PBM (HONG KONG) LTD. v. TANG KAM LUN, ALLAN AND OTHERS

CACV 274/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 274 OF 2002

(ON APPEAL FROM HCA NO. 12138 OF 1997
AND HCA NO. 13316 OF 1997)

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HCA 12138/1997

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Lam given on 24 May 2002. The appeal in this case concerned that part of the judgment by which the judge ordered that Regent Trinity Investment Limited ("RTIL") should pay the plaintiff forthwith all the monies in its bank account, representing the net proceeds of sale of Unit C, 2nd Floor, Hatton Place, Po Shan Road, Hong Kong ("the Hatton Place flat") together with interest, and that Mr Chan Chun Chung, Wyman ("Chan") and RTIL should pay the plaintiff's costs of the two actions and that the 3rd defendant in HCA 13316 of 1997, Liu Sui Yuk, who is Chan's wife, should bear her own costs. At the conclusion of the hearing of this appeal this court reserved its judgment which we now give.

Background

2. The 1st defendant in each action, Allan Tang Kam Lun ("Tang"), was an accountant employed by the plaintiff. The plaintiff's main business is the sale of watches, which it conducts on a substantial scale. Tang had a responsible position with the plaintiff; although not a director, his title was financial director. Over the years until July 1997, when he left the plaintiff's employment, he had succeeded in diverting a substantial number of payments which should have reached the plaintiff and in embezzling the proceeds. Altogether there was something in the order of at least HK$49 million which Tang had diverted to his own use. The manner in which that was done is irrelevant for the purposes of this case. It is sufficient to say, however, that Tang's fraudulent conduct had continued over a number of years. The plaintiff became aware of what had happened as a result of an internal audit which commenced in May 1997. Tang was aware of this audit at the time it was being carried out and it is apparent that he appreciated that his actions would soon come to light. He resigned his position in the plaintiff company on 18 July 1997. Although it would seem that, at some stage, he went to Canada, he returned to Hong Kong in September 1997. He was eventually charged with false accounting and pleaded guilty to those charges. He took no part in these proceedings. It would appear that Chan was assisted by Chau Sau Lai ("Chau"), who was his girlfriend, and who had herself, at one stage, been employed by the plaintiff. Chau's role in connection with Tang's fraudulent conduct seems to have been as a recipient of at least some of the proceeds.

3. This action concerns dealings in relation to RTIL. RTIL appears to have been a company whose sole purpose was to hold the Hatton Place flat. Tang and Chau contracted to buy the shares of RTIL, which held the Hatton Place flat, on 7 March 1997. The sale was completed on 2 June 1997 and the purchase price was HK$11,500,000. The judge below held that price was dictated by the value of the Hatton Place flat and probably reflected the market value of that property at that time i.e. March 1997.

4. On 26 June 1997 Tang and Chau executed a sale and purchase agreement with Chan and his wife by which all the shares in RTIL were sold to Chan and his wife. The Hatton Place flat had been mortgaged to the Yien Yieh Commercial Bank Limited and at the time when the agreement with Chan and his wife was executed there was a loan outstanding of $8,050,000. The consideration for the sale was stated to be $3,146,447.92 which was said to have been calculated on the basis of the value of the property less the mortgage due to the bank and the amount which had to be paid to the bank in respect of the change of ownership of RTIL. The first point of importance in relation to this transaction was that no money changed hands on completion. It was Chan's case that the consideration was provided by discharge of the debts owed by Tang to Chan.

5. Thereafter, in October 1997 RTIL sold the Hatton Place flat at a price of $14,230,000. It has neither been suggested that the price at which that sale took place was other than the real market value nor has it been said that there was anything untoward in that sale. In contrast, however, it has been the plaintiff's case that the sale of the RTIL shares to Chan and his wife was a bogus or sham transaction which was part of Tang's attempt to secrete assets and render them untraceable.

