PECONIC INDUSTRIAL DEVELOPMENT LTD AND ANOTHER v. CHIO HO CHEONG AND OTHERS

HCA 16255/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16255 OF 1999

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HCA 3083/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3083 OF 2002

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BETWEEN

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(HEARD TOGETHER)

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J U D G M E N T

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INDEX

INTRODUCTION

Peconic's acquisition of land in Mai Po

1.  Between October 1991 and January 1993, Peconic Industrial Development Limited (“Peconic”), the 1^st Plaintiff in HCA 16255/1999 and the Plaintiff in HCA 3083/2002 (“the first action” and “the second action” respectively), acquired 32 contiguous agricultural lots in the Deep Bay area, at the north western corner of the New Territories (“the properties”).  The properties fall within the Mai Po and Fairview Park district, which is dominated by mud flats, fish ponds and “gei wais” (intertidal shallow ponds for shrimp rearing).  The properties comprise mainly fish ponds.  They also include a three-storey village-type house erected on one of the lots as residence for a fish pond operator.  The acquisition cost a sum of $515,211,914 in total purchase price.  The total site area is approximately 2,672,634 square feet (or 248,293.76 square metres).

2.  The original purpose of the purchase was the quick resale of the properties to some supposed Taiwanese buyers for a huge profit estimated at $200 million.  When the anticipated resale did not materialise, Peconic tried to develop the properties into a golf course or a low-rise residential development.  As to the latter option, it should be noted at the outset that right adjacent to the properties were (at the time of acquisition) two well known large scale low-rise residential developments, namely Fairview Park to the south, and Palm Springs (then under construction) at the south-eastern corner of the properties.

3.  But the problem with Peconic's development intention was that the properties are located right next to the Mai Po Nature Reserve at Deep Bay, lying to the west of the properties.  At its nearest point, the properties are just 100 metres from the Mai Po Nature Reserve.

4.  According to government documents and indeed as is well known, the Mai Po Nature Reserve in Deep Bay is one of the world's most important nature reserves.  It is internationally renowned as an extensive area of unaffected wetland habitats for many species of birds and mammals and is a stopover point for thousands of migratory birds.  It is for this reason that the nature reserve has been zoned “Site of Special Scientific Interest” (SSSI) since 1976.  See the press release published in October 1992 by the Town Planning Board titled “Consideration of section 16 application for development in areas around Mai Po Nature Reserve”, page 1.

5.  Not surprisingly, progressively since early 1990 – i.e. subsequent to the approvals of the respective developments of Fairview Park and Palm Springs in the 1970s and 1980s, the government has introduced departmental and subsequently statutory planning control measures relating to land use and development in the Mai Po area, within which the properties fall.

6.  Peconic failed to obtain the necessary town planning permissions for the development of the properties into a low-rise residential development (it having dropped the alternative idea of developing the properties into a golf course).  For all practical purposes, the properties cannot be used for any purpose other than as fish ponds.  That obviously has a dramatic effect on the value of the properties.  According to Peconic's expert evidence, the open market value of the properties, as of May 2004, was only $69,400,000.00, i.e. about 13.5% of what Peconic has paid for the acquisition of the properties.

7.  In other words, unless there should be any future relaxation in planning control in the relevant area in Mai Po, the properties cannot be commercially developed, and Peconic's acquisition of or investment in the properties is a disastrous failure.

Peconic's case against Chio Ho Cheong

8.  In these two actions, Peconic claims that the respective Defendants to the two actions should be held responsible for its huge loss.  Indeed Peconic has already obtained judgments by default against the 1^st, 3^rd and 6^th Defendants in the first action.  However, its claims against the other Defendants are strenuously resisted, and this judgment deals with those claims.

9.  Essentially, Peconic says that the main culprit for the momentous loss that it has suffered in the acquisition of the properties was a gentleman known as Chio Ho Cheong (Tommy) in English (i.e. “趙河暢” in Chinese).  But significantly, he is much better known in Chinese as “陳繼杰” (transliterated in English as “Chan Kai Kit”).  In this judgment, he will be referred to as “Chio” or “Chan Kai Kit”.

10.  Chio was born in 1950 in the Mainland.  He became a businessman in Macau.  He ran various businesses, including a nightclub, restaurants, factories and construction materials trading.  At one stage, he became a legislative councillor in Macau.  He also participated in some property developments in Macau.

11.  Apparently, in connection with a property development in Macau in 1990, he came to know another gentleman known as Chen Jun-Yi, the 6^th Defendant in the first action (“Chen”).  Chen was then the sub-branch manager of the Foshan Sub-branch of the Agricultural Bank of China (“the Bank”) in the Mainland.  According to some evidence, Chen's association with Chio in the property development project resulted in the Foshan Sub-branch earning a significant amount of profit out of it.  That in turn earned Chio the trust and confidence of Chen and ultimately that of other officials in the Bank as described below.

12.  In 1991, through the introduction of Chen, Chio approached the branch manager of the Guangdong Branch of the Bank, Foo Shi Fang (“Foo” – PW1), to acquire the properties by way of a joint venture between the Bank and Chio.

13.  After negotiations and a site visit, the Bank eventually agreed to participate in the joint venture.  There is some dispute as to whether it was the Guangdong Branch or the Foshan Sub-branch which took part in the joint venture and whether the initial role of the Guangdong Branch was merely that of a short term internal lender of money to the Foshan Sub-branch to enable the latter to enter into the joint venture. All this will be dealt with in greater detail later on in this judgment,

14.  In any event, a total of US$40 million was injected by the Bank into the acquisition via the joint venture.  The joint venture took the form of a limited company in Hong Kong, namely Peconic.  The first directors of Peconic were Chio, Chen and Li Rui-chang (“Li” – PW2).  Li was the deputy general manager of the Foshan Sub-branch at the time, working under Chen's direct leadership.  They were also the first shareholders of Peconic, owning respectively 25%, 25% and 50% of the issued shareholdings in Peconic.  Leaving aside for the time being the question of whether the relevant shareholdings were held by the bank officials on behalf of the Guangdong Branch or the Foshan Sub-branch, there is no dispute that Chen and Li held their total shareholdings of 75% in Peconic on trust for the Bank. 

15.  The Bank's injection of money into the joint venture was partly done through Star Glory Investment Limited, the 2^nd Plaintiff in the first action (“Star Glory”), a so-called “window company” of the Foshan Sub-branch of the bank.  Star Glory was in essence a wholly owned investment company in Hong Kong of the Sub-branch.

16.  Peconic's complaints against Chio essentially boil down to two matters, namely fraudulent misrepresentations and secret profits.

17.  First, Chio is said to have made fraudulent misrepresentations regarding the development and resale potential of the properties and the reasonableness of the general unit price of acquisition, namely $185 per square foot.  Further, Chio is said to have made a representation to Peconic's solicitor (Paul Yu of Johnson Stokes & Master – “JSM”) that he and Chen had already obtained favourable expert opinion regarding planning permission.  Furthermore, Chio is said to have made fraudulent misrepresentations to Paul Yu that the confirmor involved in the acquisition, namely Asiagreat Limited (“Asiagreat”) was beneficially owned or controlled by a gentleman known as Poon Kam – and there were related misrepresentations regarding the reasons for the confirmor sale and the price differences.

18.  Second, Chio is said to have breached his fiduciary duty as director owed to Peconic in that he made huge secret profits out of the acquisition.  Essentially, the properties were acquired by Peconic from a confirmor, namely Asiagreat.  Apart from several subsequent transactions involving much higher unit rates, acquisition of a majority of the properties by Peconic from Asiagreat as confirmor was achieved at the unit rate of $185 per square foot.  As it transpired, Asiagreat acquired those same properties from the agricultural landowners at an effective rate of $60 per square foot.  In other words, there was a vast price difference of $125 per square foot.

19.  Even in relation to the several subsequent transactions in which Peconic acquired the relevant properties from Asiagreat at unit rates higher than $185 per square foot, there were still huge differences between the prices paid by Peconic to Asiagreat (as confirmor) and that paid by Asiagreat to the agricultural landowners (as head vendors).

20.  Reproduced (with some minor correction and editing) as schedule 1 to this judgment is a summary prepared by the Defendants in the second action for the purposes of their final submission.  It sets out the essential details of the principal and sub-sale transactions of the properties between the head vendors, Asiagreat as confirmor and Peconic as sub-purchaser.

21.  Peconic's complaint is that without the knowledge or approval of Peconic or the Bank, Asiagreat was beneficially owned and run or controlled by Chio.  The profits made by Asiagreat out of the confirmor transactions all went to Chio and his associates.  Just to give an idea, the gross profits made by Asiagreat out of the confirmor transactions were in the total sum of $364,631,770 (i.e. $515,211,914 less $150,580,144).  From that enormous sum of money, some commissions were paid to Poon Kam and others, and there were paid some other usual transaction costs.  No less than $350,534,416 is said to have been pocketed by Chio and his associates.

Default judgment against Chio

22.  As mentioned above, a default judgment has been entered against Chio in the first action.  But that is of no comfort to Peconic or the Bank because Chio has been a fugitive from justice since about 1998/1999, he having been removed from the board of Peconic and having had his shareholding diluted to a nominal percentage for failure to make the agreed capital contribution in 1997.  He is said to have been involved in a separate fraud case.  No doubt, if he had not disappeared, he would have been charged with fraud in relation to the subject transactions together with his alleged co-conspirators, namely the 2^nd, 3^rd, 4^th and 5^th Defendants in the first action, to whom I will now turn.

Peconic's case against Elsie Chan – Chio's girlfriend at the time

23.  Chan Yik Sze （陳奕詩）or Elsie Chan, the 2^nd Defendant in the first action (“Elsie Chan”) may not be generally known now to the younger generation.  However, in the late 80s and early 90s, she was rather well known as a TV and movie actress to the local audience, she having won a prize in a local beauty pageant in 1986 at the young age of 18.  She was referred to as a “celebrity” or “artiste” in some of the documents used at trial.  According to her own evidence, she became Chio's girlfriend in 1991when she was about 23 years old.  Their relationship ended in early 1998.  In other words, at all material times, she was Chio's girlfriend.

24.  Peconic's case against Elsie Chan is basically that she conspired with Chio to defraud Peconic in terms of Chio's misrepresentations and breach of fiduciary duty.  Peconic also says that Elsie Chan is guilty of rendering dishonest assistance in relation to Chio's breach of fiduciary duty as director of Peconic and/or unconscionable receipt of part of the proceeds of sale that Peconic paid to Asiagreat.

25.  Materially Peconic's case against Elsie Chan is that she played a central role in Asiagreat, which acted as the middleman or confirmor in Peconic's acquisition of the properties from the agricultural landowners. 

26.  Cutting a long story short, Lau Kwok Fai also known as Danny Lau, the 1^st Defendant in the second action (“Danny Lau”) was a practising solicitor and partner in a firm of solicitors known as Albert K K Luk & Co., the 2^nd Defendant in the second action (“Albert K K Luk”) back in 1991.  He had a former schoolmate at law school in London in the name of Louis Chow, who was 2 years junior to him at law school.  Louis Chow had a former secondary schoolmate called Wong Hing Hang, otherwise known as Mickey Wong, the 4^th Defendant in the first action (“Mickey Wong”).  Mickey Wong worked in the TV industry and happened to know Elsie Chan. Through her introduction Mickey Wong joined a company beneficially owned and controlled by Chio, namely Ang-du Int'l Corporation Limited (“Ang-du”), of which Chio, Elsie Chan and Chio's elder brother (“Witthaya Jiwatuwinan”) were directors.  Mickey Wong worked as Elsie Chan's assistant.

27.  Danny Lau had anelderly relative by marriage by the name of Poon Kam.  Danny Lau's sister was married to one of the sons of Poon Kam.  Poon Kam was a kind of village leader with considerable influence amongst the indigenous agricultural landowners and villagers in Mai Po.

28.  Through Mickey Wong, Louis Chow and Danny Lau, Elsie Chan came to approach Poon Kam for the acquisition of “a big parcel of land” in the New Territories.  Poon Kam enlisted the help of a landowner known as Yeung Fu (or Foo) Man.  Together the two gentlemen managed to persuade a number of agricultural landowners in the Mai Po area to sell their land and fishponds to Elsie Chan.  They themselves, through their own companies, were also selling their land to Elsie Chan.

29.  As far as the mechanism of sale was concerned, pursuant to the legal advice of Danny Lau, Asiagreat was formed and used as the corporate vehicle to acquire all the land from the landowners.  Poon Kam's wife and daughter-in-law were made the shareholders of Asiagreat whereas at the nomination of Elsie Chan, Mickey Wong and Leung Hiu Ling, the common law wife of the elder brother of Chio and the 4^th Defendant in the first action, were made directors of Asiagreat.

30.  The deal between Elsie Chan and Poon Kam was that Poon Kam was tasked to acquire the land from the landowners at a ceiling unit rate of $60 per square foot.  Poon Kam would get the differences between the (notional) ceiling prices calculated at the flat rate of $60 per square foot and the actual purchase prices received by the agricultural landowners as commission. 

31.  Upon the advice of Danny Lau, the properties were to be acquired by Asiagreat and after the acquisition, the shares in Asiagreat, which were held by Poon Kam's wife and daughter-in-law on his behalf (but with declarations of trust signed in favour of Elsie Chan), would be transferred to Elsie Chan or her nominees.  Various declarations of trust,blank transfer documents and indemnities were executed upon the advice of Danny Lau to safeguard the respective parties' interests.  It was agreed between Elsie Chan and Poon Kam that the former would lend a sum of $8 million to Asiagreat to finance its acquisition of the properties.

32.  Through the efforts of Poon Kam and Yeung Fu Man, a majority of the properties were thus acquired by Asiagreat at prices much below the ceiling unit rate of $60 per square foot – the average unit rate of acquisition for the first 15 transactions was a mere $32.56 per square foot!  As a result, Poon Kam earned a huge commission of over $60 million from his agreement with Elsie Chan. 

33.  Asiagreat acquired some of the rest of the properties through another agent known as Roger Chan.  According to the evidence, probably by then news of Asiagreat's acquisition of the properties in the area had become known to other landowners, and these subsequent properties were acquired at unit rates much higher than $60 per square foot.  Indeed Yeung Fu Man kept his own property to the last and managed to sell it (with a village-type house erected on it) to Asiagreat in January 1993 at a unit rate of $222.87 per square foot.  No commission for these subsequent sales was payable to Poon Kam as he was not involved in them.

34.  Peconic's case against Elsie Chan is that the acquisition of the properties by Asiagreat was for the purpose of resale to Peconic at a huge secret profit.  For as mentioned above, Peconic had, as a result of misrepresentations made by Chio to the Bank and the board of Peconic, agreed to acquire the properties at a unit rate of $185 per square foot (leaving aside the several subsequent transactions), which was more than 3 times the ceiling unit rate fixed by Elsie Chan with Poon Kam.  For the subsequent transactions, although the price differences were not as astonishing as the previous ones, nonetheless the properties were resold to Peconic at substantially mark-up prices.  More importantly, Peconic's case is that Asiagreat was really a corporate vehicle beneficially owned or controlled by Chio, and used by him to reap off massive secret profits from Peconic in the acquisition exercise.

35.  The case against Elsie Chan is that she played a crucial part in assisting, dishonestly, Chio to conceal his interest in Asiagreat and thus the secret profits he made through Asiagreat.  Peconic says that Elsie Chan in fact conspired with Chio, Mickey Wong, Leung Hiu Ling, Chen and her own mother (Wong Shiu-wai, the 5^th Defendant in the first action – see below) to defraud Peconic.

36.  Peconic alleges that Elsie Chan knew full well that Chio was entering into a joint venture with the Bank to acquire the properties at the price of $185 per square foot through Peconic and that he was a director of Peconic.  Yet she conspired with Chio and others to use Asiagreat as a vehicle to buy the properties and resell them to Peconic at huge secret profits.  Put another way, the resale price of $185 was a substantially inflated price given that Elsie Chan was able to acquire the same “at bulk” from Poon Kam at the ceiling price of $60 per square foot.  Essentially the same complaint applies to the later transactions although the price differences were not as enormous as the previous ones.

37.  Elsie Chan is said to have been present at various meetings in which Chio and Chen made the fraudulent misrepresentations to the bank officials that induced the Bank (and Peconic) to enter into the joint venture.  Those misrepresentations went to the reasonableness of the price of $185 per square foot and the resale/development potential of the properties.

38.  There can be no dispute that a substantial part of the proceeds of sale received by Asiagreat from Peconic was, after payment of commissions and necessary expenses, transferred to Chio or his nominees.  This was achieved through “tortuous and circuitous means which could only have been devised to conceal their designation”.  The monies were transferred through or at the direction of Albert K K Luk or K F Lau & Co, the firm started by Danny Lau after he left Albert K K Luk in 1992 – which is sued as the 3^rd Defendant in the second action (“K F Lau”).

39.  Amongst others, various parts of those monies went through the respective accounts of Elsie Chan, Leung Hiu Ling and Wong Shiu-wai – Elsie Chan's mother.

40.  Schedule 2 to this judgment is a reproduction of an agreed schedule used at trial (with some minor editing and revision).  It sets out the agreed money trail of the proceeds of sale and a loan of $3.3 million which Star Glory gave to Elsie Chan on 3 October 1991 (see below).

41.  The use of the so-called “Macau cheques” by Elsie Chan to pay for the initial deposits payable by Asiagreat to the various agricultural landowners for the acquisition of their properties (for onward resale to Peconic) adds another dimension to the alleged conspiracy to defraud Peconic.  According to the evidence, in order to keep the acquisition plan secret thus avoiding the individual landowners from raising the sale prices of their land, Poon Kam and Yeung Fu Man found it necessary first to use Asiagreat instead of Poon Kam's own name to acquire the properties, secondly to conceal Poon Kam's involvement in Asiagreat by using Poon Kam's wife and daughter-in-law as shareholders in Asiagreat, and thirdly to synchronise all the deals by signing the relevant sale and purchase agreements within 1 or 2 days, i.e. on 2and 3 October 1991.

42.  On the other hand, the sub-sale and purchase agreement between Asiagreat, represented by Albert K K Luk (Danny Lau), and Peconic, represented by JSM (Paul Yu), was signed on 4 October 1991.

43.  The initial deposits payable under the head sale and purchase agreements between Asiagreat and the individual landowners was in the total sum of $10,754,812.08.  On the other hand, under the sub-sale and purchase agreement between Peconic and Asiagreat, Peconic agreed to pay an extremely high initial deposit, amounting to 30% of the total purchase price, in the sum of $116,867,688 to Asiagreat.  Moreover, it was not to be stakeheld by Asiagreat's solicitors.  Rather the initial deposit could be released to Asiagreat forthwith upon the signing of the sub-sale agreement.  Whilst all this reflected the breach of fiduciary duty owed by Chio as director towards Peconic in not acting in the best interest of Peconic, it also meant that there was a time gap of 2-3 days between the payment of initial deposits by Asiagreat to the various individual landowners and the receipt by Asiagreat of the very substantial initial deposit from Peconic.

44.  What happened was that instead of paying the initial deposits required to the landowners from their own resources or obtaining a bridging loan to discharge the payment obligations in respect of the initial deposits, Peconic says, Chio and Elsie Chan used cheques issued by the Macau Branch of Overseas Trust Bank Limited (“OTB” – a Hong Kong bank) as the purported means of payment of the initial deposits.  Such cheques, on their face, looked very similar to Hong Kong cheques, given that a local bank was involved.  However, they required 10 days to 2 weeks to clear.

45.  The first Macau cheque was indeed given for the $8 million loan that Elsie Chan had promised to advance to Asiagreat for the acquisition of the properties.  It was a post-dated cheque given by Elsie Chan to Albert K K Luk in early September.  According to Danny Lau, his firm banked in that cheque on 28 September 1991 as client's money on account to fund the solicitors' cheques which his firm was going to issue to pay the initial deposits.  He said that at that time neither his firm nor its banker (First Pacific) realised that it was a Macau cheque drawn on the OTB account of a company in Macau beneficially owned or controlled by Chio (Far East (International) Trading Company). 

46.  It was only until 1 October that he was told that it was a Macau cheque and it would need 10 days or so to clear.  Alarmed by the fact that his client (Asiagreat) needed immediately available money to pay for the initial deposits, Danny Lau asked Elsie Chan to arrange for an alternative source of money.  Yet most surprisingly, on 2 October 1991 when Elsie Chan arrived at Albert K K Luk's office with replacement cheques for issue directly in favour of the individual vendors, those were also Macau cheques drawn on Far East's account.  Equally remarkable was the fact that neither Danny Lau nor his staff members (Danny Lau maintained) realised that they were also Macau cheques.  They were sent with the executed sale and purchase agreements to the various individual landowners as payment of the initial deposits required.

47.  Upon receiving the Macau cheques, many of these solicitors objected to this form of payment, and refused to sign the sale and purchase agreements.  To overcome the difficulty thus faced, Elsie Chan brought in some money in the form of cash/cashier orders – a substantial part of which, as it turned out, came from an urgent loan Chio and Elsie Chan obtained from Star Glory through Chen on 3 October 1991 on the false pretext that she required the money to purchase “a new flat”.  Nevertheless, even that loan was only for $3.3 million.

48.  As for the rest of the money required to pay the initial deposits, the problem was solved partially by a loan from one of Poon Kam's own companies.  But more significantly, it was solved by Danny Lau giving undertakings to his counterparts in the conveyancing transactions to the effect that the Macau cheques would not bounce or would be replaced by cashier orders or fresh Hong Kong cheques – even though at that time he only had Elsie Chan's $8 million Macau cheque still waiting to be cleared in the banking process.

49.  The problem having been thus solved, the sale and purchase agreements were signed by the individual landowners.  Armed with these signed agreements, Danny Lau was able to finalise the sub-sale and purchase agreement with JSM on behalf of Asiagreat on 4 October 1991.  As mentioned above, the sub-sale and purchase agreement was eventually signed by Peconic and sent over by JSM to Albert K K Luk together with a cashier order for the huge initial deposit of 30% in the late evening of 4 October.  On the 5^th, the cashier order was banked in, and Asiagreat's (or more precisely Chio's and/or Elsie Chan's) cash flow problem was forever solved.  From then on, Asiagreat, Chio and Elsie Chan, so Peconic's case goes, were so cash-rich that they were never worried about making further payments in relation to the acquisition of the properties.

50.  From all these (and there are many other peripheral matters), Peconic asks the Court to conclude that Elsie Chan took part in the conspiracy with Chio and others to defraud Peconic, she has dishonestly assisted Chio in his breach of fiduciary duty to Peconic and/or she has unconscionably received part of the proceeds of sale paid by Peconic to Asiagreat relating to the acquisition of the properties.

Peconic's case against Leung Hiu Ling – common law wife of Chio's brother

51.  Peconic's case against Leung Hiu Ling is much less complicated than its case against Elsie Chan.  Leung was the common law wife of the elder brother of Chio.  She was made a nominee director of Asiagreat.  Her signatures appeared on a number of conveyancing and corporate documents relating to the acquisition and resale of the properties and the subsequent release of the proceeds of sale.  She was given an indemnity by Elsie Chan in relation to her acting as nominee director of Asiagreat.  In July 1992, she also became a nominee shareholder of Asiagreat.

52.  Leung Hiu Ling received a sum of over $81 million out of the proceeds of sale from Asiagreat, which through various means was eventually channelled back to Chio or his nominee: see schedule 2.  However, there was a difference of slightly over $0.5 million.

53.  In evidence, Leung Hiu Ling claimed that she had expended the sum $0.5 million on purposes directed by Elsie Chan.  She kept no money for her own use or benefit.  But that is not accepted by Peconic.

54.  Two other sums are also said to be related to her participation in the fraud.

55.  Peconic's case is that Leung Hiu Ling knew that Chio was a director in Peconic, knew that Chio was also involved in Asiagreat, and knew that through the acquisition and resale exercise conducted through Asiagreat, Chio was making an enormous secret profit.

56.  In those circumstances, Peconic (and Star Glory) also rely on the same 3 causes of action against her, namely conspiracy to defraud, dishonest assistance and unconscionable receipt.

Peconic's case against Wong Shiu-wai – Elsie Chan's mother

57.  Peconic's case against Wong Shiu-wai is more or less similar.  Wong Shiu-wai, Elsie Chan's mother, became a director of Asiagreat in July 1992 after the departure of Mickey Wong.  She also became a shareholder in Asiagreat in July 1992, having taken up the share previously held by Poon Kam's nominee in Asiagreat.  As director of Asiagreat, she executed the relevant corporate and conveyancing documents in relation to the last acquisition of property that was completed in January 1993.

58.  Furthermore, she was involved in the channelling of monies comprising the proceeds of sale received by Asiagreat from Peconic to Chio or his nominee: see schedule 2.

59.  In the related criminal prosecution (see below), Wong Shiu-wai admitted to having received a total sum of $430,000 from the proceeds of sale.

60.  Again the same 3 causes of action are pleaded against her, namely conspiracy to defraud, dishonest assistance and unconscionable receipt.

Positions of Mickey Wong and Chen

61.  Mickey Wong and Chen are the 3^rd and 6^th Defendants in the first action.  They are also said to be guilty of conspiracy, dishonest assistance and unconscionable receipt.  They did not defend the first action and default judgments have been entered against them.  Those judgments are of course not binding on the remaining Defendants in the first action as such, and still less, on Danny Lau in the second action, but what has happened certainly forms part of the overall evidence that may be made use of by the parties as they deem appropriate.

Discovery of fraud and criminal prosecution

62.  To complete this part of the story, Peconic's case is that not long after the acquisition of the properties the Bank began to realise that the picture might not have been as rosy as they had first thought, and gradually they realised that Chio was not a reliable person.  Yet it did not suspect that there was anything unlawful or wrong with Chio or the transactions until 1998 when the ICAC started making enquiries and investigations into the transactions, which led to the instigation of criminal proceedings against Elsie Chan, Mickey Wong, Leung Hiu Ling and Wong Shiu-wai in 2000 (HCCC 111 & 282/2000).  The case eventually went on trial in 2002 before Jackson J with a jury.  All defendants were acquitted.  And it was during the criminal prosecution process – at the beginning of the jury trial – that Chen, who was scheduled to be a key prosecution witness, disappeared, after leaving a note which suggested that he was in a miserable condition.

Peconic's case against Danny Lau – Elsie Chan's solicitor

63.  Danny Lau was a conveyancing solicitor.  He is a relative of Poon Kam.  It is not disputed that he only came to know Elsie Chan and Chan Kai Kit through Louis Chow and Mickey Wong in 1991.  At that time he had been qualified for about 3 years and was a partner in Albert K K Luk.

64.  Yet Peconic's case against Danny Lau is a very serious one.  It is claimed that he has dishonestly assisted Chio in his breach of fiduciary duty towards Peconic – either knowingly or recklessly.  He is said to have assisted Chio in misrepresenting the beneficial ownership of Asiagreat to JSM (Peconic's conveyancing solicitors), concealing Chio's interest in Asiagreat and facilitating Chio's obtaining massive secret profits in the conveyancing transactions.

65.  Amongst other things, it is alleged against Danny Lau that he knew Elsie Chan was Chan Kai Kit's girlfriend, who beneficially owned or controlled Asiagreat through Elsie Chan, that Chan Kai Kit was Chio Ho Cheong, that Chio Ho Cheong was a director in Peconic, and that Chio Ho Cheong was making use of Asiagreat to earn huge secret profits out of the acquisition of the properties at the expense of Peconic.

66.  Of particular importance to Peconic's case against Danny Lau is an indemnity apparently given by Chio and Elsie Chan to Poon Kam.  Danny Lau through Albert K K Luk charged Elsie Chan for the preparation and execution of the indemnity in a bill.  The indemnity is never found amongst the papers in the possession of the relevant parties or the ICAC.  Another important document is a contemporaneous letter written by JSM to Albert K K Luk dated 4 October 1991 confirming that Chio was one of the directors of Peconic authorized to execute the necessary conveyancing documents on behalf of Peconic.

67.  Furthermore, even on Danny Lau's own admission, he had met Chan Kai Kit face to face on several occasions.  Peconic's case is that he must have known from such contacts that Chan Kai Kit was Chio Ho Cheong and he was a director of Peconic.

68.  Furthermore, Chio Ho Cheong's name and signatures were everywhere in the conveyancing and corporate documents, as well as the internal files and documents of Albert K K Luk, such as ledgers and documents relating to transfer of the proceeds of sale.  Peconic's case is that from these documents, it is quite impossible (in the civil sense of the word) for Danny Lau not to have known that Elsie Chan's boyfriend was Chio Ho Cheong, a director in Peconic.

69.  Peconic asserts that Danny Lau's role in setting up Asiagreat was part of a deliberate and elaborate effort to make it more difficult for anyone, in particular Peconic and the Bank, to discover the connection between Elsie Chan and ultimately Chio, and Asiagreat at a time when Peconic was purchasing the land from Asiagreat.

70.  Furthermore, it is alleged against Danny Lau that he played an active role in seeking to use the Macau cheques to buy important bridging time pending the arrival of the huge initial deposit from JSM to be paid pursuant to the sub-sale and purchase agreement.  He went so far as to give personal undertakings regarding the Macau cheques already alluded to above.  Furthermore, he also caused Poon Kam to execute a personal guarantee to JSM for the return of the huge initial deposit that was to be paid and released to Asiagreat, should there be any problem with the titles of the properties or delivery of vacant possession. 

71.  Peconic's case here is that Poon Kam's guarantee constituted a very material representation by Danny Lau to Peconic and JSM that Poon Kam was the beneficial owner of Asiagreat.  For otherwise, why should Poon Kam be guaranteeing the return of the deposit paid to Asiagreat by Peconic if there should be any title or vacant possession problem (so Peconic's argument runs)?

72.  As Asiagreat did not own any bank account, all transfers out of the proceeds of sale received by Asiagreat from Peconic were done through Albert K K Luk and subsequently K F Lau.  It is alleged against Danny Lau that these transfers out of money, which eventually ended up in the pockets of Chio and his nominees, were done at the direction or with the knowledge of Danny Lau, as part of the dishonest assistance he rendered to Chio.  The release of funds involved the preparation of various corporate and related documents of Asiagreat by Danny Lau.

73.  Finally, Peconic's case against Danny Lau also involves the allegation that Danny Lau was aware of the huge differences in purchase prices that Asiagreat – and therefore Elsie Chan and Chio – were getting from the confirmor transactions.  It is said that Danny Lau had no reason to believe that the properties were worth anywhere near $185 per square foot, particularly when he was fully aware that Elsie Chan was paying a fraction of that as ceiling price (i.e. $60 per square foot) to Poon Kam, his relative by marriage, for the acquisition of the properties, based on which Poon Kam – to Danny Lau's full knowledge – managed to earn a hefty commission.

Peconic's case against Albert K K Luk and K F Lau – Danny Lau's firms

74.  Peconic's case against Albert K K Luk and K F Lau is based on vicarious liability only.  Although staff members of both firms were involved in handling the conveyancing transactions and the related corporate documents, and may therefore have acquired some knowledge about the transactions and the relevant parties involved in them, it is not Peconic's case against the two firms of solicitors that by reason of that knowledge, they should be held liable.  As I said, the only case put forward against the two firms of solicitors is that by reason of Danny Lau's involvement in the relevant transactions, they should be held vicariously liable for Danny Lau's wrongdoing respectively.

Limitation defence

75.  Whereas Peconic's and Star Glory's claims against the various Defendants in the first action were commenced in 1999, Peconic's claim against Danny Lau and the two firms of solicitors was only commenced in 2002.  As alluded to above, Peconic claims that the bank officials only became aware of possible wrongdoing in the transactions in 1998 when the ICAC investigated into the matter.

76.  All Defendants in both actions defending at trial have raised the limitation defence.  In answer, Peconic and Star Glory claim that because of fraud and deliberate concealment and thus late discovery of the wrongdoing, time has been postponed, quite apart from their argument that in relation to some of the causes of action in question, there is no limitation period.

Defence of illegality – infringement of Mainland rules and regulations

77.  In addition to the limitation defence, Danny Lau and the two firms of solicitors have also raised an argument that because of infringement of some Mainland rules and regulations by the bank officials, enforcement of Peconic's claim against them would be contrary to public policy and common law principles.

78.  These specific defences will be dealt with in detail in due course.

Relief sought

79.  As far as relief is concerned, without going into details at this stage, Peconic and Star Glory are essentially claiming for the difference between the purchase prices Peconic has paid in acquiring the properties less the residual value of the properties.  Their claim also includes the expenses incurred in acquiring the land, in applying for planning permission and in attempting to dispose of the land, as well as all other expenses incurred in holding the land.  Alternatively, they go for the secret profits that Chio has made out of the acquisition.

80.  During the lengthy trial which lasted 40 days, the Court has heard expert planning evidence as well as valuation evidence.  The evidence is relevant to issues on liability and/or quantum.  It will be dealt with in greater detail in due course by reference to the relevant issues.

CLAIM AGAINST CHIO

Representations made

81.  At trial, nobody disputed that Chio was the culprit who had defrauded the Bank in the whole matter.  The real controversy lies in the roles of Elsie Chan and Danny Lau, as well as that of the other remaining Defendants', in the fraud.  Related questions concern the role of Chen in the matter.

82.  I can therefore be brief with my findings relating to what Chio has done.  In reaching my findings, I have considered the oral evidence given by the bank officials.  These witnesses were Foo – the then branch manager of the Guangdong Branch of the Bank, Li – the then deputy general manager of the Foshan Sub-branch of which Chen was the general manager, Huang Zhi-yong (“Huang” – PW3) – the managing director of Peconic and an official of the Guangdong Branch who became in charge of the Bank's investment through Peconic in the properties in 1993, and Leung Kwan Pui (“Leung” – PW4) – the then deputy general manager of Star Glory.  I have also considered the voluminous documentary evidence that has been placed before the Court. 

83.  I have no doubt and find as a fact that in various meetings that Chio had with the bank officials, Chio represented to the bank officials to the effect that the properties could be acquired for a quick resale at a profit of $200 million to some Taiwanese businessmen who were seriously interested in buying the properties.  Chio also represented that as an alternative the land could be developed into a golf course earning an even greater profit.  Chio told the bank officials that they had to act quickly as otherwise the properties could be fetched by others.  Eventually, the Bank was persuaded to enter into a joint venture with him to acquire the properties at a unit rate of $185 per square foot (subsequently the prices were adjusted upwards for the later properties), which reflected another representation that the price was a reasonable and acceptable one in accordance with the then market condition.

84.  I am satisfied on the evidence before me that in September 1991, at a meeting held in Hong Kong, Chen first mentioned to Foo about the proposed investment in the properties.  On the following day, Chio and Chen arranged for Foo (accompanied by Li) to visit the properties.  Elsie Chan was also present.  The representations were made.

85.  Later in the same month, at a further meeting held in Guangzhou, Chen repeated the same representations to Foo, urging Foo to act quickly lest the opportunity would be lost to other interested investors.

86.  There was then held a meeting at the Hyatt Hotel in Macau later on in the same month, which was attended by Foo, Li, Chen, Chio and Elsie Chan.  Again the same representations were made.  Leaving aside the question of which branch or sub-branch was the one within the Bank to invest in the project, it is reasonably clear that the decision to invest was made internally by Foo and his colleagues on 26 September 1991.  This was evidenced by a short-term intra-bank loan agreement of US$20 million between the Guangdong Branch and the Foshan Sub-branch, which money was to be used for the acquisition of the properties in Hong Kong.

87.  Peconic, a shelf company, was acquired on 3 October 1991 as the joint-venture vehicle between the Bank and Chio for the purpose of carrying out the investment.  As mentioned above, Chio, Chen and Li became its directors and shareholders.

88.  On the following day – 4 October 1991, through JSM Peconic entered into a sub-sale and purchase agreement with Asiagreat for the purchase of properties in the first 15 transactions (see schedule 1).

89.  In an internal minute of a meeting of the Foshan Sub-branch dated 12 October 1991, it was clearly recorded that Chen represented to those attending the meetings, including Li, that the properties could be resold for a profit of $200 million; alternatively, if they were developed into a golf course, the profit could be as great as $2 billion.  The price of the acquisition was clearly stated to be $185 per square foot.

90.  As can be seen from schedule 1, further sub-sale and purchase agreements were entered into (i.e. T16-T18) in November and December 1991 for the acquisition of properties.

91.  Then on 30 January 1992, there was another meeting held at the Hyatt Hotel in Macau, which was attended by Foo, Huang, Chen and Foo.  Further funding of US$20 million was requested by Chio and Chen for the completion of the acquisition.  Furthermore, Chio pointed out that the properties were not large enough for the development of an 18-hole golf course, but the same could be developed into a low-rise residential development.  Chio represented that the properties were close to other residential developments and the proposed development should have no problem.  Chio represented that the properties were separate from the Mai Po Nature Reserve by a river.  Chio used a map to illustrate his points.  Again, the intended development was represented as a hugely profitable one.

92.  In February 1992, the Guangdong Branch advanced another sum of US$20 million for the purpose of the investment.

93.  There was a further meeting held in the middle of 1992 at the New World Harbour View Hotel in Wanchai.  It was attended by Huang, Chen, Chio, Elsie Chan, Leung, a Li Kang Hung – then a senior land officer of the District Lands Office in Yuen Long, and a Chow Wai Kam, an architect.  During the meeting, the development plan was again discussed, and Li Kang Hung, the senior land officer who was asked by Elsie Chan to attend the meeting, expressed the view that there should be no problem in applying for a change of user to residential use given the precedents of Palm Springs and Fairview Park.

94.  This meeting was followed by another site visit to Mai Po which was attended by Foo, Chen, Huang and Chio.  Chio again explained to the bank officials the intended development plan, pointing to the nearby residential developments as examples.  On the return journey, Elsie Chan joined the men for lunch.

95.  During these meetings, the representations identified above, namely the development and resale potential of the properties and the reasonableness of the general unit prices of acquisition were made.

96.  Furthermore, in relation to the actual acquisition process, it is clear from the evidence and I find as a fact that Paul Yu of JSM did advise Chen on 27 September 1991 of the planning restrictions relating to the properties as set out in the Mai Po and Fairview Park Interim Development Permission Plan, the Town Planning (Amendment) Bill 1990 and the relevant government gazette (Gazette no. 41/1990).  Paul Yu specifically drew Chen's attention to the development restrictions in relation to the properties.  The relevant materials were also sent to Chen.  Yet Chen and Chio told Paul Yu in reply that they had already obtained favourable expert opinion regarding planning permission from Chow Wai Kam (architect) and were confident in getting the relevant approvals in future to develop the properties into a residential development.

97.  Furthermore Chio represented to Paul Yu during the conveyancing process that Asiagreat was owned or controlled by Poon Kam, and it was necessary to enlist the help of Asiagreat/Poon Kam as middleman/confirmor in order to acquire the properties.  Chio and Chen told Paul Yu that there was no impropriety in the arrangement, it was a good bargain and they agreed to proceed with the purchase.

98.  As I said, I have little difficulty in finding, on the available evidence, that the above representations were indeed made by Chio to the bank officials and Paul Yu of JSM, solicitors acting for Peconic.

