HKSAR v. CHAN PUI TONG

HCMA1139/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO. 1139 OF 2005

(ON APPEAL FROM KCCC 4246 OF 2005)

J U D G M E N T

1.  This is an appeal against conviction for fraud.  The appellant is a 52 year-old fireman.  He joined the Fire Services Department in 1974 and was promoted over the years until he reached his present rank of Assistant Divisional Officer.  Until these troubles he was the commander of Shek Kip Mei Fire Station.

2.  It is thus the case that for nearly all his adult life the Hong Kong government has been his employer.  Part of the reward for his services was his employer’s obligation to house him.  The cost of housing in Hong Kong being what it is that part of his reward was significant.  It was thus the appellant lived in government quarters.

3.  His employers changed this.  The appellant was left with no choice in the matter if he wished to continue his career as a fireman, for no longer was he to be housed in quarters as schemes were introduced whereby he would be given an allowance each month to rent or buy.  The appellant eventually opted for the latter, the Home Finance Scheme, with a monthly allowance of $23,730.  His salary was $69,233.  The allowance thus represented a full quarter of his total income.

4.  The Scheme obliged him to purchase a property and to use half the allowance to repay a mortgage loan taken out to purchase that property.  There were many other conditions attached to the allowance that were contained in Civil Service Regulations.  An important one was that the employee live in the property to be purchased and that he report to his employers any change of circumstances which would affect the payment of the allowance.

5.  Accordingly in May 1998 the appellant purchased a flat.  He also took out a downpayment loan from the government, which was secured against his pension.  He made the first seven mortgage repayments punctually but thereafter the payments were irregular and on some occasions badly overdue.  The mortgagee bank issued warning letters and notices from time to time.  Finally, the bank took proceedings in 2000 and they took possession of the property on 18 July 2001.  On 19 July the appellant managed to pay all the outstanding mortgage instalments and costs and the bank redelivered the property to the appellant. 

6.  The appellant’s cashflow problems continued and further arrears accumulated.  The bank initiated a second mortgage action and took possession on 3 April 2003.

7.  The appellant told the police, and I presume the magistrate in evidence, that he contacted the bank in November 2003 and was told that if he could pay off all the arrears and costs the bank would return the property to him, and that thereafter he kept trying to raise the money.

8.  On 4 February 2004 the property was sold by public auction.  From discussion that the appellant had with the bank he knew that they would transfer any surplus to the Treasury.

9.  The appellant’s case was that when his salary was paid to him at the end of March 2004 there had been a deduction made by the Treasury and that the housing allowance had not been paid to him; that the allowance was paid to him for April and May but that for reasons, which he explained, he did not appreciate this fact until the end of May whereon he immediately telephoned the Treasury; he then explained the situation in detail and was told that the Treasury knew about the case and that he would be informed in writing by the Treasury later.  The housing allowance was not paid for the month of June 2004 or thereafter.

10.  Of course there was no doubt that the appellant was in breach of the obligations that flowed from his employment.  This gave his employers certain rights which they exercised to the full.  They disqualified him from receiving any further allowance under the Scheme.  Whilst he could carry on working as a fireman his employer was no longer obliged to house him nor pay him any allowance in this respect, which he would otherwise have expected to run for a further four years or so.  They took the surplus funds generated by the sale after deduction of what was owed to the first mortgagee, the bank, and applied that to reducing the downpayment loan.  Whilst the loan remained secured upon the appellant’s pension his employers exercised their right to charge him an extra 5 per cent per annum above what had prevailed, which meant the appellant paid just over $7,000 per month in this regard rather than the $3,100 he had been paying before.  His monthly income, now shorn of the housing allowance, of $69,000, was reduced to $34,000 as his employers exercised their right to deduct half his salary in order to meet their claim to the repayment of the allowance paid from the time he fell into arrears with the mortgage repayments.  This amounted to some $470,000 and included both the accountable and unaccountable portions of the allowance.  They took back that which he had been free to spend as he chose.  They also exercised their right to charge him penalty interest upon this sum, which amounted to some $126,000.