Chan's case

6. It was Chan's case that the sale of the RTIL shares to his wife and himself was a genuine transaction. Although no money passed on the completion of the sale of the shares, it was said that not only was consideration provided by the discharge of debts which Tang owed him but that Tang owed a further HK$1 million over and above the consideration for the sale of the shares. It was Chan's case that Tang's indebtedness to him had arisen from a series of loans, most of which had been made in 1997, wherein money had been transferred, primarily, to accounts held by Chau. It was also Chan's case that money was owed by Tang to him in respect of entertainment expenses at nightclubs and in respect of loans made for the purposes of betting, some of them extending back to 1996.

7. At the commencement of the proceedings various interlocutory steps had been taken. These included applications by the plaintiff for mareva injunctions. As a result, Chan had made a number of affirmations. In addition he had made witness statements. At trial he was cross-examined at some length. As Mr Graham, who appeared on behalf of the plaintiff, said in the course of argument, that cross-examination took up a considerable part of the trial. As has been demonstrated in this court, Chan's affirmations were not consistent and they provided substantial material for cross-examination.

The findings in the judgment below

8. The judge came to the conclusion that Chan was not a credible witness. He considered that the sale of the RTIL shares was not a genuine transaction but was a sham. He held that it was an exercise in which Chan collaborated with Tang to conceal the assets which Tang had fraudulently acquired. Significantly, he also held that various handwritten notes which Chan relied upon in his evidence and, indeed, were relied upon in this court, were given by Tang to Chan for the purpose of giving credence to the sham transactions: see in particular paragraph 81 of the judgment.

9. In considering whether Chan had indeed made loans to Tang, the judge said, at paragraph 85 of the judgment:

"In my judgment, the only possible explanation was that Chan had been holding the money for AT (Tang). This could be either because AT had actually hidden funds in Chan's accounts or because Chan owed AT money in respect of some earlier dealings. Again for reasons given in Paragraph 12(e) above, I infer that the money hidden by AT or used by AT in such earlier dealings were funds misappropriated from PBM or monies derived therefrom. Hence, the money held by Chan for AT was money belonging to PBM in equity."

The judge then went on to consider Chan's knowledge as to the source of the funds. He concluded that Chan knew that he was assisting Tang in concealing property from their rightful owner. There was no order made against Chan for repayment of monies because the proceeds of sale of the Hatton Place flat less the amount due on mortgage had been secured by mareva injunction.

The appeal

10. On this appeal it was sought to challenge both the findings of fact made by the judge as well as the holding that Chan was liable for rendering knowing assistance in respect of Tang's breaches of trust. The attack in respect of the findings of fact centred on the argument that the judge should have held that the transfers of funds from Chan to Tang and Chau were genuine loans of Chan's own money. In support of that, particular reliance was made upon a transfer of a sum of US$120,000 which was made on 2 June 1997 from a US dollar margin trading account, 511-188369-221, held in the name of Chan and his wife to an account of Chau, pursuant to instructions. In this respect it was said that there had been a payment into that margin trading account a few days earlier of US$127,795 which had come from a company called Gencity Co. Ltd. It was said that the judge had held that there had been no evidence to trace that particular sum of US$127,795 back to Tang and that in those circumstances the judge should have concluded that that money, and hence the US$120,000 which was transferred from Chan's account to Chau's account on 2 June, was Chan's money.

11. Similarly there had been two payments from an account held in Chan's name at the Yien Yieh Commercial Bank Limited, one on 8 April and the other on 16 April 1997. These payments were made to Tang. The first was for HK$1 million and the second was for HK$500,000. The first payment was approximately two-thirds financed by overdraft and the second payment was wholly financed by overdraft. On the basis that the monies constituted the proceeds of borrowing by overdraft, Mr Chang SC, who appeared on behalf of Chan and his wife and RTIL, averred that the monies were, on the face of it, Chan's monies and that the judge should have so held.

