HKSAR v. WU YING MING

CACC394/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 394 OF 2004

(ON APPEAL FROM DCCC NO. 1315 OF 2003)

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REASONS FOR JUDGMENT

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Hon Ma CJHC (giving the Reasons for Judgment of the Court) :

1. On 26 August 2004, the Applicant was convicted after trial in the District Court of one charge of false accounting, contrary to section 19(1)(b) of the Theft Ordinance, Cap.210 (“the Ordinance”) and 17 charges of theft.  On 30 August 2004, he was sentenced to a term of 18 months’ imprisonment for the false accounting charge and 8 months for each of the theft charges, the theft sentences all to run concurrently with each other and 4 months of such sentences to run concurrently with the false accounting sentence, 4 months to run consecutively.  In total, therefore, the Applicant was sentenced to a term of 22 months’ imprisonment.  He now seeks leave to appeal against conviction.

2. At the conclusion of the hearing, we gave leave to appeal, dismissed the appeal in relation to the false accounting charge but allowed the appeal for the theft charges, as a result setting aside the sentences for those charges.  This left the Applicant to serve a term of imprisonment of 18 months for the false accounting charge.  We said we would hand down our reasons for judgment in due course.

3. The charges arose from the dealings that the Applicant had in 2001 with a finance company called SMEloan Hong Kong Limited (“SMEloan”).  In about May 2001, the Applicant was approached by a representative of SMEloan with an inquiry whether his company, Zhong Shun Enterprises Company, a sole proprietorship of the Applicant (“Zhong Shun”), wished to obtain credit facilities from SMEloan.  At that time, the Applicant appears not to have been interested.

4. Over the course of next 2 months, the Applicant was again approached by the same person at SMEloan.  This time, documents were provided to SMEloan which eventually led to the Applicant indicating that he was interested in obtaining credit facilities for his company.  This followed an indication given to him that a $1 million facility could be offered.  The mechanics of the credit facility arrangement stipulated by SMEloan required Zhong Shun to assign its business (including its existing book debts) to an incorporated company from whom SMEloan would then secure fixed and floating charges which could be duly registered in accordance with the provisions of the Companies Ordinance, Cap.32.  The Applicant understood this request.  On or about 27 August 2001, he bought a shell company, Sure Loyal Limited (“Sure Loyal”), probably for the very purpose of enabling credit facilities to be obtained from SMEloan.

5. On 19 September 2001, the Applicant attended the offices of SMEloan to formalize the $1 million credit facility arrangement.  A number of documents were signed by him that day on behalf of himself personally, of Sure Loyal and Zhong Shun.  Some of these documents have assumed considerable importance in the present appeal.  A description of the contractual arrangements becomes necessary at this juncture (all the documents referred to are dated 19 September 2001) : -

(1)	By an Offer Letter from SMEloan to Sure Loyal, it was stipulated that the type of credit afforded to that company was a revolving credit facility.  The amount of the facility was not to exceed $1 million.  Interest and fees were payable to SMEloan.  Repayment of any loan was to be on demand.  The amount of any loan was to be based on an advance ratio of 70% against “eligible account receivables”.  This phrase is of crucial importance in relation to the theft charges.
(2)	By a Deed of Assignment, the Applicant (as the sole proprietor of Zhong Shun) assigned to Sure Loyal the business of Zhong Shun and in particular its book debts.  Recital (A) of the Deed refers to a Schedule setting out a list of the debtors of Zhong Shun “as at the date hereof” (that is, 19 September 2001).  The Schedule to the Deed, headed “Details of Existing Book Debts” sets out the names and addresses of 34 of Zhong Shun’s debtors and the amount of the debts owed.  The total indebtedness was represented to be $1,544,695.84.  Details of these debts had apparently already been provided to SMEloan on 13 September 2001 and it was on this basis that the loan facility of $1 million was approved in principle.  For present purposes, the important point to bear in mind is that the details of indebtedness shown in the Schedule to the Deed of Assignment were represented as reflecting the position as at 19 September 2001.  This aspect forms the subject matter of the false accounting charge.  Here, it should also be noted that in the Credit Facilities Agreement entered into between Sure Loyal and SMEloan, these receivables are defined as accounts receivables.  By clause 11(c) of that Agreement, Sure Loyal warranted the accuracy and truth of accounts receivables contained in any report.
(3)	By a Charge over Receivables, the accounts receivables (which, as defined in that document, included those debts set out in the Schedule to the Deed of Assignment as well as future debts) were charged by Sure Loyal to SMEloan, as beneficial owner, by way of fixed charge as security for its liabilities under the credit facility arrangements (clause 3.1).  The assignment was to be an absolute one (clause 3.2).
(4)	Following on from this assignment of the accounts receivables to SMEloan, Sure Loyal became obliged to deposit into a designated account all accounts receivables once received from debtors :- see clause 4.1(a) of the Credit Facilities Agreement.  Pending such deposit, it would appear that the monies representing the repayment of debts would be held on trust by Sure Loyal for SMEloan : clause 5(a) of the Charge over Receivables.  By a letter dated 19 September 2001 from SMEloan to Sure Loyal, Sure Loyal was required to provide updates on any changes to accounts receivables.  More important for our purposes, Sure Loyal was required to deposit any payments received from debtors into a designated bank account at the Chase Manhattan Bank.

