court to draw any inference which may suggest that any of the cheques can afford legitimate consideration for any of the said credit entries.

7. I am not persuaded that the absence of any evidence of query by the plaintiff's auditors of any of the entries at the material time should somehow weaken the inference that the said credit entries were made without proper authority of the plaintiff and were not supported by any consideration from the defendant. Mr Chan said an attempt made to seek an explanation from the said auditors in respect of the said credit entries proved to be a failure. The defendant admitted in his Amended Defence that on the documents discovered "no one authorised the transaction being recorded in the aforesaid manner".

8. In view of the findings of facts I'll be making shortly it is not necessary for me to decide the case on the onus of proof. However, I agree with the decision in Seldon v. Davidson, [1968] 1 WLR 1083 that where there has been a simple payment of money between strangers when there is no circumstances giving rise to a presumption of a gift, such payment prima facie imports an obligation to repay thereby casting the onus on the recepient of such payment to show that the money is not repayable. Nevertheless, I cannot agree that that decision is applicable to the present case. The fact that the defendant was at the material time a managing director of the plaintiff takes him out of the category of strangers. However, when a person in a fiduciary position receives money payable to his principal and uses it for his own purpose, the onus is likewise upon him to show the authority for such personal use of his principal's money. Similar consideration applies when a fiduciary transfers, or accepts the transfer of money from his principal's funds into his own personal account. What we have in this case are unexplained credit entries corresponding to cheques made out to the principal's name totalling 131 occassions within a short span of two years, in irregular and odd sums, and varying greatly in amounts on each occassion. The circumstances, rather than giving rise to any inference of authority or consideration being given by the fiduciary, call for an explanation and justification it may be true that the lack of a thorough and detail investigation by the plaintiff of each and every of the 131 transactions can be fatal to the plaintiff's case if rebuttal evidence is forthcoming from the defendant. However, in the absence of any evidence to the contrary, a general affirmation on oath by the plaintiff's managing director that upon a study of the company books he had concluded that such transactions were unauthorised though investigation was only conducted into one or two of the transactions would suffice to satisfy the civil burden of proof. A reasonable inference can be drawn from the similarity in the modus operandi that there existed a systematic operation similar to the one or two transactions investigated.

9. I am satisfied from the evidence that indeed the said credit entries complained of by the plaintiff in the present claim were not authorised by the plaintiff and were not supported by any consideration from the defendant. The money under the said cheques were thus wrongfully treated as money standing to the credit of the defendant in his current account with the plaintiff. Consequentially, such sums were also money had and received by the defendant for the use of the plaintiff. In the premises, not only was the defendant in a fiduciary position to the plaintiff at the material time as a director, he was and is a fiduciary for the money so wrongfully credited to his account. As the defendant paid for a total allotment of 1,030,000 shares in the plaintiff in the sum of $1,030,000 from this account after the wrongful credit entries were made, he stands as a constructive trustee holding 484,354 shares (representing the total sum so wrongfully credited at the par value of $1.00 per share) in favour of the plaintiff.

10. The plaintiff has elected to seek a first charge in equity over 484,354 shares in the plaintiff alloted to the defendant and paid for by him from funds wrongfully credited to him in his current account with the plaintiff. To the extent that the value of such shares falls short of the sum of $484,354.40 wrongfully credited to the defendant, the plaintiff seeks an order for payment of the deficit balance, after an assessment of the value of the said shares in default of an agreement over the value. The plaintiff also seeks an order for an account and enquiry of the profits made by the defendant from the use of such funds wrongfully credited to him, inclusive of the recovery, of interest paid by the plaintiff to him on the 484,354 shares and on the $484,354.40 standing to the credit in his current account from the date of payment until refund. Judgment was given in favour of the plaintiff to give effect to the aforementioned orders it seeks. Judgment was also given in favour of the plaintiff for interest on the judgment sum, after the taking of the said account of profits and/or assessment of the value of shares, to run at the prevailing rate for secured overdraft fixed by the Hang Seng Bank, both before and after the date of judgment until payment. An order for costs of the action against the defendant was made in favour of the plaintiff.

Dated this 8th day of October 1992.