12. In the second place Mr Chang argued that the judge should not have held that Chan was guilty of rendering "knowing assistance" to Tang's breaches of trust. The appeal was put on the basis that, even if the judge had disbelieved Chan in respect of his evidence that the payments were loans to Tang, there was no basis for asserting that Chan was aware that the funds which were transferred were not Chan's own money but were monies which were impressed with a trust because they had been stolen from the plaintiff.

The appeal as to fact

13. The first part of the appeal is, thus, as to whether the judge was correct in rejecting Chan's evidence that he had made substantial loans to Tang. In addition to the three transfers which have been referred to in paragraphs 10 and 11 above, there was a further transfer on 3 June 1997 of HK$1 million from a securities account held by Chan.

14. During the course of this hearing Mr Graham demonstrated that there had been substantial inconsistencies in the evidence given by Chan on affirmation as to his dealings with Tang. For example, in the first affirmation which was made on 20 November 1997 Chan said:

"In order to give this Honourable Court the full picture of all the loans that I have lent the 1st defendant (Tang), I have to start in May, 1997."

That statement was, of course, made at the commencement of the proceedings. On 11 December 1997, Chan made another affirmation in which he found it necessary to produce the bank statements for accounts 511-188369-221. This showed a deposit which had been made by Tang into that account in November 1996. Chan sought to explain this on the basis that an equivalent sum, US$90,000, had been lent by him to Tang in October 1996 from another account. It was not apparently until much later that reference was made to other loans alleged to have been made in April 1997.

15. Another illustration of a change of stance arose out of paragraph 11 of the affirmation of 20 November. In that affirmation Chan had said that on 15 June 1997 Tang had asked him to lend him HK$2.3 million. In the affirmation made on 11 December, Chan said that he had been unable to trace the documents relating to the loan for $2.3 million. In paragraph 7 of an affirmation made on 29 December, Chan said that the loan for $2.3 million was made up by a payment of one cheque for $1 million on 8 April, another cheque for $500,000 on 16 April and a further sum of $800,000 which had been lent to Tang over the course of the 1996 to 1997 racing season. In the witness statement which was prepared for the trial and signed in July 2000, Chan said that he had agreed to lend Tang HK$2 million in April 1997 but that he only paid Tang $1,500,000 in cash in April because he had already paid expenses in the region of $500,000 for dinners and nightclubbing and he treated that as part of the loan. The witness statement also refers to a loan of HK$1 million.

16. Another discrepancy was that in the affirmation which he made on 6 January 1997 Chan provided an explanation for the transfer of RTIL on the basis that Tang had told him that because of his tight cashflow he could not afford the mortgage and other payments in respect of the property, since the mortgage loan payment alone came to $70,000 per month. Later, it transpired that Tang had continued to make the mortgage payments even after the shares were transferred. In his affirmation of 16 January 1998, Chan then came forward with an explanation as to why Tang had continued to pay the mortgage and other expenses in the period following the transfer of RTIL. This was put down to being a matter of convenience to Chan. Chan said that he repaid Tang in cash.

17. In my view, starting on this basis, before even coming to Chan's cross-examination, one could say that it would be somewhat remarkable if a court had been able to come to the conclusion that Chan had been a truthful witness. Indeed, it might also be said that the account of the loans given by Chan in paragraphs 9 to 11 of his witness statement do not even accord with Mr Chang's summary in the supplemental skeleton argument for this appeal. Having been taken through parts of the cross-examination I can only conclude that the judge was wholly justified in coming to the conclusion that he could not rely on one word which Mr Chan had said. The tenor of Mr Chan's evidence is wholly incredible. The picture, which he tried to paint, of being a generous person who would borrow money on overdraft and lend it interest free to the extent of large sums, coupled with the fact that he kept no records and simply trusted Tang because he believed Tang was a big spender who had large sums of money made from his currency and other dealings, simply belies belief.