6. After the loan documentation had been signed by the Applicant, funds were released to Sure Loyal : $500,000 and $490,000 were provided to Sure Loyal on 25 September 2001 and 27 September 2001 respectively.  These sums were never repaid.  Further, debtors of Zhong Shun (or Sure Loyal) made repayments which were never deposited into the designated account.  17 of these payments (the subject matter of the theft charges) were instead paid into the Applicant’s personal account.

7. It was against this background that the 18 charges were laid against the Applicant.

False Accounting (Charge 1)

8. The case against the Applicant on the false accounting charge was simply put.  The accounts receivables which were enumerated in the Schedule to the Deed of Assignment (which was signed by the Applicant) were dishonestly misrepresented.  The stated accounts receivables were inaccurate in that 13 of the 34 debtors stated in the Schedule (with debts amounting to $695,888.66) had in fact by 19 September 2001 already settled their debts.  Further, the debts owing from these 13 debtors amounted in any event to only $470,846.86, not $695,888.66.  So much was admitted by the Applicant as shown by the admitted facts.

9. The Judge referred to the following evidence given by witnesses called by the prosecution : -

(1)	A former employee of SMEloan, Lam Hoi-sing (PW1), who was the business development manager, gave evidence that the accounts receivables of Zhong Shun were fully discussed with the Applicant.  He was given a computed disc by the Applicant containing details of the accounts receivables.  The information on the disc was the same as that contained in the Schedule to the Deed of Assignment.  According to PW1, the accounts receivables constituted a part of the security for the credit facilities afforded to Sure Loyal (as was the position under the contractual arrangements).
(2)	The director of operations for SMEloan, Ms Lena Chen, (PW2) said that SMEloan usually did not independently verify accounts receivables provided by loan applicants.  It would rely on the accuracy of the material provided.
(3)	The operations manager of SMEloan, Ms Jenny Lai (PW3), said that all the main points of the credit facilities documentation were explained to the Applicant.  Though she told the Applicant that he could take away the documents before signing, and if necessary to seek legal advice, he declined.
(4)	A loans officer of SMEloan, Ms Cheng Wing-yin (PW4), told the Court that had SMEloan known of the fact that 13 of the debtors in the accounts receivables provided by the Applicant had already paid off their indebtedness (alleged to total $695,888.66), the whole credit facilities application and the loan amount would have been reconsidered by SMEloan.
(5)	An employee in the debt recovery department of SMEloan, Yeung Chi-keung (PW6), told of how, when he contacted debtors to verify the accounts receivables provided by the Applicant, he was informed by the accountants of these debtors that in fact no money was owed by them, the debts having already been settled.  When he confronted the Applicant with this, the latter said, without explanation (even when pressed), that he had asked those accountants to tell SMEloan that no money was owed even though in truth, according to him, the debtors did owe money.
(6)	A former clerk working for the Applicant and Zhong Shun, Ms Wai Pui-ying (PW7), said in evidence that when she prepared a disc containing the accounts receivables of Zhong Shun for the Applicant, he told her to make alterations to it.

10. The Applicant did not give or call evidence at the trial.  The Judge found the prosecution witnesses to be honest and reliable and was satisfied on the evidence (the oral testimony, the admitted facts and the documents) that the Applicant had dishonestly furnished information (namely the Schedule containing details of accounts receivables) which, to his knowledge, was misleading, false or deceptive.

11. In the Perfected Grounds of Appeal and in his skeleton submissions, Mr John Haynes (for the Applicant) has taken us through a number of points.  He referred to the background of the credit facility agreement when the Applicant was at first reluctant to take a loan.  This was, with respect, not relevant.  Mr Haynes also submitted there was some doubt as to which date the Schedule showing the accounts receivables was referable.  His submission was that the Schedule “may not have been accurate when originally generated i.e. they may not have been ‘dishonest’; they were simply out of date”.  This argument is unsustainable on the evidence.  We need only refer to the statement in paragraph (A) of the Recitals to the Deed of Assignment that the Schedule thereto contained details of debts “as of the date hereof”, that is, 19 September 2001.  At the hearing, Mr Haynes also highlighted the fact that updates on the state of accounts receivables were received by SMEloan in the time leading up to 19 September 2001 but he was unable to connect this evidence in any way to the 13 loans that had already been repaid.