Falsity of the representations

–  Golf  course –

99.  As regards the falsity of those representations, the claimed development potential of the properties into a golf course does not require serious consideration.  On the available evidence, the suggestion that the properties could be developed into anything other than a “pitch and putt” nine-hole course, fetching a profit of $2 billion, was simply absurd.  No expert called by any side supported such a wild proposition.

–  Taiwanese businessmen –

100.  The price of $185 was quite clearly, in my view, wholly unreasonable and inappropriate.  I will not at this stage deal with the valuation evidence and the differences between the experts.  All I would say at this juncture is this: given that the properties could be acquired through Poon Kam at a ceiling price of $60 per square foot to the knowledge of Chio, a director in Peconic, the price offered by his own company – Peconic – to acquire the same properties ($185 per square foot) was plainly unreasonable and inappropriate.  This is so regardless of what the true market price of the properties was at the time, a matter that I will come back to later on in this judgment.

101.  As regards the Taiwanese businessmen who were supposedly interested in buying the properties from Peconic, leading to an estimated profit of $200 million, apart from Chio's oral assertions, and save for the minutes dated 2 January 1992 of a meeting of the Foshan Sub-branch attended by, amongst others, Chen and Li, in which Chen represented that there were six Taiwanese business consortiums which were interested in acquiring the properties from Peconic – the names of two of them were given, there was essentially no evidence on these so-called interested Taiwanese businessmen.  Nothing about them was known.

102.  Significantly, none of these supposed businessmen had turned up in any meetings or negotiations with the Bank or Peconic.  There was no known correspondence or document with them or from them.  None of the bank officials who gave evidence at trial had met any of these businessmen.  Even Elsie Chan said she had never met any of these businessmen. 

103.  The claim that the resale of the properties to these Taiwanese businessmen would result in a massive profit of $200 million to Peconic also gives rise to a real doubt as to whether these businessmen did exist or not.  For the price paid by Peconic for the properties was already a hugely inflated one – judging from the standpoint of the ceiling price that Asiagreat was able to assemble the properties through the help of Poon Kam and Yeung Fu Man.  It is therefore difficult to imagine that these supposed Taiwanese businessmen would have been prepared to purchase the same properties from Peconic at a price that would be $200 million more than the already-inflated price paid by Peconic to acquire the properties, particularly bearing in mind the development restrictions that I will come to shortly in relation to the same.

104.  I must also view the assertion about the interested Taiwanese businessmen by Chio against the whole background of the case.  As I will make clear in the judgment to follow, by a rather elaborate scheme Chio has defrauded Peconic and the Bank, and the possibility that the so-called interested Taiwanese businessmen was just part of the fraud practised by Chio on Peconic and the Bank must be seriously borne in mind.

105.  Bearing everything in mind, I am satisfied that Peconic and Star Glory have proven their case on a balance of probabilities that the resale of the properties to the so-called interested Taiwanese businessmen, if they ever existed, was never a serious possibility.  That is sufficient for the purpose of finding that the relevant representation was false.  For it is plain to me that the relevant representation meant and was intended to be understood as meaning, as indeed it was, that some Taiwanese businessmen were seriously interested in acquiring the properties, at a price that would result in a profit of $200 million.  In my finding, no such serious Taiwanese businessmen ever existed.  As I said, some names were named by Chen in the internal meeting, but on the evidence before me, I cannot believe that those named ones were ever seriously interested in acquiring the properties from Peconic, which would result in the represented estimated profit of $200 million.

106.  As I say, such a limited finding would be sufficient to support the further finding that the relevant representation was false.

107.  In other words, it really does not matter whether those Taiwanese businessmen never existed, or that there were some of these Taiwanese businessmen in existence but they were never seriously interested in acquiring the properties from Peconic at such a price that would ever result in producing the represented estimated profit of $200 million.  Either of these possibilities would mean that the representation was materially false.

–  Development potential –

108.  Turning to the development potential of the properties, the Court has heard much expert planning evidence relating to the development potential of the properties, given its close vicinity to the Mai Po Nature Reserve.  For reasons that will become immediately apparent, I need only give a very brief account of the relevant evidence and set out quickly my views in the following paragraphs. 

109.  However, before I do so, it would be helpful for me to state immediately what appears to me to be of importance.  According to the evidence before me, I find that the essence of the representation made by Chio was that the properties could be developed into a low-rise residential development without problem or difficulty – meaning without any significant or material problem or difficulty.  That, in my view, must be false, regardless of what precise views one should take regarding the expert planning evidence.  For even according to the relatively more optimistic view of Mr Brownlee, the planning expert retained by those representing Danny Lau, the estimated chance of successfully obtaining the necessary planning approval for the intended development was no more than 35%.  In those circumstances, I fail to see how Chio's wholly unqualified representations to the effect that the properties could be developed into a low-rise development without any difficulty or problem could be true.

110.  That effectively sets the bottom-line for the evaluation of the expert evidence that the Court has heard.

111.  In relation to the relevant planning restrictions applicable to the properties, according to the expert evidence, before February 1990, there was essentially no planning restriction as such.  Control was exercised by the Government through the terms and conditions in the relevant Crown leases.  Matters were in the hands of the District Lands Office, Yuen Long. 

112.  In February 1990, the Planning Department produced a “Policy Guidelines for Development Control in the Deep Bay area”, as interim administrative guidelines in the consideration of development potentials in the Deep Bay area.  Buffer zones were set up in the area and the properties were located within “Deep Bay Buffer Zone 1”, which was intended to protect the special landscape and ecological value of Deep Bay coastal areas and their surroundings, including the intertidal biological community so as to ensure the Government's planning objective of protecting and enhancing the Mai Po Nature Reserve.  The policy guidelines were internal departmental guidelines that were not published to the public.  Nevertheless, according to Ms Iris Tam, the planning expert retained by Peconic, these policy guidelines would have been made known to any town planner if the Planning Department had been consulted on a proposed development.

113.  On 17 August 1990, the Mai Po and Fairview Park Interim Development Permission Area Plan no. IDPA/YL-MP/1 (“the IPPA plan”) was gazetted.  This was prepared following amendments to the Town Planning Ordinance were made in the same year, in order to provide an initial measure of control of land use and development in the rural areas of the New Territories in the face of increased development pressure.  The properties were included in the IDPA plan as “unspecified use” area.  In other words, save for some excepted users, all other developments (including the residential use envisaged by Peconic) required planning approval of the Director of Planning.

114.  On 12 July 1991, the IDPA plan was replaced by the draft Mai Po and Fairview Park Development Permission Area Plan no. DPA/YL-MP/1 (“the draft DPA plan”).  The properties remained within the “unspecified use” area and any residential development required the planning approval of the Town Planning Board.  According to the explanatory note of the draft DPA plan, which did not constitute a part of the draft plan, the planning intention for the area covering the properties was:

“primarily to protect the special landscape and ecological value of these coastline areas and their surroundings, including the intertidal biological community.  Accordingly, new development will normally not be permitted in the area unless it is required to support the conservation of the area's natural features and scenic qualities.” (para. 6.2.5)

115.  It should be noted that when the properties were first acquired in October 1991, the applicable plan was the draft DPA plan.

116.  In October 1992, there was a press release published by the Town Planning Board known as “Consideration of Section 16 Application [under the Town Planning Ordinance for approval] for Development in areas around Mai Po Nature Reserve”.  For the first time, the concept of buffer zones was used in a public document.  The properties fell mainly within “Deep Bay Buffer Zone 1”, and according to the document,

“New development within this zone should not be allowed unless it is required to support the conservation of the area's natural features and scenic qualities.” (Part IV (a))

117.  As may be gleaned from schedule 1, all the relevant transactions comprising the acquisition of the properties were completed by January 1993.  In October of the same year, the Town Planning Board published a set of “Guidelines for considering Planning Applications for Development within Deep Water Bay Zones”.  As a majority of the lots comprising the properties acquired fell within Buffer Zone 1, the same planning restriction that was set out in the press release in the previous year applied under the 1993 guidelines.

118.  There were further guidelines published in November 1994 and April 1999 respectively.

119.  According to Ms Iris Tam, it was a progressive tightening of planning control in the relevant area, starting with the internal policy guidelines back in February 1990.  She was of the firm view that at all material times, i.e. between 1990 and 1994, it was “highly unlikely” that planning permission would have been obtained for the properties from the Town Planning Board for residential development.  She pointed out as reasons that the properties were very close to the Mai Po Nature Reserve and fell almost entirely within Buffer Zone 1, and that the proposed residential development would have involved substantial pond filling.

120.  Ms Tam took the view that if a client had sought her advice between 1990 and 1994 on the development potential of the properties, she would have referred to the relevant statutory town plans and any policy guidelines which were in the public domain.  All of these documents were very clear on the planning intention which was in favour of conservation and against development.  She would also have obtained a clear policy direction from the Planning Department regarding the planning intention in the area.  Ms Tam concluded that she would have “strongly advised” the client not to purchase the properties in the hope of obtaining planning permission for a residential development.

121.  As indicated above, the expert called by Danny Lau, Mr Brownlee, was relatively more optimistic.  He would not rule out the possibility of obtaining the relevant planning permission from the Town Planning Board eventually.  He was of the view that depending on how the new statutory planning system introduced progressively starting from the early 1990s was used and how the applications and objections under the Ordinance were managed, there was a 35% chance that an application for some form of residential development could have been obtained at the time the relevant DPA plan was in existence.  He referred to some successful applications relating to lands nearby to illustrate his point.  On the other hand, it cannot be disputed that there was never any successful example for sites falling entirely (or mainly) within buffer zone 1.

122.  I need not rely on the failure of Peconic to obtain the necessary planning approval to develop the properties to judge the difficulty of obtaining the relevant permission.  The parties have expended some efforts on analysing why Peconic's endeavours in the early 1990s failed.

123.  But as I said at the outset, even according to the more optimistic view of Mr Brownlee, the estimated chance of success was no higher than 35%.  In those circumstances, Chio's wholly unqualified representations to Paul Yu and the bank officials that the properties could be developed into a low-rise residential development without difficulty or problem was quite false.  Notably, no evidence was led by anybody to seek to justify the wholly unqualified and wide representation made by Chio to the bank officials.

124.  For that simple reason, I come to the conclusion and find that the relevant representations made by Chio regarding the development potential of the properties were all false.  And for this reason also, it is really unnecessary for me to make any finding on whether the more pessimistic view of Ms Iris Tam or the relatively more optimistic view of Mr Brownlee should be preferred.  Under either of these views, Chio's representations could not be true in the absence of an appropriate qualification, which there was none.

125.  The third expert, Mr Alexander-Webber, called on behalf of Elsie Chan and Wong Shiu-wai, also gave some expert evidence on the planning aspect of the case.  But I do not think any part of his evidence affects in any significant way what I have just said regarding the development potential of the properties and the falsity of the representations made by Chio.

–  True ownership of Asiagreat –

126.  As regards the true ownership of Asiagreat, as will be discussed in greater detail below, Poon Kam was not the owner or the person in control of Asiagreat.  Any representations to that effect were false.

–  Role of middleman and huge price difference –

127.  In relation to the representations to the effect that Asiagreat and Poon Kam were required because somebody was needed to assemble the properties and therefore Peconic had to pay a huge price difference to the middleman for the job, the representations were obviously misleading or false given Chio's ownership or control of Asiagreat and Poon Kam's willingness to assemble the properties at a ceiling price of $60 per square foot only.

Chio's state of mind

128.  Regarding the state of mind of Chio when the relevant misrepresentations were made, I firmly bear in mind that Peconic's case against Chio is one of making fraudulent misrepresentations, i.e. that he knew that the representations that he made were untrue or that he was reckless as to whether the same were true or false.  This is a serious allegation and whilst the standard of proof remains the preponderance of probability, I have firmly borne in mind what has been said about proving a serious allegation such as fraud in a civil case by Lord Nicholls in Re H [1996] AC 563, 586C-587G.  See also ADS v. Brothers [2000] 1 HKLRD 568, 574E-575G and HKSAR v. Lee Ming Tee (2003) 6 HKCFAR 336, 361H-363I. As Sir Anthony Mason NPJ pointed out in Lee Ming Tee at para. 72, inferences of fraud or serious misconduct are “... not to be reached by conjecture nor ... on a mere balance of probabilities.”  They are “to be plainly established as a matter of inference from proved facts”. See also Ming Shiu Chung v. Ming Shiu Sum FACV 25/2005 (23 May 2006) paras. 45, 54 & 56.

–  $185 per square foot –

129.  Regarding the misrepresentations on the reasonableness and appropriateness of the purchase price of $185 per square foot (or the subsequent acquisition prices), I have no doubt (in the civil sense) that Chio well knew that the relevant representations were false.  He knew perfectly well that through Asiagreat, the properties could be assembled at a ceiling rate of $60 per square foot.  He also knew that for the several subsequent properties, they were available at prices much lower than that Peconic eventually paid.  As director of Peconic, there was no possible explanation for his not informing the company about it when recommending the purchase price of $185 per square foot.  The same point can be made in relation to the subsequent purchases.  On the facts of the present case, there can be only one possible inference to be drawn, namely that he knew that the relevant representations about the prices were false, and he was fraudulent in making the same.

–  Poon Kam's role in Asiagreat –

130.  As regards the representations to the effect that Poon Kam owned or controlled Asiagreat, again on the evidence before me it is plain beyond dispute that Chio knew only too well that it was not so.  In fact Asiagreat was owned or controlled by him – as regards the role of Elsie Chan, I will deal with it in the latter part of this judgment.  So again the representations made in relation to Asiagreat were knowingly false and they were thus fraudulently made by Chio.

–  Golf  course –

131.  As regards those representations relating to developing the properties into a golf course generating a profit of $2 billion, not only were the representations a load of rubbish, it is plain from the evidence that Chio made them fraudulently in the sense that he knew that they were false.  On all the materials before me, nobody could have entertained an honest belief that the properties could be developed into a golf course generating an estimated profit of $2 billion.  That was wholly fanciful.  The only possible inference on the evidence that I can draw is that Chio made that up.  He could not have obtained any credible advice from any experts in any field that profit of such a magnitude could be generated by developing the properties into a golf course – leaving aside whether such a development would have been permitted by the Town Planning Board in the first place.  Again the relevant misrepresentations were fraudulently made by Chio.

–  Taiwanese businessmen –

132.  Likewise for the Taiwanese businessmen, I have already concluded and found as a fact that put at the lowest, there were never ever any Taiwanese businessmen who were seriously interested in acquiring the properties from Peconic, which would result in an estimated profit of $200 million to Peconic.  As Chio was the only supposed contact point of these Taiwanese businessmen, he must have known the true position.  At the very least, in the absence of any credible explanation from him, that is a wholly legitimate inference to be drawn.  On the facts, I am prepared to draw such an inference and conclude that the relevant misrepresentations were also fraudulently made by Chio, knowing the same to be false.

–  Development potential –

133.  Finally, relating to the development potential of the properties into a low-rise residential development, this is a slightly more tricky point.  The simple reason is that one simply does not know for sure what sort of advice or expert advice Chio had obtained at the material times regarding the planning or development potential of the properties. 

134.  People like Li Kang Hung and Chow Wai Kam featured in the scene and they appeared to have given supportive views relating to Chio's representations about the development potential of the properties (per Elsie Chan's evidence).  Given that in the early 1990s, planning control in the rural New Territories was in a state of flux, the expert evidence adduced by the parties did not exclude people like Li Kang Hung as persons who could give relevant advice regarding the development potential of the properties, although he only worked in the Lands Department, rather than the Planning Department or the Town Planning Board. 

135.  Chow Wai Kam was an architect, and at least to a layman, he might appear to have some expertise in the development potential of the properties. 

136.  Here, it must be remembered that in order to judge whether Chio was fraudulent (i.e. whether he had knowledge of the relevant falsity or was recklessness as to the same), one must approach the matter from the standpoint of Chio.  The focus is on his knowledge of the falsity of his representations or alternatively his recklessness regarding whether what he represented to others was true or false.  It is not on whether the expert advice that he had got, if any, was right or wrong.

137.  I also bear in mind one further fact – that Chio did not immediately disappear from the scene after the acquisition of the properties.  He remained a director and shareholder of Peconic and he was instrumental in taking steps on behalf of Peconic to apply for the necessary planning permission to develop the properties into a low-rise residential development.  One possible explanation for his action was that he also held out some hope regarding the intended development of the properties.

138.  Having considered the evidence as a whole, I have come to the conclusion and find that Chio was reckless regarding whether his representations on the development potential of the properties into a low-rise residential development were true or false.  My reasons may be briefly stated as follows.

139.  At least by the time when Paul Yu gave Chen and Chio the planning restriction advice prior to the signing of sub-sale and purchase agreement in the first 15 transactions, Chio must have known that there were planning restrictions relating to the properties.  At that stage, if he had already got some expert advice to the contrary, he ought to have gone back to his experts – whoever they may have been – and asked them for specific views on the matter, and if necessary he ought to have gone to a planning expert for advice (if the experts he had got by then were not planning experts). 

140.  On the other hand, if by then he had not got any expert advice, he ought to have sought such advice.  In either case, he could not possibly have gone back to Paul Yu immediately as he and Chen did and told him that they had already got expert advice and that they were confident that the relevant permission could be obtained eventually to permit development of the properties into a low density residential development.  To do so as he did was reckless.

141.  As regards the involvement of people like Li Kang Hung, it is true that Elsie Chan in her evidence mentioned that Li Kang Hung was involved in the acquisition of the properties almost from the very early beginning.  He attended an initial site visit in September 1991.  But Elsie did not elaborate on what advice, if any, Li gave Chio or Chen on that occasion.

142.  It is also true that according to the evidence, Li, belonging to the Lands Department, was somebody that one could reasonably approach for advice on planning approval matters given that at that time the planning control regime was in a state of flux and it was not that long ago that those matters were in the exclusive province of the district land offices.

143.  However, it does not follow that in the face of the new legislation, draft DPA plan and explanatory note, which quite obviously imposed a new statutory regime of control over development of the area to which the properties belong, Chio need only approach an officer working in the Lands Department for planning permission advice, before he could responsibly give an unqualified representation that the properties could be developed into a low rise residential development without difficulty. 

144.  Nor was it right to simply point to the neighbouring developments, the approvals of which were given many years earlier under a different regime of planning control, as sufficient support for the unqualified view that a similar development could be undertaken at the properties.

145.   Whilst as I said I would not regard Li Kang Hung as being wholly irrelevant in terms of obtaining appropriate advice, he certainly was not a planning expert from whom alone Chio ought to have sought advice before making the representations. 

146.  As for Chow Wai Kam, according to his ICAC statements, he was only consulted in late 1991 or early 1992, after the properties had been contracted to be purchased.  He hired Urbis Travers Morgan as town planning expert who no doubt must have given him and Chio advice on the planning restrictions and difficulties in question: see in particular the ICAC statement of Tsang Chi-chung of Urbis dated 2 November 1999, para. 9.  Furthermore, Townland Consultants Ltd, town planning consultants, had by letter advised Chow Wai Kam that the properties fell within Buffer Zone 1 and were subject to development restrictions on as early as 25 January 1992.

147.  The involvement of Chan Tak-yuen of A D Sinensis & Associates Limited in October/November 1991 to prepare a development concept report on the properties (within 10 days) did not improve the position of Chio as Chan was never asked to advise on any planning restrictions of the properties.  Rather Chan's “impression” of the planning position actually came from Danny Lau who told him that the properties could not be used for high density building development (per Chan Tak-yuen's ICAC statement).

148.  I fully bear in mind that the burden of proof lies with Peconic.  But on the available evidence before me, and in the absence of any positive explanation or case from Chio (or Chen – with Elsie Chan claiming ignorance in the matter), it is quite open to this Court to infer and conclude a case of reckless misrepresentation against him (despite its serious nature).

149.  In my view, Chio was not merely negligent or grossly negligent in not seeking proper planning advice before he made the relevant representations.  I find that he simply did not care whether his representations were true or false.  He did not confirm the correctness of the same with a proper planning expert.  He did not correct himself after experts like Urbis were retained.  What he did or failed to do went beyond merely being grossly negligent.  As I said, he was reckless. 

150.  That this is so is not surprising if one puts the present discussion in its context.  Quite plainly from the evidence, Chio was most intent and anxious to lure the Bank into joining the joint venture in acquiring the properties so as to enable him to heap a huge secret profit out of it and anything standing in his way, including any potential planning difficulties, would have to be brushed aside – and there was an almost irresistible temptation for him to do so.  In those circumstances, even though he was warned by Paul Yu (if not others as well) of the potential planning difficulties, he went ahead with his representations and plans to defraud Peconic and the Bank.  In light of those circumstances as background, I have little difficulty in concluding that Chio was reckless regarding the development potential of the properties.  When he made the relevant representations, he simply ignored the known risk regarding the planning difficulties in making his representations or concealed them from his representees.

151.  In the present context, the debate over whether Ms Iris Tam's view or Mr Brownlee's more optimistic view regarding the chances of obtaining planning permission should be preferred has little relevance.  For as explained, one must approach the question from the standpoint of Chio.  He had never consulted any of them.  What they would have told him if consulted is simply irrelevant.  But the bottom-line is that even if Chio had consulted someone like Mr Brownlee, he would only have been told that there was a 35% chance of success, which as I said would not have justified the unqualified representations made by Chio.

152.  The finding that Chio was reckless regarding the development potential stands well with what he did on behalf of Peconic after the acquisition of the properties, in terms of applying for the necessary planning permission.  For there Chio was merely using Peconic's money (which essentially came from the Bank despite his agreement to subscribe for 25% shareholding in Peconic) to make the relevant application, which if successful could hopefully bring in more profits for himself via his agreed shareholding in Peconic.  Put another way, he had nothing to lose by carrying on the planning permission application for Peconic.

– Representees and reliance –

153.  To whom were the representations made?  Mr Paul Shieh SC, Ms Linda Chan with him, appearing for Danny Lau and the two firms of solicitors, submitted in final submission that the fraudulent misrepresentations were made only to the bank officials, rather than Peconic or its board of directors, and therefore did not support Peconic's case on misrepresentations.  Mr Shieh pointed out that of the three directors of Peconic, Chio himself was the representor whereas Chen – according to Peconic's case – was a co-conspirator with Chio and therefore could not be a victim of any misrepresentations, and Li was too junior to make any difference regarding the decision-making process (– he simply followed Chen's decisions). 

154.  Furthermore, Mr Shieh argued that the decision to invest was made by the bank officials even before Peconic was acquired (on 3 October 1991 – one day before the signing of the sub-sale and purchase agreement).  A related argument was that there was no relevant reliance by Peconic on the misrepresentations, because the relevant decision was made by Foo or either the Guangdong Branch or the Foshan Sub-branch to invest in the properties via Peconic.  Li, the only innocent director of Peconic, did not on behalf of Peconic, place any material reliance on the misrepresentations.

155.  I have no difficulty in rejecting these technical arguments, regardless of whether Chen was really a co-conspirator of Chio (which I will come to).  Here I accept the arguments of Mr John Scott SC, Mr C W Ling with him, appearing for Peconic and Star Glory in the two actions, set out in paragraphs 27 to 30 of their final submission.

156.  In short, a representation made to a company promoter with the intention that it should be acted upon by the company when formed becomes a representation to the company: Spencer Bower, Turner and Handley, Actionable Misrepresentation (4^th ed.) para. 166.  As Peconic was acquired as the corporate vehicle for the specific purpose and as part of the plan to acquire the properties, and as Chio's representations were addressed to the bank officers with a view to inducing the Bank to participate in the joint venture which was done through Peconic, there is no question of separating artificially the Bank from Peconic in the present context (i.e. in terms of the identity of the representee and reliance).  See also Leslie Leithead Pty Ltd v. Barber (1965) 65 SR(NSW) 172, 177, quoted by Mr Scott in paragraph 28 of his final submission.

157.  Furthermore, a representation having been made for the purpose of an intended transaction will normally be regarded as continuing until the transaction is entered into or completed, unless varied or withdrawn in the meantime: Spencer Bower, at para. 61.  At no time did Chio ever withdraw or modify the misrepresentations that he had made to the bank officials or Peconic's board after the formation of Peconic.

158.  As regards Li, although he held a position junior to Chen (and of course Foo, the branch manager), it does not mean that he did not rely on the misrepresentations made by Chio, whilst acting as director of Peconic.  His evidence, which I accept in this regard, was that if he had known about the falsity of the representations made to him by Chio, he would not have signed as director for and on behalf of Peconic the relevant conveyancing documents, and he would have reported the matter to his superiors.

159.  In any event, as discussed above, I fail to see why one cannot take into account the reliance placed by Foo on the misrepresentations made by Chio, which represented the reliance placed by the Bank, effectively a promoter of Peconic.  On the evidence as a whole, Foo and the other bank officials clearly relied on the representations in deciding to acquire the properties and in proceeding with the acquisition.  And according to the principles set out in Spencer Bower, such reliance is in law treated as reliance by Peconic itself.

160.  It was submitted on behalf of Elsie Chan and her mother in final submission that out of greed the bank officials decided to enter into the joint venture hoping to “make a killing in the Hong Kong real estate market as they believed others had done before”, and they were “willing to take the risk as they were all blinded by their greed and the desire to reap substantial profits”.  All I need say is that what is important here is whether the bank officials placed reliance on Chio's representations in deciding to embark on the joint venture and proceeding with it to its logical conclusion.  On the evidence as a whole, the answer is plainly “yes” – regardless of what their motives were.  If they were “blinded” – they were blinded in whole or in part by Chio's representations.

Conclusion on misrepresentations

161.  In conclusion, on the evidence before me, I have no hesitation in finding that Chio has defrauded Peconic in terms of the misrepresentations that he has made.

Breach of fiduciary duty – making of secret profits

162.  Furthermore, it is plain from the evidence that Chio has made a huge secret profit, without the knowledge or approval of Peconic or the bank officials, from the acquisition of the properties.  It is trite that by so doing, he has acted in breach of his fiduciary duty owed by him as director to Peconic.  No Defendants, including Mr Shieh's clients, have seen fit to make any submissions to the contrary during final submission.  What Chio has done is simply indefensible.

Chen: a co-conspirator or victim of misrepresentations?

163.  It is in fact unnecessary to deal with the question of whether Chen was himself a co-conspirator of Chio, or a victim of his misrepresentations.  As indicated above, the default judgment entered again Chen is not conclusive regarding his role in the whole matter, so far as the remaining Defendants involved in the trial are concerned.  It is true that Chen himself did make a number of representations which turned out to be false, along the lines of those representations made by Chio.  But it does not necessarily mean that Chen knew that the representations he made or the representations that Chio made in his presence, to the bank officials, were false at the material time.  He himself may have been a victim of fraud committed by Chio.

164.  In his final submission, Mr Scott pointed out that Peconic's case against Chen went beyond the simple point of his absence.  It relied also on the timing of his disappearance – just as he was about to be called to give evidence at the criminal trial where his action would be exposed.  Notably, Mr Scott no longer relied on the note that Chen left behind upon his disappearance, the wording of which was at one time thought to be indicative of a guilty conscience.  I think senior counsel was right not to place much reliance on that note because the suggested indication of a guilty conscience arose more from the less than perfect English translation of the Chinese note, rather than anything else.  I do not think the note, as originally written in Chinese, bears the suggested indication.

165.  But in any event, Mr Scott also relied on: Chen's complete disappearance from the scene when he had accommodation in Hong Kong; that he could not be found despite a diligent search; that Chio and Chen were very close and that Chen admitted in his ICAC statement that he received payment of half a million dollars paid into his account by a “Chio Wai-mei” on 11 September 1992.  But Mr Scott accepted that this Chio Wai-mei may or may not have anything to do with Chio in our case.  Nonetheless Mr Scott submitted that Chen's absence made it very difficult to exclude this possibility.  Mr Scott also pointed out from the evidence that both Chio and Elsie Chan referred to Chen as “Master” as a result of, she said, “social dance” lessons given to Chio.  Mr Scott observed that this was an unusual connection for a banker to make with a borrower, to say the least.

166.  I accept that there is some substance in the points made by Mr Scott.  But there could be counter arguments and alternative (innocent) explanations.

167.  As I said, it is not necessary to resolve the question of whether Chen was a co-conspirator or a mere victim of fraud.  But I should indicate that I am inclined to find, bearing in mind that a serious allegation is involved here, that it has not been proven to the satisfaction of the Court that Chen was a co-conspirator.

Mickey Wong

168.  Likewise, it is not necessary to say anything about the true position of Mickey Wong, and I do not propose to do so.

CLAIM AGAINST ELSIE CHAN

169.  I now move on to deal with the position of Elsie Chan.

Law on dishonest assistance

– Dishonesty as the sole criterion –

170.  Before I deal with the facts and make the relevant findings, it is necessary to set out the relevant law, in particular, the law relating to dishonest assistance.  For reasons that will become apparent, this is the main cause of action that bears the greatest relevance to Peconic's case against not only Elsie Chan but also Danny Lau.

171.  This is also the area of law where there has been some recent development, which, it is hoped, will put to rest some controversy relating to a crucial element of the cause of action.

172.  The leading modern authority on dishonest assistance in furtherance of breach of trust is undoubtedly the Privy Council decision of Royal Brunei Airlines v. Tan [1995] 2 AC 378.  In that case, after reviewing the authorities and the underlying rationale for making a third party (accessory) liable to a beneficiary under a trust for taking part in the breach of trust by a trustee, the Privy Council adopted dishonesty as the sole criterion for deciding the third party's liability.  This is so irrespective of whether the third party has received any trust property in the process and regardless of whether the trustee was dishonest or fraudulent.  At p. 392F–G/H, Lord Nicholls set out the accessory liability principle thus:

“Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability.  It is also a sufficient ingredient.  A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation.  It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly.  “Knowingly” is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden [1993] 1 W.L.R. 509 scale of knowledge is best forgotten.”

– Test of dishonesty –

173.  As regards the meaning of “dishonesty”, his Lordship had some important observations to make (at pp. 389C–H and 390F to 391B):

“Whatever may be the position in some criminal or other contexts (see, for instance, Reg. v. Ghosh [1982] Q.B. 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances.  This is an objective standard.  At first sight this may seem surprising.  Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence.  Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated.  Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct.  Carelessness is not dishonesty.  Thus for the most part dishonesty is to be equated with conscious impropriety.  However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances.  The standard of what constitutes honest conduct is not subjective.  Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

In most situations there is little difficulty in identifying how an honest person would behave.  Honest people do not intentionally deceive others to their detriment.  Honest people do not knowingly take others' property.  Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.  However, in the situations now under consideration the position is not always so straightforward.  This can best be illustrated by considering one particular area: the taking of risks.

Taking risks

All investment involves risk.  Imprudence is not dishonesty, although imprudence may be carried recklessly to lengths which call into question the honesty of the person making the decision.  This is especially so if the transaction serves another purpose in which that person has an interest of his own.

…

The only answer to these questions lies in keeping in mind that honesty is an objective standard.  The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances.  It is impossible to be more specific.  Knox J. captured the flavour of this, in a case with a commercial setting, when he referred to a person who is “guilty of commercially unacceptable conduct in the particular context involved:” see Cowan de Groot Properties Ltd. v. Eagle Trust Plc. [1992] 4 All E.R. 700, 761.  Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty.  An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person.  He might, for instance, flatly decline to become involved.  He might ask further questions.  He might seek advice, or insist on further advice being obtained.  He might advise the trustee of the risks but then proceed with his role in the transaction.  He might do many things.  Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.

Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time.  The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.”

174.  That dishonesty, rather than recklessness, is the touchstone of the cause of action, as reformulated by the Privy Council in Royal Brunei Airlines, has since been accepted as correct.  However, debate soon arose regarding the meaning of dishonesty, particularly whether dishonesty is a purely “objective” test with some subjective characteristics as Lord Nicholls has explained in the passage quoted above, or whether it goes further and requires knowledge on the part of the accessory that what he does is, in the eyes of others (i.e. objectively), dishonest. 

175.  The debate cumulated in a divided decision of the House of Lords in Twinsectra Limited v. Yardley [2002] 2 AC 164.  In that case, by a majority, the House held that for a person to be held liable as an accessory to a breach of trust he had to have acted dishonestly by the ordinary standards of reasonable and honest people and have been himself aware that by those standards he was acting dishonestly.  Thus Lord Hutton, a member of the majority, explained in his speech why he preferred the so-called “combined test” for determining dishonesty in the present context, namely a standard which combines an objective test and a subjective test. The test requires that before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realized that by those standards his conduct was dishonest (para. 27). 

176.  In paragraphs 35 and 36, Lord Hutton went on to explain the rationale behind his views:

“35    There is, in my opinion, a further consideration which supports the view that for liability as an accessory to arise the defendant must himself appreciate that what he was doing was dishonest by the standards of honest and reasonable men.  A finding by a judge that a defendant has been dishonest is a grave finding, and it is particularly grave against a professional man, such as a solicitor.  Notwithstanding that the issue arises in equity law and not in a criminal context, I think that it would be less than just for the law to permit a finding that a defendant had been “dishonest” in assisting in a breach of trust where he knew of the facts which created the trust and its breach but had not been aware that what he was doing would be regarded by honest men as being dishonest.

36.    It would be open to your Lordships to depart from the principle stated by Lord Nicholls that dishonesty is a necessary ingredient of accessory liability and to hold that knowledge is a sufficient ingredient.  But the statement of that principle by Lord Nicholls has been widely regarded as clarifying this area of the law and, as he observed, the tide of authority in England has flowed strongly in favour of the test of dishonesty.  Therefore I consider that the courts should continue to apply that test and that your Lordships should state that dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct.”

177.  Lord Millett, in a strong dissenting judgment, maintained that Royal Brunei decided that the test of dishonesty is objective, although account must be taken of subjective considerations such as the defendant's experience and intelligence and his actual state of knowledge at the relevant time.  But it is not necessary that he should actually have appreciated that he was acting dishonestly; it is sufficient that he was: para. 121.  The question is whether an honest person would appreciate that what he was doing was wrong or improper, not whether the defendant himself actually appreciated this (para. 122).

178.  His Lordship went on to give three reasons for his preferring the objective approach to the combined test (at para. 127):

“(1) Consciousness of wrongdoing is an aspect of mens rea and an appropriate condition of criminal liability: it is not an appropriate condition of civil liability.  This generally results from negligent or intentional conduct.  For the purpose of civil liability, it should not be necessary that the defendant realised that his conduct was dishonest; it should be sufficient that it constituted intentional wrongdoing.

(2) The objective test is in accordance with Lord Selborne's statement in Barnes v Addy LR 9 Ch App 244 and traditional doctrine.  This taught that a person who knowingly participates in the misdirection of money is liable to compensate the injured party.  While negligence is not a sufficient condition of liability, intentional wrongdoing is.  Such conduct is culpable and falls below the objective standards of honesty adopted by ordinary people.

(3) The claim for “knowing assistance” is the equitable counterpart of the economic torts.  These are intentional torts; negligence is not sufficient and dishonesty is not necessary.  Liability depends on knowledge.  A requirement of subjective dishonesty introduces an unnecessary and unjustified distinction between the elements of the equitable claim and those of the tort of wrongful interference with the performance of a contract.”

179.  In Hong Kong, judicial sentiments have been expressed that the dissenting views of Lord Millett should be preferred: see for instance UBS AG v. Stand Ford International Enterprises Ltd [2002] 3 HKC 621, 627I to 628E (per Stone J).

180.  Hopefully, the very recent decision of the Privy Council in Barlow Clowes International Ltd v. Eurotrust International Ltd [2006] 1 All ER 333 will put the controversy to rest.  In that case, Lord Hoffmann, giving the judgment of the Judicial Committee, reaffirmed the objective test, i.e. the one maintained by Lord Millett in Twinsectra, as the correct test for dishonesty in the present context.  That case concerned a Gibraltar company that had previously been used to operate a fraudulent offshore investment scheme.  A claim against the defendant company and its principal directors was that they had dishonestly assisted in the misappropriation of investors' funds.  The issue raised was whether a defendant director had the requisite dishonest state of mind.  He argued that he could not have been dishonest unless he had been aware that it would by ordinary standards be dishonest and that only in such a case could he be said to have been consciously dishonest (i.e. the combined test). 

181.  In paragraph 14 of the judgment, Lord Hoffmann recited the passages in Lord Hutton's judgment in Twinsectra which have been reproduced above.  His Lordship went on to explain what Lord Hutton and what he himself had meant in their respective judgments in Twinsectra (in paragraphs 15 and 16):

“[15]      Their Lordships accept that there is an element of ambiguity in these remarks which may have encourage a belief, expressed in some academic writing, that the Twinsectra case had departed from the law as previously understood and invited inquiry not merely into the defendant's mental state about the nature of the transaction in which he was participating but also into his views about generally acceptable standards of honesty.  But they do not consider that this is what Lord Hutton meant.  The reference to ‘what he knows would offend normally accepted standards of honest conduct' meant only that his knowledge of the transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct.  It did not require that he should have had reflections about what those normally acceptable standards were.

[16]       Similarly in the speech of Lord Hoffmann, the statement (at [20]) that a dishonest state of mind meant ‘consciousness that one is transgressing ordinary standards of honest behaviour' was in their Lordships' view intended to require consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour.  It did not also require him to have thought about what those standards were.”

182.  Earlier on in paragraph 10, his Lordship had said:

“[10]      The judge stated the law in terms largely derived from the advice of the Board given by Lord Nicholls of Birkenhead in Royal Airlines Sdn Bhd v Tan [1995] 3 All ER 97, [1995] 2 AC 378.  In summary, she said that liability for dishonest assistance requires a dishonest state of mind on the part of the person who assists in a breach of trust.  Such a state of mind may consist in knowledge that the transaction is one in which he cannot honestly participate (for example, misappropriation of other people's money), or it may consist in suspicion combined with a conscious decision not to make inquiries which might result in knowledge: see Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1, [2001] 1 All ER 743, [2003] 1 AC 469.  Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective.  If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards.  The Court of Appeal held this to be a correct statement of the law and their Lordships agree.”

183.  In short, the Privy Council disowned the combined test and reverted to the objective test of dishonesty.

184.  It is true that strictly speaking these authorities are not binding in Hong Kong.  However, I see no reason for not following the latest development of the law by the Privy Council.  The decision has been followed in first instance decisions in England: Fresh ‘N' Clean (Well) Ltd v. Miah [2006] EWHC 903 (Ch) (29 March 2006); Abou-Rahmah v. Abacha [2006] 1 Lloyd's Rep 484.  For my part, I prefer the views of Lord Millett expressed in Twinsectra for the reasons that his Lordship explained in some detail in that case.

– Extent of knowledge required –

185.  Both Lord Millett in Twinsectra and Lord Hoffmann in Barlow Clowes had some important observations to make regarding the extent of knowledge required on the part of the third party/accessory relating to the subject transaction constituting the breach of trust by the trustee, in assessing whether the accessory was dishonest.  In paragraphs 135 and 136 in Twinsectra, Lord Millett explained knowledge as follows:

“135 The question here is whether it is sufficient that the accessory should have actual knowledge of the facts which created the trust, or must he also have appreciated that they did so?  It is obviously not necessary that he should know the details of the trust or the identity of the beneficiary.  It is sufficient that he knows that the money is not at the free disposal of the principal.  In some circumstances it may not even be necessary that his knowledge should extend this far.  It may be sufficient that he knows that he is assisting in a dishonest scheme.

