HKSAR v. LAM HONG AND OTHERS

HCMA 989 /2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO. 989 OF 2001

(ON APPEAL FROM ESCC 79 OF 2001)

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J U D G M E N T

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1. This is an appeal against conviction only.

2. The four appellants were charged with and convicted of the following offences:-

" (Amended) 1st Charge (against D1 & D4)
Statement of Offence

Conspiracy to defraud, contrary to common law and punishable under section l59C(6) of the Crimes Ordinance, Cap. 200.

Particulars of Offence

LAM Hong and CHAN Yu-hong, on or about the l5th day of January 2000, in Hong Kong, conspired together to defraud China Sea Marine Limited by dishonestly:-

(a) failing to disclose or concealing their interest in Smart Win Shipping (HK) Limited to the said China Sea Marine Limited;

(b) diverting service orders of Zhong Hua Fang Da (HK) Limited from the said China Sea Marine Limited to the said Smart Win Shipping (HK) Limited;

(c) falsely representing to the said China Sea Marine Limited that the said Smart Win Shipping (HK) Limited was the shipper of the service order number 450MVTOR3225 when in fact it was the said Zhong Hua Fang Da (HK) Limited; and

(d) thereby causing the said China Sea Marine Limited to charge at a lesser rate for its services.

(Re - Amended) 2nd Charge (against D1 & D3)
Statement of Offence

Conspiracy to defraud, contrary to common law and punishable under section l59C(6) of the Crimes Ordinance, Cap. 200.

Particulars of Offence

LAM Hong and LEE Kwok-keung, on or about the 3rd day of February 2000, in Hong Kong, conspired together to defraud China Express Agency Company Limited by dishonestly: -

(a) failing to disclose or concealing their interest in Smart Win Shipping (HK) Limited to the said China Express Agency Company Limited;

(b) diverting service orders of Zhong Hua Fang Da (HK) Limited from the said China Express Agency Company Limited to the said Smart Win Shipping (HK) Limited;

(c) falsely representing to the said China Express Agency Company Limited that the said Smart Win Shipping (HK) Limited was the shipper of the service orders number RS5695700 and RS5700755 when in fact it was the said Zhong Hua Fang Da (HK) Limited; and

(d) thereby causing the said China Express Agency Company Limited to charge at a lesser rate for its services.

(Re -Amended) 3rd Charge (against D1 & D2)
Statement of Offence

Conspiracy to defraud, contrary to common law and punishable under section 159C(6) of the Crimes Ordinance, Cap. 200.

Particulars of Offence

LAM Hong and LAM Kwok-hung, on or about the 6th day of February 2000, in Hong Kong, conspired together to defraud China Sea Marine Limited by dishonestly: -

(a) failing to disclose or concealing their interest in Smart Win Shipping (HK) Limited to the said China Sea Marine Limited;

(b) diverting service orders of Zhong Hua Fang Da (HK) Limited from the said China Sea Marine Limited to the said Smart Win Shipping (HK) Limited;

(c) falsely representing to the said China Sea Marine Limited that the said Smart Win Shipping (HK) Limited was the shipper of the service order number 450MVTOR3204 when in fact it was the said Zhong Hua Fang Da (HK) Limited; and

(d) thereby causing the said China Sea Marine Limited to charge at a lesser rate for its services.

(Amended) 4th Charge (against D1 & D3)
Statement of Offence

Conspiracy to defraud, contrary to common law and punishable under section 159C(6) of the Crimes Ordinance, Cap. 200.

Particulars of Offence

LAM Hong and LEE Kwok-keung, on or about the 18th day of February 2000, in Hong Kong, conspired together to defraud China Express Agency Company Limited by dishonestly: -

(a) failing to disclose or concealing their interest in Smart Win Shipping (HK) Limited to the said China Express Agency Company Limited;

(b) diverting service orders of Zhong Hua Fang Da (HK) Limited from the said China Express Agency Company Limited to the said Smart Win Shipping (HK) Limited;

(c) falsely representing to the said China Express Agency Company Limited that the said Smart Win Shipping (HK) Limited was the shipper of the service orders number SYD-000lA and SYD-0001B when in fact it was the said Zhong Hua Fang Da (HK) Limited; and

(d) thereby causing the said China Express Agency Company Limited to charge at a lesser rate for its services."