12. We are of the view that the Judge’s approach and conclusions on the first charge cannot be faulted.  There can be no reasonable doubt that the information presented to SMEloan regarding the accounts receivables was misleading, false or deceptive in a material particular and that the Applicant was aware of this.  The appeal on this charge therefore stood to be dismissed.

Theft (Charge 2 – Charge 18)

13. The case against the Applicant in relation to these charges was equally simply put.  After the credit facilities have been granted to Sure Loyal, there came a time in the course of September and October 2001 when Zhong Shun’s (Sure Loyal’s) debtors repaid their debts.  Instead of depositing the repayments into the designated bank account at Chase Manhattan Bank, the Applicant paid them, or instructed others, namely, PW7 to pay them, into his personal account at the National Commercial Bank.  This, says the Respondent, was plainly theft : the repaid sums represented property that the Applicant was obliged to deal with in a particular way, namely to be paid into the designated bank account and held for SMEloan’s benefit.  It was therefore property belonging to another : - see section 6(3) of the Ordinance.

14. The Judge agreed and accordingly convicted the Applicant of these charges.

15. From the above description of the contractual arrangements for the credit facilities (see paragraph 5 above), it can be seen that the structure of the facilities afforded to Sure Loyal does not at first sight appear to be out of the ordinary.  A statement of accounts receivables was provided and these accounts receivables (which were to be assigned to Sure Loyal) were charged to SMEloan together with an obligation on Sure Loyal’s part to pay amounts received from debtors into a designated account.  The monies in this designated account would be charged to SMEloan : - see the Charge on Deposits dated 19 September 2001.  Quite simply, it appears that payments received by Sure Loyal would be automatically subject to the fixed charge.

16. However, it will be remembered (see paragraph 5(1) above) that the Offer Letter states the advance ratio to be 70% against “eligible account receivables”.  This term was defined in the Offer Letter in the following terms : -

“	(i)	Excluding any account receivables from a related company.
	(ii)	Maximum account receivables concentration is at 35%.
	(iii)	Invoice(s) past due more than 90 days will be classified as ineligible receivables; if 25% of a debtor’s outstanding receivables is past due more than 90 days, then all its receivables will also be classified as ineligible receivables.
	(iv)	If debtor(s) payment were collected by your company directly instead of deposit through SMEloan collection bank, such debtor(s) will be classified as ineligible receivables.
	(v)	Overseas receivables will be classified as ineligible receivables.” (emphasis added)

17. We draw attention in particular to paragraph (iv) of this definition.  From this, it would appear at least to be reasonably arguable that, implicitly, any payments received from debtors could be paid into an account other than the SMEloan designated account.  In other words, it could be paid into the Applicant’s own account (or any account other than the designated account), the only consequence being that the relevant debt would no longer be classified as an eligible accounts receivable which could be taken into account in assessing the 70% advance ratio earlier mentioned.  Obviously, if the debt were to be paid into the designated account, it could be treated as an eligible accounts receivable but if it was not, the consequence would not be that it became a wrongful appropriation, much less a dishonest one.

18. We realize that the effect of this clause appears to be contrary to those provisions in the other contractual documents that make it quite clear that any accounts receivable would be charged to SMEloan.  We also recognize that this was not a point taken by the Applicant either below or on appeal (until the Court alerted the parties to it).  The Judge did not consider it (understandably in the circumstances).

19. It may be possible to construe the clause consistently with the other apparently contradictory provisions by giving effect to it only where the advance ratio at any time (here it should be remembered that the credit was a revolving one) was in excess of 70%.  Be that as it may, we are left with some real doubt as to whether it was proved that the Applicant had the necessary dishonest intent in relation to the theft charges.  It should be noted that an appropriation is not to be regarded as dishonest if a person acts in the belief he is entitled to appropriate : - see sections 3(1)(a) and (b) of the Ordinance.  In the present instance, there is also some doubt as to whether the relevant property (the repayment made by the debtors) belonged to SMEloan in the first place.

20. The above conclusions gain support from the Respondent’s own skeleton submissions.  At paragraph 32, the Respondent says this “Item (d) [that is, (iv) of the definition of ‘Eligible account receivables’ referred to in paragraph 16 above] appears to assume that the Applicant was allowed to deposit cheques received from account receivables into his own account, in which event, the account receivables to which the cheques related would cease to be eligible”.  At the hearing of the appeal, Mr John Reading SC (for the Respondent) has fairly accepted that he faces real difficulties in relation to the theft charges.

21. In the circumstances, we were satisfied that the convictions for the theft charges could not stand and the appeal on these charges was accordingly allowed.