136 That is not this case, for in the absence of knowledge that his client is not entitled to receive it there is nothing intrinsically dishonest in a solicitor paying money to him.  But I am satisfied that knowledge of the arrangements which constitute the trust is sufficient; it is not necessary that the defendant should appreciate that they do so.  Of course, if they do not create a trust, then he will not be liable for having assisted in a breach of trust.  But he takes the risk that they do.”

186.  In the same vein, Lord Hoffmann dealt with knowledge in paragraph 28 of his judgment in Barlow Clowes on the following terms:

“[28]      Their Lordships consider that this passage displays two errors of law.  First, it was not necessary (as the Staff of Government Division had themselves said earlier in the judgment) that Mr. Henwood should have concluded that the disposals were of monies held in trust.  It was sufficient that he should have entertained a clear suspicion that this was the case.  Secondly, it is quite unreal to suppose that Mr Henwood needed to know all the details to which the court referred before he had grounds to suspect that Mr. Clowes and Mr Cramer were misappropriating their investors' money.  The money in Barlow Clowes was either held on trust for the investors or else belonged to the company and was subject to fiduciary duties on the part of the directors.  In either case, Mr Clowes and Mr Cramer could not have been entitled to make free with it as they pleased.  In Brinks Ltd v Abu-Saleh (No 3) [1996] CLC 133 at 151 Rimer J expressed the opinion that a person cannot be liable for dishonest assistance in a breach of trust unless he knows of the existence of the trust or at least the facts giving rise to the trust.  But their Lordships do not agree.  Someone can know, and can certainly suspect, that he is assisting in a misappropriation of money without knowing that the money is held on trust or what a trust means: see Twinsectra Ltd v Yardley [2002] 2 All ER 377, [2002] 2 AC 164 at [19] (Lord Hoffmann) and at [135] (Lord Millett).  And it was not necessary to know the ‘precise involvement' of Mr Cramer in the group's affairs in order to suspect that neither he nor anyone else had the right to use Barlow Clowes money for speculative investments of their own.”

187.  So much for the law on dishonest assistance.  I will not deal with the law on conspiracy or unconscionable receipt at this stage, but will go straight to the facts relating to Elsie Chan, bearing firmly in mind what the ingredients for dishonest assistance of a breach of trust are.

Elsie Chan's evidence

188.  As mentioned above, Elsie Chan was born in April 1968.  Her father is a retired superintendent of the police whereas her mother, the 5^th Defendant in the first action, is a retired accounting clerk.  According to Elsie, she was raised in a very “proper” family.  She spent her secondary school years in England, returning to Hong Kong in mid 1980s.  In 1986, at the age of 18 she won a prize in a local beauty contest and was employed by a local television station.  In the following few years, she became a rather well known television hostess and movie actress.

189.  According to Elsie, she became acquainted with Chio in 1989 and started a relationship with him in May 1991.  She soon lived in Macau on a semi permanent basis, only returning to Hong Kong to honour her obligations under her television commitments.  According to her, Chio took care of her financially and paid all her bills and expenses.  She was love-struck with Chio and was “completely devoted to him and [their] relationship and trusted him implicitly”.  At another point of her evidence, Elsie Chan said she wanted to “spend every minute with him” – that was why she accompanied Chio to many of the business meetings that he had with the bank officials. 

190.  Elsie Chan accepted that she was aware of the acquisition of the properties by the Mainland bankers with Chio.  She knew Chen through the introduction of Chio in mid 1991.  She drove the Mainland bankers to the properties for a site visit in September 1991.  She was present on some of the occasions when the matter was discussed.  However, according to her, only the men did the talking and she was just there to accompany her lover, Chio.  Chio was chauvinistic and did not like women interfering in men's business.

191.  As to one of the Hyatt Hotel meetings in Macau, she said she was not present and only joined the men for dinner.

192.  She was present in the lunch meeting at the New World Harbour View Hotel in 1992, but again her evidence was that the men did the talking.

193.  In fact, according to Elsie Chan, she did not participate at all in the discussions relating to the acquisition of the properties and the development of the same into a low-rise residential development.  She was just there to accompany Chio.  She had no recollection of any details of those meetings or discussions.  The conversations were conducted in Mandarin, and her knowledge of Mandarin at the time was not particularly good.

194.  Elsie accepted in evidence that she took part in instructing Danny Lau in the acquisition transaction.  However, her main point was that she just accompanied Chio to meet Danny Lau in their initial meeting in which Chio explained to Danny Lau what he intended on doing.  She had no recollection of what exactly was discussed.  She said she, Chio and Danny Lau visited the land in the New Territories and Danny Lau introduced Poon Kam to her and Chio.  The men inspected the land and presumably talked about the potential development.  She did not participate in the inspection or conversations.

195.  After these initial meetings, at the request of Chio, she agreed to help Chio and became the managing director of Ang-du, a Hong Kong company beneficially owned and controlled by Chio.  Furthermore Asiagreat was formed and documents were prepared by Danny Lau which had the effect of making her the beneficial owner of Asiagreat.  But she maintained in the witness box that at that time she did not know that that was the position.  She said she thought that Asiagreat – the name of which she did not even know at the time – was owned or controlled by Poon Kam.

196.  According to her, her involvement in Asiagreat was kept to a minimum.  It was only when Chio or Danny Lau told her that she was needed that she participated in its management.  She never acted of her own accord in relation to Asiagreat.  She just acted as she was told by either Chio or Danny Lau.  She accepted that it was she who took the Macau cheques to Danny Lau's office for the purposes of paying the requisite deposits.  She said she did not know that clearing those Macau cheques in Hong Kong would be problematic.

197.  She said she did not know that according to Danny Lau's files, she was Danny Lau's and his firm's client.  She said she never told Danny Lau that because she was a celebrity, she wanted to keep a low profile or to remain anonymous.

198.  Elsie Chan said she was not aware of Chio's directorship in Peconic, but accepted in the box that she knew that Chio was entering into a joint venture with the Mainland bankers to acquire the properties, and Chio had a senior role in the joint venture.  Elsie accepted that she did take part in negotiating with the landowners for the acquisition of their properties, but at various points of her examination in the box, she said she could not recall any details.  She said whatever she did was done pursuant to the request of Chio (or Danny Lau).

199.  In the box, Elsie Chan could not remember many things.  For instance, she could not recall ever entering into a commission agreement with Poon Kam relating to Poon Kam's acquiring the properties at a ceiling price of $60 per square foot for Asiagreat and his keeping the difference between the ceiling price and the actual price as his commission.  She said her understanding was that the Mainland bankers and Chio were buying the land, whereas Poon Kam's company was selling the land.

200.  In relation to the negotiations with some of the landowners (not involving Poon Kam), she said she had no recollection whatsoever.  Nor did she have any meaningful recollection of the involvement of a land agent, Roger Chan, in some of those acquisitions.  So for instance, she could not recall ever negotiating with Ching Chung Taoist Association for the acquisition of its land (transaction 19), although the Taoist association was and is rather well known in Hong Kong.  Elsie explained in the box that she had spent some years in England and was not particularly religious – that was why she had never heard of the Taoist association before.  In the box, she had no recollection of negotiating with the Taoist association, despite clear recollection of her involvement by others including Roger Chan in the criminal proceedings.

201.  A major theme of Elsie Chan's evidence in the box was that she could not remember anything.  Another theme was that whatever she did was done pursuant to what she was told to do by either Chio or Danny Lau.  So for instance, she could not recall ever giving any detailed instructions to the solicitors' firm in relation to the acquisition of the properties, despite some clear attendance notes prepared by an assistant of Danny Lau, Caroline Chong, suggesting the contrary.

202.  Elsie Chan could not remember who Caroline Chong was.  She also said she could not remember the contents of the attendance notes prepared by Caroline Chong concerning the instructions that she gave the firm of solicitors.

203.  Despite her claim that she could not recall any details, this much she admitted in the box: she said she was aware that the purchase price of the properties by the Mainland bankers and Chio was $185 per square foot – Chio told her about that, and she was also aware of the price difference in the acquisition transactions.  She said that she was aware of the acquisition price of $60 per square foot and the huge price difference at a subsequent stage.  She also accepted at one stage of the evidence that she knew that Chio was in control of Asiagreat through her – although at that time she did not know that the name of the company was Asiagreat.

204.  As for her involvement in channelling all the proceeds of sale eventually to Chio and those nominated by him, Elsie Chan's story was essentially that she acted as she was told by Danny Lau or Chio.  She said she did not receive any personal benefit from the land transactions.

205.  Although huge amounts of money went through her hands, and likewise a large sum of money went through her mother's bank account, she said she was not struck by the large amounts involved.  In relation to her mother's involvement, she could not recall why her mother was asked to be made a director of Asiagreat.

206.  Evidently, Elsie Chan can speak and write very good English, and she said she acted as Chio's interpreter/translator.  She explained that that was why much of the correspondence written in English was sent to her in her office in Hong Kong (Ang-du), and it was then faxed over by her to Chio in Macau.

207.  In short, as Mr Kevin Egan, Ms Kathy Kukreja and Mr Choy Ki with him, submitted on her behalf in final submission, the picture that Elsie painted in the box was that in 1991, she was a relatively “young, naïve and commercially inexperienced starlet” who was very much in love with her boyfriend, Chio.  She trusted Chio implicitly and did whatever it was that he asked of her, even more so in commercial matters as he appeared to be a successful businessman with a number of enterprises under his control or directorship. 

208.  It is also a fair summary of Elsie's evidence that as Chio was old-fashioned who did not like women getting involved in “men's business”, and coupled with the fact that Elsie wished to spend as much time as possible with him, her sole reason for attending any meetings, meals or site visits was because of Chio.  As Mr Egan put it, the substance of Elsie's evidence was that whatever she said about the land acquisition project, her comments were of a general nature, lacking in substance and consistent with her role as Chio's “loving, supportive and subservient partner”.  She was “arm candy” for Chio and simply attended the meetings to provide “supporting chirping”.

Discussion

209.  I have given much allowance for the fact that the material events took place almost 15 years ago and naturally, people's memories lapsed and recollections faded.  There are bound to be memory slips and inconsistencies in recollections that are due to innocent reasons.  Furthermore, I am acutely conscious of the obvious fact that people do change and (hopefully) become mature over time.  The Elsie Chan that one saw giving evidence in the box in December last year could well be quite different from the one whom the bank officials and Danny Lau met and dealt with almost 15 years ago when she was only 23 years old.  No doubt, she now looks confident, knowledgeable, intelligent and well versed in the ways of the world.  But that may not have been a correct description of her when she was only 23.

210.  I have of course fully borne in mind Elsie's demeanour in the box.  But demeanour cannot be the sole guide, nor is it always a very reliable one.  Certainly in terms of demeanour only, Elsie's performance in the box was satisfactory in the sense that her answers were spontaneous and she looked genuine.  In responding to the many questions that she was asked during her long examination in the box, she was never “evasive” – in the sense that most of her answers to questions having any material significance in the case were essentially the same, namely that she had no recollection of the matter concerned.  A standard fallback position would be that whatever she did – which she now has no recollection about – she did it at the request of Chio or Danny Lau.

211.  Having borne the above general points and allowance in mind, I now proceed to evaluate her evidence and the allegations made against her.

212.  I find Elsie's lack of recollection of many matters pertaining to the subject acquisition disturbing.  As Mr Scott submitted in final submission, her recollection seems to be selective in nature.  So for instance, whilst she could clearly recall that she merely accompanied Chio to meet Danny Lau in their first meeting and firmly disagreed with the suggestion made on behalf of Danny Lau that she alone went with Mickey Wong to meet him at their first meeting, she could not remember almost any material details regarding her dealings with Danny Lau, Poon Kam, Caroline Chong (whom she could not recall at all), or Roger Chan who featured in the subsequent acquisition transactions.  She even claimed that she did not know that the company responsible for acquiring the properties and re-selling them to Peconic was Asiagreat.  She could recall that she was present or absent in a particular meeting with the Mainland bank officials, but could not recall ever negotiating with some landowners, such as the Taoist association, for the acquisition of their land.

213.  Her claim that she attended those meetings with the Mainland bankers with Chio for the sole reason that she was greatly in love with him and wanted to be with him every minute not only sounds rather unreal, but is also contradicted by the fact that there were undoubtedly many meetings with Danny Lau, Poon Kam, Roger Chan, some of the landowners and some of the solicitors acting for those landowners (Wong Hui and Co.) which she attended by herself in the absence of Chio.

214.  As mentioned, she reads and writes excellent English, and it is an undeniable fact that she signed and executed a number of documents of Asiagreat prepared by Danny Lau.  Yet she claimed that she did not even know that the name of the company in question was Asiagreat.  Despite the fact that the documents clearly said otherwise, she said she thought that the company (i.e. Asiagreat) was owned by Poon Kam, rather than herself.  She could not even remember why she asked her mother to become a director in Asiagreat.

215.  Her claimed role as Chio's interpreter/translator must have given her much knowledge of what was going on through the documents and correspondence in English that went through her or her office, leaving aside that she was Chio's close and devoted girlfriend at the time.

216.  Much money went through her hands or was released by Danny Lau pursuant to documents signed by her or her mother.  She claimed that she had no knowledge about them except that whatever she did was done pursuant to Danny Lau's or Chio's requests.  I find the assertion extraordinary, bearing in mind the huge amounts of money involved.

217.  The attendance notes prepared by Caroline Chong also contradict Elsie's claim that she merely played a very passive and minimal role in relation to contacting Danny Lau and his firm.  Caroline Chong's attendance notes clearly show that she gave specific instructions relating to the acquisition and the related conveyancing matters and litigation.  The notes show that she was substantially involved in the negotiations and the acquisition process, and knew what was going on.  Instructions were sought from her – whether she was in Hong Kong or elsewhere, and they were given.

218.  Mr Egan, in his final submission tried hard to contend that the reality was that in complicated transactions such as those involved in the present case, it was the solicitor who advised the client of what was required by way of instructions and then procured the client to “give” him those instructions.  Mr Egan suggested that the solicitor's records would of course show the fact that the client issued the instructions, but would omit the fact that those very instructions were preceded by the solicitor's advice to the client to give those instructions.

219.  Depending on the subject matter of the instructions, I would not necessarily disagree with Mr Egan's very general observation.  But judging from the contents of the attendance notes that we have in the present case, I do not think it can be seriously argued that Elsie Chan was merely used by Danny Lau or Caroline Chong as a “bouncing board” for obtaining the desired instructions.

220.  Her claim that she made no contribution whatsoever in the meetings with the Mainland bankers is also contradicted by the evidence of those officials at trial.  Understandably, given the lapse of time, none of them was able to say specifically what Elsie Chan had said in those meetings.  But they were adamant that Elsie knew what was going on and played a supportive role in those meetings.  I need not decide precisely which meeting Elsie had attended and which meeting she had not or only joined at a later stage.  The important point here is that at least in some of those important meetings when the representations were made by Chio to the bank officials about the viability of the investment, Elsie was there and she knew what was going on.

221.  Elsie's negotiations with some of the landowners, such as the Taoist association, were well referred to by others who were present, such as Roger Chan and Lee Wai, in the ICAC statements or the criminal trial (16 May 2002).  Whilst I fully bear in mind that these people have not been called by any of the parties to give evidence at trial, their evidence is nonetheless admissible and is entitled to weight.  I have also borne in mind that what they said in the criminal proceedings was said under oath and there were ample opportunities for others, including Elsie Chan's counsel (Mr Egan), to cross-examine them.  I also bear in mind whether there was any motive or reason for Roger Chan or Lee Wai to give false or incorrect evidence.

222.  Having borne all this in mind, I do not see any reason for rejecting their recollections of what happened in those negotiations in which Elsie took an active part.  Given those parts that she took, it is quite perplexing for Elsie now to claim – despite the lapse of time – that she had no recollection whatsoever of her ever taking part in those negotiations.  She said that the Taoist association did not even ring a bell in her memory.

223.  Likewise, Elsie Chan had no recollection about her role played in negotiating through Roger Chan for the purchase of the last piece of land from Yeung Fu Man at $210 per square foot, despite Roger Chan's statement suggesting otherwise.  Again I find the total lack of recollection, even with the help of statements like that made by Roger Chan, on the part of Elsie Chan, rather astonishing.

224.  It is clear that her evidence regarding her dealings with Danny Lau and Danny Lau's corresponding evidence cannot stand together.  According to Elsie, she did everything according to the request of Chio or Danny Lau.  She was a mere pawn.  However, according to Danny Lau, Elsie Chan was the client who gave all the necessary instructions in the acquisition transaction and the release of the huge proceeds of sale.  He looked to her for instructions and he never had any direct contact with Chan Kai Kit.

225.  Whilst I will deal with Danny Lau's evidence in due course, I can say in advance here that in this regard, I very much prefer the evidence of Danny Lau to that of Elsie Chan.  I believe she did play a much more substantive role in her contacts with Danny Lau (and Caroline Chong) than she was prepared to admit in the box.

226.  Poon Kam did not live long enough to give evidence at trial.  But in March 2004, he gave a signed witnesses statement for the purpose of the second action in which he set out his involvement in the transactions.  I fully bear in mind that Danny Lau is related to Poon Kam, and Danny Lau's interest in these two actions conflicts with that of Elsie's.  I also bear in mind that Poon Kam is dead and was not available for examination at trial.

227.  Nonetheless, Poon Kam's statement clearly suggests that Elsie played a significant role in the land acquisition.  Unless Poon Kam has painted a wholly distorted picture of what had happened, it is simply impossible to square Elsie Chan's evidence in the box with Poon Kam's story.  Put another way, Poon Kam's story, as narrated in his witness statement, simply cannot fit Elsie's claim that she was merely a marionette in the whole matter.  In particular, Poon Kam's statement, which was much corroborated by Danny Lau's live evidence at trial, simply could not reconcile with Elsie Chan's claim that she knew nothing about the agreement or deal with Poon Kam whereby Poon Kam agreed to procure the acquisition of the properties at a ceiling price of $60 per square foot (with the difference between the ceiling price and the actual price as commission to him), which properties were resold to Peconic at a huge profit.

228.  Peripheral people like Baron Chau, Chan Tak-yuen and Chow Wai Kam, all said in their ICAC statements that they had had contact with Elsie Chan (and Chio).  What they said suggests that Elsie's role was much more than a nominal one.  The ICAC statement of Mickey Wong also suggests that Elsie played a significant role in the whole matter – although I firmly bear in mind that Mickey was himself implicated in the whole matter and one must approach what he said with some caution.  I also firmly bear in mind that all these out-of-court statements have not been tested by cross-examination at this civil trial.

229.  These are just some of the more obvious points that really go against Elsie's claim of ignorance and innocence in the whole matter.

Findings of fact

230.  Having borne everything in mind, particularly having borne in mind the fact that very serious allegations are being made against Elsie when applying the standard of proof, I am afraid I am unable to accept Elsie's evidence.  I do not find her to be a truthful witness.  I reject her evidence that she was ignorant and innocent.  I find that she was privy to what was going on.  Whether out of love, greed or some other motives or mixed motives, she was a knowing and willing assister to Chio's fraudulent scheme whereby Peconic was defrauded of its money in the acquisition transactions. 

231.  Specifically, I find that she knew that Chio was making the relevant false representations to the Mainland bankers regarding the development potential and resale potential of the properties, and the reasonableness of the unit prices of acquisition ($185 per square foot and the subsequent prices).  She assisted Chio in concealing the true ownership or control in Asiagreat, from whom Peconic was to purchase the properties.  She assisted Chio knowingly in remitting through circuitous routes the proceeds of sale representing Chio's secret profits to Chio and his nominees.  She assisted Chio in recruiting others to act as directors and shareholders in Asiagreat for the purpose of concealment.  She acted as Chio's front in instructing Danny Lau in the whole acquisition/resale exercise.  I also find that she was fully aware that Chio was earning huge secret profits in the deal without any approval, consent or lawful authorization from Chio's joint venture partner in Peconic, namely the Mainland bankers.

232.  I have no doubt that Elsie Chan was – and still is – charming, intelligent, resourceful, confident and articulate, possessing good interpersonal skills.  She was – and is – no “simpleton”.  Unfortunately, she has, I find, put all her strong points to wrong use by assisting Chio in his scheme of fraud against Peconic and the Mainland bankers.

Findings on dishonest assistance

233.  I further find, on those primary findings of knowledge, that Elsie had the requisite dishonest state of mind judging by the objective standards of honest and reasonable man.  In fact, I would go further: even if the combined test were the correct test, I would have no doubt in concluding that Elsie knew at the time that what she was doing would be considered by reasonable and honest people to be dishonest.  The fact that she and Chio had to go to such length to conceal and cover Chio's real involvement in Asiagreat in order to earn the secret profits out of the acquisition exercise speaks volumes of what they knew others would think if the truth was revealed to them.

Conspiracy

234.  So much for dishonest assistance.  In relation to conspiracy, in the present context, what is required is an agreement involving two or more persons to use unlawful means, resulting in damage to the plaintiff.  No predominant purpose to injure is required.  See generally Clerk & Lindsell on Torts (19^th ed.) para. 25–121 et seq.

235.  On the facts, I have no difficulty in inferring and finding, although understandably by the nature of things there is no direct evidence of an agreement, that Chio and Elsie Chan had agreed or conspired together to defraud Peconic, by using Asiagreat as a vehicle to buy the properties and resell them to Peconic thereby resulting in huge secret profits to Chio, a director of Peconic, in breach of his fiduciary duty.

236.  The unlawful means consisted of the fraudulent misrepresentations made by Chio as well as the breach of fiduciary duty owed by Chio as Peconic's director: Sphere Drake Insurance Ltd v. Euro International Underwriting Ltd [2003] Lloyd's Rep IR 525, paras. 85-88.

237.  On the facts of the present case as found by me, there is more than sufficient evidence to infer that Elsie Chan must have been privy to Chio's scheme of defrauding Peconic in terms of the secret profits.  Her acts of assisting Chio in using Asiagreat to effect the scheme, to conceal Chio's interest in Asiagreat and to induce Peconic to acquire the properties at hugely inflated prices (in the sense that the same could have been purchased through Poon Kam or directly from the landowners at much lower prices), and the circuitous and tortuous routes by which the proceeds of sale and illicit secret profits were channelled back to Chio and his nominees, all point strongly to Elsie being intimately connected with the scheme of fraud practised by Chio on Peconic.  On the evidence as a whole, as I say, I have no hesitation in concluding and finding as a fact that Elsie Chan had agreed with Chio by way of conspiracy to take part in the scheme of fraud.

238.  I also bear in mind Elsie Chan's admitted intimate relationship with Chio in coming to the conclusion that she was a co-conspirator of Chio.

239.  That the conspiracy may not have involved other people such as Chen is neither here nor there.

Unconscionable receipt

240.  Finally as regards unconscionable/knowing receipt, given the conclusions that I have reached above, I can be very brief.  Here I accept Mr Scott's formulation in his opening submission that to establish liability for knowing or unconscionable receipt, Peconic must show (1) a disposal of its assets in breach of fiduciary duty, (2) beneficial (as opposed to ministerial) receipt by Elsie Chan which are traceable as representing the assets of Peconic and (3) such knowledge on the part of Elsie Chan that the assets she received are traceable to a breach of fiduciary duty, so as to make it unconscionable for her to retain the benefit of the receipt: Bank of Credit and Commerce International (Overseas) Ltd v. Akindele [2001] Ch 437, 448C and 455F; High Fashion Garments Company Limited v. Ng Siu Tong, HCA 12093/1999, Lam J (18 August 2005), paras. 17 and 22.

241.  On the facts, particularly the agreed money trail, it is plain that very substantial amounts have been received by Elsie Chan from the proceeds of sale.  They have been particularised in paragraph 115 of Mr Scott's opening submission, which I will not repeat here.  Indeed at the criminal trial, Elsie Chan had through her counsel (also Mr Egan) admitted receiving and retaining a total of $12 million to $14 million.  There have been some minor adjustments to the agreed money trail during the trial.  I will leave it to the parties to agree on the exact amount.  But in view of my conclusion on dishonest assistance, all this is going to be over-shadowed by the consequence of that finding.

CLAIM AGAINST WONG SHIU-WAI

Essence of claim 

242.  As regards the position of Wong Shiu-wai, Elsie Chan's mother, the main complaint against her was that she handled part of the proceeds of sale so as to conceal the money trail for Chio.  She opened a time deposit account at Hang Seng Bank and deposited $27.8 million paid by Elsie Chan to her to earn interest.  The money eventually went back to Elsie Chan.  She also acted as Elsie Chan's proxy in handling the latter's Hang Seng Bank time deposit account and current account.  She paid a cheque of $1 million from her Hang Seng Bank account to Ang-du on December 1991.

243.  In addition to from handling directly part of the proceeds of sale, Wong Shiu-wai also took up appointment as Asiagreat's director in lieu of Mickey Wong on 14 July 1992.  She acquired one share in Asiagreat from Lee Sau Fong and made a declaration of trust in respect of the same in favour of Elsie Chan on 16 July 1992.

244.  In relation to the last two land transactions, i.e. transactions 19 and 20, it was she who signed the relevant minutes of Asiagreat's board to resolve to buy and re-sell the land.

245.  On 29 July 1992, Wong also advised K F Lau to release a sum of more than $1 million to Wong Kam Hun, one of Chio's nominees to receive the proceeds of sale.

246.  Wong as director of Asiagreat also executed agreements and assignments in relation to transaction 20.

247.  In the criminal trial, Wong Shiu-wai also admitted to having received $200,000 and $230,000 on 4 May 1992 and 28 June 1993 respectively from Elsie Chan, which came from the proceeds of sale.

Discussion

248.  From Elsie Chan's evidence, Wong Shiu-wai had worked as a clerk in an accounting firm and occupied a position in a trading company.  It cannot be said that she was a mere housewife who did not know anything about the business world.

249.  Mr Scott has submitted that given the secretive nature of the facts that Wong involved herself in, the sheer amounts of money she was involved in handling and the money that she kept for herself, and given her close connection to Elsie Chan, the Court could readily infer dishonesty against Wong in respect of her involvement in the transactions and the assistance that she had rendered to Chio.

250.  The position of Wong Shiu-wai is not improved at all by her failure to take any meaningful part in the first action.  As Mr Scott has submitted, she had been a defendant in the first action and aware of the proceedings against her since 1999.  She did not put in a witness statement nor did she give evidence at trial.  No attempt was made by her to apply to adduce evidence by means of an affidavit or some other forms of hearsay statement.

251.  Her defence is hopelessly uninformative.

252.  No explanation came from her as to why she did not turn up at trial to give evidence.  Elsie Chan sought to explain why her mother did not give evidence at trial.  As has been pointed out by Mr Scott in his final submission, the explanation suggested by Elsie Chan simply did not hold water, and did Wong Shiu-wai's case no good.  Her claimed poor health (as per Elsie Chan) simply did not stand up to scrutiny.  Her counsel (also Mr Egan) did not seek to disown Elsie Chan's explanation given in the box on her behalf or to proffer any alternative explanation for her election not to give evidence at trial.

253.  In the box, Elsie Chan simply could not tell the Court why her mother was asked by her to become a director and shareholder in Asiagreat.

254.  I think Mr Scott was correct in submitting that Wong Shiu-wai was simply unwilling rather than unable to give evidence at trial.

255.  Lewin on Trusts (17^th ed.) para. 40-33 has this to say about proof of dishonesty:

“40-33   We consider that authorities on proof of knowledgeare of general application in relation to proof of dishonesty, albeit that the court is less likely to draw an inference of dishonesty than of knowledge, and where the issue is one of dishonesty, the burden of proof is a heavy one.  A defendant should appreciate that if the facts proved by the claimant as to the proper inferences to be drawn from his conduct are such as to shift the evidential burden to him, it will not be safe for him to elect to call no evidence, since the court may infer dishonesty even though the defendant might have been able to provide a credible explanation of his conduct had he elected to call evidence.”

256.  Deputy Judge Lam (as he then was) also had some pertinent observations on drawing adverse inferences to make in a non-fraud/dishonesty case, Ip Man Shan Henry v. Ching Hing Construction Co. Ltd (No. 2) [2003] 1 HKC 256, 307B to F:

“155 On the other hand, Mr Yu relied on Cross & Tapper on Evidence (9^th Ed) p 36-38 and invited this court to draw adverse inference against Arnold.  In my judgment, the relevant principles applicable to civil proceedings can be summarized as follows,

(a) if a prima facie case is made out, and if there is evidence available to the party against whom the case is established which could displace the prima facie case, and he omits to call such evidence, an inference could be drawn;

(b) however, the inference could be rebutted by a plausible explanation by the party who elected not to call the evidence;

(c) if an inference is to be drawn, it would be an inference that such available evidence, even if adduced, would not displace the prima facie case;

(d) it is also open to a tribunal of fact, upon the drawing of such an inference, to take it into account in respect of a matter with respect to which the person not called as a witness could have spoken,

i. in deciding whether to accept any particular evidence, which has in fact been given, either for or against that party;

ii. in deciding whether to draw inferences of fact, which are open to them upon evidence which has been given.”

257.  Of course I have not forgotten that very serious allegations are being made against Wong Shiu-wai and again in applying the standard of proof, I must make adjustments accordingly.

Findings on dishonest assistance

258.  Nonetheless, I am satisfied on the whole of the evidence before me that Wong Shiu-wai knew that she was assisting Chio in earning money from a dishonest scheme as well as channelling the money so earned to himself or to others nominated by him.  Here I bear particularly in mind her close relationship to Elsie Chan, the fact that Elsie was Chio's close girlfriend and was quite obviously assisting Chio generally, that the huge amount of money in question could not have been the money of Elsie given her young age and income and that it must have belonged to her close boyfriend, Chio, the very substantial price differences in the two transactions that she was involved in as director, and the secretive manner in which the control and ownership of Asiagreat was being concealed as well as the manner in which money was being channelled out from Asiagreat. 

259.  I need not make any finding that Wong was actually aware of the fact that Chio was a director in Peconic and he was earning a secret profit in breach of his fiduciary duty as director of Peconic.  As Lord Millett has pointed out in Twinsectra (para. 135), it is not necessary that the defendant should know the details of the trust or the identity of the beneficiary.  It is sufficient that he knows that the money is not at the free disposal of the principal.  In some circumstances, it may not even be necessary that his knowledge should extend this far.  It may be sufficient that he knows that he is assisting in a dishonest scheme.

260.  On all the materials before me, and bearing in mind the failure of Wong Shiu-wai to come forward to explain herself, I am prepared to draw the inference and find that Wong knew she was assisting in a dishonest scheme involving her daughter and her boyfriend, and that the money in question was not at the free disposal of Chio.  The fact that she had obtained benefits from her involvement also reinforces the adverse inferences drawn against her.  I further find, on applying the objective test, that Wong was dishonest in rendering the assistance.

261.  So much for dishonest assistance.

Conspiracy

262.  On the other hand, I am not prepared, on the evidence before me, to find that Wong was a co-conspirator with Chio and Elsie Chan.  The available materials and evidence do not permit me to draw such an inference against Wong.  In other words, I am unable to find that Wong knew and agreed sufficiently enough to constitute her a co-conspirator.

Unconscionable receipt

263.  As regards knowing or unconscionable receipt, it really overlaps with the finding on dishonest assistance.  In so far as may be necessary, I also find that Peconic's case against Wong in this regard has been established in respect of the relevant amounts of money in question.  From the available evidence the Court is entitled to infer, particularly in the absence of any explanation from Wong, that her receipt of the various sums of money was unconscionable.

CLAIM AGAINST LEUNG HIU LING

Basic facts

264.  Leung Hiu Ling came from a humble background in the Mainland.  She immigrated to Hong Kong in 1986.  Shortly thereafter she became the common law wife of the elder brother of Chio, Witthaya Jiwatuwinan (Chan Kai Cheung).  They were never formally married but resided together as man and wife.  They have a daughter.  Her common law husband deserted her in 1997/1998.

265.  Leung was involved in the establishment of Asiagreat.  She was one of the first directors of Asiagreat.  She presented Asiagreat's first return to the company registry.  She took an indemnity from Elsie Chan for her protection against any claims in connection with her directorship in Asiagreat.

266.  Regarding the acquisition and resale of the properties by Asiagreat, she as director signed various corporate and conveyancing documents to effect the transactions.

267.  On 16 July 1992, Leung Hiu Ling became a shareholder in Asiagreat as nominee for Elsie Chan, for which she executed a declaration of trust.  She took up the share from the wife of Poon Kam.

268.  Leung was also involved in the transfer of proceeds of sale from Asiagreat to Chio.  Most importantly, on 18 October 1991, she received a sum of over $81.8 million from Albert K K Luk's client account into her newly opened Overseas Trust Bank (OTB) account.  Three days later, she transferred a sum of $81,265,000.00 to Chio's account.  The difference of slightly over $0.5 million was transferred into a joint bank account held by her and her common law husband on 23 October 1991.

269.  Further on 25 June 1992, out of the sum of over $81 million that was transferred by Leung Hiu Ling to Chio, Chio transferred a sum of $10.5 million to the joint bank account of Leung and her husband maintained with the OTB.  Shortly thereafter (on 29 and 30 June 1992), by three withdrawals in the respective sums of $4 million, $5 million and $1.5 million respectively, the money was transferred out of that account, supposedly to a Thai friend known as “He Ah Dee” as per Leung's evidence in the box.

270.  Further Leung also acknowledged receipt of a sum of almost $5.6 million belonging to the proceeds of sale on behalf of a Chu Wan-ieng, a nominee of Chio, from K F Lau on 27 August 1992.

Leung's explanation

271.  Leung's story is rather simple.  As the common law wife of Chio's elder brother, she of course knew Chio.  But he was only known to her as Chan Kai Kit (in Chinese).  She did not know that he was known as Chio Ho Cheong in English.  She knew that Elsie was his girlfriend, but they were just ordinary friends.

272.  According to her evidence in the box, she was asked by Elsie on a social occasion to become a nominee director of Asiagreat on her behalf.  The explanation given was that Elsie was a celebrity and she wanted to avoid publicity.  Under those circumstances, Elsie took her to Danny Lau's office where she signed various documents and became the director of Asiagreat.  Thereafter she met Danny Lau on a number of occasions and signed various documents in connection with Asiagreat.  She had no idea what the documents were really about.  She just did as she was told by Elsie or Danny Lau.  She never gave any instructions to Danny Lau.  She said she thought Asiagreat was Elsie's business.

273.  Leung said she was not aware of the indemnity given by Elsie to her.

274.  Leung said she did not know that Chan Kai Kit was involved in the buying and selling of any properties.  All she knew was that Elsie Chan was involved.  She did not make any inquiry.  She said she did not pay any attention to Chio's signatures appearing on a number of conveyancing documents, which she also executed as director of Asiagreat.  She did not know or pay any attention to the fact that Asiagreat was making a huge profit from the acquisition and re-sale exercise.

275.  As regards the opening of the OTB account in her sole name, she said she remembered that Danny Lau was involved in asking her to open the bank account.  She said she was rather overwhelmed by the almost astronomical amount (over $81 million) that was to be deposited into that account.  She said Danny Lau told her that the money did not belong to her and she must act in accordance with Elsie's instructions.

276.  Leung was positive in the box that she could remember Danny Lau giving her a cheque for the sum of over $81 million to be deposited into her newly opened OTB account.  She said she was very impressed by the amount written on the cheque which was astronomical to her.  In fact, her recollection must be wrong because the transfer of money from the solicitors' firm to the OTB account was done by way of bank transfer, instead of a cheque deposit.

277.  Leung could not definitely recall who asked her to transfer out over $81 million from that bank account to Chio Ho Cheong – a name that she did not recognize.  The relevant bank transfer slip was typed in English and she could not recall who prepared it for her for use at the bank.  She said it could be Danny Lau or somebody in his firm who asked her to so transfer out the money; or it could be Elsie Chan who asked her to do so.

278.  As regards the sum of $10.5 million that went through the joint bank account of her and her common law husband, Leung was adamant at the box that the money belonged to a Thai friend known as He Ah Dee.  What she did was simply to help his friend who somehow did not have a bank account that could effect the transfer, to transfer the money from Macau via Hong Kong to Thailand.  She could not explain why the money in fact came from Chio – a cheque written by Chio in favour of Chan Kai Cheung, her common law husband.

279.  As regards her acknowledgement of receipt on behalf of Chu Wan-ieng, she said she did not know who the recipient was and simply signed the document as she was told.

280.  Leung said that she had expended the remainder of the $81 million (about $0.5 million) on the renovation of the office premises of Ang-du, and payment of rent in relation to the same.  Chuen Tai, a company in which Leung was interested, had a small room in the same office premises.  According to the calculations put forward by Leung, she had in fact over-repaid the money to Elsie/Ang-du by a small margin.

Leung's ICAC statement

281.  In the middle of the trial and after Leung had completed her evidence, a statement of the ICAC was disclosed.  It recorded an interview by an ICAC officer of Leung whom the officer visited in the early morning of 10 September 1998.  The visit concerned the transactions in question as well as an unrelated fraud case involving the use of false letters of credit (the “Guang Nam” case – in relation to which ultimately Leung was convicted of fraud and sentenced to a period of imprisonment).  During the interview, Leung said she did not know anything about the sale of the properties, nor did she have a company known as Asiagreat.  She said she knew Elsie was Chan Kai Kit's girlfriend and Wong Shiu-wai was Elsie's mother.

282.  As regards the respective shareholdings in Asiagreat, she said in the interview that she did not know about them.  However, she said she remembered that Chan Kai Kit had asked her to give a hand and to go to a solicitors' firm to sign some documents “so as to transfer the commission on the land sale to him”, in the sum of $80 million.  She explained that “Chan Kai Kit asked me to open an account at Overseas Bank and to transfer to him after the transfer was successfully made”.

283.  When asked as to whether Chan Kai Kit had explained to her the reason for asking her to transfer the sum of commission, Leung answered that Chan Kai Kit said that “[she] was also one of his own…because [her] husband is his elder brother”.  She said she received no benefit from so helping Chan Kai Kit.

284.  With her agreement, Leung was recalled to the box and gave evidence on the ICAC statement.  She essentially said that it was an early morning raid by the ICAC, she was caught by real surprise and her answers given in that morning were not really accurate in so far as they differed from her evidence in the box, which was given to the best of her recollection.  In particular, she strenuously denied that she knew she was transferring out the sum of $81 million to Chan Kai Kit, or that she knew Chan Kai Kit was Chio Ho Cheong – the named transferee of the huge amount of money in question.

Discussion

285.  I have of course taken into account the demeanour of Leung Hiu Ling in the box.  I have also firmly borne in mind the serious nature of the allegations that are being made against her.

286.  I do not believe Leung was as innocent or ignorant as she portrayed herself to be in the box.

287.  Her evidence in the box, or at least a major part of it, had looked plausible until the ICAC statement surfaced.  Having considered all the evidence, I believe what she had said to the ICAC officer as recorded in the statement was nearer to the truth than what she told the Court.  According to the statement, she was regarded by Chio as one of his own, because she was his elder brother's wife.  She was asked to give a helping hand so as to enable Chio to receive the huge commission that he was getting out of the land sale.  This was done through the newly opened OTB account.  Quite clearly, she knew where the money was coming from and where it was going to.