11.  From being a fireman who received some $93,000 a month for his services, he now took home $34,000.  His troubles did not end there.  His employer instigated disciplinary proceedings that led to criminal prosecution.

12.  He was arrested and gave a series of interviews to the police, the first being the most substantial, taking over nine hours.

13.  He was charged with fraud.  The particulars of the offence claimed that he had been deceitful from the day his flat was repossessed by the bank because he dishonestly omitted to report to the Director of Accounting Services that this had happened and that he no longer resided there, and that with intent to defraud he induced the Director of Accounting Services to continue to pay the Home Finance Allowance.

14.  He pleaded not guilty and defended himself.  He agreed all the prosecution’s evidence.  He gave evidence but was convicted.  I do not have a transcript of his evidence but I know from the summary of it as set out in the magistrate’s statement of findings that he said he fully intended and hoped to be able to repay all the monies outstanding and repossess the property before it was sold and that after it was sold in February 2004, a series of unfortunate incidents delayed his disclosure until he saw his salary slip at the end of May but that he thought the bank would have informed the government in any event.  The statement of findings also told me that the appellant’s evidence was substantially the same as that which he told the police in his interviews, of which I have copies.

15.  I do have a transcript of his short closing address, which included this:

“In this case I did not intend to cheat the government at all.  Since the investigation started I have been co-operating with the department and the police.  Before the auction of my premises I thought that the government would not suffer any loss, because after the auction there would be a surplus of amount of money which would go to the government.  And after the auction and I believed that the bank would inform the Director of Accounting Services very soon.  Therefore I did not inform them as soon as possible.  And up to June when I saw the allowance still transferred to my account -- when I saw that on the payslip I even made inquiries with them.”

16.  The crucial issue was dishonesty.  The magistrate found against him, not because he disbelieved his evidence as to the facts of what had happened but because he found that the appellant was aware that had the Director known that the bank had repossessed the property in April 2003 the allowances would have stopped.  He judged that ordinary people would have realised that it was dishonest in those circumstances not to report the change of circumstance to the Director and continue to take the allowance, and that the appellant must have realised that what he was doing was, by the standards of those ordinary people, dishonest.

17.  The magistrate said that “the fact that the defendant hoped that he would be able to save the situation by raising funds to repay the outstanding amount and take repossession of the property is simply a matter of mitigation.”

18.  The finding of dishonesty was really based upon the proposition that (a) the appellant must have been aware of the contractual situation and the contractual situation was such that he was not entitled to continue to receive the allowance and must report it, and (b) that he must have been aware that if the Director had been told of the true position he would have stopped payment of the allowance.  In my judgment that is too broad a proposition in the context that existed here as it promoted the private contractual obligation to report to the equivalent of a duty, call it moral or whatever, that it would be dishonest to ignore and it wrongly relegated the genuine “hope of saving the situation” to mitigation.  The context of the failure to disclose is all important when it comes to judging dishonesty here.

19.  When it comes to considering that context, it is important to remember that the relationship between the appellant and the government was one of employer and employee, and that the Civil Service Regulations have no more force nor weight than the provisions of an ordinary contract of employment; that the crime alleged was one of omission and not commission; and that the accused man all along provided his services and did his job and so upheld, in this sense, his side of the bargain he had with his employer.

20.  It is right to remember that in ordinary contracts of employment there is an implied condition of good faith and that the fact that the Civil Service Regulations spell out a duty to disclose should not take on too great a prominence.  The professional man who treats with his employer’s competitors looking to move jobs while still taking his salary would equally know that his employer would not pay him if he knew that truth and good faith requires disclosure.  In my judgment no one would expect a prosecution for fraud in such circumstances and that is because the employee was still doing his job and the violation of the employer’s rights was a private matter between them which did not extend into the realm of a public mischief attracting criminal sanction.  How different, one may ask, is the case of this fireman?

21.  Contracts are continually broken without involving the criminal law.  The man in breach will habitually be there because he saw financial advantage to himself in the conduct that led to the breach.  One must carefully examine whether a clause requiring disclosure inserted by the more powerful party to the contract takes such conduct out of the private and into the public domain.  The point is that a man can break a contract, designedly so to benefit himself, without necessarily having to be dishonest.