3. It can be seen that the particulars of each offence, with the exception of the transaction numbers were identical. The facts of the case as found by the magistrate were that each of the appellants at all relevant times were employed by China Express Agency Ltd. or its subsidiary China Sea Marine Ltd. (jointly referred to as CECS Ltd). They were shipping companies operating in Hong Kong and were in the business of obtaining cargo space on vessels for the purposes of their clients' shipping goods overseas.

4. One of those clients of CECS Ltd was Zhong Hua Fang Da (HK) Ltd (ZH Ltd) an exporter of goods from HK which from time to time had booked shipping space through CECS Ltd. That had occurred by way of a ZH Ltd employee, PW2, contacting the 1st Appellant at CECS Ltd and, after accepting the price quoted by CECS Ltd, ordering shipping space to be booked by CECS Ltd on behalf of ZH Ltd.

5. On 17 January 2000, i.e. two days after the transaction particularised in the 1st charged offence, the 1st appellant, the 3rd appellant and the 4th appellant had incorporated a company Smart Win Shipping Ltd (SW Ltd). Each of those appellants was a shareholder. The 2nd appellant became a shareholder about 10 days later. Each appellant had a roughly equal shareholding in SW Ltd. At the time each appellant was still employed by CECS Ltd. The 1st appellant was a sales executive of CECS Ltd who communicated directly with CECS Ltd's clients including PW2 of ZH Ltd. The 2nd appellant and the 3rd appellant were operations supervisors within CECS Ltd, and the 4th appellant was an operations clerk within CECS Ltd.

6. The business of CECS Ltd, for the purpose of this appeal, had two relevant aspects. The first was that on occasion CECS Ltd would book shipping space directly for a client exporters shipment such as it did on a regular basis for ZH Ltd. On those occasions the client exporter would be charged a full fee by CECS Ltd.

7. A second aspect of CECS Ltd's business was that on occasion it would book shipping space for another shipping company so that shipping company could provide shipping space to its own client. On those occasions CECS Ltd would charge the other shipping company (called a co-loader) a much reduced fee and the other shipping company or co-loader would accordingly receive the lion's share of the shipping fee paid by the client exporter.

8. In respect of the present offences it was alleged that on each charged occasion the 1st appellant and his charged co-conspirator had, with the consent of PW2 on behalf of ZH Ltd, put forward their own company SW Ltd as a co-loader whose client was ZH Ltd and that when the appropriate entries were made in the records of CECS Ltd by the conspirators, CECS Ltd would then regard SW Ltd as a co-loading company and charge it a reduced fee allowing SW Ltd to receive the balance of the shipping fee paid by ZH Ltd.

9. CECS Ltd on those occasions was unaware that ZH Ltd was involved in the particular transaction as the exporter of the shipped goods.

10. What these facts effectively comprised, in the findings of the magistrate, was a diversion of business from CECS Ltd by CECS Ltd employees to their own company, SW Ltd.

11. The grounds of appeal of the appellants are identical in respect of each appellant and can be fairly summarised to the effect that as PW2, properly, and as she was entitled to do on behalf of ZH Ltd, had decided to use SW Ltd as its shipper at the invitation of the 1st appellant rather than continue its business with CECS Ltd, no fraud was practised on CECS Ltd as CECS Ltd had no right or entitlement to the business of ZH Ltd.

12. As a corollary to that says Mr Yu on behalf of the appellants, the entries made in the books of account of CECS Ltd by the appellants to the effect SW Ltd was the "co-loader" company in respect of the charged shipping transactions were not misrepresentations of facts and the appellants had not acted or agreed to act dishonestly.

13. It must be said that the alleged criminality in this case revolves around the simple and non-contentious fact that the appellants secretly, whilst employees of CECS Ltd, set up their own shipping company in opposition, or at least in trade competition, with CECS Ltd, and while purportedly performing their duties within CECS Ltd took orders for their own company from a CECS Ltd client, ZH Ltd.

14. But having said that it is true that such secret profit making scenarios, if they may be called that, have on occasions caused divergences of opinion in the law. On the one hand the prosecution alleges that an agreement to do secretly that which it is common ground for the purposes of this appeal was done in respect of each of the charged transactions in the present case is plainly an agreement by employees of CECS Ltd to defraud CECS Ltd. On the other hand the appellants argue that although they may have displayed a degree of moral turpitude by their secret activities and were not acting in the best interests of their employer, perhaps even being in breach of their contract of employment, what they have done falls short of the criminality required to establish the offence of conspiracy to defraud.