288.  If she had not known who Chio Ho Cheong – the named payee in the transfer slip – was, she would have told the ICAC people that the money was transferred out to an unknown person at the direction of Chan Kai Kit, Elsie or Danny Lau, the solicitor.  That was not her answer.  She said twice in the interview that the money was “transferred to him” – Chan Kai Kit.

289.  Despite her vigorous denial in the box, I do not believe her evidence that she did not know that Chio Ho Cheong was in fact Chan Kai Kit.  Such denial simply could not stand with what she said in her ICAC statement.  In fact, she even knew – back in 1998 – that Wong Shiu-wai, her fellow shareholder in Asiagreat, is the mother of Elsie Chan – the girlfriend of Chan Kai Kit – the younger brother of her husband.

290.  Again her ICAC statement could not be reconciled with her evidence that she thought Asiagreat was Elsie's business and she did not know that Chio was involved in it.  Quite plainly (as per her ICAC statement) she did know that Chio was earning a huge “commission” out of the land transaction involving Asiagreat of which she was a nominee director and shareholder.

291.  Her claim that her recollection of the events now (2005/2006) was better than what she could remember back in December 1998 is not capable of serious belief – due consideration having been given to the fact that what she said in the ICAC statement was said in the course of a surprise morning raid by the ICAC.  Yet the spontaneous answers that she gave betray the extent of her knowledge of the land transaction.

292.  Even without the ICAC statement, Leung could not possibly have believed that the huge sum of money of over $81 million belonged beneficially to Elsie, who was barely 23 years old at the time.  She must have suspected, to say the least, that the money belonged to her superficially successful boyfriend, i.e. Chan Kai Kit – his brother-in-law.  In fact, her ICAC statement said so in terms.  The money was his “commission”.

293.  As regards the remainder of the $81 million, i.e. the sum of over $0.5 million, I do not doubt that some money had been expended by Leung on behalf of Ang-du in respect of its office premises in which Chuen Tai also shared a small room.  What I am not so sure about is whether those items of expenditure related to the supposed repayment of the remainder of $81 million by Leung to Elsie.  As Mr Scott correctly pointed out in his final submission, the outgoings came from a different bank account, i.e. the account of Chuen Tai, rather than the joint account of Leung and her common law husband.

294.  The story of a Thai friend known as He Ah Dee, given in relation to the sum of $10.5 million, only emerged without any prior warning at the trial when she was giving evidence in the box.

295.  The allegation relating to the sum of $10.5 million was included in Peconic's  re-re-re-re-amended statement of claim pursuant to leave given by the Court on 30 August 2004 (paragraph 48).  Paragraph 50 of Leung's re-re-amended defence specifically denied that there was any such transfer of $10.5 million to any account of hers, whether in her sole name or in joint names with others.  No mention of He Ah Dee was made in the defence.  Nor was this story ever mentioned in Leung's witness statement.  It thus came as a surprise to everybody that she suddenly mentioned this Thai friend whilst giving evidence in the box in relation to the $10.5 million.  It should be noted that even Ms Catherine Wong, appearing together with Ms Evelyn Lee, for Leung, did not make any mention of this story of He Ah Dee in her written opening.

296.  The story that the money came from He Ah Dee and Leung was simply helping this Thai friend of hers to transfer the very substantial amount of money from Macau to Thailand is hopelessly contradicted by the copy cheque of the amount in question, which was clearly written by Chio in favour of his elder brother.  In the box, Leung could not explain why her friend could not transfer the sum of money from Macau to Thailand by himself and must enlist her help to effect the transfer of money.  It is also noteworthy that no particulars or details about this He Ah Dee were supplied by Leung in the box.  Apart from his name and the facts that he had this very substantial amount of money to transfer from Macau to Thailand and that he needed the help of Leung to help him to do so, nothing about him or his money was known.  Leung offered no explanation on why the payment out (or supposed transfer to Thailand) had to be made by instalments.

297.  I have come to the conclusion that I cannot believe Leung Hiu Ling's evidence.  Of course my rejection of her evidence in the box or classification of many of her answers as false ones or lies does not necessarily mean that she has done what she is alleged to have done.  False answers or even lies are not by and of themselves equivalent to guilt.  But in the present civil context, I am entitled to take those lies told in the box along with the rest of the evidence into account in making my findings of fact.

298.  I have also borne in mind Mr Egan's suggestion that the false answers that Leung gave simply reflected her very natural inclination towards distancing herself from the real culprit in the present case, Chio.  Thus, for instance, her denial that she knew she was remitting the money to Chan Kai Kit/Chio should be viewed in that light.

299.  More specifically, Ms Wong has urged upon me in final submission that even assuming that she knew the money was going to Chio/Chan Kai Kit, that by itself would not necessarily mean she was dishonest.  This was because unless she knew that Chio/Chan Kai Kit had no right to receive the money (or “commission” as per her ICAC statement), she was not involved in something dishonest or illegal, and no liability for dishonest assistance should attach.

300.  I bear all this in mind.  By and of themselves, they are valid points.  I do not take a simplistic approach towards the case or evidence against Leung (or, for that matter, the claims against the other defendant in the two actions).

301.  I have, as I said, taken into account all the evidence and possibilities.  I have borne in mind the fact that very serious allegations are being made against Leung in applying the standard of proof.  I have not forgotten that people have different reasons for not telling or failing to tell the truth in the box.  I have borne carefully in mind Leung's demeanour in the box, not forgetting at the same time that demeanour could be an unreliable guide at times.  Although I have mentioned Leung's conviction in a totally unrelated fraud case (which also implicated Chio and his elder brother), I have not given any weight to these highly prejudicial matters in my evaluation of the case against Leung (or the case against Chio).

302.  I have carefully taken into account all the points that have been raised not only by counsel for Leung, but also by Mr Egan as well.  For obvious reasons, I cannot and indeed need not recite all of them in this judgment, let alone deal with them one by one here.

Findings on dishonest assistance

303.  Having considered the entirety of the evidence before me, I conclude and find that Leung either knew or at the lowest suspected, that Chan Kai Kit (who was also known to her as Chio at the material time) was earning a secret commission out of the transactions.  The strongest pieces of evidence were the very secretive way in which the commission was earned via the corporate vehicle of Asiagreat in which Chio's involvement was concealed behind two layers of people and the convert manner in which the supposed commission was channelled to Chio.  By two layers of people, I mean Leung herself and Wong Shiu-wai as the first layer, and Elsie as the second one in whose favour they executed declarations of trust. 

304.  It is difficult to believe, put at the lowest, that Leung did not seriously suspect that something that could not be revealed openly to others was going on which required such clandestine modes of going about things. 

305.  On top of that, Leung was quite clearly closely connected to Chio via her common law husband.  Chio regarded her as “one of his own”. 

306.  If Chio was earning lawfully the huge amount of commission out of the sale of land, there should have been no good reasons for the secrecy in terms of Asiagreat's structure and in terms of the manner in which the proceeds of sale were remitted to Chio.  The fact that Chan Kai Kit needed to find someone “of his own” to help him receive the commission was strongly indicative of something highly suspicious.  The sheer amount of “commission” involved should and must have, at the very least, put Leung on alert, regard having had of Leung's level of education and general experience in life.  And it is difficult to believe that she did not make any enquiry about the whole matter via her husband or Elsie or directly with Chan Kai Kit.  If, in fact, she had not asked, the only reason was that she deliberately chose not to find out the truth.

307.  Her claim that she did not know Elsie Chan well was betrayed by the fact that she even knew that Wong Shiu-wai is her mother (as per her spontaneous answer given to the ICAC officer).  The fact that the cheque of $10.5 million written by Chio in favour of his elder brother actually went into the joint bank account of his and Leung certainly suggests that both Leung and her common law husband knew what was actually going on.

308.  I have already said that I could not accept Leung's evidence in the box.  I have borne in mind the possible motives or reasons for her not telling the truth in evidence.  I am afraid I am unable to accept Mr Egan's more benevolent interpretation of what went through her mind whilst giving evidence in the box.

309.  As I said, having borne everything in mind, I have come to the conclusion that she knew sufficiently about the whole transaction to constitute a dishonest state of mind on her part according to the objective test.

310.  As already mentioned above, it is unnecessary to find that she knew precisely the role of Chio in Peconic.  For my part, I would find that she knew that she was helping Chio/Chan Kai Kit to receive and channel money to himself that did not belong to him and that he had no right to receive or keep.  At the very least, she must have suspected (and did suspect as per my finding) that his so-called commission was unlawful but, again put at the lowest, she shut her eyes to the obvious and did not ask what she did not want to know.  Applying the objective test of dishonesty, I find that a dishonest state of mind was present (see also the subsection “Blind eye dishonesty” below).

311.  Her liability in relation to the two sums of $81 million and $10.5 million is thus established.  On the other hand, very little has been said or is known about the third sum of $5.6 million received not by Leung but by Chu Wan-ieng.  Leung simply acknowledged receipt of the money on Chu's behalf.  I do not think I can conclude that what Leung did really cause Peconic's loss of that particular sum of money.  In any event, the matter was not pursued by Peconic in final submission.

Conspiracy

312.  As regards conspiracy, again on the evidence before the Court, I am not prepared to go so far as to conclude that she was a co-conspirator.  I am unable to infer that there was such an agreement between her and Chio and Elsie.  But that does not really matter given my conclusion on dishonest assistance.

Unconscionable receipt

313.  As regards knowing or unconscionable receipt, again this is academic given my conclusion on dishonest assistance.  But insofar as may be necessary, I would, given my rejection of Leung's explanations and positive findings against her, conclude that in relation to the remainder of the sum of $81 million that she received from the solicitors' firm, that was unconscionable receipt.  I accept Mr Scott's argument that the so-called repayments, which did not even tally with the amount outstanding but involve a puzzling amount of over re-payment, were separate dealings between the parties.  As mentioned above, they came from a separate account belonging to Chuen Tai.  I reject the claim that the payments were connected to the remainder of the illicit proceeds of sale that Leung had received and kept.

CLAIM AGAINST DANNY LAU AND THE TWO SOLICITORS FIRMS

Danny Lau's evidence

314.  I now turn to consider the position of Danny Lau.

315.  There is nothing particular about the background of Danny Lau.  Born and raised in Hong Kong, he completed his secondary school education at a local school in Hong Kong.  He read law in London and obtained his law degree in 1986.  He did his articles with JSM, spending one year in its Yuen Long branch doing mainly mortgage and general conveyancing work and his second year in Central doing general work.  After his articles, he joined Albert Leung & Co., a small local firm, doing mainly referral conveyancing work from estate agents.  In 1990, together with Albert Luk and Gary Chan, they formed Albert K K Luk.  He was a conveyancer and did mostly conveyancing work.

316.  As mentioned above, Poon Kam was his relation by marriage.  His sister was married to one of the sons of Poon Kam.

317.  Albert K K Luk was small in size.  The conveyancing work that Danny Lau did was supported by a team of conveyancing clerks headed by a senior clerk known as Billy Chan, who had two junior conveyancing clerks working under him.  There was an accountant responsible for the accounting work of the firm.  Danny Lau had his own secretary, who was a very junior person without any previous experience in the legal field.

318.  According to Danny Lau, as a local conveyancing firm, it delegated most of the conveyancing work to the senior conveyancing clerk.  As solicitor, Danny Lau would concentrate on checking titles and attesting execution of documents.  The firm relied heavily on standard forms and precedents, many of which were obtained from JSM where Danny Lau had spent his articles years.

319.  It is plain from the documents generated by the firm at the time that have been put in evidence at trial that the standard of work of the firm was not particularly high.  There were many typos, errors and mistakes in the documents prepared by the firm in relation to the transactions in question, some of which were important ones going to title and registration.

320.  The essence of Danny Lau's case and evidence at trial was that he was not aware at any material time (until the ICAC investigation) that Chan Kai Kit was Chio, that Chio had a beneficial interest or control in Asiagreat or that Chio was a director and shareholder of Peconic.  He did not know that the price of $185 per square foot was not the market price.  Nor did he know that development of the properties was not commercially feasible.

321.  Danny Lau said in evidence that his first meeting with Elsie Chan was through the introduction of Louis Chow and Mickey Wong.  That was in mid 1991.  Chio was not present.  Elsie was looking for properties in the New Territories to purchase.  He mentioned it causally to Poon Kam, which eventually led to a meeting between Elsie Chan and Poon Kam.  Danny Lau said subsequent to the first meeting, he met Chio at a meeting with Elsie Chan.  Chio was simply introduced by Elsie to him as “Mr Chan”, her boyfriend.  Chio did not give him any name card, which would have revealed to him that his English name was Chio.  According to Danny Lau, he did not even know the full Chinese name of Chio at that time.

322.  Danny Lau regarded Elsie Chan as his client.  Her name was put down as the name of the client in the two sets of solicitors' files dealing respectively with the corporate work of Asiagreat and the conveyancing work relating to the acquisition and resale of the properties.  (He also said he regarded Poon Kam as his co-client.)

323.  Danny Lau has admitted in the criminal proceedings that he knew that Chio was the actual purchaser of the properties from the landowners.  But in the box, he said that having tried his best to recollect the events, he was sure that it was only in November 1991, i.e. after the signing of the first batch of sub-sale and purchase agreements in relation to the majority of the properties, that Mickey Wong told him that Elsie Chan's boyfriend was financing her to acquire the properties from the landowners.

324.  Danny Lau had to accept in Court that Chio's name or signatures appeared at various places in documents prepared or kept by his firms, including ledgers, cheques, documents effecting payment of money, receipts, and conveyancing documents which were executed by Chio as director of Peconic.

325.  More importantly, there was a letter dated 4 October 1991 from JSM to Albert K K Luk confirming specifically that Chio and Chen were directors of Peconic, who were authorized to execute the sub-sale and purchase agreement on behalf of their company.

326.  Another highly prejudicial document is a bill dated 25 October 1991issued by Albert K K Luk to Elsie Chan as client.  It was an interim bill including many items of work and charging a total of $162,200.00.  The first item of work was “preparing engrossing and attending execution of Deed of Indemnity given by you [i.e. Elsie Chan] and Chio Ho Cheung to Poon Kam”.  The second and third items of work related to preparing, engrossing and attending execution of two deeds of indemnity given by Elsie Chan to Mickey Wong and Leung Hiu Ling respectively.

327.  The adverse implications of this bill are obvious.  It is diametrically opposite to Danny Lau's claim that he did not know Chio.  For the bill clearly stated that he and his firm had prepared, engrossed and attended the execution of a deed of indemnity given by Elsie Chan and Chio to Poon Kam.

328.  As mentioned above, for some unknown reasons and indeed it is rather unfortunate to those who want to find out the truth that the deed of indemnity or a copy of it is nowhere to be found.  On the application of Danny Lau's side during the trial, a subpoena was issued to the ICAC for discovery of the document; the response was that it did not ever have in its possession or control such a document.

329.  Danny Lau's responses in the box to the bill and particularly the reference to the deed of indemnity given by Elsie Chan and Chio were progressively definite.  His initial answer was that he could not remember ever preparing or seeing such a deed of indemnity.  But when he came to be cross-examined by Mr Scott, he was positively sure that he never prepared or saw the deed of indemnity.  To him, the bill was a complete mystery.

330.  As for the name of Chio appearing as one of the directors/signatories of Peconic in the conveyancing documents, Danny Lau's evidence was that when he attested to the execution of those documents by Asiagreat, he never paid any attention to what was written on the execution page that was not relevant to his attestation, and he did not notice the name or signature of Chio.  In any event, given his evidence that he did not know Chio by his name Chio Ho Cheong, even if he should have glanced over the name of Chio Ho Cheong on any of those documents, the same would not have left any impression on him.

331.  As regards JSM's letter of 4 October 1991, the same observation could be made.  More importantly, Danny Lau said that he had never seen this letter before.  From what he knew, he believed that the letter came after the sub-sale and purchase agreement had been executed by both sides; by then it was late and after office hours, it was a long day and he had gone home.  The letter must have been read by his clerk who simply put it in the firm's file after reading.  He never saw it himself.

332.  Danny Lau also pointed out in the box that as Peconic was a newly formed company, and Chio only became a director of Peconic on 3 October 1991, no company search was done at the time of execution of the sub-sale and purchase agreement on 4 October 1991, and even if one were done, it would not have revealed anything.  Danny Lau could not tell whether subsequently a company search was done in relation to Peconic, but even if one was in fact done, the matter would have been handled by his conveyancing clerks, and he had no knowledge about it.

333.  According to Danny Lau, he only learned of Chio's Chinese name (陳繼杰) in 1992 or 1993 when he was asked to join in a newspaper congratulatory advertisement regarding Chio's appointment as the honorary consul of a certain foreign country.

334.  To complete the story, he only came to learn that Chan Kai Kit was Chio Ho Cheung, a director in Peconic during the ICAC investigations.  He also explained that many of the answers that he gave to the ICAC, as recorded in the ICAC statements, simply reflected information that the ICAC officers had fed him with before conducting the interview.  What he said was a substantial mixture of what he knew by that stage and what he had known before, when he answered the questions put to him.  Moreover, those answers were not verbatim answers, but rather summaries of answers that he had given.

335.  Danny Lau maintained that he never had any direct contact with Chio and he never took any instructions from him.  All instructions that he had were obtained from Elsie Chan or Mickey Wong.  He said that in relation to the transactions in question, he regarded himself as acting for Elsie Chan as well as Poon Kam.  He did not act for Chio/Chan Kai Kit.

336.  Danny Lau emphasized in the box that Asiagreat was not used as a means by him to conceal Chio's interest in the acquisition or resale exercise.  He explained that based on what Elsie Chan and Poon Kam had told him that they had agreed and wanted to achieve, he devised the simple scheme of using Asiagreat to accomplish the acquisition of the properties and sale of the same to Elsie Chan.   Asiagreat would be used as the vehicle to acquire the properties from the landowners and after completion of the acquisition, the shares in Asiagreat would be transferred to Elsie or her nominees. 

337.  According to the scheme, before completion, the shares were to be held in the names of Poon Kam's nominees, i.e. his wife and daughter-in-law (married to another son of Poon Kam – Poon Kwong Him).  On the other hand, Elsie's side would have the control of the board of Asiagreat so as to monitor the land acquisition and the proper use of her loan of $8 million to be advanced to Poon Kam to pay for the initial deposits of the acquisition.  Danny Lau explained that that was why Elsie's nominees, namely Mickey Wong and Leung Hiu Ling, became the first directors of Asiagreat. 

338.  Danny Lau further explained that this was a simple and cost-saving way devised by him to achieve what Poon Kam and Elsie Chan had agreed and wanted to do.  At the same time, this arrangement served to protect the interests of both sides at different stages.  Danny Lau denied that the whole arrangement was designed to conceal Chan Kai Kit's interest in Asiagreat.

339.  Danny Lau reiterated during evidence that the resale of the properties to Peconic (or indeed to anyone else) was never in the horizon, from his own standpoint at least, until 3 or 4 October 1991.  Put another way, throughout his understanding and instructions were that Elsie Chan would like to acquire land in the New Territories through the help of Poon Kam (and Yeung Fu Man).  While resale of the properties would always be a possibility, his understanding was never that Elsie Chan was acquiring the properties for an immediate resale at a profit, let alone a huge profit. 

340.  He explained that that was his belief notwithstanding the receipt of a letter from JSM representing Peconic dated 26 September 1991.  That happened at around the same time when Poon Kam and Yeung Fu Man told him that negotiations on the acquisition of the various properties from the landowners were near completion and he was told to start preparing the legal documentation to effect the same.  JSM said in the letter that its client was prepared to purchase the same properties at the unit price of $185 per square foot.  In fact, this letter was received after Elsie Chan had orally told him that such an offer was forthcoming.  Yet Danny Lau maintained in the box that he never thought that this was a serious offer.  And he never linked the offer with the purchase by Elsie through Poon Kam of the properties.  All along, he thought that the acquisition by Asiagreat of the properties was a freestanding matter quite independent of JSM's offer, which he viewed at that time with much scepticism.  According to him, he did not realize that the JSM offer was a serious one until one or two days before the actual signing of the sub-sale and purchase agreement.

341.  This leads conveniently to Danny Lau's point that he had never intended to use the huge deposit to be derived from the sub-sale to JSM's client (Peconic) to fund Asiagreat's payment of the initial deposits to the landowners.  This is an important plank in Danny Lau's defence because he is accused of knowingly taking part in using the Macau cheques as an “ingenious” device to buy time in order to enable Elsie Chan and Chan Kai Kit to acquire the properties and resell them to Peconic without paying a single dollar by themselves for the necessary initial deposits.  The Macau cheques were effectively used as cheque kites, Peconic argues, to buy valuable bridging time between the head sale and purchase agreements and the sub-sale and purchase agreement.

342.  As mentioned above, under the arrangement between Poon Kam and Elsie Chan and to the knowledge of Danny Lau, Elsie had to advance a sum of $8 million to finance payment of the initial deposits of the properties to the landowners.  This Elsie did by a cheque posted-dated to 28 September 1991, which was a Macau cheque issued by Far East (International) Trading Co., a company in Macau owned or controlled by Chio.  Danny Lau's evidence was that he did not realize that the cheque was a Macau cheque or the problems in clearing that it would bring.  He was only told by his firm's banker on 1 October 1991 about the difficulties.

343.  As mentioned above, he then immediately realised the implications in terms of due payment of the initial deposits to the landowners, which had been scheduled to be done by means of solicitors cheques of Albert K K Luk.  He therefore asked Elsie to bring in alternative funds.  This Elsie apparently tried to do on 2 October when she brought in a number of blank cheques for direct payment to the various landowners as initial deposits. 

344.  Again as mentioned above, the strange thing was that Elsie again brought in some further Macau cheques of Far East.  But what was even more surprising was that according to Danny Lau, neither he nor any staff members of his firm, who were by then all aware of the difficulties caused by the first Macau cheque of $8 million, noticed that these further cheques were also Macau cheques.  Not even the accountant of the firm noticed this obvious fact. 

345.  Danny Lau explained that on that day, he was very busy with negotiating with the landowners' solicitors to conclude the deals which he thought Poon Kam and Yeung Fu Man had concluded – but in fact they had not.  In his witness statement, Danny Lau said Elsie Chan gave the cheques to him and he “handed over” the cheques to his conveyancing/accounting staff without checking the details.  But in the box, he said upon further reflection, Elsie did not give him the cheques personally; rather the same were given by Elsie either to his clerk or secretary for handling.  He said he could remember that Elsie was in the conference room at the time and he was in his own room working busily towards the completion of the negotiations with the head vendors' solicitors.

346.  Danny Lau also emphasized in Court that throughout his belief and understanding was that the Macau cheques were good and valid payments; their only problem was that it would take longer than usual to clear them.  That was why when on the same day after the cheques were sent out (2 October 1991) and he began to receive complaints from his counterparts about the Macau cheques, he continued to send out further Macau cheques to other firms of solicitors, hoping that they would not raise a similar complaint.  Danny Lau explained he did not think that the Macau cheques were bad payments; he said he believed different firms might take different attitudes towards them.  He agreed during examination that he was gambling on these other solicitors firms not objecting to the Macau cheques.

347.  But when a majority of them did, it led to another perplexing event in the present case, namely Danny Lau giving various undertakings to his fellow conveyancers that the cheques would not bounce or that they would be replaced with cashier orders.  It must be pointed out that the amounts involved in his undertakings were substantial, particularly if one were to ignore his evidence that he never sent out the intended undertaking to Wong Hui & Co. – the undertakings went to several million dollars. 

348.  Danny Lau admitted that he never got the consent of his other partners in the firm for giving the undertakings.  He also accepted that there was no immediate fund in the firm to back the undertakings.  What he had basically was the Macau cheque of $8 million which was still in the process of clearing.  Apart from that, all he got was Poon Kam's and Elsie Chan's oral assurances that the Macau cheques would not bounce and if there should be any problem, they would back up the cheques with alternative funds.

349.  Danny Lau said that throughout he believed that the $8 million Macau cheque was backed by good money sitting in the Macau bank account.  Clearing the cheque was just a matter of time.  That was why he continued to have the cheque sent for clearance after being told on 1 October that it was a Macau cheque. 

350.  The surprising thing here is that Danny Lau never asked Elsie to remit the supposed $8 million sitting in the Macau bank account to Hong Kong by other means, such as telegraphic transfer.  Danny Lau's explanation in the box was that the idea never occurred to him.  Implicit in his evidence was that the idea never occurred to others in the firm, or for instance, Poon Kam. 

351.  A rather bizarre episode was that in the evening of 2 October 1991 when the crisis brought about by the use of Macau cheques was at its height, somebody brought along a brown envelop of cash from Macau to Danny Lau's firm as alternative payment in lieu of the Macau cheques.  This apparently became a cashier order of $560,000 on the following day which Danny Lau used to replace one of the Macau cheques.  Danny Lau said he never thought of asking Elsie to bring in more cash from Macau to replace the rest of the Macau cheques.

352.  As regards the guarantee given by Poon Kam to JSM at the latter's request, it provided that he would be responsible for Asiagreat's refund of the huge 30% deposit paid by JSM under the sub-sale and purchase agreement in case the sub-sale should fall through due to problems with title or delivery of vacant possession.  Danny Lau said that there was never meant or intended to be a representation, still less a misrepresentation, that Poon Kam was the beneficial owner or person in control of Asiagreat. 

353.  Danny Lau explained that at first JSM wanted to have a general guarantee for the return of deposit if the transaction should fall through.  Through negotiations with Paul Yu, he managed to persuade JSM to limit the operation of the guarantee to the transaction falling through due to title problems or failure to give vacant possession.  He further explained that as Poon Kam was the person responsible for acquiring the properties from the various landowners, it was reasonable and acceptable for Poon Kam to be the person guaranteeing the return of deposit arising from any title problems or failure to deliver vacant possession.  For the same reason, he said he did not find it appropriate to ask Elsie Chan to give the guarantee to JSM.

354.  Furthermore, he said that he had gone through the title documents of the various properties, and found that titles were rather straightforward and free from problems.  And Poon Kam was confident that delivery of vacant possession upon completion was no problem.  He therefore found it appropriate to advise Poon Kam to give the guarantee.

355.  Danny Lau told the Court that in those circumstances, as both he and Poon Kam were respectively confident about title and vacant possession, there was practically no risk of the sub-sale falling through due to either of those two matters, and the giving of the guarantee by Poon Kam was therefore not objectionable.  This was so even though by doing so, he was exposing his client, Poon Kam, to a huge potential liability of almost $117 million, money which was not paid to Poon Kam but in fact to Elsie (apart from the commission which Elsie was going to pay to Poon Kam out of that massive deposit).

356.  In any event, Danny Lau did not consider that by procuring Poon Kam to execute the guarantee, he was putting forward Poon Kam as the person beneficially owning or controlling Asiagreat.

357.  All this is directly linked to the missing deed of indemnity referred to in the bill mentioned above.  Danny Lau said that he could not think of any reason why he would need to prepare a deed of indemnity by Elsie Chan and Chio in favour of Poon.  That was one of the reasons why he said, in the latter part of his cross-examination, that he was positive that he did not prepare and never saw the deed of indemnity.  He categorically disagreed with the suggestion that the obvious reason for a deed of indemnity was to provide a back-to-back guarantee to Poon Kam in relation to the guarantee that he had agreed to give to JSM.  For after all, Poon Kam was exposing himself to the repayment of a huge deposit that he did not receive.  It was only natural that he should obtain a back-to-back guarantee or indemnity from Elsie Chan and Chio, to whom the huge deposit actually went.

358.  Danny Lau did not agree that an indemnity for such purpose (or for any other purpose) was ever prepared or signed.  He disagreed that that was a possible reason for the existence of such an indemnity.

359.  Danny Lau said as Asiagreat did not have any bank account of its own, he and his firm effectively acted as the banker of Asiagreat in distributing the proceeds of sale.  He said all this was a matter for client, and he simply followed client's instructions, i.e. the instructions of Elsie.  He or his staff simply prepared all the necessary payment-out documents, corporate authorizations and other related documents, all in accordance with instructions from Elsie.  He said he did not mind doing all that because the work generated income for the firm.  Nonetheless, it is plain from the available bills that not all of these works were charged eventually.

360.  Turning to the charges that Danny Lau billed Elsie, there is no dispute that the total amount of professional fees billed amounted to over $1.5 million.  Danny Lau said he did not receive any other payment or benefit from Elsie or other persons.  He said Poon Kam had offered to pay him a commission for his role in introducing to him the deal, out of which he earned a hefty commission.  But he refused to accept it.  During cross-examination, he denied that he was the recipient of a sum of cash of over $3.3 million, which was unaccounted for in the money trail, as remuneration for his role in the matter.  In this regard, there is little dispute that Louis Chow and Mickey Wong both got substantial payments as commissions from Poon Kam/Poon Kwong Him for their roles in the transactions.

361.  Danny Lau denied that he knowingly took part in any devious scheme to channel illicit proceeds of sale and secret profits to Chio and his nominees.

362.  Danny Lau said he was only a conveyancer and did not know the true market prices of the properties.  He accepted that he was conversant with the arrangement between Elsie and Poon Kam in terms of the ceiling price and commission.  He was of course also aware of the prices paid by JSM under the sub-sale transactions.  Yet he did not agree that he knew that the properties were being acquired by JSM's client at  grossly inflated prices.  He said the property market was buoyant at the time and huge profits were made on a daily basis by people from property transactions.  All he thought was that Elsie was very smart in being able to earn such a substantial profit.

363.  Danny Lau said he was merely a lawyer and was wholly nonchalant to the development potential of the properties.  He denied that he was ever aware of any expert advice (including Baron Chau's fax relating to a different piece of property).  But according to the account given by Chan Tak-yuen (a friend of Danny Lau) in his ICAC statement, Chan was introduced by Danny Lau to prepare a development concept report on the properties for his client (Elsie Chan) in October/November 1991.  Chan said Danny Lau told him that in terms of planning restrictions, the properties could not be developed into any high-rise development.  It is quite plain from Chan's account that Danny Lau played more than a nominal role in assisting Elsie Chan (and the man with her – Chio) to obtain the report – within 10 days.

364.  As regards the huge deposit of 30% which need not be stakeheld but could be released to Asiagreat upon signing of the sub-sale agreement, Danny Lau's position was that it was merely a commercial term agreed to by clients.

Discussion

365.  I have firmly borne in mind the burden and standard of proof, particularly given that very serious allegations are being made against Danny Lau, a professional person.  I have taken into account all relevant evidence.  I have carefully considered the very detailed submissions of counsel.  I have fully borne in mind Danny Lau's demeanour in Court.  I have given due allowance for Danny Lau's less than satisfactory command of oral English.  No point whatsoever is taken against him arising from his language ability. 

366.  I have also borne in mind and given generous allowance for possible innocent lapses in memory given that many of the events happened a long time ago.  I have also given ample allowance for the fact that in addition to memory lapses, over time there could be different ways of expressing the same thing, discrepancies in interpretation of the same events and also changes in recollection and impression – I have borne all this in mind in considering changes and variations in details of Danny Lau' story as told over the years, as evidenced by the ICAC statements, his evidence given in the criminal proceedings, his witness statement and his evidence in the box at trial.

367.  I have also specifically guarded against approaching what Danny Lau said or did (or did not say or do) at the material times with what Mr Shieh has described in paragraph of 124 of his written final submission as a “litigator mindset”.  Nor do I consider the case against him with the benefit of hindsight.  Indeed I have given Danny Lau liberal allowance in considering his defence and evidence. 

– Deed of indemnity by Chio and Elsie Chan to Poon Kam –

368.  I am unable to accept Danny Lau's denial of knowledge of the deed of indemnity.  He simply could not explain sensibly why such a document was referred to in his firm's bill. 

369.  Danny Lau said the bill was prepared by his very junior secretary of several months' legal experience only.  Even if one were to believe that that really was the case, he had to accept that the secretary must have simply copied the documents kept in the firm's files into the bill as items of work.  In the process, the secretary may have mistaken a document not under seal as a deed – as was in the case of the so-called deed of indemnity given by Elsie Chan to Mickey Wong which was in fact not under seal.  The same was also true in relation to the so-called deed of indemnity given by Elsie Chan to Leung Hiu Ling.  But those were real documents – the only qualification is that they were not given under seal. 

370.  I simply find it impossible (in the civil sense) for the secretary to have invented a non-existing document by herself and included it in the bill.  Moreover, she would have to somehow pluck the name of “Chio Ho Cheung” from somewhere and add him as a joint provider of the deed of indemnity in favour of Poon Kam.  This was wholly impossible (again in the civil sense) given that Danny Lau claimed that even he himself did not know who Chio was – in fact at that time he did not even know the full name of this “Mr Chan” – Elsie's boyfriend, let alone the name “Chio Ho Cheung”.

371.  Mr Shieh said that if there really were such a document, which by nature would have to be a serious document, it would not have mis-spelt the name of Chio (i.e. as “Chio Ho Cheung”).  I do not accept this.  The mistake in question was more likely than not a mistake in the bill itself rather than the underlying document.

372.  In any event, even if it was a mistake in the underlying document, i.e. the deed, it does not help Danny Lau's case at all.  For after all documents prepared by Danny Lau and his firm were full of mistakes.  The important point here is that the bill clearly evidences the existence of a deed of indemnity in favour of Poon Kam by Elsie Chan and Chio.

373.  Furthermore, even if the document was really included in the bill by the secretary, Danny Lau's claim that he never noticed the presence of this document is not capable of belief.  It must be remembered that the bill was signed by Danny Lau.  It charged a total sum of $162,200.00.  Danny Lau accepted in the box that it was a substantial amount of fees back in those days.  It is unlikely that Danny Lau would have paid little attention to the bill or its contents, as he claimed in the box. 

374.  Danny Lau said he did not charge his clients according to time; rather he just looked at the amount of work done and charged an amount which he believed would be acceptable to his client.  He said that therefore he did not look at the individual items of work as such to allocate time or costs to them individually.

375.  That may be so.  But that does not mean that he need not pay attention to what items of work had been done or included in the bill, in order to justify to his client the amount that he would like to charge.  So for instance, if he had included too few items of work in the bill, they might not be sufficient for him to convince his client to accept the amount that he would like to charge.

376.  Moreover, it must be remembered that the deed of indemnity given by Elsie Chan and Chio to Poon Kam was the first item of work appearing on the bill.  It is simply quite impossible to miss it if Danny Lau had looked at the items of work at all, even if only very quickly.  It would be quite impossible to miss the name “Chio Ho Cheung” which was clearly typed at the top half of the first page of the bill.

377.  Mr Shieh put forward two alternative explanations in final submission.  First, the deed never existed and somehow the secretary got it wrong and “created” it in the bill.  That is, as I have just analyzed, quite a fanciful suggestion.  Mr Shieh tried to give credence to this theory by pointing to the fact that the deed of indemnity cannot be found – it is and was not in the possession of the ICAC, nor was it in the possession of Albert K K Luk from whom the ICAC seized the relevant file in the first place.  Mr Shieh also said that nobody could have the foresight of removing the deed of indemnity from the relevant file beforehand, and if anyone did have the foresight, more documents than the deed of indemnity would have been removed.

378.  I am afraid I am not impressed by the argument.  Documents, whether important ones or not, do go missing from time to time for all sorts of reasons – some known and some unknown.  Sometimes documents are misplaced.  Sometimes they are simply given to someone for a purpose and not returned.  At some other times, documents are simply mistakenly discarded.  The theory of the junior secretary somehow knowingly or unknowingly invented this document in the bill is simply quite absurd and is incapable of serious support.  (Nor can I read too much into Danny Lau's last-minute application during the trial for the issue of a subpoena to the ICAC for production of the deed.  There could be various tactical considerations behind such a belated move.)

379.  The other alternative is that this document was somehow prepared by a clerk or secretary in Albert K K Luk without Danny Lau's knowledge.  And somehow when the bill was prepared and although it was included as the first item of work in the bill, Danny Lau managed to miss it when going through or signing the bill.

380.  Mr Shieh premised his theory on the evidence of Danny Lau that from time to time Elsie Chan would approach his clerk or secretary to prepare miscellaneous documents without his knowing about it.

381.  While this is a possibility which I have seriously considered, I do not accept it.  First, as I say, the chances of Danny Lau missing the reference to the deed of indemnity by Elsie Chan and Chio (a total stranger to him as per his evidence) in the bill are small.  Moreover, regardless of whether the deed of indemnity gave Poon Kam a general indemnity against liability or was, as Mr Scott has submitted to be the likely case, a back-to-back guarantee in respect of Poon Kam's guarantee given to JSM, it must have been a very important document.  It is difficult to imagine that Elsie Chan or Chio would have come up with the idea of giving Poon Kam an indemnity on their own initiative, and not only that, but also asked a staff member in the firm to prepare it for their execution – without telling Danny Lau about it.  And on top of that, one has to assume also that Poon Kam failed to consult or inform him about the deed whether beforehand or afterwards. 

382.  It is plain from Danny Lau's own evidence that he treated not only Elsie but also Poon Kam as his clients, and after all Poon Kam was his relation.  It was only natural for him to advise Poon Kam and to protect his interest.  Against that background, it is quite impossible to believe that the giving and obtaining of such an important document would have taken place via the conveyancing clerk or secretary in the firm without Danny Lau knowing anything about it.

383.  In any event, this possibility is fatally defeated by Danny Lau's own evidence in the matter, namely that after his attention had been drawn to the reference to a deed of indemnity in the bill, he had specifically asked Poon Kam whether he remembered ever getting one from Elsie Chan and Chio.  He said Poon had told him that he could not remember any such deed.  That piece of evidence, if accepted, would go against the possibility of Poon Kam having obtained such a deed from Chio and Elsie behind the back of Danny Lau.  In other words, on Danny Lau's own case or evidence, his counsel's second alternative explanation is simply not open to him.

384.  Furthermore, I simply find Danny Lau's denial of any reason for such a deed of indemnity troubling.  Danny Lau denied that there was any need for such a deed.  He went further to say that he had thought hard about the matter and could find no reason for the existence of such a deed.  That formed a main reason for his saying positively in Court that to the best of his knowledge and recollection, no such deed was ever prepared or seen by him.

385.  Here, I find Mr Scott's argument quite unanswerable.  There were obviously good reasons for the existence of the deed.  If people like Mickey Wong and Leung Hiu Ling were getting indemnities from Elsie for their roles as nominee directors in Asiagreat, there was all the more reason for Poon Kam to obtain a similar indemnity.  After all, Poon Kam's two relations were the nominee shareholders of Asiagreat and they remained so until July 1992.  Poon Kam himself was represented by Elsie to JSM and Peconic as the owner or the person in control of Asiagreat.  Indeed Paul Yu of JSM said in evidence that his side throughout thought that Asiagreat was owned or controlled by Poon Kam.  Elsie Chan said in the box that she thought the company doing the acquisition and resale belonged to Poon Kam.  As analyzed above, the guarantee did, regardless of Danny Lau's subjective intention or understanding, present Poon Kam as the owner or the person in control of Asiagreat, who was to receive the huge 30% deposit – looking at the matter from the standpoint of somebody like Paul Yu of JSM.  For after all, why else should he be guaranteeing the return of deposit in case of problems with title or vacant possession?