22.  The nature of the Civil Service Regulations in being conditions of employment rather than regulations with statutory force cannot be ignored.  Half of the allowance was accountable.  What does this actually mean when it is paid monthly?  Does it mean that the failure to match one or two or three monthly payments of allowance to monthly mortgage repayments due to some personal financial pressure or circumstance creates an obligation to report and the risk of prosecution if that is not done?  What scope does the man who takes this government allowance have for flexibility in the management of his affairs before he faces an accusation of dishonesty and crime?  Did the appellant put himself at risk of prosecution in respect of the first repossession proceedings, when he was put out one day but paid up the next?

23.  Another matter I believe it right to consider when looking at the context of the alleged offence concerns the history of how it came about that the parties stood as they did in relation to each other.  The bargain they had was not something that had been personally negotiated.  In effect there was imposition by one side, in the mightier position, of the terms on the other.

24.  Finally, in relation to context, it is relevant to look at the human implications of the questioned conduct.  What is expected by those who seek to prosecute in such circumstances, is that a man who encounters financial difficulty that creates mortgage arrears, never mind for what reason or by whose fault, must analyse his situation, judge it worthy of report, disregard his hopes of saving the situation, and make a report the effect of which would be to reduce his income by one quarter at the moment when he needs every penny the most.  Frankly, that is asking a lot.  The survival of an honest hope in “saving the situation” is a very human thing, and it is one that prompts caution before finding dishonesty by omission in such circumstances.

25.  The human implications also require one to look to the quality of the relationship of employer and employee.  If that quality was one where an employee could expect to be able to go to his employer and point to long years of service and ask for a break or even help, a failure to report would be the more colourable and may indicate fraud.  I judge that not to be the case here.

26.  Having made those remarks about the context, let me turn to the appellant and his case.   Importantly, the magistrate did not decide his case on the basis of adverse findings of credibility against the appellant.  I do not have the advantage of seeing and hearing him give evidence but I can tell from the papers that the appellant was a decent man.  Of course he had a clear record.  He was demonstrably open and cooperative with the police.  His long service in useful work commended him.  In short, his was a word that was going to carry some weight.

27.  I think it right to examine his conduct and what he said about it in two stages, namely before and after the auction.  This is so as different considerations arise in respect of each period.

28.  I repeat that the magistrate did not disbelieve the appellant when he said that he fully intended and hoped to be able to repay all the monies outstanding and repossess the property.  He merely said that it went only to the issue of mitigation.  It is with respect that I disagree.  If the appellant may have genuinely believed that he could salvage the situation then, notwithstanding that he knew he was in breach of contract and prejudicing the rights of his employer, he can still sensibly argue that he was not dishonest.  He was able to do so with more force as it was the fact that he had been able to save the day in relation to the first repossession proceedings.  He was also able to point to the fact that someone at the bank told him that full payment would result in the return of the property to him as late as November 2003, some eight months after they took possession.  It also cannot have been irrelevant to his state of mind as to whether he realised he was dishonestly cheating his employers generally that they had a second charge on the property whereby they would be entitled to any surplus left after the discharge of the first mortgage and that they also controlled his pension fund (with rights under the Civil Service Regulations against it for sums owed) which had 30 years contribution in it.  The appellant told me this was worth some $3 million.  Also the appellant certainly claimed in his closing address that he considered that his employers would sustain no loss as they would have the surplus after auction.

29.  Counsel for the respondent, who fought her corner both firmly and fairly, sought to meet the appellant’s claim that he fully intended and hoped to be able to repay all the monies outstanding with an assertion that the state of mind amounted to no more than wishful thinking due to the size of the arrears and the length of time that had gone by.  However, there was simply no support for this in the evidence.  I cannot see that the matter was ever seriously investigated.  This was probably so because the defendant was unrepresented and the magistrate did not regard the point as one that went beyond mitigation to any live issue in the trial.  The claim was not one that was inherently incredible and had to be dismissed out of hand.  In his interview with the police the appellant spoke of raising the money with family and friends.  The claim thus remained undefeated by evidence and there was no finding that the appellant could not have honestly and genuinely had the state of mind which he claimed.  Indeed, the way the magistrate expressed himself in his statement of findings (at paragraph 3 on page 19 of the bundle) suggests that he accepted such to be the fact.