15. In Professor Smith's text "Property Offences" the learned author says this in respect of secret profit making by employees at the expense of their employer:-

"The untidiness and uncertainties of the present law are well illustrated by considering the making of secret profits by an employee who makes use of his employer's facilities and materials. This has been held to be indictable as conspiracy...It is also possible that the makers of secret profits commit theft because they become constructive trustees of the proceeds of what they sell. However, in Tarling v. Government of the Republic of Singapore, the House of Lords said that company directors who enriched themselves at the expense of the companies for whose benefit they supposedly acted as directors were not guilty of conspiracy to defraud, theft or any other offence. It is difficult to reconcile the two strands of authority, and the law is simply uncertain."
(A.T.H. Smith "Property Offences" 1994 Ed P. 582)

16. While none of the cited cases are exactly in point in terms of the facts of the present case, and in saying that I include the case of Tarling v. Government of the Republic of Singapore (1978) 70 Cr App R 77, the passage does serve to illustrate the potential difficulties of such factual situations as the present so far as the concept of fraud is concerned.

17. In my view the matter must be resolved by having regard to what amounts in law to the defrauding of an individual or company. There is no necessarily precise definition of common law fraud. But the definition which is most often relied upon as best expressing the elements and limitations of the common law offence of conspiracy to defraud is contained in the leading case of Scott v Metropolitan Police Commissioner (1975) A.C. 819 where Lord Dilhorne said:-

"...it is clearly the law that an agreement by two or more persons by dishonesty to deprive a person of something which is his or to which he is or would be or might be entitled and an agreement by two or more by dishonesty to injure some proprietary right of his, suffices to constitute the offence of conspiracy to defraud." (emphasis added)

18. It was argued before me by Mr Yu that CECS Ltd had no propriety right to the business of ZH Ltd and that ZH Ltd could, if it wished, simply cease to do business with CECS Ltd or, as it did, switch that business to SW Ltd.

19. In my view that must be so. It may be that CECS Ltd arguably has some contractual right as to its employees not undermining or damaging its business, but that in no way formed any part of the prosecution case so far as these offences were concerned and in no way formed any part of the magistrate's findings.

20. Instead, the prosecution case as accepted by the magistrate in his findings appears to have been that the conspirators on each charged occasion, in terms of the Scott definition of conspiracy to defraud, "...deprived a person (i.e. CECS Ltd) of something ... to which it might become entitled" namely the full amount of fees paid by ZH Ltd for shipping services provided by CECS Ltd.

21. In my judgment that is a sufficient financial interest so as to be capable of being the subject of a conspiracy to defraud. The mere fact that it is only an interest to which CECS Ltd might become entitled in the event that ZH Ltd had continued doing business with and paying fees to CECS Ltd does not remove it from the category of things to which CECS Ltd might be entitled. The entitlement, so far as the financial interest is concerned, does not have to be a presently existing entitlement. It is enough if it is only a possible entitlement in the sense that it is something which the victim of the conspiracy, but for the conspiracy, might expect to have obtained.

22. A somewhat extreme example of that would be perhaps where a group of conspirators, in order to ensure their own chances of succeeding in a tender for a commercial project, dishonestly intercepted and removed the tender of a rival. It seems to me that the victims of such a fraudulent scheme would include at the very least the bidder whose tender was removed and that this would be so regardless of the fact that victim had at that time no specific right in or entitlement to any future contract.

23. But in the present case the facts, as found by the magistrate, are much clearer. He concluded that the financial rewards of the existing business of CECS Ltd with ZH Ltd was lost to it by way of ZH Ltd's business being diverted to SW Ltd as the result of the actions of the conspirators. That diversion was evidenced in the records of CECS Ltd being altered so as to remove reference to ZH Ltd and substituted by reference to SW Ltd so as to ensure the major part of the shipping fee was diverted to the appellants' company SW Ltd. Those facts found by the magistrate are, in my judgment, sufficient in law to establish, in the terms of Scott's case that CECS Ltd, as a result of the conspiracy, was to be and was defrauded of something to which it might have been entitled in the sense the conspiracy was directed to the detriment of CECS Ltd's receipt of the financial benefit of future fees paid by ZH Ltd.