386.  There was simply every reason for the existence of an indemnity in favour of Poon Kam in general.

387.  More specifically, as Mr Scott has strongly submitted, there was a most specific reason for the existence of the indemnity, i.e. the giving of the guarantee for the return of the 30% deposit by Poon Kam to JSM.  For even if there should be a problem with title or delivery of vacant possession and the deal could not go through, from the standpoint of Poon Kam: why should his exposure go beyond the total amount of initial deposits that the landowners had got from Asiagreat, and be extended to cover the entire 30% deposit that Elsie and Chio got from JSM through Asiagreat under the sub-sale?  That would be wholly unfair and disadvantageous to Poon Kam.  The only fair and just way to protect Poon Kam was to obtain a counter guarantee or indemnity from Elsie and Chio regarding the excess in liability, which was a substantial one given the great disparity between the 30% deposit under the sub-sale and the initial deposits paid to the various landowners under the head sale and purchase agreements.

388.  Furthermore I am not sure if Danny Lau could be so certain about the titles of the various lots in question.  After all, he did not have much time to study the titles and there were a total of 15 transactions to go through.  Moreover, vacant possession was something that could also be problematic and unforeseeable, given that one is concerned with New Territories land.

389.  As Poon Kam's relation and solicitor, it is quite impossible for Danny Lau not to have thought of all this and sought to protect Poon Kam's interest by a suitable indemnity or counter-guarantee.  For Danny Lau to say that he had not even thought of asking Elsie Chan for a counter-guarantee on behalf of Poon Kam in relation to the guarantee that Elsie had asked Poon Kam to give to JSM, considering that Poon Kam was also his client and relative, was rather surprising.

390.  Yet Danny Lau's story was that he did not prepare such a deed.  More significantly, he could not see any need for such an indemnity or counter-guarantee.  Even in the box, he still maintained that he could not see any need for such a document.  In my judgment, all this simply betrays the fact that Danny Lau was seeking to distance himself from the deed of indemnity referred to in the bill and thus Chio himself at all costs.  I am unable to accept his evidence.

391.  Mr Shieh referred to the fact that Poon Kam refused to give a similar guarantee in relation to the last few transactions because he was not involved in them to support the explanation given by Danny Lau relating to the first guarantee.  But I do not think this gets his client's case very far.  As Poon Kam was not involved in the subsequent transactions and was not going to earn any commission out of them, there was simply no incentive for Poon Kam to give the guarantee regardless of whether a counter-guarantee was offered.  The situation was wholly unlike the previous one where Poon Kam's interest in seeing to it that the sub-sale with JSM could be concluded in relation to the first 15 transactions coincided with that of Elsie's and Chio's – on the assumption, which I find to be the case, that Poon Kam (like Danny Lau – see below) realised at some stage that Elsie's acquisition of the properties was for the purpose of their quick resale to JSM's client for profits, from which (realistically) he was going to get his commission paid.  Coupled with the offer of a counter-guarantee or indemnity, one could see why Poon Kam was willing to give the guarantee to JSM although he did not personally receive the huge deposit.

392.  The existence of the deed of indemnity or a document of that nature, which I find to be the case, adversely affects Danny Lau's case.  His denial that such a document existed greatly damages his credibility in general, although I firmly bear in mind that an untruthful answer or even a lie does not necessarily prove guilt by itself.  The existence of the indemnity plainly suggests that Chio, in his English name, was somebody known to Danny Lau at the material time – the bill was dated as early as 25 October 1991.  The fact that Elsie Chan and Chio were jointly giving the indemnity to Poon Kam points toward that Danny Lau knew both of them were getting benefit from the Asiagreat arrangement in general or more specifically the 30% deposit if the indemnity was meant to be a counter-guarantee in respect of Poon Kam's guarantee to JSM.  In other words, Danny Lau knew that Chio was substantially involved in the whole matter.

– Macau cheques –

393.  But the case against Danny Lau does not stop there.  I must say I find the whole Macau cheques saga quite difficult to believe.  I am prepared to accept that when the first Macau cheque of $8 million was given by Elsie Chan to him, Danny Lau or his firm did not realise that it was a Macau cheque or that it would bring in so much problem in terms of clearing.  But when the matter was drawn to his attention on 1 October 1991 and when he saw immediately the implications in terms of payment of the requisite initial deposits as per his own evidence, so much so that he immediately asked Elsie Chan for alternative funds for payment, what happened next according to his evidence is not easy to understand or accept.

394.  Danny Lau's evidence was that on the following day, Elsie Chan brought in a number of cheques for direct payment to the various vendors' solicitors.  As noted above, initially, Danny Lau said he personally received the cheques from Elsie and gave them to the clerk or accountant to handle.  He changed his evidence in the box by saying that he did not actually see Elsie that day, as he was busy in his own room.  Elsie simply went to the big conference room next door and gave the cheques to his clerk or secretary.

395.  Regardless of which version is true, the amazing thing is that nobody in the whole firm of Albert K K Luk noticed that these further cheques were also Macau cheques although according to Danny Lau's own evidence, by then the problem caused by the first Macau cheque had already been known within the firm and it was the very reason for the further cheques in the first place.  Yet nobody in the firm, from Danny Lau downwards to the accountant, noticed that these were further Macau cheques.

396.  I would have thought that given the experience of the first Macau cheque, Danny Lau would have been the first person to ensure that the cheques given by Elsie to his firm on 2 October were not yet again Macau cheques.  This was not what he did.  Indeed according to Danny Lau, he did not even advise Elsie Chan to bring in local cheques.  Nor did he, according to him, check whether the cheques that Elsie Chan brought in on 2 October were local cheques.

397.  Apparently Danny Lau thought that there was a distinction between his firm issuing solicitors' cheques to other solicitors based on a Macau cheque yet to be cleared (i.e. the $8 million Macau cheque) and his client writing Macau cheques directly to these solicitors.  His firm obviously was not prepared to do the former as that was why he asked Elsie Chan to bring in new cheques.  Yet in relation to the latter course, because of his belief that Macau cheques were good payments even though the clearing time was longer than a Hong Kong cheque, he did not find it objectionable to send them to solicitors acting for the head vendors. 

398.  I fail to see the distinction.  As I see it, Macau cheques were, for almost all practical purposes, like post-dated cheques.  Why should Danny Lau think that his counterparts acting for the landowners would be prepared to accept post-dated cheques?  In any event, there is no good explanation for his failure to spot that these further cheques were also Macau cheques.  His change in evidence in the box from what he said in his witness statement as to whether he personally got the Macau cheques from Elsie did not impress me at all.

399.  Still more importantly, I am unable to accept his evidence that it never occurred to him to ask Elsie to use other methods to transfer the $8 million which he said he thought was sitting in the Macau bank account to Hong Kong in order to meet the urgent need for funds to pay the initial deposits. 

400.  According to Danny Lau, it was important to conclude the deals with the individual landowners as soon as possible and at the same time so as to prevent the leaking of the news of acquisition, which could lead to individual landowners increasing their prices or going back on their word regarding the sale of their properties to Asiagreat/Poon Kam.  That was the reason why, so he thought, the deals could not be postponed to await the cashing of the first Macau cheque of $8 million by his firm, and that was why alternative funding had to be found urgently.  Danny Lau also said in evidence that throughout he believed in Elsie Chan's financial soundness.  He fully believed that there was a sum of $8 million sitting in a Macau bank account to meet the first Macau cheque, the clearing of which, he thought, was simply a matter of time.  

401.  That being the case, it was most surprising for him not to have thought of asking Elsie Chan simply to transfer the sum of $8 million from Macau to Hong Kong to pay for the initial deposits.  Yet the surprising answer from Danny Lau was that he never thought of doing so.  Not only that, but also implicit in his story was that nobody involved in the transactions, including Poon Kam, his conveyancing staff, his accountant, and Louis Chow who helped out in his firm, thought of this very obvious alternative. 

402.  It should be remembered that according to Danny Lau's own story, people like Poon Kam went to the extent of “pressurising” him into giving solicitors' undertakings regarding the Macau cheques.  Poon Kam also lent money to Elsie to pay for the initial deposits. Furthermore, again according to Danny Lau's own evidence, Elsie's boyfriend – who was only known to him as Mr Chan at the time – came to his office on 2 October evening to look for Elsie and asked him whether he could be allowed to “fix” the matter (of Macau cheques). 

403.  It is difficult to believe that all this would be necessary when there was immediate cash of $8 million sitting in Macau waiting to be used.  After all, as I have said, some cash was indeed brought to Danny Lau's office to replace one of the Macau cheques, so if nothing else could be done, why could the $8 million not be brought over in cash from Macau to Hong Kong (or, of course, more conveniently, by telegraphic transfer or other form of remittance)?  Why was all this not thought of by Danny Lau or those in his firm?  As to all this, I did not receive any satisfactory answers.

404.  Danny Lau's attitude towards the Macau cheques was betrayed by the undisputed fact that even after the receipt of complaints from some of the solicitors who had received the Macau cheques as payment for initial deposits, Danny Lau knowingly continued to send out further Macau cheques to other firms of solicitors as payment for initial deposits.  As mentioned above, he simply gambled on those solicitors not noticing that they were Macau cheques or not raising any objections in relation to them.  I have already commented that his belief that Macau cheques were good payments is baffling.  For my part, I see little difference between a Macau cheque and a cheque post-dated for 10 to 14 days.  In either case, I fail to see how a conveyancing solicitor acting for a purchaser would have advised his client to accept it.  What Danny Lau did, even on his own evidence, in relation to these further Macau cheques after he had learnt of the complaints from his fellow practitioners was highly indicative of his attitude at the time.

405.  Mr Shieh asked rhetorically that: if Danny Lau knew that the Macau cheques, particularly the $8 million one, were not good for payment, why should he ask his bank to proceed with clearing the $8 million cheque after learning that it was a Macau cheque, which would cost his client several thousand dollars in banking charges?  I note that according to Albert K K Luk's ledgers, the cheque was said to have bounced.  I do not think too much mileage can be made by Mr Shieh out of all this.  In any event, I wish to say expressly that I have borne Mr Shieh's point in mind.

– Solicitors' undertakings –

406.  The undertakings that Danny Lau gave to his fellow solicitors in relation to the Macau cheques also threw light on the extent of his involvement in the transactions.  He admitted that before he gave those undertakings, he had not consulted his partners.  He also accepted that those undertakings exposed his firm and he himself to a substantial liability.  Depending on whether the undertaking to Wong Hiu & Co. was actually sent out or not, the total value of the undertakings given by Danny Lau relating to the Macau cheques was either $2 million or $5.2 million; in either case, it was a huge amount of money. 

407.  Danny Lau had no choice in the box but to accept that at that time, he only had the word of Elsie Chan, a client whom he had known for barely several months, that the Macau cheques would be good for payment.  Danny Lau also said in evidence that Poon Kam had also been eager to have the deals completed and had given him assurances that he would back up Elsie Chan.  That may be so, but in the absence of actual funds in his firm's clients' account, it is difficult to see how Danny Lau could have accepted such bare oral assurances, which were not even reduced to writing for the protection of himself or his own firm.  The analysis does not depend on whether the undertaking that he gave to Wong Hui & Co. in the sum of over $3.2 million was ever withdrawn or not.  With or without that particular undertaking, the undertakings that he had undisputedly given were of a substantial amount in total by themselves.

408.  Mr Shieh has tried hard in final submission to convince the Court that Danny Lau was merely a conveyancing solicitor acting for a client in conveyancing transactions and he should not be saddled in an ex post facto fashion with obligations and foresight of all sorts.  But I am afraid Mr Shieh cannot have it both ways.  If Mr Danny Lau was merely a conveyancing solicitor, the undertakings that he gave would be most inexplicable.  On the other hand, if one were to say that because the deal involved Poon Kam and if completed, the deal would be highly profitable to Poon Kam, and Danny Lau wanted to do everything possible to help Poon Kam (and therefore Elsie Chan) to complete the deal with the head vendors, so much so that he was prepared to give those undertakings in question, then one could not simply say that his role in the matter was simply an disinterested conveyancing solicitor.  In my judgment, he simply was not.

409.  Could the undertakings be explained away by the relatively lack of experience on the part of Danny Lau, who was handling a rather exceptional transaction or series of transactions of some scale and in a great rush?  Based on Danny Lau's own story, the exposure and risk were obvious and from my observation, whilst Danny Lau may have been inexperienced and less than meticulous in his work then, he is (and was) a man who knows what he is doing.  Maybe as he claimed he did not have the luxury of time on those few hectic days to really think things through, but I do not accept that he was therefore unaware of the obvious and serious implications of his giving the undertakings.

410.  On the known facts, I find Mr Scott's argument much more convincing.  Senior counsel's argument was simple: Danny Lau was prepared to give those undertakings because he knew that once he got the sale and purchase agreements with the head vendors signed, he would be in a position to conclude the sub-sale agreement with JSM at once, whereby his client would immediately receive a huge deposit that could be used to back his undertakings.  Whether the deposit was the conventional 10% or the extraordinary 30% of the purchase price, it would be more than sufficient to back the undertakings.  Here I need not go as far as Mr Scott did to say that the closing of the sub-sale was a foregone conclusion to the knowledge of Danny Lau because he knew that Chio was behind Peconic and was in a position to ensure the finishing of the deal.  All I need find is that at that time, Danny Lau had already been persuaded by Elsie and Poon Kam that the sub-sale deal with JSM was highly likely to be closed.

– The JSM offer –

411.  Danny Lau insisted in the box that he never took the offer from JSM seriously until after the acquisition of the properties by Asiagreat from the landowners was concluded.  He emphasised that particularly in the context of whether he had deliberately assisted Elsie Chan in using the Macau cheques to buy valuable bridging time pending execution of the sub-sale agreement with JSM's client, whereby his client would receive a huge amount of initial deposit, more than sufficient to pay for the deposits required for the agreements with the head vendors.

412.  I find Danny Lau's assertion not particularly impressive.  Even according to his own witness statement, Elsie Chan had informed him that there would be a sub-purchaser buying the properties after the conclusion of the acquisition by Asiagreat and as a result he had to deal with one further party.  Shortly after this, he received JSM's letter dated 26 September 1991, which fully confirmed what Elsie had already told him orally.  There was thus no reason for Danny Lau not to take JSM's offer seriously.  His claim that he merely treated JSM's offer as some sort of general enquiry and his insistence that he did not really see the offer as a serious one are baffling.  I do not accept his assertion.

413.  The negotiations with JSM were unbroken.  Letters were exchanged one after another and each letter brought the deal closer to conclusion.  JSM's first letter dated 26 September 1991 had initially asked for the signing of the agreement on 30 September 1991, and in their letter dated 1 October 1991 JSM asked for the supply of title deeds and a draft sale and purchase agreement for their perusal “so that the matter [could] proceed as quickly as possible”.   I do not see why Danny Lau said he did not think that the JSM offer was a serious one until after the acquisition of the properties.  Rather, the conclusion of the agreements to buy the properties from the landowners was a pre-requisite to the conclusion of the sub-sale agreement.  That is (and was) plain for everyone to see.

414.  The truth is, in my view, he must have taken into account JSM's offer, and particularly the deposit that JSM's client was prepared to pay Asiagreat upon signing of the sub-sale and purchase agreement, whether it be the conventional 10% or the huge 30%.  That deposit (10% or 30%), once received, would immediately relieve Asiagreat's cash flow problem in relation to payment of initial deposits under the head agreements – given the great disparity in price.  I find it impossible for Danny Lau not to have borne that in mind when deciding whether to send out the Macau cheques or further Macau cheques to the solicitors of the head vendors, and whether to give personal undertakings regarding those Macau cheques.  His assertion that he was prepared to give those undertakings merely on his belief on Elsie Chan's ability to meet the cheques (independent of the initial deposit from JSM) is not credible.  I further reject his assertion that he genuinely believed that Elsie Chan had the money to pay for the initial deposits, independent of the initial deposit from JSM.

415.  I find it much more probable that on the one hand, he was aware of the inability of Elsie Chan (and those behind her) to meet the payment obligation of the initial deposits to the head vendors from her (and their) own resources, yet on the other, he was fully conscious of the JSM offer, knew that it was a serious offer, and realised that if all went well it was only a matter of time that Asiagreat would have much more than sufficient cash to pay for the initial deposits – all he needed was a day or two's bridging time between the head sale and purchase agreements and sub-sale and purchase agreement.  Danny Lau may well have thought and believed that if all this could be accomplished, that would be to the good of everybody, including Elsie Chan, Poon Kam, he himself (as a conveyancing lawyer) and even JSM and its client.  From his standpoint, it is not difficult to understand why he was eager to complete the deal and assist in whatever way he could towards its conclusion.

– Knowledge of Chio's involvement behind Asiagreat's acquisition of the properties: further considerations –

416.  On this important topic, in addition to the matters already discussed at length above, there are further material matters, discussed in this sub-section, to specifically bear in mind.

417.  It cannot be denied that Danny Lau's story on his knowledge of Elsie Chan's boyfriend's role in the transactions has undergone important changes – i.e. from the “actual purchaser” as per the ICAC statement to a financier of Elsie (as per his evidence in the box).  Neither the changes nor the explanations he gave for them really impressed me. 

418.  Danny Lau's assertion that Chio never gave him any name card when they met does not accord well with normal business/social practice in Hong Kong – although I fully bear in mind the possibilities that Chio might have a different practice and (alternatively) that it was deliberate.  But then if Chio really intended to conceal his identity from Danny Lau by not giving him any name card as per general business/social practice, Chio would not have allowed his English name to appear in the accounts statements, ledgers and other documents and records of the solicitors' firm in relation to payment and receipt of monies – I do not lose sight of the counter-possibility that Chio might have been careless in allowing that to happen.  Even according to Danny Lau's own story, Chio went so far as to offer to help fix the problem in relation to the Macau cheques on the evening of 2 October when he met Danny Lau in his office.  Furthermore, Danny Lau was in frequent contact with Elsie and Mickey Wong, and the chances of his learning of the full name of “Mr Chan” in Chinese or English must have been high.

419.  Danny Lau was clearly aware that Elsie Chan was involved in Ang-du.  For instance, according to Chan Tak-yuen's ICAC statement, Danny Lau asked him to put Ang-du, instead of Elsie Chan, as the client in preparing the development concept report on the properties in October 1991.  Ang-du, incorporated in August 1991, had three directors, namely Chio, Elsie Chan and Witthaya Jiwatuwinan (Chio's brother).  Its name in Chinese is nothing other than “繼杰國際集團有限公司”.

420.  Whilst I must view what Mickey Wong said in his ICAC interview with circumspection, and bear in mind that he was not called by either side to give evidence at trial, I do note that according to his answers, Chio had more than a nominal role to play during the meeting that he and Elsie Chan had with Danny Lau regarding the acquisition of the properties.  According to Danny Lau, Chio even went out of his way, when he met Danny Lau in his office on the evening of 2 October 1991, to offer to “fix it” – i.e. the problem arising from the Macau cheques.

421.  Mr Scott argued that the compelling inference from the known circumstances is that Danny Lau knew that Elsie Chan was not the person ultimately in charge of Asiagreat.  He could not honestly have believed that a young actress was buying all these properties on her own without substantial financial backing and commercial sophistication which was needed to ensure the success of the ingenious “Macau cheque” scheme.  At least he knew that the funding came from someone in Macau and that someone had reasons to remain hidden in the shadow.  It was quite plain, as Mr Scott put it, that Chio was more than an “occasional spectator” of the deal.  I find force in Mr Scott's argument.  Chio's offer to “fix” the difficulty created by the Macau cheques, even on Danny Lau's own story, showed that he was very much in the know.  It suggested that he regarded himself as someone having some say in the deal.  That Chio was involved or interested in the deal together with or through Elsie Chan/Asiagreat must have been obvious to Danny Lau.  That Elsie Chan was Danny Lau's and Caroline Chong's main point of contact for instructions and report is not inconsistent with Chio being involved or interested in the deal together with or through Elsie Chan, or Danny Lau being aware of that fact.

– Knowledge of Chio's involvement in Peconic –

422.  I now move onto Chio's involvement in Peconic and Danny Lau's knowledge of it.  As mentioned JSM's letter dated 4 October 1991 specifically said that Chio was a director of Peconic authorised to sign the sub-sale and purchase agreement on its behalf.  Moreover, Chio's name and signature clearly appeared on the execution page of the sub-sale and purchase agreement.

423.  In the criminal trial, Danny Lau agreed to the suggestion that “as at 4 October, you were clearly on notice that Mr Chio Ho Cheong is a director of Peconic, the purchaser” (6 May 2002).  Danny Lau sought to explain this at trial by saying that he was merely confirming what he subsequently learned from the documents when he agreed to the suggestion. 

424.  Given my rejection of Danny Lau's denial of knowledge of the deed of indemnity given by Elsie Chan and Chio to Poon Kam and my view that Danny Lau actually knew that Elsie Chan's boyfriend was Chio, and both of them had a substantial stake in the acquisition and resale of the properties, I consider that at the very least, Danny Lau must have noticed that Chio was also a director of Peconic.  I do not believe him when he said in evidence that he had not read JSM's letter or noticed Chio's name or signature on the execution page of the sub-sale and purchase agreement.  After all, JSM's letter was written to his firm for his attention. 

425.  As for the sub-sale and purchase agreement, he attested Mickey Wong's two signatures on the execution page, which were respectively merely an inch or so above and beneath the name and signature of Chio on the same page.  Moreover, one of Danny Lau's two attesting signatures on that same page was just an inch immediately above the name of Chio as director of Peconic in the execution clause for the purchaser.  That strictly speaking, Danny Lau had no duty (as a witnessing solicitor) to vet the names and signatures of the persons signing on behalf of Peconic – which was what he said in the box – is quite beside the point.

426.  Furthermore, given that he knew Chio was involved in the deal and that out of this acquisition/resale exercise, Chio (alone or together with Elsie) was/were going to earn a huge profit, and given the peculiar use of the Macau cheques and the fact that the acquisition and resale exercise could by no means be described as a run-of-the-mill transaction, at the very least, Danny Lau must have been most curious as to the identity of the sub-purchaser who was buying the properties from Chio and Elsie, and who was paying a price which would result in a huge profit to them.  Given that sort of background, it is quite impossible to believe that Danny Lau would not have, putting the case against him at the lowest, paid some attention to the identities of those individuals signing on behalf of Peconic.  And in the process, he would not have missed the name of Chio.

– Chio's and Elsie Chan's names “being everywhere” –

427.  This leads me to Mr Shieh's general argument that if Danny Lau was really in the know, Chio's name would not have been everywhere in the files of the two solicitors' firms.  Likewise, Elsie Chan's name would not have appeared in the receipts sent to JSM as Danny Lau's client.  For all this would have revealed to anybody reviewing the papers that Chio and Elsie Chan were involved in the acquisition and resale exercise.

428.  This sort of arguments has superficial appeal.  But as Mr Scott has argued in final submission, although attractively put, the argument overlooks the fact that human (and litigation) experience does suggest that not all crooks (or for that matter, wrongdoers generally) are, or always, clever or even meticulous.  Here, I am afraid, Danny Lau has shown himself to be a less than careful person in relation to documents.  The facts pointed out by Mr Shieh to premise his argument do not necessarily preclude a guilty state of mind on Danny Lau's part.

429.  That said, I wish to say specifically that I have carefully borne Mr Shieh's point about Elsie's and Chio's names being everywhere in mind.  Indeed, I have seriously considered all other arguments of his before I make my findings of fact.  However, I would like to highlight the following considerations in my deliberation in relation to Mr Shieh's point under discussion.

430.  As regards Chio's name appearing in documents of the solicitors firms, it must be remembered that the matter was quite outside Danny Lau's control.  If Chio decided to write a cheque in his own name and through Elsie Chan gave it to Danny Lau for payment, the firm had no choice but to record that fact in its records and ledgers.  Likewise for the release of money.  The matter was really in the hands of Chio and Elsie Chan.  The case against Danny Lau is dishonest assistance, not conspiracy with Chio/Elsie Chan.  

431.  As regards Elsie Chan's name being all over the place, and Danny Lau's misconceived attempt at one stage to register the shares sale agreement between Poon Kam and Elsie Chan, it has to be remembered that Elsie Chan, as client, approached and instructed Danny Lau from day one, when Danny Lau did not have all the knowledge (and suspicions) that he subsequently had – see the subsection “Timing” below.  Elsie was naturally named as the client of the firm from the outset.  Given the nature of the transactions involved, Elsie's name had to appear everywhere in the firm's records and ledgers (which under normal circumstances, would not be seen by any outsiders).  There was not much choice about it on the part of the firm.  As I said, the case against Danny Lau is dishonest assistance, not conspiracy with Chio/Elsie Chan. Likewise given Danny Lau's erroneous belief that the agreement had to be registered, he did not have much option but to send the agreement for registration so as to protect the respective interests of not only Elsie Chan but also Poon Kam, vis-à-vis each other.   

432.  Whilst I do take Mr Shieh's argument seriously in my deliberation before coming to any factual findings, I do not think this is a point of the greatest significance.

433.  As to the disclosure of the name of Elsie Chan to JSM as Danny Lau's client, it must be remembered that although Elsie Chan was a rather popular local actress at the time, she was well known under her Chinese name “陳奕詩”, rather than under her English name “Elsie Chan” – which is a very common name in Hong Kong.  As a matter of fact, the appearance of the name “Elsie Chan” in some of the receipts given by Albert K K Luk to JSM did not catch the eyes of Paul Yu, as per his evidence in the criminal proceedings (13 May 2002).  It is wholly understandable that to Paul Yu, leaving aside the instructions he got from Chio and Chen, the much more important representation regarding the identity of the person who beneficially owned or controlled Asiagreat came from the guarantee that Poon Kam gave in relation to the return of deposit.

– Other considerations –

434.  The subsequent release of the proceeds of sub-sale to various persons at the direction of Elsie Chan was merely a logical step in the whole scheme of things which Danny Lau did pursuant to Elsie's instructions.  It was consistent with Danny Lau being in the know.

435.  I cannot make any positive finding on whether Danny Lau received any secret profit out of the whole deal.  He said in the box that Poon Kam did offer to pay him a commission for his role in the matter, but he refused it.  On the other hand, he confirmed that both Louis Chow and Mickey Wong got substantial commissions from Poon Kam or his son, Poon Kwong Him.  Furthermore, there is indeed a payment of a sum of cash of over $3.3 million unaccounted for, which originally formed part of the commission received by Poon Kam.  We simply do not know who the recipient of the cash was.

436.  However, it must be remembered that Danny Lau (and his firms) earned a total of over $1.5 million by way of professional fees out of all the transactions, which was by any standard a very substantial amount, particularly bearing in mind that all this took place back in early 1990s, when Danny Lau was a fairly junior solicitor, albeit a partner in a small firm.

437.  Moreover, as I say, one must not only view Danny Lau as merely a conveyancing solicitor acting for Asiagreat, Elsie Chan or Poon Kam.  He was the person who introduced Elsie Chan to Poon Kam.  He was a relation of Poon Kam, who earned a huge commission out of the deal.  Coupled with my finding that he did not positively know that Chio was not authorised by the board of Peconic to earn the hefty profits out of the acquisition and resale exercise, which perhaps made the objection to his involvement in the transactions appear less starkly to him subjectively, all this explains why he was prepared to do what he did in the transactions.

438.  There are, as I already indicated, many peripheral matters concerning the case against Danny Lau and the points raised by him or on his behalf to counter the allegations.  I have had lengthy oral evidence from Danny Lau, on top of the voluminous documentary evidence available.  I have got detailed submissions from counsel on all sides regarding the claim against Danny Lau.  It is, needless to say, quite impossible and indeed unnecessary, to rehearse all these points and arguments here, let alone to deal with them one by one.  Suffice it to say, they have all been borne in mind.  I reach my findings of fact on the entirety of the evidence before me.  I have simply mentioned the more important points and arguments in the preceding judgment.  But they are not the only matters that I have considered, nor are they the only matters that bear any weight in my deliberation. As I say, I have borne the entirety of the evidence in mind.

Findings on knowledge, dishonesty and other matters

– Knowledge –

439.  I find that by the latest on the evening of 4 October 1991 when the sub-sale and purchase agreement with Peconic was executed by Asiagreat (it having been first executed by Peconic) or shortly thereafter when JSM's letter dated 4 October 1991 confirming that Chio was one of the directors of Peconic signing the sub-sale and purchase agreement on its behalf arrived, Danny Lau knew that Chio was a director in Peconic.  Furthermore, I find that before that, Danny Lau had already known that Elsie Chan's boyfriend was, either together with or through Elsie, substantially involved and interested in the acquisition of the properties through Poon Kam from the various landowners and in reselling the properties to Peconic, via Asiagreat.  He had known that Elsie's boyfriend was Chan Kai Kit or Tommy, and further that he was also known as Chio Ho Cheong in English.

440.  I further find that he knew from the documents that Asiagreat, and therefore Elsie Chan and Chio together, or Chio himself, was/were earning a huge profit out of the acquisition and resale transactions.  As I say, I am not prepared to find that at the material time Danny Lau positively knew that Chio was earning such a huge profit without the knowledge or approval of Peconic.

441.  However, I find that this was so only because Danny Lau shut his eyes to the obvious and did not ask the obvious questions or make further enquiries in this regard which would have resulted in knowledge.  Furthermore, I find that he knew that something very suspicious was going on and he must have worked out in his mind that Chio was earning something that he was not supposed to be earning.  However, he chose to ask no questions, and simply did as he was told. 

442.  I find that he must have suspected that what Chio (alone or with Elsie) was/were earning was unlawful – from the way the transactions were asked to be structured, the use of nominees, the use of the Macau cheques, the huge profit that was being reaped from the quick resale, the secretive role played by Chio, the urgency of the whole thing and the fact that Chio was a director in Peconic – the opposite party of Asiagreat/Chio's girlfriend. 

443.  What happened subsequently, i.e. after the execution of the first sub-sale and purchase agreement only served to confirm Danny Lau's suspicion – the tortuous and circuitous route by which the proceeds of sale were channelled away from Asiagreat to various people through use of nominees such as Leung Hiu Ling and Wong Shiu-wai, and the further transactions concluded whereby Asiagreat/Elsie/Chio continued to reap substantial profits out of them at the obvious expense of Peconic.

444.  I find that Danny Lau must have reckoned in his mind that Chio did not have the knowledge or approval of Peconic to earn the huge profits, which were therefore secret profits earned by Chio unlawfully behind the back of his own company, Peconic.  As a trained lawyer, Danny Lau must have realised that that was unlawful.  However, he simply ignored all this.  He refrained from making enquires which would have resulted in knowledge.

– Dishonesty –

445.  Applying the objective test of dishonesty, I have no difficulty in concluding that based on what Danny Lau's knowledge, suspicions and decision not to make enquiries which would have resulted in knowledge, he was dishonest.  The fact that he did not know the final link in the matter positively – that Chio did not have the approval or consent of Peconic's board to earn the profits in question, is neither here nor there.  He did not know because he did not ask.  He did not ask because he did not want to know.

– “Blind eye dishonesty” –

446.  In Grupo Torras v. Al-Sabah [2001] Lloyd's Law PN 117, the English Court of Appeal affirmed the trial judge's finding of dishonesty against a solicitor whom the trial judge described as being guilty of “blind eye” dishonesty.  There, the judge found the solicitor knew that the transaction in question was “of an obviously questionable nature” and yet he did not “at any stage [raise] any question”.  As the Court of Appeal viewed it, the judge was saying that the failure to ask question was “dishonest not because it was negligent not to ask them, but because any honest Spanish lawyer would have done so”.  Put another way, the judge was saying that this failure on the part of the solicitor was “deliberately dishonest”.  According to the judge, the solicitor “understood well enough, but thought it wisest to probe no further”.  The Court of Appeal therefore held that the solicitor's assistance had been rendered “regardless” of what was going on and was dishonest.  In other words, it had been rendered because the solicitor decided to have “no regard to what was going on”.  This was “blind eye” dishonesty.  See paragraphs 112 and 113.

447.  After the clarification of the law by the Privy Council in Barlow Clowes that the test for dishonesty is an objective one, it is no longer necessary to probe into the defendant's subjective understanding of generally accepted standards of honesty, and still less, his subjective opinion of himself in terms of honesty.  All one needs to do is to look at what he actually knew and suspected at the material time, and ask whether that constituted a dishonest state of mind from an objective standpoint, provided that a person who merely had suspicions but without actual knowledge could still be dishonest (viewed objectively) if he deliberately chose not to make enquiries which might result in knowledge: Abou-Rahmah, supra, at para. 43(ii), per Treacy J.  Sometimes, it is still helpful to refer to what the defendant suspected but deliberately refrained from finding out as Nelsonian knowledge, and it may still be convenient to call the type of dishonesty resulting from such Nelsonian knowledge or suspicion as blind eye dishonesty.  But for my part, I would prefer to keep everything straightforward and simply apply the objective dishonesty test to the knowledge and suspicions that a defendant had and (where relevant) his decision not to make enquiries at the material time and ask objectively whether that constituted a dishonest state of mind.

448.  On the facts as I find them, whilst many of the general descriptions employed by the Court of Appeal in Grupo could equally be applied to the case of Danny Lau – and of course there are differences between the two cases also, I would not complicate the matter by calling his dishonesty in the present case blind eye dishonesty.  I would simply find that on the basis of his knowledge, suspicions and decision not to make enquiries at the time, viewed objectively, he was dishonest, regard having had to all personal attributes of his insofar as they are relevant in the present context.  (In any event, on the evidence before me, I would have found that Danny Lau, a trained lawyer, knew what he was doing fell short of ordinary accepted standards of honesty – it was never suggested otherwise by him in evidence, pleadings or submission.  In other words, if the combined test was the correct test of dishonesty, I would still have concluded that Danny Lay was dishonest.)  

449.  Regarding knowledge of whether there was any proper disclosure to Peconic or approval from Peconic regarding the huge profits to be made out of the resale, short of a direct question to Peconic, JSM or Chio (or maybe Elsie Chan), it would not have been possible for Danny Lau to actually know the answer.  By the nature of things, the answer can only be obtained from Peconic/JSM and Chio/Elsie.  If Danny Lau chose not to ask any of them, he would not have known – in the sense that he would not have any direct knowledge as such.  However, as a trained lawyer, he must have worked out the true position in his mind.  I am unable to accept that somehow negligently he did not apply his mind to the facts and therefore did not realise all this.  The plain fact was that he did not ask either Peconic/JSM or Chio/Elsie about it because he did not want to find out the answer.  He just went along with his so-called “instructions”.

– Timing –

450.  In my judgment, Danny Lau did not come to realise all this in one go.  His knowledge and suspicion grew as more and more instructions came in and events unfolded themselves.  As I have said, I find that Danny Lau knew that Elsie Chan's boyfriend was involved in Asiagreat and the deal almost from the beginning.  He also knew that the Chinese and English names of the boyfriend were Chan Kai Kit and Chio Ho Cheong (Tommy) almost from the outset. 

451.  However, I do not believe Danny Lau was involved in the Macau cheques at the beginning.  In fact, he and his firm were the victims of the first Macau cheque which they thought was a Hong Kong cheque.  I find that at first Chio and Elsie wanted to use the $8 million Macau cheque to trick Danny Lau and his firm into writing out solicitors' cheques in favour of the various landowners.  It was only after the scheme failed that Elsie Chan brought in further Macau cheques. 

452.  And it was at this stage, so I believe and find, that Danny Lau became implicated in the Macau cheques saga by being persuaded into agreeing to send out the batch of Macau cheques on Elsie's and Chio's behalf, gambling on his opposite numbers not complaining about them – as he frankly admitted to the Court during cross-examination (albeit in relation to the second batch).  At that time, he knew that the Peconic deal was close at hand, and if concluded there would be more than sufficient money to meet the Macau cheques and meet them in time – given the time necessary for them to be cleared.  That may well have helped to ease his conscience.

453.  When other solicitors started to complain, he fell into the trap of yielding to the persuasion and pressure from Elsie Chan, Chio and even Poon Kam to do whatever he could to salvage the deal.  At that time, he knew that the Peconic deal was close at hand, if only he could persuade the solicitors for the head vendors to sign the sale and purchase agreements so that he could show them to JSM to conclude the sub-sale.  As I say, I do not find, and strictly speaking this is not Peconic's pleaded case, that at that stage, Danny Lau already knew that Chio was a director on the side of Peconic.  He could not – because Chio himself did not become a director of Peconic until 3 October 1991.  But nonetheless, he had known from Elsie Chan and Chio by then, so I find, that the resale was almost a certainty – if only he could manage to have the sale and purchase transactions with the head vendors concluded.  That was why he was prepared to give the undertakings.  That was also why he continued to send out the second batch of Macau cheques to other solicitors, hoping against hope that these other solicitors would not notice them or objected to them.

454.  Events continued to unfold themselves and his knowledge and suspicion increased.  By the 3^rd, things were turning for the better after he gave the undertakings and two cashier orders had been brought in by Elsie to replace two of the earlier Macau cheques.  Furthermore, the deal with JSM was being finalised.  On the 4^th, everything with the head vendors was being smoothed out, and eventually he managed to send the signed sale and purchase agreements over to JSM.  On the same day, the sub-sale and purchase agreement was signed, after the last hurdle – i.e. the guarantee by Poon Kam – had been solved.  As I say, I cannot believe Danny Lau's evidence that he had not thought of taking steps to protect Poon Kam's position, after all Poon Kam was both his client and relation.  He obtained a counter-guarantee – the so-called deed of indemnity – for Poon Kam from Chio and Elsie.

455.  It was at that stage, i.e. the signing of the sub-sale and purchase agreement by Asiagreat that he must have noticed from the execution clause that Chio was a director of Peconic.  Alternatively, he must have noticed that fact from JSM's letter dated 4 October.  By then, he must have realised what was going on, why there was such a need for all the secrecy and urgency, and Chio's role in it.  As I say, he did not at that stage and in those circumstances, see fit to ask JSM/Peconic or Elsie/Chio as to whether Chio had got the knowledge and approval of Peconic for him to earn the huge price difference as profit.  One can understand why, having got himself so much drawn into the transactions, he did not find it fit to ask.  As I say, he must have worked out the position himself in his mind.  He chose not to ask the ultimate question lest he would find out the answer.

456.  I say all this to deal with a pleading point raised by Mr Shieh as to what Danny Lau actually knew at various points in time and what actually has been pleaded against him.

– Causation –

457.  The above discussion is also relevant to a causation argument raised by Mr Shieh.  He said that since, ex hypothesi, Danny Lau only knew or suspected sufficiently to render his involvement in the transactions dishonest at the time of execution of the sub-sale and purchase agreement or slightly thereafter when JSM's letter was received, he did not cause the loss (i.e. the secret profit) under the first sub-sale agreement involving the first 15 transactions.  He should not be held liable for the secret profit earned by Chio under the first 15 transactions when he did not have all the requisite knowledge or suspicion.