30.  In the respondent’s supplemental submissions, which I received this morning, counsel emphasises that the appellant was not entitled to the housing allowance.  I agree with that.  But it misses the point that a contractual non-entitlement does not necessarily involve dishonesty. 

31.  I do not know whether the appellant was aware of it, but I know it from the statement of findings, that the bank was informed of the appellant’s participation in the HFS and was asked to notify the Director if there was “a foreclosure, cessation or early redemption of the mortgage loan”.  The statement of findings also tells me that the defendant in his evidence said that he thought the bank would have informed the government.  It is clear that this must relate to the sale of the property, but it is not clear whether it related to the repossession of the property pending sale as well.  I am not going to adjourn for a transcript as, because of the matters I have just dealt with, the respondents have failed to make me sure that the appellant was acting dishonestly after repossession and before sale.  Whether he actually knew or not, or guessed it or whatever, the fact of the arrangement that his bank tell his employer of any “cessation” sits ill with the idea of keeping mortgage default and repossession dishonestly secret.  There was, very fairly, a suggestion in argument from counsel for the respondent that the appellant may well have signed an authority allowing the bank to divulge his affairs to his employers, but in the circumstances it was not necessary to pursue this.

32.  Finally, in relation to this period and dishonesty, one needs to look to the length of time involved.  There may well come a moment when the passage of time after dispossession may demonstrate dishonesty in relation to the continued receipt of allowance.  Whilst 10 months is getting on, I do not judge in the circumstances that it was so long that it made an adverse inference on honesty the only reasonable inference.  After 30 years service a man may consider that he has earned himself some breathing space to save his home, whatever he may know and appreciate about the private rights flowing from the contract of employment.  In my judgment he can be heard to say that he truly intended to make everything all right and pay all the arrears and so resume living in the property and was therefore not acting dishonestly, even though he knew himself to be in breach of the terms of his employment.

33.  Let me turn to the question of dishonesty between the sale of the property on 4 February 2004 and the appellant telling someone at the Treasury over the telephone, when he received his salary statement at the end of May 2004, that the sale had taken place.

34.  The appellant gave evidence that he knew the bank would tell the government.  No one can disbelieve that.  It was obvious that it would happen.  I thus find it hard to see how he can successfully be accused of dishonesty for failing to report that event at this stage when he knew that the bank was going to tell his employer.  The identity of the person who reveals the information was not significant.  It had to be a question of time only.

35.  Even if there was no explanation for the appellant’s delay in his approaching the Treasury, a case for dishonesty built on delay or inactivity would be a thin one as it would be difficult to infer dishonesty thereby as there was no reason for the appellant to think that there would be any significant delay.  The natural expectation would not be one of delay.

36.  However, there was an explanation as to why the appellant did not notice that the allowance was still paid, involving a road traffic accident and his absence from work and a failure to keep up with the relevant paperwork at his office; the fact that the allowance for March was not credited to his bank account and a withdrawal by his girlfriend without his knowledge from his account in April.  When the appellant saw the allowance was paid for May 2004 he then reported the matter to the Treasury.  Again the magistrate did not reject these explanations as he was sure of dishonesty on the basis that it flowed from the appellant’s knowledge of the contractual position, namely that the Director would not pay if he knew all the facts.

37.  No evidence or argument in the case destroyed these explanations of his delay.  Indeed, as I have said, the word of the appellant was one that attracted weight.  It is thus that the respondents have failed to make me sure that the appellant acted dishonestly in the period between the sale of the property and the end of May as well.

38.  The result is that this appeal against the conviction succeeds.  I quash the conviction and the suspended sentence of imprisonment that was imposed.