24. There are some final matters to be dealt with. Mr Yu argues that because PW2, on behalf of ZH Ltd agreed to dispense with CECS Ltd as its shipping agent and replace it with SW Ltd that no fraud could have been practised on CECS Ltd. In my judgment the determination of whether a fraud has been practised on CECS Ltd is not decided by ZH Ltd, or a staff member of ZH Ltd, being compliant in SW Ltd taking over CECS Ltd's business with ZH Ltd. It is decided by proving the agreement between the conspirators was, firstly, one that had within its terms the object of diverting business in the form of CECS Ltd customers from CECS Ltd to the appellants' company, SW Ltd. It does not matter that any such customer agreed to or consented to that, so long as the conspirators can be shown to have set out to achieve that divergence of business. Secondly the agreement must be shown to have been dishonest, and thirdly it must be shown for the purposes of this case that it involved, as I have said, the conspirators acting to the detriment of CECS Ltd's receipt of a financial benefit.

25. In his Statement of Findings the learned magistrate said the following:-

"During the material time each defendant was a (CECS Ltd) employee owing a duty to act at all times in a manner which protected (CECS Ltd's) commercial interests. In the circumstances surrounding each charge all the defendants acted in a manner contrary to the interests of their common employer. They each agreed, in the circumstances of each charge, to substitute (SW Ltd) to the detriment of (CECS Ltd)."

(and later)

"...All defendants failed to disclose to (CECS Ltd) their vested interests in (SW Ltd). The only possible, foreseeable result of this would have been to enhance their own company's accounts, their own personal and hidden profits arising therefrom and commensurately reduce their employer's due income from each transaction."

(and finally)

"Each defendant:

(i) failed to disclose his interest in (SW Ltd) to (CECS Ltd)

(ii) participated in diverting (ZH Ltd) shipping orders from (CECS Ltd)...to their own company (SW Ltd)

(iii) participated, as described and found by me in making false representations to (CECS Ltd) as the case might (be) thro' manipulations of the (CECS Ltd) records which had the intended and actual effect of ensuring that (CECS Ltd)...treat each of the shipping orders listed in the charges as (SW Ltd) orders rather than as direct (ZH Ltd) shipping orders, and;

(iv) thereby caused, in the circumstances of each charge, (CECS Ltd) to charge (ZH Ltd) at a lower rate to its prejudice and to (SW Ltd's) advantage."

26. The magistrate was entitled to arrive at these findings of fact on the evidence before him. He was entitled to find that the appellants, so far as each charged offence was concerned, had entered into a dishonest agreement which involved acting to the detriment of CECS Ltd's financial interests, namely, its obtaining full fees from ZH Ltd by diverting ZH Ltd as a customer from CECS Ltd to SW Ltd, and so representing that in the accounts of CECS Ltd.

27. The final aspect of the appellants' grounds of appeal is their complaint that the magistrate was wrong to reject the appellants' version of events to the effect that the alteration by them of CECS Ltd's books of account may have come about through innocent mistake or error.

28. There is no merit in this complaint. By the magistrate's carefully considered findings of dishonesty in this regard he effectively removed any possibility of the alterations to CECS Ltd's record being made through innocent mistake. He applied the test set out in R v Ghosh (1982) 75 Cr App R 154 so far as this is concerned, and said:-

"I rejected any suggestion that honest mistake, ignorance or simple lack of ethics was just as equally consistent with the actions of the defendants as was the notion of criminal conspiracy. Having answered both questions to the Ghosh direction in the affirmative on each charge for each defendant, I found the element of dishonesty proven in each charge as against each defendant. I drew the only available inference namely, that they dishonestly agreed to bring about that state of affairs whereby (CECS Ltd) considered these transactions to be referral co-loader ones."

29. In my view given the fact that each appellant was operating secretly within CECS Ltd as a director of a rival company which had diverted business from an existing customer of CECS Ltd and had then altered CECS Ltd's records so as to describe their own company SW Ltd as a "co-loader" with CECS Ltd in the transactions involving ZH shipments, the magistrate was perfectly entitled to conclude the appellants had acted dishonestly and was entitled to reject any possibility of honest involvement by the appellants in any aspect of the overt acts of the conspiracy, including the alteration of CECS Ltd's accounts.

30. For these reasons the appellants' appeals against their convictions are dismissed.