458.  Mr Shieh argued that by the time Danny Lau knew/suspected sufficiently about the whole matter, the loss to Peconic had already been incurred, and by that stage, what Danny Lau could and ought to have done was simply to return the initial deposit to Asiagreat, his client, and cease to act.  The proceeds of sale and secret profit would still have been lost by Peconic under those circumstances.

459.  Put another way, Mr Shieh argued that although completion of the first sub-sale agreement was only to take place many months later, by 4 October 1991 when the sub-sale and purchase agreement was executed, everything was crystallized – Peconic had contractually bound itself to the transaction whereby it would lose a huge amount of money in terms of secret profit to Asiagreat/Elsie/Chio.  Regardless of what Danny Lau did or did not do thereafter, Peconic would have suffered the loss.

460.  I do not agree.  What Danny Lau could and ought to have done, when he realised that he had been rendering assistance to wrongdoers, was not only to cease to act for Asiagreat and Elsie Chan (with Chio behind her), but also to return the money to Peconic (see Soar v. Ashwell [1893] 2 QB 390, 405 per Kay LJ), or at least to keep the money with his firm pending Peconic's claim for its return or alternatively to seek interpleader relief.

461.  I disagree entirely with Mr Shieh's suggestion that what he ought to have done was to return the money to Asiagreat or its new solicitors.  This is because based on what he knew and suspected, Asiagreat itself was implicated in the wrongdoing and there is simply no question of Danny Lau releasing the proceeds to Asiagreat or its new solicitors.

462.  I bear firmly in mind that the burden of proof on causation lies with Peconic and not Mr Shieh's clients.  However, as I see it, unless I should conclude that the loss of the proceeds, i.e. the secret profit, was a forgone conclusion by 4 October – which I do not accept to be the case on the evidence before me, Mr Shieh's argument based on causation must be rejected.  (For the sake of completeness, I should point out that no similar argument of causation has been run on behalf of the Defendants in the first action.)

463.  In those circumstances, Danny Lau's continued acting for Asiagreat and Elsie Chan (with Chio behind her) in the acquisition/resale transactions and in the release of the proceeds of sale, after acquiring the requisite knowledge/suspicion, constituted dishonest assistance to Chio's wrongful breach of fiduciary duty towards Peconic.

– Secret reward? –

464.  As mentioned above, there has been some suggestion and indeed suspicion that Danny Lau has received a secret reward for his role in the whole matter, in addition to the very substantial legal fees that he and his firm were paid for their services.  In particular, there was a missing sum paid out of Poon Kam's huge commission earned in the acquisition exercise, the recipient of which is unknown.  But on the evidence, I am unable to make any positive finding in relation to it.  I make no adverse finding against Danny Lau in this regard.

Conclusion on dishonest assistance

465.  In conclusion, I uphold Peconic's claim based on dishonest assistance against Danny Lau.

Vicarious liability of the two firms of solicitors

466.  As regards the two firms of solicitors, it has been clarified by Mr Shieh in his final submission that Albert K K Luk is vicariously implicated in the first 18 transactions, whereas K F Lau as a firm is implicated in the 20^th transaction.  In relation to the 19^th transaction, it was done by Danny Lau through K F Lau & Co as a sole proprietorship of his.  So K F Lau as a firm was not involved in it.

467.  There is no longer any argument regarding the two firms' vicarious liability for Danny Lau's primary liability.  They must therefore be held liable vicariously in relation to the respective transactions in question, along with Danny Lau.

ILLEGALITY

The argument

468.  Danny Lau and the two firms of solicitors run in the second action a defence of illegality, based on a public policy encapsulated in the Latin maxim ex turpi causa non oritur actio – an action does not arise from a base cause.

469.  Mr Shieh put his client's argument on illegality in his final submission as follows: Peconic is not suing on a contract said to be tainted by illegality or which is said to have been concluded with an illegal objective in mind.  The claim by Peconic is akin to a tortuous claim against alleged wrongdoers.  Senior counsel then referred to two English Court of Appeal decisions, namely Cross v. Kirby (unreported, 18 February 2000) and Hewison v. Meridian Shipping Pte [2003] PIQR 252 for a number of general principles that he advanced.

470.  First, Mr Shieh argued that the correct approach is not to ask the question of whether recovery by the plaintiff would be an affront to ordinary members of the public: Hewison at paras. 22 to 26.

471.  Secondly, counsel said that whether a claim is brought in contract or tort, public policy only requires the court to deny its assistance to the plaintiff seeking to enforce a cause of action if he was implicated in the illegality and in putting forward his case he seeks to rely upon the illegal act: Hewison at paras. 24 to 27, citing Clunis v. Camden and Islington Health Authority [1998] QB 978 at 986H-989E (per Beldam LJ).  The test is a broad one – Is the claim or the relevant part of it based substantially (and not therefore collaterally or insignificantly) on an unlawful act?  Hewison at para. 36 (per Clarke LJ) and para. 51 (per Tuckey LJ).

472.  Mr Shieh further argued that there is, however, no general principle that the plaintiff must either plead, give evidence of or rely on his own illegality for the principle to apply.  The principle (barring recovery) applies when the plaintiff's claim is so closely connected or inextricably bound up with his own criminal or illegal conduct that the court should not permit him to recover without appearing to condone that conduct: Cross v. Kirby (per Beldam LJ).

473.  On that basis, Mr Shieh sought to brush aside cases like Tinsley v. Milligan [1994] 1 AC 340, which placed emphasis on whether a plaintiff, in an action seeking to enforce or vindicate his proprietary right in the subject matter of dispute, needs to rely on and assert, and therefore plead, his own illegality, in determining whether the claim is caught by the doctrine of ex turpi causa.  Mr Shieh argued that the requirements of pleading do not provide a real clue to the question of illegality.

474.  The thrust of Mr Shieh's case on illegality is that the Guangdong Branch or the Foshan Sub-branch of the Bank has, in forming Peconic as a joint venture vehicle in Hong Kong for the acquisition of the properties, and/or in injecting money into the joint venture, breached a number of rules and regulations applicable to them in the Mainland.  Enforcing Peconic's claim, counsel argued, would give the appearance of condoning the illegal conduct because Peconic's claim is closely connected or inextricably bound up with the Bank's illegal conduct.  The Court could not permit Peconic to recover without appearing to condone that conduct.

475.  As Mr Shieh's case on illegality is premised on some breaches of rules and regulations in the Mainland, I will now turn to those rules and regulations.  For that purpose, the Court has heard expert evidence on Mainland law.  Having heard the expert evidence and considered the expert reports as well as the relevant rules and regulations, it is plain that some of these rules and regulations have indeed been breached.  In this regard, I accept Mr Shieh's description of the position set out in paragraphs 327 and 328 of his written closing submission.  In fact in final submission, Mr Scott did not seriously submit otherwise.  The following paragraphs summarize the position.

Mainland rules and regulations

– Regulations on the Administration of Foreign Exchange Business of the Foreign Exchange Designated Banks (“the 1990 Regulations”) –

476.  Article 22 provides for an approval requirement in respect of offshore loans made by a domestic institution of a designated bank.  If the US$40 million remitted to Star Glory in Hong Kong amounted to loans by the Bank in the Mainland, then Article 22 has been infringed, irrespective of whether the loans were made by the Guangdong Branch or the Foshan Sub-branch.

– Interim Regulations on Foreign Exchange Control (“the Interim Regulations”) –

477.  Article 6 prohibits a domestic institution, in the absence of the relevant approvals, from keeping foreign deposits abroad.  It also prohibits a domestic institution from transferring foreign currency deposits belonging to its subsidiary abroad.

478.  If the remittances to Star Glory were not loans but simply deposit of foreign currency deposits abroad, then article 6 of the interim regulations would have been infringed.

479.  Peconic's own expert (Mr Lin) acknowledged in the box that article 6 would apply, even if the transfer by a domestic institution to a foreign subsidiary concerned foreign currency already placed in a foreign bank account.

480.  Article 11 of the Interim Regulations prohibits an offshore entity from keeping foreign currency deposits for a domestic institution.

481.  In the present case, the remittances, whether from the Guangdong Branch or the Foshan Sub-branch, went first to Star Glory from the remitting accounts before payments were made in respect of the purchase of the properties.  That amounted to “keeping” of the monies by Star Glory, thus infringing Article 11.

– No. 62 Circular/Guo Fa 62 –

482.  The Circular sets out the registration and approval requirements for the setting up of organizations in Hong Kong and Macau.  Guo Fa 62 has no retrospective effect.

483.  However, article 14 provides for “ratificatory” approval for organizations which were established prior to the coming into force of Guo Fa 62.

484.  Guo Fa 62 applies to not only solely owned enterprises, but also joint venture enterprises such as Peconic.

485.  As Guo Fa 62 did not have retrospective effect, no infringement as such was involved in relation to the setting up of Peconic in Hong Kong.

– Implementation Rules of the Administrative Measures regarding Foreign Exchange of Overseas Investments (“the Implementation Rules”), implementing the 1989 Administrative Measures on Foreign Exchange (“the 1989 Administrative Measures”) –

486.  Articles 3 and 4 of the 1989 Administrative Measures stipulated various approvals and procedures which had to be obtained and gone through before an investment could be made abroad.  Article 5(3) of the Implementation Rules required a feasibility study verified by a firm of accountants registered in the place of investment.

487.  As there is no evidence that either the Guangdong Branch or the Foshan Sub-branch had prepared the feasibility study or obtained and gone through the various approvals and procedures required, the investment in the properties through Peconic, the joint venture vehicle, breached the provisions in the Administrative Measures and Implementation Rules.

– Overseas Investment Opinion –

488.  Article 2 of the Opinion prescribed certain approval requirements for investments above certain thresholds.  Either the Guangdong Branch or the Foshan Sub-branch failed to comply with the approval requirements.

– 1989 Notice of the Opinion on the Issues relating to the Registration of Titles etc. and 1991 Regulations on the Handling of Notarization of Trust Agreements etc. –

489.  Both sets of rules dealt with the holding of “state investment” in the names of trustees or nominees.

490.  The requirements have not been complied with by either the Guangdong Branch or the Foshan Sub-branch, depending on which one of them was the investor.

– Financial Audit Rules –

491.  Article 10 would apply to the situation where the Guangdong Branch made short-term loans to the Foshan Sub-branch but the sub-branch used the short-term loans for the purpose of a long-term fixed asset loan to Star Glory.  If that was the case, then article 10 would be infringed.

492.  This turns on whether the Guangdong Branch or the Foshan Sub-branch was the investor.

Was the Guangdong Branch a mere moneylender or an investor/co-investor?

493.  This conveniently brings me to a factual dispute that has been alluded to on more than one occasion in this long judgment, namely whether the Guangdong Branch was a mere lender of monies or an investor/a co-investor (along with the Foshan Sub-branch) in the joint venture.  To recapitulate, it was the oral evidence of the bank officials, particularly Mr Foo (PW1) and Mr Huang (PW3) that the initial role of the Guangdong Branch was just a mere lender of monies to the Foshan Sub-branch, which was the entity investing in the properties via the joint venture vehicle, Peconic.  It was only in 1993 that the loans were converted into shareholdings and the Guangdong Branch, through nominees, became directly interested in Peconic as shareholder.  Some shareholdings were then carved out and they went to the hands of outsiders.

494.  This factual dispute is, in my view, wholly academic.  For the purpose of Peconic's claim in the two actions, it is not of consequence whether it was the Guangdong Branch or the Foshan Sub-branch which was the branch investing in the acquisition of the properties.

495.  And in relation to Danny Lau's and the two solicitors firms' defence based on illegality, it does not make any difference which branch was the investing branch, so long as one or both of them were in breach of the rules and regulations in the Mainland that they relied on.  The success or failure of the illegality defence does not turn on this factual dispute.

496.  In those circumstances, I do not intend at all to lengthen this long judgment by a detailed examination of the facts and evidence.  In short, I agree with Mr Shieh's analysis of the evidence set out in paragraphs 329 to 346 of his written closing submission, to this extent – that the Guangdong Branch was a 50% investor in the joint venture, whereas the Foshan Sub-branch was a 25% investor.  In other words, Chen held his 50% on trust for the Guangdong Branch, whereas Li (PW4) held his 25% as nominee and trustee for the Foshan Sub-branch.

497.  In short, there are ample documentary evidence and materials to support this finding.  There are contemporaneous documents and minutes showing the distribution of investment between the branch and the sub-branch.  Chen's story in this regard did not change between 1991 as per the Foshan Sub-branch's internal minutes dated 12 October 1991 and 1999 as per Chen's ICAC statement given on 14 September 1999.  PW2 (Li)'s evidence in the criminal proceedings was to the same effect (14 August 2000).  Moreover, even Peconic's pleadings initially put forward such a position.

498.  On the other hand, there is little if any contemporaneous documentary evidence to support the oral assertions of PW1 and PW3 that the Guangdong Branch was merely a lender, apart from perhaps PW1's ICAC statement given on 22 October 1999.  I am not particularly impressed by the two so-called short-term loan agreements between the Guangdong Branch and the Foshan Sub-branch in respect of the two sums of US$20 million each.

499.  The minutes which Mr Huang said evidenced the conversion of the so-called loans made by the Guangdong Branch to the Foshan Sub-branch to shareholdings in early 1993 did not really support what the witness asserted.  In fact, the minutes (paragraph 1) referred to a meeting on 1 March 1993 in Zhongshan and mentioned an “internal confirmation of shareholdings”, which Mr Huang took to mean the conversion of the loans to shareholdings.  But as Mr Shieh has correctly pointed out in his closing submission (paragraph 342), the word used was “confirmation”, rather than conversion.  Far from evidencing Mr Huang's oral assertion, it actually contradicted it.

500.  Amongst the documentary evidence, one finds Star Glory's books of accounts which treated, at least for accounting purposes, one of the remittances as being a remittance by the Guangdong Branch, even though the money was actually remitted by the Foshan Sub-branch to Star Glory.  If the Guangdong Branch was a mere lender, then given the fact that the money was actually remitted not by the Guangdong Branch directly to Star Glory as was the case with the previous remittances, but by the Foshan Sub-branch to Star Glory, that particular remittance ought to have been credited as the remittance from the Foshan Sub-branch as part of its investment in Peconic.  Yet the maker of the books of accounts clearly perceived that remittance from the Foshan Sub-branch as being a remittance from the Guangdong Branch.

501.  At a meeting of the Foshan Sub-branch held on 2 January 1992, Chen reported that Foo had asked for a quick sale of the properties or to let the Guangdong Branch have a $80 million “profit” – that request was quite inconsistent with Foo's evidence that the Guangdong Branch was a mere lender of money at that time.

502.  The witnesses called by Peconic simply could not explain all this.

503.  As I say, I do not wish to dwell on the factual details.  I have already expressed my agreement with Mr Shieh's analysis of the evidence in this regard.  To that extent, I do not accept the evidence to the contrary by the factual witnesses of Peconic. 

504.  For the avoidance of doubt, I should point out that I have also borne this firmly in mind when I assess the credibility of these witnesses and in particular, when I consider whether I should accept their evidence in relation to other matters relevant to Peconic's claim against the Defendants in the two actions.  I have already set out my findings above.  As Mr Shieh himself has lost no time to point out during final submission, rejection of one part of a witness's evidence does not necessarily mean that the witness is generally not credible or that the other parts of his evidence must also be rejected.  There are many reasons why a witness may fail to tell the truth or the whole truth in the box.  In a civil trial, the fact that a witness has failed to tell the truth or told a lie on a particular point is certainly relevant in considering whether other parts of his evidence should be accepted, but that by no means is a conclusive factor.

Breach of the Mainland rules and regulations

505.  Mr Shieh has in paragraphs 347 and 348 of his written closing submission set out the breaches of the Mainland rules and regulations that had occurred on two alternative bases, namely that the Guangdong Branch was the investor and that the Foshan Sub-branch was the investor respectively.  As I have found that both the Guangdong Branch and the Foshan Sub-branch were investors, in terms of 50% and 25% respectively, both scenarios described by Mr Shieh in the two paragraphs apply respectively to those extents.  I just wish to say that I agree with his analysis of the position, in terms of breach of the Mainland rules and regulations.

A side argument – Bank's awareness of falsity of Chio's representations

506.  But where does all this lead us?

507.  Before I answer that, I must first get rid of one side argument.  It has been faintly suggested on behalf of Danny Lau and the two firms of solicitors that given the regulatory regime in the Mainland, it is open to the Court to assume that the Guangdong Branch and/or the Foshan Sub-branch (being law-abiding institutions) had complied with the relevant legal requirements.  And if they had done so, the argument runs, they must have been aware of the falsity of the representations made by Chio to the bank officials.  Yet notwithstanding that, they chose to invest in the properties via Peconic.  It therefore does not lie in the mouth of the Bank, and therefore that of Peconic, to complain about misrepresentations or breach of fiduciary duty, and thus there is no question of dishonest assistance by Danny Lau.

508.  On the facts, I do not accept this suggestion at all.  The bank officials who gave evidence all testified to the fact that they had not obtained any approvals from the relevant authorities or got any feasibility study regarding the investment.  Whilst they did not agree that they had breached any provisions, for the purpose of dealing with Mr Shieh's alternative argument, all I need say is that there is simply no or insufficient evidence to support any finding that the bank officials had complied with the legal requirements and were therefore aware of the falsity of Chio's misrepresentations.

Is Peconic's claim affected by the Bank's illegality?

509.  Returning to the defence of illegality, it is plain that Mr Shieh's argument has a number of hurdles to overcome.  First, one is concerned here with a claim by Peconic against Danny Lau and the two firms of solicitors, not a claim by either the Guangdong Branch or the Foshan Sub-branch against the Defendants.  Still less are we concerned with a claim by the Bank (with its head office in Beijing), as distinct from the branch and the sub-branch, against the Defendants.

510.  Moreover, Peconic has its own shareholders, some of whom are wholly unconnected with the Bank, the Guangdong Branch or the Foshan Sub-branch.

511.  Mr Shieh sought to overcome all this by arguing that illegality which defeats a claim is not limited to illegal acts committed by the plaintiff; it must also extend to illegal acts to which the plaintiff was privy.  Counsel argued that in an area such as public policy the court must look at substance and not form.

512.  Mr Shieh went on to argue that on the facts Peconic was but a vehicle of the “investing branch” or branches of the Bank for investing in the properties.  The fact that the funds of the Guangdong branch or Foshan Sub-branch went through the intermediate designation of Star Glory, a window company of the Foshan Sub-branch, cannot make the case any different from, say, a case where the Foshan Sub-branch or the Guangdong Branch had sent the money straight to Peconic.  Nor is there any real difference with a case where the Foshan Sub-branch or the Guangdong Branch had come to Hong Kong and purchased the properties in its own name.

513.  Mr Shieh also argued on the facts that participation of an outsider (Foshan Second Light Industry Bureau – “Second Light”) makes no difference to the analysis because it only became involved at the later stage of the transactions sometime in 1992.  By that time the investment had already been made (or substantially made).  If the claim by Peconic had been “tainted” right at the outset, it cannot be saved later simply because the Guangdong Branch or the Foshan Sub-branch chose to hive off part of their investment to Second Light.

514.  Mr Shieh cited no direct authority to support his argument.  I agree as a matter of general principle that in the context of public policy or illegality, the courts are more inclined to look at the substance rather than form.  Thus in an extreme case, such as where a wholly owned subsidiary was used to do something illegal, the court would be more than ready to equate the subsidiary with its parent company.

515.  However, in the present case, from the outset, Peconic was a joint venture.  Besides the Bank, which owned 75% shareholdings between the branch and sub-branch, Chio himself was a 25% shareholder.  The fact that Chio happened to be the culprit in the present case does not change the nature of Peconic, i.e. that it was a joint venture company with different shareholders/joint venture partners.

516.  Regardless of how serious Chio's wrongdoing in the present case has been, the one thing that he was not guilty of was breaching the rules and regulations in the Mainland that applied only to the Bank.

517.  In those circumstances, one must ask, from first principles – given that Mr Shieh was unable to cite any direct authority on the point, why should a claim by Peconic to seek equitable damages against an outside wrongdoer be affected by a breach of rules and regulations by one of its shareholders – albeit a majority shareholder?

518.  The logic of Mr Shieh's argument would apply to a claim by Peconic against, say (hypothetically), a defaulting landowner from whom Peconic had contracted to buy one of the properties in question.  Suppose that landowner reneged on the agreement to sell and refused to return the deposit, and is therefore sued by Peconic for recovery of the deposit.  Now the deposit came from monies forming part of the investment made by the Bank without complying with the relevant rules and regulations in the Mainland.  According to the logic of Mr Shieh's argument, Peconic should not be allowed to recover the deposit from the landowner because its claim is “so closely connected or inextricably bound up with” the bank's illegality in failing to comply with the relevant rules and regulations in the Mainland.

519.  And if one should vary the facts slightly and say that the minority shareholder (Chio) has also contributed towards the capital of Peconic so that part of the deposit sought to be recovered actually came from the capital contribution made by the minority shareholder, who was not guilty of breaching the rules and regulations in the Mainland.  The logic of Mr Shieh's argument would require the court to deny recovery because the whole claim is still be so closely and inextricably bound with the illegality committed in the Mainland, despite the contribution from the innocent minority shareholder.

520.  I see no justification for any such position.

521. On the facts of the present case, Chio did contribute over $4.5 million towards the capital of Peconic.  Although that amount fell much short of his 25% shareholdings or commitment, it was by no means an insubstantial amount on its own.  Moreover, Chio was not guilty of breaching the relevant rules and regulations.  Why should the claim of his company suffer because the majority shareholder has breached some rules and regulations in the Mainland?

522. One can easily think of other examples to illustrate the fallacy of Mr Shieh's argument.

523.  Furthermore, I do not agree that the involvement of a new shareholder like Second Light does not change the position.  It might be that before the introduction of the wholly innocent new shareholder (i.e. Second Light), the court would be more ready to equate Peconic with the Bank, which had breached the rules and regulations.  But the scenario has changed with the introduction of Second Light as new shareholder, an innocent third party for valuable consideration without notice.  Although I am not directly concerned with equity's darling here, I am nonetheless discussing Mr Shieh's argument on first principles, as apart from first principles, Mr Shieh managed to find no authorities to support his argument.

524.  Once an innocent third party like Second Light has become a shareholder in Peconic, I think the picture has completely changed.  One simply cannot equate Peconic with the Bank without doing a grave injustice to Second Light.

525.  One must not forget that in the present context, one is concerned with whether the Court should enforce a claim.  Whether a claim should be enforced by the Court should be judged at the time when enforcement is sought before the Court.  The Court is concerned with the present position, in terms of public policy, justice and fairness.  It would be quite unfair to the new and wholly innocent shareholder, and thus Peconic itself, to deny recovery for a purely historical reason.

526.  The law is full of examples of a change in position bringing about a change in relief available.  Thus in equity, the coming into the picture of a bona fide purchaser of the legal title for value without notice would generally defeat a prior equitable claim.  And a change in position, typically due to the purchase by an innocent third party without notice, would as a rule make an otherwise voidable transaction no longer capable of being rescinded at the instance of the injured party, who is left to the remedy of damages against the wrongdoer.

527.  In these instances, no one has found it fit to criticise the court for condoning the original wrongdoing by denying the primary remedy to the victim and upholding the innocent third party/purchaser's title or interest in the property or transaction in question.  Likewise, I do not see how the Court can be criticised for condoning the Bank's failure to comply with the rules and regulations in the Mainland by allowing Peconic, the shares of which are now owned not only by the Bank but also by an innocent third party, to recover equitable damages from those who have wronged the company.

528.  For all these reasons, I reject Mr Shieh's argument.  That being so, the whole defence based on illegality fails.

Illegality under foreign law

529.  For the sake of completeness, I would go on to deal with the further hurdles faced by Mr Shieh in his argument.  The next hurdle is the fact that one is not concerned with infringement of any local rules and regulations.  One is concerned with breach by the Bank and its branch/sub-branch of rules and regulations in the Mainland.  Those rules and regulations are not law of Hong Kong.

530.  Again, Mr Shieh was forced to fall back on first principles to argue that whether the illegality concerned local or foreign law, the same general principles should apply.  No authority was cited.

531.  For my part, I do derive some assistance from how the law of contract deals with enforcement of a contract in England in a case where it is illegal by a foreign law other than the law applicable to the contract.  Thus Chitty on Contracts (29^th ed.) Vol. 1, para 16-031 reads:

“Illegality under foreign law applicable to contract.  Is a contract unenforceable in England in a case where it is illegal by a foreign law other than the law applicable to the contract?  The decisions on this question are somewhat confusing, but the following propositions appear to represent the law before the adoption of the Rome Convention.  First, the English courts would not enforce any contract the recognition of which might constitute a hostile act against a foreign friendly government.  Thus, in De Wützv Hendricks the plaintiff, in order to raise a loan in support of Greek rebels against their Turkish government, deposited with the defendant certain papers.  The loan having fallen through, the purpose of the transaction which encompassed the overthrow of a friendly government prevented the plaintiff recovering the papers.  Likewise in Regazzoni v K.C. Sethia (1994) Ltd a contract to export a commodity from India to South Africa contrary to the law of the former country was held unenforceable.  And although the English courts have refused to enforce a penal law at the suit of a foreign state, nevertheless they will not enforce a contract which involves the breach of such a law, or grant equitable relief to one whose claim is based on such breach unless the law in question was “repugnant to English conceptions of what may be regarded as within the ordinary field of legislation or administrative order even in this country” or such that its enforcement would be against “morals.”  English courts have also refused to enforce a contract where the common intention of the parties was to violate the law of a foreign friendly state.  The above principle, however, has not been extended to cases where there was a mere sale in England in the knowledge that the goods were to be imported into a foreign country contrary to the revenue law of that country or where there was the giving of an English cheque as part of an arrangement which, as the parties knew and intended, would involve the doing of acts in a foreign country which were criminal by the laws of that country.  Nor has the fact that strict compliance with the contract would cause a party to perform illegal acts contravening exchange control regulations in the country of his residence, or place of business, prevented the English court from upholding the contract and awarding damages in the event of its breach.  The explanation of these cases was that performance of the contracts did not “necessarily” involve the doing of an act which was unlawful by the law of the place where it had to be carried out.  Difficulties have been encountered in ascertaining whether performance of a contract involves such an illegal act.  In making this assessment it was said to be “immaterial whether one party has to equip himself for performance by an illegal act in another country.  What matters is whether performance itself necessarily involves such an act.”  But all these matters may now require reconsideration in the light of the Rome Convention.”

532.  Kleinwort, Sons & Co. v. Ungarische Baumwolle Industri Aktiengesellschaft [1939] 2 KB 678 is instructive.  In that case, bills of exchange were drawn by a Hungarian company on an English bank payable in three months in London.  The applicable legislation in Hungary made it illegal for Hungarian subjects to pay money outside Hungary without the consent of the Hungarian National Bank.  No consent was obtained for payment of the bills.  The bills were not honoured and the plaintiffs, who were bankers carrying on business in London, brought an action against the Hungarian company and the Hungarian bank claiming payment of the amount of the bills and interest.

533.  The English Court of Appeal held that the proper law of the contract was English law and that since the contract was to be performed in England, it was enforceable in the English courts, even though its performance might involve a breach by the defendants of the law of Hungary.  Du Parcq LJ said at pp. 698 to 699 as follows:

“The question in this case is whether one can go very much further than any decision ever has done and say that if a sovereign State chooses to enact that, if one of its subjects, obeying the law of a foreign country, carries out in that foreign country a contract which he has made according to its laws, he will be committing an offence against the laws of his own country, then the Courts of England must say:  “We cannot compel you to keep your contract because, if you “do, you will be breaking the law of your sovereign State.”  I think that the answer to that suggestion ought to be a very emphatic negative.  I do not say for a moment that a sovereign State may not legislate to control the acts of its subjects beyond its borders.  Of course it may.  Nothing can prevent a sovereign State from so legislating, and it is a matter with which these Courts have no concern.  But it is right that it should be understood that, if a sovereign State legislates so as to interfere with the acts of its subjects outside its own territory and, in a sense, its own jurisdiction, then it cannot expect – and I suppose that no State would expect – that the Courts of another country will enforce that legislation at the expense of their own laws.  Primarily it is our business to see that English contracts are observed and carried out according to English law.  It is an exception to that rule that if, in carrying out a contract, the law of the place where it is performed will be broken, to that extent the contract is treated as invalid.  Here the place where the contract is to be performed is London.  For all we know the defendants may have money due to them in London from British creditors, on payment of which they will be in a position to pay the plaintiffs' just demand.  In those circumstances I have no doubt at all that it would be quite inconsistent with principle to hold that the argument put forward on behalf of the defendants should prevail.”

534.  Atkinson J said at pp. 700 – 701 as follows:

“In this contract the obligation is to pay certain money in London, and the contract is not concerned with the steps which the debtors may have to take to put themselves in a position to pay.  It is concerned only with the payment itself, which is to be made in this country.  This contractual obligation, in my view, does not come within the exception to the rule as stated in Dicey, or by Scrutton L.J. in Ralli's case.  It would indeed be intolerable if English creditors, in respect of obligations to be performed here, could be deprived of their rights by Hungarian decrees making it unlawful for debtors to pay.

I would like to add that in my opinion there is nothing in the agreed statement of facts which negatives the possibility of the judgment being enforced in this country without involving any act on the part of the defendants contrary to Hungarian decrees.”

535.  Of course, in Kleinwort the party who would be acting in breach of foreign law was a defendant, whereas in the present case Peconic is the Plaintiff.  But there can be no valid distribution between the two situations.  In Kleinwort, the court was concerned with not giving the appearance that it was coercing the defendant to breach a foreign law; in the present case, the Court should strive to avoid giving the appearance of condoning a breach of foreign law by somebody closely connected with the Plaintiff.

536.  Chitty has pointed out in the passage extracted above that the explanation for cases like Kleinwort was that performance of the contract did not “necessarily” involve the doing of an act which was unlawful by the law of the place where it had to be carried out; indeed Atkinson J has said as much in the passage quoted above:  Libyan Arab Foreign Bank v. Bankers Trust Co. [1989] QB 728, 743 – 746 (per Staughton J).

537.  In my view, the essence of the test of “necessary involvement” is that it draws a distinction between the core facts of the claim and its background facts.  An illegality that “necessarily” follows from, or leads to, facts crucial to a claim may logically and rationally be regarded as part and parcel of those facts.  An illegality that may or may not follow from, or lead to, facts crucial to a claim should, on the other hand, be treated simply as part of the non-essential background of the claim.  In the former case, it is right that the illegality should affect the claim because it forms part and parcel of the facts crucial to it.  In the latter case, the background illegality should not be allowed to affect the claim.

538.  Of course, all this is said in the context of law of contract.  But Mr Shieh has argued, by reference to authorities, that there is just one law on illegality based on public policy, which applies to all branches of law regardless of the precise cause of action in question.  I think the development of the law on illegality in the context of contracts is instructive here.  Amongst other things, the test of “necessary involvement” and the rational behind it highlights the importance to look at the cause of action involved and the requisite facts in support of it.  After all, the court is asked to refuse enforcement of a claim on the ground of public policy.  And public policy can only be gauged in context and the context is provided by the cause of action and the supporting facts.

539.  In the present case, the claim against Danny Lau is based on dishonest assistance.  It related to the breach of fiduciary duty owed by a director of Peconic to the company by earning secret profits behind the back of the company.  No doubt the profits originated from monies injected by the Bank to Peconic.  But that only formed the background.  The gist of the claim in the present case is that a director has breached his director's duty in earning secret profits from his own company, and an outsider (i.e. Danny Lau) has dishonestly assisted the director in doing so.  What the law and the Court are being asked to do is to make the dishonest assister (Danny Lau) pay equitable damages to the company for the wrong that he has so done to the company.

540.  The Court is in essence being asked to put its mark of disapproval on the act of dishonest assistance and grant compensatory relief.  That is the essence of the claim.

541.  Thus analysed, it is difficult to see how what happened before – i.e. that in breach of the regulatory rules and regulations in the Mainland, the Bank had set up Peconic and injected money into it for the purpose of acquiring the properties, should affect such a claim by Peconic against the dishonest assister.  As I said, all that went before only formed the background.  The claim as such did not really concern or turn on what had happened before.  That, in my judgment, is a sufficient answer to Mr Shieh's argument.

542.  In any event, a more general answer, quite independent of the “necessary involvement” test, is this:  Regardless of whether Peconic, which was incorporated in Hong Kong fully in accordance with the laws here, was formed in contravention of the applicable rules and regulations in the Mainland vis-à-vis the Bank, and regardless of whether Peconic's monies came from the Bank in infringement of the rules and regulations in the Mainland, what Chio, the defaulting director, has done was still unlawful according to Hong Kong law, and likewise what his accessory – Danny Lau – has done by way of dishonest assistance was still something contrary to the rules of equity applicable in Hong Kong.  The wrongs were done in Hong Kong against Hong Kong law.

543.  A Hong Kong court has every right and indeed duty to sanction such wrongs committed within its jurisdiction in contravention of its own law.  Not to enforce Peconic's claim would, in my view, amount to condoning such wrongdoing committed within the Court's jurisdiction.  To my mind, that is the primary and overriding consideration in the present case.

544.  As the Court of Appeal said in Kleinwort, the contract made in England must be enforced as a rule.  Otherwise, the law of contract in England would lose its credibility.

545.  Likewise, the wrongdoing committed in this jurisdiction in terms of breach of fiduciary duty (secret profits) and dishonest assistance of such a breach of fiduciary duty must be sanctioned by the Hong Kong court, otherwise the law here would lose its credibility.  As I say, that is the primary and overriding consideration.

546.  Taken to the highest, Mr Shieh's argument would only mean that to enforce such a claim would or might at the same time give the appearance that the local court is condoning the infringement of some foreign rules and regulations.

547.  Grant that sort of appearance.  When compared with the paramount importance for the Court not to condone wrongdoing done within its jurisdiction in terms of breach of fiduciary duty and dishonest assistance, the consideration put forward by Mr Shieh pales into insignificance.

548.  Of course, I am restricting my observations to the facts of the present case.  What is in issue is the breach of some Mainland rules and regulations relating to financial matters, foreign exchange, and overseas investment by Mainland entities.  I am not concerned with serious crimes according to Mainland law, such as treason, murder or serious commercial fraud.

549.  For all these reasons, I also reject the second part of Mr Shieh's argument.  That is an additional or alternative reason for rejecting the defence based on illegality.

Is Peconic's claim so connected or inextricably bound up with the Bank's illegality that the Court could not permit Peconic to recover without appearing to condone that illegality?

550.  Thirdly, even assuming that Mr Shieh's argument could overcome all these difficulties, and we move on to apply the test advocated by Mr Shieh, namely whether Peconic's claim is so closely connected or inextricably bound up with the Bank's illegal conduct that the Court could not permit Peconic to recover without appearing to condone that conduct, I am afraid I am still not with Mr Shieh.

551.  Mr Shieh argued that enforcing Peconic's claim could give the appearance of condoning the illegal conduct.  He argued that the fact that the policy behind the subject rules and regulations in the Mainland was to safeguard state-owned assets does not mean that Peconic's claim should be enforced.  To refuse enforcement would lead to sterner and more rigid measures of compliance in the future.

552.  Senior counsel further argued that to render assistance by enforcing Peconic's claim would simply create the impression that the rules and regulations could continue to be flouted at will and still the Hong Kong courts would assist the “flouter” (and entities privy to the flouting) in recovering the unlawfully repatriated funds.  Refusing assistance on this occasion might be “painful” to the particular plaintiff (Peconic) but in the long run it would be conducive to the protection and safeguarding of state-owned assets.

553.  Mr Shieh also argued that inability to recover anything in Hong Kong based on illegality would no doubt have serious repercussions for the branches and personnel concerned in the Mainland, and put bluntly that would be how they would “learn their lesson”.

554.  I do not think these are really important considerations.  I doubt whether they are relevant considerations at all.

555.  Mr Shieh's suggested considerations, with respect, confuse what the policy or rationale behind a piece of foreign legislation is and what the best ways to implement or further that policy or rationale are.

556.  In my judgment, the rationale or policy behind the relevant rules and regulations in the Mainland here is obvious: the protection of state-owned funds from unauthorised investments overseas, and the control of foreign exchange.

557.  That is the whole thrust of the regulatory regime.

558.  Therefore the crucial question here (assuming all other matters in Mr Shieh's favour) is: whether enforcement of Peconic's claim would go against the policy or rationale.  The answer must be “no”.  Enforcement of the claim would achieve the contrary, i.e. recovery of lost state-owned funds.

559.  Mr Shieh's suggested considerations do not go to the obvious policy or rationale behind the rules and regulations.  They go to how that policy or rationale could be furthered or better implemented or promoted.  I am sure there are many possible ways of furthering the policy or rationale in question.  That is a matter for the Mainland government and authorities.  I wholly disagree with the proposition implicit in Mr Shieh's suggested considerations that a Hong Kong court should be involved in considering how the policy or rationale behind a piece of foreign legislation could be furthered by deciding a case before it in a particular way.

560.  It must be remembered that the question or focus in issue is whether enforcement of a claim in the local court would give the appearance that it is condoning the breach of a piece of foreign legislation.  To answer that question, the focus of inquiry must be on whether enforcement of the claim by the Hong Kong court would go contrary to the policy or rationale behind that piece of foreign legislation.  Beyond that, a Hong Kong court need not and, in my judgment, must not venture.  It is no business of a Hong Kong court to consider how a policy or rationale behind a piece of foreign legislation could be better implemented or furthered by deciding a case that is pending before it in a particular way.

561.  I should not be taken as agreeing with Mr Shieh that refusal to enforce the recovery claim would better promote the policy underlying the rules and regulations – I need not express any view on it.  All I note is that those rules and regulations themselves do not provide for such a drastic consequence for contravention.  It would be quite surprising for a Hong Kong court to adopt the draconian course suggested by Mr Shieh in those circumstances.

562.  For these reasons, I also reject Mr Shieh's argument.  Needless to say, this is yet another additional or alternative ground for rejecting the argument based on illegality.

The “public conscience” test

563.  That said, I am reluctant to be drawn into the debate as to whether the so-called “public conscience” test used by the Court of Appeal in Chung Man Yau v. Sihon Co. Ltd [1997] 1 HKLRD 1221 should no longer be followed in Hong Kong, in light of the development of law in England, as Mr Shieh has submitted.  To recapitulate, Mr Shieh submitted that the public conscience test, which seeks to answer the question of illegality by asking whether in all the circumstances it would affront the public conscience or offend the ordinary right-thinking citizen if a claim is upheld (see Chung Man Yau at p. 1227D–E per Mortimer V-P), has been expressly rejected by the English Court of Appeal in Hewison (at paras. 22-26 per Clarke LJ and para. 49 per Tuckey LJ). 

564.  Nor need I dwell on whether this Court is free to depart from the test adopted by the Court of Appeal in Chung Man Yau and adopt the more recent test propounded in the English cases referred to by Mr Shieh.  I prefer not to express any view on the matter, apart from saying that, yet again contrary to Mr Shieh's alternative argument, if the public conscience test is the applicable test, my answer is still in favour of enforcing Peconic's claim.

565.  My reason is essentially the same.  I fail to see how the public conscience would be affronted or how an ordinary right-thinking citizen in Hong Kong could be offended if this Court were to enforce Peconic's claim against Danny Lau and the two solicitors firms, merely because Peconic was formed by one of its shareholders (i.e. the Bank) in breach of some investment rules and regulations in the Mainland and that Peconic's monies were injected into it by the Bank in breach of some rules and regulations in the Mainland.

566.  Again, Mr Shieh's argument relating to the test of public conscience went to matters that properly belong to the government or relevant authorities in the Mainland, rather than a court of law in Hong Kong. 

567.  As I say, the court is only concerned with whether enforcing a claim here would be seen to be going against the rationale or policy, insofar as it can be ascertained, behind a piece of foreign legislation.  If the answer is “no”, the court is really not concerned with how such a policy or rationale can be furthered by deciding the case before it in a particular way.  That is no business of the local court.

Conclusion

568.  For all these reasons, Mr Shieh's argument based on illegality is wholly rejected.

LIMITATION AND OTHER EQUITABLE DEFENCES

Parties' positions on limitation

569.  I now turn to the vexed question of limitation.  All Defendants in the two actions raised the limitation defence.  That is not surprising because whilst the subject matters of complaint mainly happened between mid 1991 and early 1993, the first action was not commenced until 13 October 1999, whereas the action against Danny Lau and the two firms of solicitors was only commenced on 12 August 2002.

570.  During final submission, Leung Hiu Ling, the 4^th Defendant in the first action, through counsel confirmed with the Court that she no longer relied on the limitation defence.  As for Elsie Chan and Wong Shiu-wai, Mr Kevin Egan on their behalf did not make any submission on limitation at all.  However, he did not formally withdraw the defence, but simply adopted whatever points on limitation that might be applicable to the claims against his clients, which were to be raised by Mr Shieh on behalf of his clients in his closing submission.

571.  On the other hand, the question of limitation was a major area of debate between Mr Shieh and Mr Scott in final submission, and much time was expended on it.  Literally dozens of cases and authorities were cited to the Court in support of the respective contentions.

572.  It is not my intention nor function to write a discourse on the relevant law of limitation.  In the following part of the judgment, I will attempt to discuss the law in the light of the facts and arguments that have been raised, and decide the arguments on the facts of the case.

573.  As the focus of argument concerns Peconic's case against Danny Lau for dishonest assistance, I will centre my discussion on that cause of action first.

Limitation Ordinance, ss. 4 & 20

574.  The relevant legislation in Hong Kong on limitation is the Limitation Ordinance (Cap. 347).  Section 4 of the Ordinance sets a basic limitation period of 6 years for actions founded on simple contract or on tort: section 4(1)(a).  Sub-section (7) of section 4 reads:

“   (7)   This section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the court by analogy in like manner as the corresponding enactment contained in the Limitation Act 1980 (1980 c. 58 U.K.) is applied in the English Courts.”

575.  It is clear that a cause of action based on dishonest assistance is not an action based on simple contract or on tort.  Rather, it is a claim for equitable relief.  According to section 4(7), section 4 does not apply to such a claim, except insofar as any provision in section 4 may be applied by the court by analogy in like manner as the corresponding enactment contained in the Limitation Act 1980 is applied in the English courts.

576.  But before one seeks to find out whether any limitation period may be applied by analogy to a claim based on dishonest assistance, one must consider section 20 of the Ordinance, which specifically deals with actions relating to trust and trust property.

577.  Section 20 of the Ordinance reads:

“(1)   No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action –

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.

(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Ordinance, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:

…”

578.  It can be immediately seen that a limitation period of 6 years is prescribed under section 20(2) of the Ordinance for “an action by a beneficiary to recover trust property or in respect of any breach of trust”.

579.  The only exceptions to such a period of 6 years are provided by section 20(1).  The exceptions apply to two types of actions respectively.  First, an action “by a beneficiary under a trust”, which is “in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy”: section 20(1)(a).  Secondly, an exception applies to an action “by a beneficiary under a trust”, which is to “recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use”: section 20(1)(b).

580.  For an action falling within either type of actions covered by the two exceptions, which for convenience I will refer to as “exception (a)” and “exception (b)” respectively, no limitation period prescribed by the Ordinance – including of course section 4 of the Ordinance – is applicable.

581.  For an action “by a beneficiary to recover trust property or in respect of any breach of trust” falling within section 20(2), but not falling within either exception (a) or exception (b) in section 20(1), the applicable limitation period is 6 years.

582.  For an action which does not fall within the description “an action by a beneficiary to recover trust property or in respect of any breach of trust” as set out in section 20(2), but which is an action for equitable relief, one must see whether any limitation period can be applied by analogy: section 4(7) of the Ordinance.  If the answer is “yes”, the limitation period by analogy will be applied.  If the answer is “no”, the action is not subject to any limitation period.

583.  The above discussion does not take into account the equitable doctrines of laches and acquiescence.

Nub of the dispute – position of the dishonest assister

584.  Before I dwell further on the relevant provisions, I will outline the nub of the dispute between the parties in relation to section 20.

585.  Section 20 applies to trust and trust property.  Superficially, it is irrelevant to the present case because it is concerned with the making of secret profits by a fraudulent director in breach of his fiduciary duty owed to his company; it is also concerned with the dishonest assistance rendered by a solicitor to the delinquent director.  There is no express trust or trust property.  Neither the director nor the solicitor is an express trustee.

586.  However, the matter is not that straightforward.  Section 2(1) of the Limitation Ordinance defines “trust” and “trustee” as having the same meanings respectively as in the Trustee Ordinance (Cap. 29).  Section 2 of the latter Ordinance stipulates that the expressions “trust” and “trustee” extend to “implied and constructive trust”.

587.  Thus the argument arose as to whether Chio was a constructive trustee and in making the secret profits in breach of his fiduciary duty, he had committed a breach of (constructive) trust.  Moreover, a further question arose as to whether Danny Lau, in dishonestly assisting Chio in breaching his fiduciary duty, has rendered himself a constructive trustee.  Furthermore, the question arose as to whether the secret profits were (constructive) trust property.  From another standpoint, the question is whether Peconic is making a claim as a “beneficiary” to recover “trust property” or “in respect of [a] breach of trust” – the wording used in section 20(2) to give an action falling within its description a limitation period of 6 years, subject to the two exceptions in sub-section (1) of the same section.

588.  Mr Shieh's main argument is that the claim based on dishonest assistance, which was obviously commenced many years after the lapse of the period of 6 years from the events in question, is time-barred.  Mr Shieh argued that the claim is not “an action by a beneficiary to recover trust property or in respect of any breach of trust”, and therefore does not fall within section 20(2).  Still less does it fall within either exception (a) or (b) in section 20(1).  That is his primary position.

589.  Under this primary position, Mr Shieh argued that section 4(7) comes into play because the claim is one for “equitable relief” and it requires the Court to see whether any period of limitation can be applied by analogy.  Mr Shieh argued that the answer is ‘yes', because the claim based on dishonest assistance is analogous to a claim founded on the tort of conspiracy.

590.  Interposing here, I would have thought that a much better analogy would be the economic tort of procuring a breach of contract or unlawful interference with economic and other interest: see generally Clerk & Lindsell on Torts (19^th ed.) para. 25-15 et seq. and para. 25-88 et seq. respectively.  Mr Shieh accepted this in his written supplemental closing submission.  Indeed, in Royal Brunei Airlines v. Tan, supra, the leading case on constructive trust and dishonest assistance, Lord Nicholls referred to a “close analogy” between dishonest assistance and procuring a breach of contract.  His Lordship said (at p. 387C):

“There is here a close analogy with breach of contract.  A person who knowingly procures a breach of contract, or knowingly interferes with the due performance of a contract, is liable to the innocent party.  The underlying rationale is the same.”

591.  In any event, under Mr Shieh's primary position, a claim based on dishonest assistance is subject to a limitation period by analogy (with a claim based on tort), and therefore the limitation period of 6 years stipulated in section 4(1)(a) is applicable.  In other words, the present claim is time-barred.

592.  Understandably, Mr Scott for Peconic took the opposite views on all these points and the battle lines were drawn.

593.  A number of alternative or subsidiary arguments were raised by both sides which, insofar as they are relevant to my decision, will be dealt with in the following part of my judgment.

Paragon Finance – two classes of constructive trust

594.  A good and indeed essential starting point is the discussion of the relevant law by Millett LJ (as he then was) in Paragon Finance v. D B Thakerar [1999] 1 All ER 400, 408-414, a case on amendment of pleadings after expiry of the limitation period.  His Lordship started off with the original rule of the Court of Chancery that a claim against an express trustee was never barred by lapse of time.  The learned judge explained that this was because his possession of the trust property is never in virtue of any right of his own, but is taken from the first for and on behalf of the beneficiaries.  His possession was consequentially treated as the possession of the beneficiaries, and for that reason time did not run in his favour against them: p. 408g-h.

595.  Importantly, his Lordship said at p. 408h-j that this rule was applied to “trustees de son tort and to directors and other fiduciaries who, though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principals' property for themselves”.  Millett LJ added that “such persons are properly described as constructive trustees” – a type of constructive trustee which has since been known as constructive trustee (and constructive trust) of the first class/category.

596.  There is, however, as Millett LJ explained in Paragon Finance, a second class or category of so-called “constructive trust” and “constructive trustee”.  Whereas the first covers those cases where “the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff” (pp. 408j-409a), the second covers those “where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff” (p. 409a).  As his Lordship explained (at p. 409f-g):

“Such a person is not in fact a trustee at all, even though he may be liable to account as if he were.  He never assumes the position of a trustee, and if he received the trust property at all, it is adversely to the plaintiff by an unlawful transaction which is impeached by the plaintiff.  In such a case the expressions “constructive trust” and “constructive trustee” are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are “nothing more than a formula for equitable relief”.”

Importance of the distinction in terms of limitation

597.  The importance of the distinction for the case before his Lordship, as well as for the present case, lies in the application of limitation period.  His Lordship explained at pp. 409j-410f the relevant legislative history in England as follows:

“The importance of the distinction between the two categories of constructive trust lies in the application of the statutes of limitation.  Before 1890 constructive trusts of the first kind were treated in the same way as express trusts and were often confusingly described as such; claims against the trustee were not barred by the passage of time.  Constructive trusts of the second kind however were treated differently.  They were not in reality trusts at all, but merely a remedial mechanism by which equity gave relief for fraud.  The Court of Chancery, which applied the statutes of limitation by analogy, was not misled by its own terminology; it gave effect to the reality of the situation by applying the statute to the fraud which gave rise to the defendant's liability:  see Soar v Ashwell [1893] 2 QB 390 at 393, [1891-4] All ER Rep 991 at 993 per Lord Esher MR:

‘If the breach of the legal relation relied on … makes, in the view of a Court of Equity, the defendant a trustee for the plaintiff, the Court of Equity treats the defendant as a trustee … by construction, and the trust is called a constructive trust; and against the breach which by construction creates the trust the Court of Equity allows Statutes of Limitation to be vouched.'

Lord Esher MR's reference to the breach of the legal relation shows that while the first kind of constructive trust was a creature of equity's exclusive jurisdiction the second arose in the exercise of its concurrent jurisdiction.  That is why the statute was applied by analogy.  For a fuller discussion of the distinction between the two categories of constructive trust, see Hovenden v Lord Annesley (1806) 2 Sch & Lef 607 at 632-633, Soar v Ashwell, Taylor v Davies [1920] AC 636, Clarkson v Davies [1923] AC 100, Selangor United Rubber Estates Ltd v Cradock (No 3) and Competitive Insurance Co Ltd v Davies Investments Ltd [1975] 3 All ER 254, [1975] 1 WLR 1240.

It was evidently considered unduly harsh that trustees should remain liable indefinitely for innocent breaches of trust when even common law actions for fraud were barred after six years, and s 8 of the 1888 Act introduced a period of limitation (effectively six years) for such claims.  Its purpose was to provide protection for trustees who would otherwise be liable without limitation of time (laches and acquiescence apart) where the breach of trust was committed innocently:  see Re Richardson, Pole v Pattenden [1920] 1 Ch 423 at 440.  It excepted two cases from its provisions: (i) where the claim was founded upon any fraud or fraudulent breach of trust to which the trustee was party or privy, and (ii) where the proceeds were still retained by the trustee or had previously been received by the trustee and converted to his use.  The same scheme was adopted by s 19 of the 1939 Act and s 21 of the 1980 Act.”

598.  For all practical purposes, subject to one argument raised by Mr Scott which I will turn to in due course, the local provisions are identical to the English provisions.

599.  Put shortly, regarding “an action by a beneficiary to recover trust property or in respect of any breach of trust”, the limitation period of 6 years stipulated in section 20(2) of the Ordinance and the two exceptions to that stipulation set out in section 20(1) only apply to an express trust or a constructive trust of the first class.  They do not apply to a so-called constructive trust of the remedial type, i.e. the second class of case.

Directors as constructive trustees of the first category

600.  Pausing here, it has to be remembered that the first class of constructive trustee includes “directors and other fiduciaries who, though not strictly trustees [are] in an analogous position” (per Millett LJ at p. 408j), and therefore so far as the question of limitation is concerned, an action against directors and other fiduciaries “who abused the trust and confidence reposed in them to obtain their principal's property for themselves” (p. 408j) is put on the same footing as an action against an express trustee.

601.  That, in my judgment, effectively answers a point raised by Mr Shieh, i.e. that Chio, though a director of Peconic and a fiduciary owing fiduciary duty towards his company, was not a constructive trustee of the first category in relation to his wrongdoing in the present case.  I reject the argument.

602.  In JJ Harrison (Properties) Ltd v. Harrison [2002] 1 BCLC 162, a director purchased a property belonging to his company without sufficient disclosure of his interest.  The company sued to set aside the transaction and to recover the property or its proceeds of sale.  Chadwick LJ set out four propositions relating to company directors which the learned judge regarded as beyond argument (at para. 25):

“(i) that a company incorporated under the Companies Acts is not trustee of its own property; it is both legal and beneficial owner of that property; (ii) that the property of a company so incorporated cannot lawfully be disposed of other than in accordance with the provisions of its memorandum and articles of associations; (iii) that the powers to dispose of the company's property, conferred upon the directors by the articles of association, must be exercised by the directors for the purposes, and in the interests, of the company; and (iv) that, in that sense, the directors owe fiduciary duties to the company in relation to those powers and a breach of those duties is treated as a breach of trust.  If authority for those propositions is required it can be found in Re Lands Allotment Co [1984] 1 Ch 616 – see the judgments of Lindley LJ (at 631), and Kay LJ (at 638) – Cook v Deeks [1916] AC 554 – see the advice of the Privy Council delivered by Lord Buckmaster LC (at 564) – and Belmont Finance Corp v Williams Furniture Ltd (No 2)[1980] 1 All ER 393 – see the judgment of Buckley LJ (with whom the other members of the court agreed) ([1980] 1 All ER 393 at 405).”

603.  Moreover, in relation to the company property that was in the hands of the wrongful director, the director was regarded as a constructive trustee of the first category.  Chadwick LJ explained that:

“There is no doubt that Millett LJ regarded it as beyond dispute that a director who obtained the company's property for himself by misuse of the powers with which he had been entrusted as a director was a constructive trustee within the first category.  He referred to ‘directors and other fiduciaries' in that context – at [1999] 1 All ER 400 at 408.  There is also no doubt, if I may say so, that he was correct to do so – see Re Sharpe, Re Bennett, Masonic and General Life Assurance Co v Sharpe [1982] 1 Ch 154 at 172, Soar v Ashwell [1893] 2 QB 390 at 398.  The reason is that a director, on appointment to that office, assumes the duties of a trustee in relation to the company's property.  If, thereafter, he takes possession of that property, his possession ‘is coloured from the first by the trust and confidence by means of which he obtained it'.  His obligations as a trustee in relation to that property do not arise out of the transaction by which he obtained it for himself.  The true analysis is that his obligations as a trustee in relation to that property predate the transaction by which it was conveyed to him.  The conveyance of the property to himself by the exercise of his powers in breach of trust does not release him from those obligations.  He is trustee of the property because it has become vested in him; but his obligations to deal with the property as a trustee arise out of his pre-existing duties as a director; not out of the circumstances in which the property was conveyed.” (para. 29)

604.  Of course, in JJ Harrison, the subject matter of the constructive trust was a piece of land.  The director was regarded as a constructive trustee of the piece of land, which constituted the constructive trust property.  It was a class one constructive trust.  On the other hand, the present case concerns the making of secret profits.

605.  However, in my judgment, the same principle must apply to the funds of the company.  In other words, if a director abused his management powers entrusted to him by virtue of his office and misappropriated money belonging to the company, then in an action to recover the company's money from the director, the director should also be regarded as a constructive trustee of the first category in relation to the money sought to be recovered, which constitutes the constructive trust property.  In this regard, there can be no valid distinction between money and other forms of asset or property of a company – a director's duty in relation to them is the same.  Se Re Sharpe [1892] 1 Ch 154; Re Lands Allotment Company [1894] 1 Ch 616; Tintin Exploration Syndicate, Ltd v. Sandys (1947) 177 LT 412; Belmont Finance Corporation v. Williams Furniture Ltd (No. 2) [1980] 1 All ER 393 and Bairstow v. Queens Moat Houses plc [2001] 2 BCLC 531.

Chio as constructive trustee of the first category

– Secret profits as constructive trust property –

606.  This analysis therefore applies to a case like the present where the delinquent director (Chio), in breach of his fiduciary duty, earned secret profits out of monies paid by his company as proceeds of sale to a third party (Asiagreat) owned or controlled by the director for the acquisition of property. 

607.  The proceeds originally belonged to Peconic.  They were Peconic's monies and Chio as Peconic's director by virtue of his office assumed the duties of a trustee in relation to the company's monies.  That pre-dated the acquisition of the properties by Peconic under which the monies were paid out by Peconic to Asiagreat as purchase prices – out of which Chio earned his secret profits.

– Confidential information and corporate opportunity as constructive trust “property”? –

608.  During final submission, the question of whether one could analyse the facts of the present case in the instant context of discussion in the following way was mooted:  Suppose a director had some confidential information or corporate opportunity belonging to his company.  Yet he misused the information or opportunity for his own benefit and earned profit out of it.  The company now sues to recover the profit.

609.  Generally speaking, a trust cannot exist without a subject matter (the trust property).  To say that there is a trust or constructive trust, one must be able to identify the trust property.  If the claim is simply viewed as an action to recover the profit, one would be inclined to conclude that the wrongful director is merely a constructive trustee of the second category vis-à-vis the profit as constructive trust property, because the profit (and therefore the constructive trust) only arose out of the very transaction which the company is seeking to impeach.  The secret profit did not predate the breach.

610.  However, if the action is perceived to be one in respect of the director's breach of duty in his misappropriation of the confidential information belonging to the company or the corporate opportunity, then it would be quite open for the court to say, the argument runs, that the director is a constructive trustee of the first category in relation to the confidential information or corporate opportunity, which already existed and pre-dated the subsequent breach of fiduciary duty by the director in his misappropriation of the same for his own use.  The corporate opportunity or confidential information as trust property (and therefore the constructive trust over it) did not arise out of the transaction constituting the misappropriation.  That the relief sought, i.e. recovery of the profit made, happens to be directed toward the very product of the transaction under impeachment is neither here nor there.  The profit, under the present analysis, simply represents the original trust property – the confidential information or corporate opportunity – in a converted form.

611.  On reflection, the problem with this alternative analysis is that generally speaking, information or opportunity – whether corporate or otherwise – is not considered “property” as such, in contradistinction to what it could materialise into, such as profits, proprietary interests or contractual rights – which are generally considered “property”.  Therefore, it may not be right to say that there is a constructive trust of the information or opportunity of which the wrongful director is a constructive trustee. 

– Gwembe Valley: a difficult case –

612.  Notably, this was not the way the English Court of Appeal dealt with the facts in the rather difficult case of Gwembe Valley Development Co. Ltd v. Koshy (No. 3) [2004] 1 BCLC 131, which senior counsel on both sides spent much time on to analyse and interpret.

613.  Put very simply, in that case, a company borrowed money in Zambian currency for the purpose of investing in Zambia.  The director of the company knew of a peculiar foreign exchange restriction in that country which would enable US dollars to be exchanged to the Zambian currency at a highly favourable rate.  He did not disclose the information to his own company, but instead made use of the same to obtain a massive profit out of the relevant transactions.

614.  Mummery LJ, giving the judgment of the English Court of Appeal, took the view that prima facie, the claim against the wrongful director was one falling generally within section 21(3) of the Limitation Act 1980, which is equivalent to our section 20(2), and therefore subject to a 6-year limitation period: paras. 111 and 112.  In other words, his Lordship was of the opinion that the action for an account was one “by a beneficiary to recover trust property or in respect of any breach of trust”.

615.  The learned judge then went on to discuss whether the exceptions in section 21(1)(a) and (b) of the English Act, which are equivalent to our section 20(1)(a) and (b), took the case out of the 6-year limitation period.

616.  As regards exception (b), i.e. section 21(1)(b) of the English Act (i.e. section 20(1)(b) of our Ordinance), relating to an action to recover from the trustee trust property or the proceeds thereof, Mummery LJ, after reviewing the case law and the facts, concluded that the wrongful director was a constructive trustee of the second category in relation to the profits that he made.  Accordingly, the exception did not apply.  This was what his Lordship said (at paras. 119 and 120):

“By contrast, Mr Koshy's [the delinquent director] liability to account for undisclosed profits, and any constructive trust imposed on those profits, do not depend on any pre-existing responsibility for any property of the company.  They arose directly out of the transaction which gave rise to those profits, and the circumstances in which it was made.  The fact that Mr Koshy was in a pre-existing fiduciary relationship with the company was not enough, by itself, to bring the case within class 1, any more than it was in Taylor v Davies.

Accordingly, in our view, GVDC's case cannot be bought within s 21(1)(b).”

617.  However, his Lordship went on to consider whether the claim for the secret profits was excepted under exception (a), i.e. section 21(1)(a) of the English Act, namely fraud.  After reviewing the findings made below, his Lordship found that a case of fraud had been made out, and therefore the case fell within exception (a), and no period of limitation applied to defeat the company's claim for a general account of all the profits made.

618.  The confessed difficulty of senior counsel on both sides in understanding the decision is that if the case did not fall within exception (b) because it involved a constructive trust of the second category, it could not fall within exception (a) either because that exception applies to “an action by a beneficiary under a trust” only – and “trust” does not include a constructive trust of the second category.

619.  Moreover, the same logic would mean that in fact the case did not fall within section 21(3) of the Act or the 6-year limitation period prescribed by it at all, because section 21(3) also applies only to an action by a beneficiary to recover “trust property” or in respect of any breach of “trust”, and “trust” does not include a constructive trust of the second category.

620.  I can understand counsel's difficulties.  As mentioned above, the English Court of Appeal did not seek to analyse the case in terms of misuse of corporate information already alluded to above.  I do not wish to say anything further about that possibility save to note that, in any event, on the facts of the present case, Mr Shieh would seem to have a point when he submitted that in relation to the information that the properties could be acquired at the ceiling price of $60 per square foot, that piece of information was acquired by Chio sometime before the formation of Peconic and his becoming a director of it.  In other words, the information was Chio's personal information, rather than corporate information belonging to Peconic.  (But Mr Shieh's argument cannot hold true in relation to the subsequent pieces of information regarding the rest of the properties to be purchased.  Those pieces of information were acquired after Chio had become a director of Peconic.  There is no question of Chio acquiring the information other than as director of Peconic.)

– On the facts, Chio is a constructive trustee of the first category –

621.  But irrespective of the perceived difficulties regarding the decision in Gwembe Valley, on the facts of our case, Chio is plainly a constructive trustee of the first category if one focuses on the monies used by Peconic to pay for the purchase prices for the acquisition of the properties.  As analysed above, they were monies belonging to Peconic, in relation to which Chio as director had “trustees-like responsibility” in terms of his management power.  In breach of his fiduciary duty and by means of the acquisition transactions, he misappropriated the monies in terms of the secret profits he made out of the proceeds of sale of the properties.  As the monies were company monies pre-dating the transactions under challenge, Chio is a constructive trustee in relation to them.

622.  In my judgment, this is an a fortiori case to the bribery case decided by Deputy Judge Barma SC (as he then was) in Secretary for Justice v. Hon Kam Wing [2003] 1 HKLRD 524.  In that case, a claim to recover a bribe received by a corrupt police officer was treated as a claim based on a constructive trust of the first category.  A major premise of the court's analysis was that the bribe was regarded by equity as a legitimate payment, intended for the agent's principal, which had to be paid over at once to the principal upon receipt.  The court concluded that what was involved was a real trust.  The agent was not treated by law “as if he were” a trustee, he was a trustee in the eyes of law of the bribe the moment it was received by him.

623.  Our case is an a fortiori case, because before the secret profits were ever earned by Chio, the monies comprising the secret profits had already been monies belonging to Peconic.  The moment the monies were paid by Peconic to Asiagreat – Chio's instrument in effecting the fraud and breach of fiduciary duty, and the moment Peconic lost its legal title to the monies due to the payment over, the law imposed a constructive trust in favour of Peconic on the same sums of money, and thus on the secret profits made by Chio out of them.  Peconic's beneficial interest in the monies (as the legal owner thereof), and Chio's “trustees-like responsibility” in terms of his management power as director over the monies, pre-dated the creation of the constructive trust and were independent of the sub-sale and purchase transactions with Asiagreat whereby the fraudulent breach of fiduciary duty was effected.

624.  Having come to that conclusion, I can summarise the position reached thus far as follows: Peconic's claim against Chio in the present action is an action by a beneficiary (Peconic) to recover trust property (i.e. the secret profits) or in respect of a breach of trust (i.e. Chio's breach of fiduciary duty).  It therefore falls within section 20(2) of the Ordinance, subject to exceptions (a) and (b) in section 20(1).  This is because one is concerned with a constructive trust of the first category.

But what about the limitation position of the dishonest assister?

625.  However, one must not forget that the present discussion on limitation is primarily concerned with Peconic's claim, not against Chio as the wrongful constructive trustee of the first category, but rather against his dishonest assister – Danny Lau.

626.  This brings me to Mr Shieh's argument that the claim against Danny Lau does not fall within section 20(2) or the exceptions in section 20(1).  He argued that Danny Lau as a dishonest assister is merely a constructive trustee of the second category.  This is so regardless of whether Chio, the primary wrongdoer, is a constructive trustee of the first category or not.  Mr Shieh therefore argued that the claim against Danny Lau does not fall within section 20 (and particularly section 20(1)) at all.  (Counsel proceeded to ask the Court to apply a limitation period of 6 years to the claim by analogy with a cause of action based on tort.)

627.  Mr Scott raised several arguments to counter all this.  For the purposes of the present discussion, I will specifically mention two.  First, counsel argued that the action against Danny Lau is an action against a constructive trustee of the first category – namely Danny Lau himself.  Secondly and alternatively, Mr Scott argued that the action against Danny Lau is one “in respect of [a] breach of trust” by Chio as constructive trustee of the first category, and falls within exception (a) in section 20(1).

Is the dishonest assister himself a constructive trustee of the first category?

628.  Mr Shieh premised his primary argument that Danny Lau is a constructive trustee of the second category on the analysis of the distinction between the two classes of constructive trust by Millett LJ in Paragon Finance. 

629.  In essence, counsel pointed out that Danny Lau, or the dishonest assister, was not a trustee and did not have any “trustees-like responsibility” before the impeached transaction.  He had no trust powers to exercise or duties to perform.  His constructive “trusteeship” only arose out of the very transaction under challenge.  It did not predate the impugned transaction nor was it independent of it.  His liability as trustee stems from the very wrong that the victim complains about in his claim.  The “trusteeship” is only imposed as a remedial device to make him liable for compensatory relief in favour of the victim.  The dishonest assister is therefore a typical constructive trustee of the second category. 

630.  Relying on Millett LJ's historical review of the law in Paragon Finance, Mr Shieh stressed that a constructive trustee of the second category has never been meant to be covered by the relevant limitation provisions starting with section 8 of the Trustee Act 1888, which modified the original rule of the Court of Chancery on limitation regarding claims against express trustees and constructive trustees of the first category.  Therefore, counsel concluded, a claim against a dishonest assister as a constructive trustee of the second category must fall outside those limitation provisions (i.e. section 20 of our Ordinance).      

631.  Mr Shieh's argument is supported by the view of Dr Charles Mitchell in Birks and Pretto, Breach of Trust (2002 ed.).  At pp. 209 to 210, the learned academic said:

“As has been discussed in part B above, dishonest assistants are often said to be personally liable “as constructive trustees,” but in this context the phrase means that they are personally liable “as though they were express trustees which in fact they are not,” and not that they are personally liable “because a constructive trust has been imposed on property of which they are the legal owners.”  Hence, as Millett LJ reiterated in Paragon Finance plc v D B Thakerar & Co, references in the Limitation Act 1980 to “trustees” do not apply to them, even though they do apply to constructive trustees proper.

The question therefore arises, how the Limitation Act 1980, section 21, affects claims against dishonest assistants. …

So far as section 21(1) is concerned, it follows from what has been said above that in principle a dishonest assistant cannot himself be the “trustee” referred to in paragraph (a), and that the “trustee” referred to there can only be the primary wrongdoer.  This suggests that in principle it cannot be right to say [per Lewin, supra] that “the accessory [probably] remains always unable to plead a defence of limitation, since his dishonesty will suffice to bring him within section 21(1)(a).”

632.  A similar view was expressed by Mr William Swadling in another chapter in the same book.  At pp. 341 to 342, the learned writer set forth his view as follows:

“Where a third party is held liable for assisting a breach of trust, that person comes under a liability either to compensate the beneficiary for his loss or to make restitution to the beneficiary of the third party's gains.  In a rational world we would call this a liability to pay damages, either compensatory or restitutionary, for the wrong of assisting a breach of trust.  Unfortunately, we do not live in such a world, though there are signs that we are moving in that direction.  Instead of speaking of damages for wrongdoing, the courts couch the liability in terms of the assister “accounting as a constructive trustee.”  We have already seen how the Limitation Act 1980 defines “trustee” to include “constructive” trustees.  Would a claim for assistance therefore come within the six-year period laid down by section 21(3)?

Looking at the legislative history of section 21(3), it would appear that such claims do not fall within its purview.  As we have seen, section 21(3) ultimately derives from section 8(1)(b) of the Trustee Act 1888, which enacted a six-year time limit for claims against express trustee for compensation for innocent breaches of trust.  And though the definition of “trustee” in the 1888 Act also included “constructive” trustees, there is no reason why section 8(1)(b) should extend to non-trustees.  Although the assister is liable to account as if he were a trustee, we know that this is only a device to bring him within the jurisdiction of the court.  As Millett LJ recently pointed out in Paragon Finance plc v D B Thakerar & Co (a firm), he is in no sense a real trustee.  Moreover, we have seen that the reason why the legislature in 1888 introduced an extended meaning of trustee was to enact the “no side-stepping” rule contained in section 8(1)(a).  Indeed, with that rule now rendered redundant by the recasting of limitation statutes in terms of causes rather than forms of action, we have seen that the wide definition of trustee used in the 1939 and 1980 Acts is no longer needed, and a limitation to express trustees could profitably be restored.”

633.  Relying chiefly on the old case of Soar v. Ashwell [1893] 2 QB 390 and the view of Lewin on Trusts at para. 44-44, Mr Scott took the opposite stance.  He argued that a dishonest assister like Danny Lau is a constructive trustee of the first category. 

634.  Undeniably, there are passages in Soar v. Ashwell which plainly suggest that a limitation defence is not open to a knowing assister in a fraudulent and dishonest disposition of the trust property.  Thus Lord Esher MR said at pp. 394-395:

“There is another recognised state of circumstances in which a person not nominated a trustee may be bound to liability as if hewere a nominated trustee, namely, where he has knowingly assisted a nominated trustee in a fraudulent and dishonest disposition of the trust property.  Such a person will be treated by a Court of Equity as if he were an express trustee of an express trust.  The propositions thus enunciated seem to me to follow the judgments of Lord Hatherley and Giffard, L.J., in Burdick v. Garrick, and of Lord Selborne in Barnes v. Addy. Where, in cases decided by judges as judges both of fact and law, you can collect the principle of law on which they have all assumed to act, it seems to me unnecessary to determine, though it is useful to consider, whether one would have applied that principle of law to the facts in the same way that any particular judge did in the case before him.  I am of opinion that the present case is within the description of that which is treated as and is called in equity an express trust, and that the inquiry as to the alleged breach cannot be stopped by the Statute of Limitations.”

Bowen LJ said at p.396:

“Secondly, the rule as to limitations of time which has been laid down in reference to express trusts has also been thought appropriate to cases where a stranger participates in the fraud of a trustee: Barnes v. Addy.”

Lastly, Kay LJ said at p.405:

“A stranger to the trust, who receives the trust money with notice of the trust, or knowingly assists the actual trustee in a fraudulent and dishonest disposition of the trust property, is a constructive trustee.  The trust may be clear, may be declared in a written instrument, and may be in that sense express, but the stranger is not expressly appointed a trustee.  He becomes bound by the trust by the construction which the law puts upon his dealings with the trust property.

The result seems to be that there are certain cases of what are, strictly speaking, constructive trusts, in which the Statute of Limitations cannot be set up as a defence.  Amongst these are the case where a stranger to the trust has assumed to act and has acted as a trustee, and the case where a stranger has concurred with the trustee in committing a breach of trust, and has taken possession of the trust property, knowing that it was trust property, and has not duly discharged himself of it by handing it over to the proper trustees or to the persons absolutely entitled to it.”

635.  Mr Scott also relied on Lewin on Trusts.  This iswhat Lewin said in paras. 44-44 to 44-45:

“A person who dishonestly assists a trustee to commit a breach of trust is himself liable as a constructive trustee.  It is now clear that the liability is based on the dishonesty of the accessory and the honesty or dishonesty of the formally-appointed trustee is irrelevant.  Previously it was thought that liability was based on knowing assistance in a dishonest and fraudulent breach of trust on the part of the trustee; it was then well established that the accessory was himself treated as an express trustee and before the Trustee Act 1888 was not entitled to raise a defence of limitation.  The rule may be regarded as exceptional, since the accessory has not assumed the duties of a trustee, and so appears to be constructive trustee of the second kind, though the trust pre-dates his involvement, but the principle of the rule survived the Trustee Act 1888 and has apparently survived the redefinition of the accessory's liability as not dependent on the dishonesty of the formally-appointed trustee.  In other words, accessories fall outside the category of constructive trustee who is always entitled to raise a defence of limitation notwithstanding section 21(1)(a) of the 1980 Act.

The consequence is probably that the accessory remains always unable to plead a defence of limitation, since his dishonesty will suffice to bring him within section 21(1)(a). That follows if dishonesty necessarily constitutes a “fraud or fraudulent breach of trust to which the trustee was a party or privy” within that paragraph, as it appears to do, and if the accessory is himself to be regarded as “the trustee” for the purposes of the paragraph, as it is thought he is.”

636.  In addition to Soar v. Ashwell andLewin, Mr Scott also referred me to Taylor v. Davies [1920] AC 636 (PC); Clarkson v. Davies [1923] AC 100 (PC); Re Gallard [1897] 2 QB 8; Barlow Clowes International Ltd v. Eurotrust International Ltd (1998/99) 2 OFLR 42 (Staff of Government Division of the Manx High Court – i.e. the court of appeal of the Isle of Man) and Schulman v. Hewson [2002] EWHC 855 (Ch), para. 44.

637.  Taylor v. Davies, Clarkson v. Davies and Re Gallard all cited Soar v. Ashwell with approval.  As for Barlow Clowes (Manx court of appeal), I do not think the decision there on this particular point went beyond what had been said in Soar v. Ashwell and Taylor v. Davies.  As far as Schulman v. Hewson is concerned, Blackburne J simply relied on Lewin without any detailed examination of the law.

Paragon Finance was not a case on a dishonest assister's limitation position

638.  It seems to me that the key to resolving the issue is to remember that Paragon Finance, despite its great contribution to clarifying the distinction between the two categories of constructive trust, was not a case on dishonest assistance or the limitation position of a dishonest assister.  Millett LJ's exposition of the law regarding the two categories of constructive trust and their difference in terms of limitation was not primarily concerned with the position of a dishonest assister.

639.  It is noteworthy that his Lordship actually referred to Soar v. Ashwell in his historical survey and quoted a passage from Lord Esher's judgment in that case at p. 393 to illustrate the second class of constructive trust that he had in mind (at p.410 a-b).

640.  Lord Esher in the passage of judgment quoted was only dealing with some types of constructive trust that fell within one end of the spectrum of constructive trust – the breach of which the Courts of Equity would allow a statute of limitations to be vouched, in contradistinction to those typical cases forming the first category of constructive trust that fell within the other end of the spectrum – in relation to which no limitation defence was available.

641.  However, Lord Esher immediately went on to point out that there were cases falling in between the two ends of the spectrum:

“some of which have been treated by the Courts of Equity as within the class in respect of which a Statute of Limitations will not be allowed to be vouched, and some within the class in respect of which such a statue may be vouched.” (p. 393)

642.  His Lordship then proceeded to discuss some of those intermediate cases which fell in between the two ends of the spectrum – amongst them, the case of a knowing assister of a trustee in a fraudulent and dishonest disposition of the trust property – in respect of which a Court of Equity would not allow a statue of limitations to be vouched.  I have already quoted the relevant passage from Lord Esher's judgment.  Indeed both Bowen LJ and Kay LJ expressed similar views in their respective judgments, from which I have also quoted.

643.  In my view, no doubt Millett LJ must have been well aware of these passages in Soar v. Ashwell that he did not find it necessary to quote or deal with.  Nor did he express any disagreement with these passages that dealt with the position of an accessory.  The simple reason, as I see it, is that Millett LJ was not primarily concerned with the position of an accessory in the case before him, when he analysed the respective positions of the two categories of constructive trust.  He said so in terms at p. 412a/b-c when he referred to the first holding of the Manx court of appeal in Barlow Clowes (supra at pp. 65f-66a & 82d-e) regarding the limitation position of a knowing assister of a fraudulent breach of trust. The only place where his Lordship significantly mentioned the position of an accessory can be found at p. 414a/b-c/d of the law report, where his Lordship said:

“There is a case for treating fraudulent breach of trust differently from other frauds, but only if what is involved really is a breach of trust …

A principled system of limitation would also treat a claim against an accessory as barred when the claim against the principal was barred and not before.  There is, therefore, a case for treating a claim against a person who has assisted a trustee in committing a breach of trust as subject to the same limitation regime as the claim against the trustee: see J W Brunyate Limitation of Actions in Equity (1932).”

A question of statutory construction in light of the legislative history – section 8 of the 1888 Act

644.  That being the case, is Paragon Finance still helpful in determining whether a claim against a dishonest assister falls within the limitation provisions that we have been discussing thus far?  In my view, the answer is “yes” – but not in terms of the distinction of the two categories of constructive trust.  Rather the key lies in the historical survey of the law in that case.

645.  As per the historical survey, before section 8 of the 1888 Act which came into operation in 1890, express trustees did not enjoy any limitation defence.  Along with them, a host of people, whom equity regarded as standing in analogous positions as express trustees, did not have available to them any such defence either.  According to Soar v. Ashwell, these other people to whom the Courts of Equity denied a limitation defence included, significantly, a knowing accessory of a fraudulent and dishonest disposition of the trust property (formulated according to the then substantive law on accessory liability).  Like an express trustee, such an accessory did not have the benefit of a limitation defence.

646.  This being the historical picture immediately prior to the enactment of section 8 of the 1888 Act, it seems to me the all-important question is whether in enacting section 8 to give express trustees (and those whom Millett LJ called constructive trustees of the first category) a limitation defence subject to exceptions, Parliament intended to give an accessory a similar defence?  Put another way, did the legislative intention or policy behind the section or the mischief that it sought to tackle vis-à-vis express trustees (and the like) apply likewise to an accessory so that the section should be construed accordingly?  To me, the issue is ultimately a question of statutory construction of section 8 of the 1888 Act.

647.  I prefer approaching the present issue in the above manner to arguing about whether Millett LJ would have called an accessory a constructive trustee of the first or second category.  In my view, resolving that latter argument would not supply the answer to the problem faced by the Court.

648.  Returning to Parliament's intention behind the 1888 Act, the relevant provisions were enacted because “[i]t was evidently considered unduly harsh that trustees should remain liable indefinitely for innocent breaches of trust when even common law actions for fraud were barred after six years”.  The purposes of section 8 of the 1888 Act which introduced a period of limitation (effectively six years) for such claims was “to provide protection for trustees who would otherwise be liable without limitation of time (laches and acquiescence apart) where the breach of trust was committed innocently”.  Paragon Finance per Millett LJ at p. 416d-e (emphasis added).

649.  That the intention of the 1888 Act was only to provide a limitation defence for innocent breaches of trust is clear from the specific exception to the new limitation period, namely where the claim was founded on any fraud or fraudulent breach of trust to which the trustee was party or privy. 

650.  According to the then formulation of the substantive law on accessory liability by reason of assistance, an accessory would only be liable if he assisted “with knowledge in a dishonest and fraudulent design” of the primary trustee: per Lord Selborne LC in Barnes v. Addy LR 9 Ch App 244, 251-252.  Given the law as it then was, a claim against a guilty accessory would by definition always fall within the excepted case of fraud. It would therefore appear that the intention behind section 8 of the 1888 Act did not require the inclusion of a claim against such an accessory within its ambit of operation.  There was simply no point in doing so.

651.  In this regard, it is important to gauge the legislative intent of the 1888 Act with the then understanding of the law on accessory liability, rather than the modern law on dishonest assistance as re-formulated by Lord Nicholls in Royal Brunei.  This is particularly so because under his Lordship's re-formulation, the accessory's liability does not turn on whether the primary trustee whom he assisted was fraudulent or not; rather his own honesty or dishonesty is the sole determinative factor of his liability.  In other words, there can be a dishonest assister to an innocent primary trustee in respect of the latter's breach of trust.  To use that re-formulated law on accessory liability which only came into being in 1995 to ascertain whether there was any legislative need or intention to include the case of an accessory in the new limitation provisions contained in section 8 of the 1888 Act would produce a highly misleading answer.

652.  In my view, section 8 of the 1888 Act did not cover the case of an accessory.  There was simply no need to do so.  Such a case was well-taken care of by the Courts of Equity, which would not allow a limitation defence to stop a claim against a knowing assister of a primary trustee in his dishonest and fraudulent design:  Soar v. Ashwell, supra.

Section 19 of the 1939 Act and the “in respect of” argument

653.  This conveniently brings me to section 19 of the 1939 Act (on which our section 20 is modelled), which replaced section 8 of the 1888 Act, and the “in respect of” argument relied on by Mr Scott as his alternative argument under section 20.

654.  In one important aspect for our purposes, section 19 of the 1939 Act changed the wording of section 8 of the previous Act.  Under section 8, the limitation provisions applied only to an action “against a trustee or any person claiming through him”.  However, section 19 referred to and covered “an action by a beneficiary ... in respect of any breach of trust”.

655.  This change in wording thus paved the way for the argument that if section 8 of the 1888 Act did not cover the case of an accessory (who, of course, would not normally be a person “claiming through” the primary trustee), the new and wider wording of section 19 brought about a change.  A claim against the accessory, thought not a claim against the primary trustee in breach of trust, is nonetheless a claim “in respect of” the primary trustee's breach of trust, so that it falls within the new statutory regime.

656.  In short, Peconic's argument is that its action against Danny Lau is an action “in respect of” the fraud or fraudulent breach of trust committed by Chio as constructive trustee (of the first category).  Therefore the claim falls within exception (a) in section 20(1)(a).  No limitation period is applicable.  (Exception (b) in section 20(1)(b) is not engaged under this argument because the “trustee” in the present context is Chio whereas the defendant is Danny Lau.)

657.  This argument has the specific support of Dr Charles Mitchell in Birks and Pretto, op. cit., at p. 210, where the learned academic said:

“The better view must rather be that if an action for dishonest assistance is relevantly an action “in respect of” a primary breach of trust – and it is submitted that it is – then the action will be affected by section 21(1)(a) in the event that the trustee has acted fraudulently, but if he has not then it will not be affected.  And in the latter case, section 21(3) would therefore seem to apply, again on the assumption that an action for dishonest assistance is an action “in respect of” the primary breach.  The editors of Lewin on Trusts quite rightly dislike this conclusion.  It means that there are two different limitation rules for dishonest assistance actions whose applicability turns on a question which the Royal Brunei case expressly held to be irrelevant to the dishonest assistant's liability, viz the question whether the primary wrongdoer was himself dishonest.  However, it is submitted that the appropriate response to this anomaly is for Parliament to amend the wording of section 21 to reflect the change in the law wrought by the Royal Brunei case, and not for the courts to fudge the meaning of the term “constructive trustee” in order to fit dishonest assistants into section 21(1)(a) as “trustees” in their own right, as the editors of Lewin suggest.”

658.  This is what Lewin on Trusts, para. 44-45 says:

“If the accessory were not regarded as “the trustee” then that role would be filled by the formally-appointed trustee and section 21(1)(a) would apply only if the latter too had been fraudulent, an anomalous result given that his fraud is now irrelevant to the actual liability of the former in that event, however, the six-year period imposed by section 21(3) of the 1980 Act would clearly apply where the formally-appointed trustee had not been fraudulent.”

659.  Mitchell in footnote 372 at page 210 of Birks and Pretto referred to two cases in support of the wide meaning he ascribed to the expression “in respect of” a breach of trust.  In Re Diplock [1948] Ch. 506, 512-513 where the court was dealing with section 20 of the Limitation Act 1939 (which is equivalent to our section 21), concerning limitation of actions claiming personal estate of a deceased person, the court said:

“On the other hand we cannot see that according to ordinary usage of the English language, the section does not equally apply to a claim by an unpaid beneficiary direct against one overpaid or wrongly paid.  In our judgment Mr. Pascoe Hayward is right in saying that such an action is fairly and properly described as an action “in respect of” a claim to the personal estate of a deceased person or to a share therein.  The examination we have made into the previous history of the legislation does not in our judgment provide any valid reason for rejecting this interpretation of the language.  On the contrary, the references on which Mr. Pascoe Hayward relies seem to us strongly to support it.”

660.  The second case relied on by Mitchell was G L Baker Ltd v. Medway Building and Supplies Ltd [1958] 1 WLR 1216, 1221-1222, concerning section 19 of the 1939 Act (on which our section 20 is based).  There Danckwerts J said on p. 1222:

“There is a point taken by Mr. Settle on behalf of the defendant company that they do not claim through the fraudulent trustee.  He also said with regard to section 19(1) of the Limitation Act that the action was not in respect of any fraud or fraudulent breach of trust, because the action against the defendant company in the present case is based upon the receipt by them without any fraud of monies which were part of the trust fund belonging to the plaintiff company.  I am bound to say that I think that the words “in respect of any fraud or fraudulent breach of trust” are wide enough to cover the present case, because it is the fraudulent payment by Titley to the defendant company which is the origin of the proceedings against the defendant company.  It is because they received that payment by virtue of Titley's fraudulent breach of trust that the plaintiff company is able to bring this action against them.  Consequently, so far as those words are concerned, the provision seems to me wide enough.”

661.  Despite the efforts of Mr Shieh to distinguish the two cases on the facts, I am satisfied that what has been said in relation to the expression “in respect of”, albeit in slightly different contexts, is apposite to the proper construction of the expression when used in our section 20(1)(a) (as well as section 20(2)).  In my view, as a matter of ordinary and plain meaning, the expression is wide enough to cover a claim against the accessory to a fraudulent breach of trust committed by the primary trustee.  Such an action is “in respect of” the fraud or the fraudulent breach of trust by the primary trustee to whom the defendant was a dishonest assister.

662.  As a matter of legislative history, the 1939 Act was the first comprehensive limitation statute to be passed following the abolition of the forms of action in the previous century (the Common Law Procedure Act 1852).  The Act therefore no longer used the language of the common law forms of action but talked instead of causes of action.  The statute did not differentiate between common law and equitable claims.  Swalding, op. cit., at p. 333.  Furthermore, it has been pointed out that the Limitation Act 1939 was “partly a consolidating and partly an amending statute”: Westdeutsche Landesbank v. Kleinwort Benson Ltd [1994] 4 All ER 890, 942e/f, per Hobhouse J.  It is therefore quite possible to regard the wider wording of “in respect of” introduced by section 19 of the 1939 Act as being reflective of a legislative intention to statutorily cover the related question of the accessory's position on limitation under the new provisions, instead of leaving it, as it were, as an abandoned child in the hands of equity. 

663.  Given the then law on an accessory's liability, whether his case was included in the new provisions in section 19 or not would not matter – he would still have no limitation defence.  However, including it within the ambit of the new section 19 would have the advantage of putting both the liability of the primary trustee and that of his accessory under the same statutory regime of limitation.  

664.  From the standpoint of law and logic, the “in respect of” argument has the support of at least some incidental observations made by Millett LJ in Paragon Finance at p. 414a/b-c/d, which have already been cited above in another context.  It is worth repeating them under the present discussion:

“There is a case for treating fraudulent breach of trust differently from other frauds, but only if what is involved really is a breach of trust …

A principled system of limitation would also treat a claim against an accessory as barred when the claim against the principal was barred and not before.  There is, therefore, a case for treating a claim against a person who has assisted a trustee in committing a breach of trust as subject to the same limitation regime as the claim against the trustee: see J W Brunyate Limitation of Actions in Equity (1932).” (my emphasis)

665.  A wide construction of “in respect of” would achieve what a principled system of limitation would require as per Millett LJ.  This conveniently brings me to an anomaly mentioned in the respective passages extracted above from Lewin and Mitchell.  Both recognized that this interpretation would lead to an anomaly: whether there is an applicable limitation period at all will turn on whether the primary trustee was fraudulent in his breach of trust.  If he was fraudulent, then the case would fall within section 20(1)(a), and the claim against the dishonest assister would not be affected by any limitation period.  If the primary trustee was not fraudulent, then even though the accessory was dishonest, the claim against the dishonest accessory would only fall within section 20(2) but not the exception in section 20(1)(a).  In other words, a limitation period of 6 years would be applicable.

666.  Superficially this does seem to go contrary to the rationale behind making an accessory to a breach of trust liable to the beneficiary, as explained by Lord Nicholls in Royal Brunei at pp. 384D/E-385D.  There his Lordship placed exclusive emphasis on the state of mind of the accessory, treating it as irrelevant the state of mind of the primary trustee whose breach of trust was assisted by the accessory, in determining the accessory's liability toward the beneficiary.  If the accessory was dishonest, he would be liable to the beneficiary even if the primary trustee's breach of trust was not fraudulent.  On the other hand, even if the primary trustee was fraudulent, an accessory to the breach of trust would not be liable to the beneficiary if he himself was not dishonest.  This is the reason for the apparent anomaly pointed out by Lewin at para. 44-45 already extracted above.

667.  I do not, with respect, agree that this is a true anomaly.  One is here not concerned with whether the accessory is liable.  Ex hypothesi, the accessory was dishonest and he is therefore liable to the beneficiary.  One is here concerned with whether in an action by the beneficiary against the dishonest accessory, a limitation period is applicable.  The “in respect of” argument would mean that such a dishonest accessory will escape liability after 6 years if the primary trustee's breach of trust was not fraudulent.  On the other hand, a dishonest accessory to a fraudulent primary trustee will never be able to raise a limitation defence to a claim by the beneficiary against him for dishonest assistance.

668.  Whilst liability is decided solely by reference to the accessory's own state of mind (assessed objectively), and the state of mind of the primary trustee is irrelevant for that purpose, when it comes to limitation, neither logic nor reason requires that the same consideration should apply.  From the point of view of limitation, I do not see why it is unjust, unfair or illogical to deny an accessory any limitation defence in the situation where, and only where, not only he himself was dishonest, but the primary trustee was also fraudulent.  If nothing else, it seems that that represents the most serious type of case justifying the giving of an unlimited period of time to the victim to pursue a claim against the dishonest assister, laches and acquiescence apart.  It is also important to note that in such a case, the primary trustee who was also fraudulent would not have any limitation defence either.  On the other hand, if the primary trustee was not fraudulent, the dishonest assister's liability to the victim will be subject to a limitation period, just like the position of the primary trustee.  A “principled system of limitation” (in this regard), as per Millett LJ, can thus be achieved.

669.  In any event, if there really was such an anomaly, that was only brought about by the re-definition of the law on dishonest assistance by the Privy Council in Royal Brunei in 1995 – well after the relevant statutory provisions both in England and in Hong Kong were enacted.  The previous law before Royal Brunei, as encapsulated in Lord Selborne LC's formulation in Barnes v. Addy, supra, was that an accessory to a breach of trust is not liable to the beneficiary unless he assisted “with knowledge in a dishonest and fraudulent design” of the primary trustee.

670.  In as late as 1979, Lord Selborne's formulation was enthusiastically followed by the English Court of Appeal in Belmont Finance Corporation Ltd v. Williams Furniture Ltd [1979] Ch. 250, 267, 274, as pointed out by Lord Nicholls in Royal Brunei at p. 384A/B-C/D.

671.  In other words, when the relevant statutory provisions were enacted and for many years thereafter (before 1995), there was no question of a person being found liable to a beneficiary as an accessory even though he was dishonest in rendering the assistance unless the primary trustee's breach of trust was dishonest and fraudulent as well.  That being the case, there was no question of the so-called anomaly arising.  In relation to a claim against an accessory, one would not even get into the argument over “in respect of” under section 20(1)(a) unless the primary trustee was fraudulent and dishonest.  There was no question of two different limitation periods for an accessory.

672.  The so-called anomaly was only brought about by the change (or re-definition) of law effected by Royal Brunei.  In other words, this is a case of a statute not catching up with the development of the common law.  I do not subscribe to the fiction that Royal Brunei only re-discovered what the common law has always been, based on which the statute was drafted.  In my view, the reality is that the statute was based on the then understanding of what the common law was, and when the common law was restated or changed, a so-called anomaly was born and the statute has not been amended to close the anomaly.  As Mitchell said in the passage already extracted, the solution lies with Parliament “to amend the wording of section 21 to reflect the change in the law wrought by the Royal Brunei case”.  In my view, the solution does not lie in the court giving an unduly restricted meaning to the expression “in respect of” so as to avoid the supposed anomaly.

673.  Again ultimately the matter is a question of statutory construction of section 19 of the 1939 Act.  On the whole, I am marginally inclined towards taking the view that section 19 effected a change and brought the liability of an accessory under the same statutory regime of limitation as that of the primary trustee.  In other words, both section 20(1) and (2) of our Ordinance apply to the claim against an accessory.

Limitation by analogy?

674.  However, if I am wrong and section 19 did not have such an effect, all it means is that the limitation position of an accessory remains to be governed by equity, just as it has always been as per Soar v. Ashwell.  Equity simply will not allow the guilty accessory to rely on any limitation defence, whether directly or by analogy.  The result is therefore the same either way.  In the former case, a dishonest assister to a fraudulent primary trustee will by definition be excepted under section 20(1)(a) of the Ordinance (section 19(1)(a) of the 1939 Act), and therefore has no limitation defence.  In the latter case, section 20 does not come into play at all and equity simply does not allow the dishonest assister any limitation defence.

675.  In relation to the last-mentioned aspect, there is no question of equity applying any limitation period by analogy as per section 4(7) of the Ordinance.

676.  Regarding the application of a limitation period by analogy, Mr Shieh has referred me to Cia de Seguros Imperio v. Heath (REBX) Ltd [2001] 1 WLR 112, where the court cited with approval (at pp. 120E to 121A) a passage from Spry's Equitable Remedies (5^th ed.) 419-420, which reads:

“a statute of limitations may be raised by analogy in defence to a claim that is brought in the exclusive jurisdiction of a court of equity, such as in proceedings for the enforcement of a trust, rather than in its auxiliary or concurrent jurisdictions. Here there is no question of merely recognising and giving effect to an abrogation of a right at law or of acting in obedience to a statute that relates to rights at law. Hence it must be seen first whether there is a special statutory provision that affects directly, whether expressly or by implication, the particular equitable right that is in question. But if there is no such provision, the court may decide that the material equitable right is so similar to legal rights to which a limitation period is applicable that that limitation period should be applied to it also. In this latter case the limitation period is said to be applied by analogy, and the principles that govern cases of this kind are that if there is a sufficiently close similarity between the exclusive equitable right in question and legal rights to which the statutory provision applies a court of equity will ordinarily act upon it by analogy but that it will so act only if there is nothing in the particular circumstances of the case that renders it unjust to do so. What is regarded by courts of equity as a sufficiently close similarity for this purpose involves a question of degree, and reference must be made to the relevant authorities. The basis of these principles is that, in the absence of special circumstances rendering this position unjust, the relevant equitable rules should accord with comparable legal rules.”

677.  Furthermore, the Court of Appeal pointed out in Cia Imperio that the court is not looking to see whether a limitation period was actually applied to a claim by analogy before 1 July 1940, but looking to see whether it would have been applied (per Waller LJ at p. 120A).  The court also stressed that whether the court is exercising the exclusive or concurrent jurisdiction of equity in relation to the claim before it does not supply the answer to the question of whether a limitation period would have been applied by analogy (see pp. 121A/B to 122G/H).

678.  In my view, Mr Shieh's reference to this and other general authorities not concerning directly the position of a guilty accessory is futile.  For in relation to such a person's position on limitation in the eyes of the Courts of Equity, Soar v. Ashwell was crystal clear.  In the several passages cited from the judges hearing that case, it is plain that a knowing assister to a fraudulent and dishonest disposition of the trust property by the primary trustee did not enjoy any limitation defence at all – equity simply would not allow him to do so.  There was no question of applying any limitation period by analogy.  Using Spry's terminology, there were, by definition, special circumstances rendering any such application unjust.

679.  I do not think the re-definition of the basis of an accessory's liability by Lord Nicholls in Royal Brunei affects the question of whether equity would have applied a limitation period by analogy – at least in a case like the present, where not only was the assister dishonest, but also the primary trustee's breach of trust was fraudulent and (therefore) dishonest.  In such a case, I fail to see how the court would have applied a limitation period by analogy to a claim against the dishonest assister.

Conclusion on the dishonest assister's limitation position

680.  In conclusion, I am of the view that a claim against a dishonest assister for equitable compensation falls within section 20 of the Ordinance by reason of the “in respect of” wording.  If the primary trustee (including a constructive trustee of the first category) was not fraudulent in his breach of trust, a limitation period of 6 years is applicable: section 20(2).  On the other hand, if the primary trustee was fraudulent, no limitation is applicable: section 20(1)(a).

681.  However, if I am wrong about the “in respect of” argument, section 20 is not engaged at all.  In that case, there is no limitation period directly applicable under the Ordinance to a claim against the dishonest assister.  If the primary trustee was fraudulent, no limitation by analogy will be applied and no limitation defence is available to the dishonest assister.  I need not express any view on the situation where the primary trustee was not fraudulent.

682.  In other words, in a case where the primary trustee was fraudulent, irrespective of whether the “in respect of” argument is correct or not, the dishonest assister does not enjoy any limitation defence.  

683.  In those circumstances, Danny Lau as a dishonest assister in Chio's fraudulent and dishonest breach of fiduciary duty as director (and thus breach of constructive trust of the first category) does not have any limitation defence to Peconic's claim against him. Mr Shieh's reliance on the limitation defence must fail.  

Statutory abolition of the distinction of two classes of constructive trust?

684.  For the reasons explained above and given the conclusion that I have reached, it is not necessary for me to dwell on yet another alternative argument raised by Mr Scott, namely that at least in Hong Kong, the distinction between the two classes of constructive trust has been abolished with the introduction of the Limitation Ordinance in 1965 in Hong Kong, given the general definition of “trust” and “trustee” as including a constructive trust, without differentiating it into any categories.

685.  In Extramoney Ltd v. Chan, Lai, Pang & Co. [1992] 1 HKLR 244, 248-253 the Court of Appeal set out in some detail the competing arguments as to whether the distinction between the two classes of constructive trust had been abolished when the local limitation legislation was passed.  The court eventually concluded that the point was an arguable one – that was sufficient to dispose of the appeal, as what was in issue in that case was whether a proposed amendment was useless by reason of an unanswerable limitation defence.

686.  Furthermore, in Barlow Clowes, supra, the Manx court of appeal decided that the Manx equivalent of section 20 had abrogated the distinction between constructive trustee of the first and second types, so that the limitation positions of both are governed by the same statutory provisions.

687.  Mr Scott also referred the Court to the first instance and Court of Appeal decisions in China Everbrigh-IHD Pacific Limited v. Ch'ng Poh,HCA 12837/1995 Yuen J (27 February 2001) and CACV 513/2001 (19 February 2002), which counsel said supported his proposition.  However, the decisions did not contain any detailed discussion about the distinction or the suggested abolition of it.

688.  It is also true that the Law Reform Committee in England has recommended the abolition of the distinction (see Paragon Finance at p.411e-g).

689.  On the other hand, Millett LJ in Paragon Finance was strongly against this view that the distinction had been statutorily abolished.  At pp. 411h to 414e, his Lordship dealt with Barlow Clowes (Manx court of appeal) and gave no less than ten reasons for not agreeing with the view that the distinction had been abolished.  But his Lordship said that in Paragon Finance, there was no need to decide the point.

690.  As I said, I need not express any definite view on this point, which in any event would only be obiter in nature.  But in so far as may be necessary or useful, I would indicate my preference for the continued existence of the distinction in Hong Kong.  If I may say so with respect, I find the reasons given by Millett LJ in Paragon Finance for the continued existence of the distinction persuasive.  Specifically regarding the local position, I do not believe that the local legislature ever intended to abolish the distinction when the Limitation Ordinance was first enacted in Hong Kong in 1965.  Nothing in the passages in the legislative debate that Mr Scott has referred me to – without objection from any other parties –persuaded me to the opposite view.  In my view, what Hong Kong was then doing was simply to follow the English position on limitation, which was fully reviewed by Millett LJ in his historical survey of the law in England in Paragon Finance.

691.  The local authorities cited by Mr Scott did not really decide the point and there is nothing binding on this Court.

692.  However, regardless of what view that I may tend to take on this point, it is not crucial to Peconic's claim.  As I have already concluded, I hold in favour of Peconic's claim against the limitation defence.

Positions of other Defendants

693.  What has been said about the claim by Peconic against Danny Lau applies equally to the claim based on dishonest assistance or unconscionable/knowing receipt against Elsie Chan, Leung Hiu Ling and Wong Shiu-wai.  But it does not apply to the claim based on conspiracy against Elsie Chan, which is prima facie covered by a limitation period of 6 years, subject to any postponement.

Postponement of limitation period

694.  Given my rejection of the limitation defence as a matter of law in relation to dishonest assistance and knowing/unconscionable receipt, the debate over the postponement of limitation period under section 26(1)(a) of the Ordinance loses much of its significance.  I will deal with it very briefly.

695.  Section 26(1) of the Limitation Ordinance reads:

“(1)   Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either –

(a) the action is based upon the fraud of the defendant;

(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant;

…

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”

– Fraud –

696.  Given the requirement of dishonesty for the cause of action based on dishonest assistance, quite clearly fraud is involved.  In a nutshell, as Mr Scott has submitted in his final submission, Peconic's case is that until the results of ICAC's investigations were made known to it in December 1998, Peconic had no idea that it had been the victim of a fraud or that Asiagreat had been set up by Chio and Elsie Chan as a vehicle for making huge sums of money for themselves and thereby perpetrating the fraud.  Until then, Peconic had no reason to think that such a fraud had been practised upon it and had still less reason to suspect that Danny Lau (and his firms) had had anything to do with it other than the trite fact that they were Asiagreat's solicitors in the transactions.

697.  In paragraphs 238 to 245 of Mr Scott's written final submission, he referred to a number of matters and important aspects of evidence that were not discovered or known to Peconic until the ICAC's investigations.

698.  Mr Scott therefore argued that if ever there was an applicable limitation period, and there certainly was one in relation to conspiracy, time was postponed until the ICAC investigations.

699.  Mr Shieh, on the other hand, relied essentially on two arguments to say that time was not postponed to such an extent as to bring the commencement of the second action against his clients within the 6 year period.  His first point was a general one – that the bank officials as directors of Peconic ought to have discovered the fraud earlier.  The second point he raised was more specific.  He essentially argued that given the requirements under the rules and regulations in the Mainland, the bank officials were under a continuing duty to comply with those requirements – and if they had done so, they could with reasonable diligence have discovered the fraud practised by Chio on them and not only so, they could also with reasonable diligence have discovered the dishonest assistance rendered by Danny Lau in relation to it.

700.  I reject both arguments.  First, in relation to the general argument, the test for discovery of fraud in the present context is, as per Millett LJ in Paragon Finance at p. 418d:

“How a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency.”

701.  I have heard the evidence of the bank officials, in particular the evidence of Mr Huang, who became in charge of Peconic in Hong Kong since 1993.  According to his evidence, which I have no difficulty in accepting, he was in fact alarmed by the substantial differences in price between what Peconic paid to Asiagreat and what Asiagreat paid to the head vendors for the acquisition of the same properties for resale to Peconic.  He was alarmed by the fact that a middleman, Asiagreat/Poon Kam, was involved.  He explained in the box that eventually he came to the conclusion that everything was all right.  He mentioned three specific considerations that had gone through his mind.  First, he thought that the transactions had been handled by JSM, the biggest local law firm in Hong Kong.  He felt that JSM must have taken care of Peconic's interest.  Secondly, he had in fact instructed a second firm, Poon and Cheung, to review the papers and give a sort of “second opinion” on the matter.  Poon and Cheung did not give him any advice that would put him on alert.  Thirdly, as regards the use of middleman and the huge profits made by it, Mr Huang explained that Chen and Chio had explained to him about the need to involve a middleman for the acquisition of the properties and the fact that the middleman had to earn profit.  He had also heard generally that in Hong Kong middlemen did make (and lose) a lot of money out of the transactions they did.

702.  As regards the things that he had been told by Chen, both Mr Huang and Mr Foo said in the box that Chen was an experienced and well-trusted banker within the Bank.  His sub-branch was the most profitable sub-branch under the Guangdong Branch.  There was no reason not to trust what they had been told by Chen.

703.  I accept Mr Huang's evidence.  I further find on the entire evidence before me, that he and Peconic have not failed to exercise reasonable diligence in discovering the fraud.  It is easy to use the benefit of hindsight to say what Peconic's directors could and could not have done.  In general, I accept Mr Scott's analysis of the relevant evidence and argument set out in his final submission in relation to postponement.  I do not wish to further lengthen this judgment by repeating them here.

704.  In particular, I accept that as far as Danny Lau's role is concerned, without full knowledge of the existence of, for instance, the bill of 25 October 1991 referring specifically to a deed of indemnity given not only by Elsie Chan but also Chio to Poon Kam, it is quite difficult to pin Danny Lau on liability.  Peconic simply lacked the investigative powers to unearth the fraud and particularly, the actual role played by Danny Lau in it.  It is noteworthy that even the ICAC overlooked the significance of the reference to the deed of indemnity by Elsie Chan and Chio to Poon Kam in the bill of 25 October 1991, and Danny Lau was never asked anything about it by the ICAC.  Needless to say, the ICAC never charged Danny Lau for anything.

705.  As regards Mr Shieh's second argument based on the rules and regulations in the Mainland, the answer, put briefly, is this: with respect, Mr Shieh has again confused Peconic and its directors with the bank officers.  It may well be that the bank officers were, at all material times, under a continuing obligation to comply with the requirements under those Mainland rules and regulations.  For the sake of argument, I am also prepared to assume that complying with those rules and regulations could have led to the uncovering of the fraud by Chio and Elsie Chan.

706.  The fallacy of Mr Shieh's argument is that again there is a mix up of roles.  In the context of postponement, one is focusing on whether the plaintiff, i.e. Peconic in the present case, could with reasonable diligence have discovered the fraud.  Peconic, being a corporate entity, can only act through its directors and officers.  So the pertinent question is whether, if those directors (and officers) in their capacity as such directors (and officers) had exercised reasonable diligence, they could have discovered the fraud.  The answer, in my judgment, must be “no”.  This is because, for instance, Mr  Huang, in his capacity as director of Peconic, a local company, was simply not under any obligation to do anything that was the subject matter of requirement under the Mainland rules and regulations.  It was only in his capacity as a bank official of the Bank in the Mainland that he was, according to Mr Shieh's argument, under a continuing obligation to comply with those rules and regulations.  

707.  Thus analyzed, Mr Shieh's argument falls apart quite immediately.  Whatever Mr Huang or other bank officials had failed to do in relation to the Mainland rules and regulations, they failed to do so in their capacity as Mainland bank officials of the Bank.  They did not fail to do so in their capacity as directors or officers of Peconic. 

708.  Nor has it been suggested that Peconic itself, as a local company registered under the laws of Hong Kong, was under any obligations pursuant to the Mainland rules and regulations.  In those circumstances, Peconic had not failed to do with reasonable diligence anything that ought to have been done, in terms of the requirements under the rules and regulations in the Mainland, which if done could have led to the discovery of the fraud.

709.  For this simple reason, I reject Mr Shieh's specific argument based on the Mainland rules and regulations.

710.  In any event, I accept Mr Scott's argument that even if the requirements under the Mainland rules and regulations had been complied with, it does not follow at all that the dishonest assistance rendered by Danny Lau (as opposed to the fraud practised by Chio and Elsie Chan on Peconic) could have been discovered with reasonable diligence within such time that would make the commencement of the action against Danny Lau time-barred – assuming for the sake of argument that a period of limitation is applicable to the cause of action based on dishonest assistance.  In this regard, I again accept Mr Scott's arguments, which were all set out in his written submission.  I will not repeat the same here.

711.  In any event, all this discussion is academic given my holding that in relation to the cause of action based on dishonest assistance against Danny Lau (and the causes of action based on dishonest assistance and knowing/unconscionable receipt against the Defendants in the first action), there is no limitation period applicable.

712.  In relation to the cause of action based on conspiracy against Elsie Chan, the first action was commenced in 1999.  Counting 6 years backward would take one back to 30 October 1993.  No one has seriously suggested, regardless of what Mr Huang and other officers of Peconic should or should not have done, that Peconic could have with reasonable diligence uncovered the fraud by then (October 1993).  Even Mr Shieh accepted that there would have to be a lead-time of says 1.5 to 2 years for Mr Huang to uncover the fraud as per his argument.  Certainly, that sort of timeframe would not benefit Elsie Chan.  The claim against her is not time-barred.

713.  So in conclusion, having dealt with the argument very briefly given that its significance has very much diminished as a result of my earlier holding, I conclude that the applicable limitation period, if any, has been postponed so as to cover both actions.

           – Deliberate concealment –

714.  I do not wish to add to this lengthy judgment any further reference to the arguments based on deliberate concealment also relied on by Mr Scott pursuant to section 26(1) (b) of the Ordinance, save to say thatI accept his arguments set out in paragraphs 269 to 277 of his final submission.

Conclusion on limitation defence

715.  So both as a matter of law and as a matter of fact and evidence, I reject the limitation defence raised by all the Defendants in the two actions.

Laches, acquiescence and delay

716.  Finally, turning to laches, acquiescence and delay, Mr Shieh did not raise any separate argument in support of such equitable defences.  He simply relied on the same matters that he relied on in support of his argument relating to postponement.  For the reasons that I have already given, as well as the argument made by Mr Scott in paras. 278 to 282 of his final submission, I reject these defences.

QUANTUM

Valuation of the properties

717.  As regards quantum, there is not much dispute between the parties, except in relation to the valuation of the properties.  In relation to it, I have no hesitation whatsoever in rejecting the evidence of the valuation expert called on behalf of Danny Lau and the two firms of solicitors that the open market values of the properties at the times of acquisition by Peconic were in the total sum of $458,630,000. 

718.  Ms Winnie Koo – the expert of Danny Lau and the two firms of solicitors, came up with a range of average prices of $149 to $175 per square foot for the properties (ignoring the small house on Yeung Fu Man's land) in her evidence in the box.  That range represented a concession from the even higher range of $170 to $201 per square foot given in her report.  She made the adjustment after taking into account some comparables referred to by Peconic's side. 

719.  On the other hand, Peconic's expert, Mr C K Lau, gave a range of $54 to $77 per square foot as the average price per square foot of the properties, and the open market values of the properties were in the total sum of $153,100,000 at the times of acquisition by Peconic.  The differences between the experts' respective figures are astonishing.

720.  As I say, I have no hesitation in rejecting Ms Koo's expert evidence.  I entirely agree with Mr Scott's argument in his final submission that Ms Koo's calculations were substantially inflated as a result of her complete disregard of the head transactions T1-T20 as relevant comparables and the Government ex gratia compensation tables.

721.  I reject Ms Koo's reason for not taking into account the head transactions whereby Asiagreat acquired the properties from the landowners as relevant comparables.  She said she was anxious to avoid a “price matching game” – using the “subject transaction” as comparable to determine the open market value of the property under valuation. 

722.  However, there simply is no question of playing such a game.  The “subject transactions” in the present case are the resale transactions whereby Asiagreat resold the properties to Peconic – they are of course not used as comparables by anybody in the valuation exercise.  What Mr Lau did, and I agree with him, was to use the antecedent transactions whereby Asiagreat acquired the properties from the various landowners as comparables.  They are not the “subject transactions” in the present valuation exercise.  They were arm's length transactions between Poon Kam/Yeung Fu Man and the landowners, which preceded the “subject transactions” by a day or two.  They were good evidence of what the market prices were.  No “price matching game” has been played.  To ignore them was, in my judgment, wholly unjustified.

723.  Likewise, I find the use of the ceiling price offered by Elsie Chan to Poon Kam for the acquisition of the properties, i.e. $60 per square foot to be a useful guide.  Again nobody is suggesting that that price was a conclusive one for the purposes of the present valuation exercise.  But it provides a useful indication as to how much a middleman/land-assembling agent like Poon Kam would require to be paid to assemble the scattered pieces of land into a huge piece of land for sale to somebody like Elsie Chan.

724.  Ms Koo's figure did not sit well at all with the Government ex gratia compensation tables.  Her figure would equate the properties with “land situated in a new town in the New Territories”, not to mention that the Government ex gratia compensation figures are by definition generous figures designed to induce those whose properties are resumed by the Government to accept the ex gratia compensation in lieu of the time-consuming compensation assessment process.

725.  Ms Koo's failure to suspect the Skyince/Granduse transactions described in section 19 of Mr Lau's report as being not arm's length transactions does not do her supposed impartiality as expert any good.  On the materials unearthed by Mr Lau, at the very least one should have approached the relevant comparables with some caution.

726.  As I say I accept Mr Scott's final submission.  I further prefer and accept Mr Lau's expert evidence to the contrary evidence of Ms Koo. 

727.  I do not find Mr Alexander-Webber's (Elsie Chan's expert) approach relevant at all to the question of the open market values of the properties.  I am not interested in what Peconic was prepared to pay in the light of what the perceived estimated profits to Peconic would be out of the deal.  I am interested in finding out how much Peconic, “acting knowledgeably, prudently and without compulsion”, would have needed to pay for the properties, i.e. the properties' open market values. 

728.  Incidentally, I note that Mr Alexander-Webber said in evidence that if he had been asked to advise on the open market values of the properties, he would probably agree with Mr Lau's valuation.

729.  I accept that the open market values of the properties as at the various times of purchase were in the total sum of $153,100,000 in total.  The average unit prices of the properties were $54 (for T1 to T15), $77 (T16), $55 (T17 and T18), $66 (T19) and $75.6 (T20).

Secret profits

730.  However, these are not crucial findings.  For in my judgment, the more appropriate relief to Peconic against the Defendants, given that the main or sole liability against them is in relation to their dishonest assistance rendered to Chio's breach of fiduciary duty whereby Chio earned the secret profits out of the transactions, is equitable damages measured in terms of the secret profits earned by Chio. 

731.  During final submission, nobody seriously challenged the amount of secret profits received by Chio and his nominees. 

732.  On the evidence, I have no difficulty in accepting the figure claimed by Peconic, i.e. $350,534,416, details of which can be found in paragraph 37 (g) of the amended statement of claim in the second action.  This is the figure that represents the liability of Elsie Chan and Danny Lau respectively.

733.  As regards Leung Hiu Ling, her liability is limited to the two sums she was involved in, namely $81,807,341.70 and $10,500,000, totalling $92,307,341.70.

734.  Likewise for Wong Shiu-wai, her involvement was restricted to the sum of $27,800,000.

735.  As regards Albert K K Luk and K F Lau & Co, I do not have the respective figures of the secret profits earned by Chio in T1 to T18 and T20 readily at hand.  They should not be controversial. 

736.  I will leave it to the parties to agree on the figures.

OUTCOME

737.  For these reasons, I find in favour of Peconic against the Defendants in the two actions.  At trial, no practical distinction was drawn between Peconic and Star Glory in the claim in the first action.  No submission was made to say that judgment should not be entered for Star Glory.  On the other hand, I do not find it comfortable to enter judgment for Star Glory in the absence of full submission.  I am content to enter judgment for Peconic against the Defendants only.

738.  In summary, in the first action, I order that judgment be entered for Peconic against Elsie Chan for the sum of $350,534,416.  I also give judgment in favour of Peconic against Leung Hiu Ling for the sum of $92,307,341.70 and against Wong Shiu-wai for the sum of $27,800,000. 

739.  At the request of Mr Scott, I reserve the questions of interest and costs in the first action for further submission.

740.  In the second action, I give judgment for Peconic against Danny Lau for the sum of $350,534,416.  I also give judgment for Peconic against Albert K K Luk and K F Lau respectively – I would leave it to the parties to agree on the judgment figures, with liberty to apply to me for further direction or determination where necessary. 

741.  Likewise, I reserve the questions of interest and costs in the second action for further submission.

742.  Last but not the least, I would like to thank counsel on all sides, as well as their supporting teams, for the unfailing assistance that they have rendered to the Court in this long trial.

Schedule 1

Schedule 2