18. One final matter which might be mentioned in relation to Chan's explanation as to the transfers of money relates to the 3 handwritten documents. As exhibits to his first affirmation, which was made on 20 November 1997, Chan exhibited 3 handwritten documents. 2 of those documents were dated the 30 May 1997 and purported to be acknowledgment for loans of $1 million each. The loans were stated to be temporary to be repaid in 3 months. The third note was also said to be in respect of a temporary loan to be for 3 months. That loan was said to be of $2.3 million and the Hatton Place flat was stated to be security for the loan. The flat was also stated to be security for a loan of $2 million which had been borrowed previously. The judge rejected these notes as being fabrications. Again, the only conclusion can be that the judge was amply justified in so doing. As has already been noted above, Chan's version of events, particularly in relation to the alleged $2.3 million loan, changed dramatically as new versions were given. It only need be said that the production of the notes in November 1997 tallied with the version of events then being given and that the version of events which was proffered ultimately had the hallmarks of being adjusted to try and make it appear that the notes had some validity.

19. Having rejected Chan's evidence about the transfers of money being loans to Tang, the question arises as to why would Chan make such a transfer. The transfers were unlikely to be gifts. The judge came to the conclusion that the only possible explanation was that Chan had been holding the money for Tang. From that it was a short step for the Judge to conclude that the only possible explanations were that Tang had passed funds to Chan in order to hide them in his accounts or because Chan owed Tang money in respect of some earlier dealings. Given the fact that Tang had been living beyond his means for a number of years and that he had only been able to do so by defrauding the plaintiff, it was quite legitimate for the judge to infer that these monies were funds misappropriated from the plaintiff or monies derived therefrom.

20. The judge was justifiably of the view that transactions involving Tang, Chau and Chan had all the hallmarks of money laundering. One incident that, perhaps, also illustrates this is the transfers in July 1997. On 2 July 1997, Tang deposited US$120,000 into Chan's US dollar Account. A few days afterwards, on 10 July 1997, at Tang's request, there was a transfer of US$120,000 to Chau's account. Tang's request is to be understood in the light of the fact that he himself drafted the letter of request to the bank, on his computer at work, and gave it to Chan to sign. Chan's explanation was that the 2 July transfer was unexpected and that it was in repayment of the outstanding amount of HK$1 million that he was owed. A few days later Tang had asked him for another loan and as he, Chan, had been busy, Tang had drafted the fax to the Bank. There are obvious matters which make Chan's explanations even on their face appear incredible. According to Chan, Tang had been in such desperate financial straits in June 1997 that he could not afford the mortgage payments and had to transfer the Hatton Road flat, in the shape of RTIL, at less than it would seem he could have obtained on the open market. Yet within a few days he was making a payment into Chan's account, unrequested and unexpectedly. Then within days he is arranging for an identical amount to be paid not to himself but to his girl friend. When to this is added the factor that the payment into Chan's account had been a cash payment the matter becomes more than suspicious. The only explanation is that Tang was arranging the transfers in order to hide the money in a place where he thought it was safe and would not be found and, at the same time, using the cash payment in an attempt to avoid leaving a readily detectable trail.

21. In paragraphs 52 to 81 of the judgment, the judge gave a detailed examination of Chan's evidence. From paragraph 62 onwards, the Judge dealt with the reasons for disbelieving Chan, specifically in relation to the alleged loans. It would be unnecessary to recite all the details here. The judge's analysis is cogent. Mr Chang did not attempt to deal with any of the crucial points made for disbelieving Chan's evidence. There were one or two observations which were made where it was said that the judge drew conclusions which should not have been made. One example was that the judge had made reference to the fact that the transfer of the shares in RTIL was effected so quickly that no proper investigation of title to the Hatton Road flat could have been made. Even on the basis that Mr Chang is correct that the same solicitors were involved in both the acquisition by Tang and Chau of the shares as were involved when the shares were passed to Chan and his wife, the criticism is of no effect when contrasted with the damning effect of the changes in the explanations and the inconsistencies in Chan's own evidence.

Knowledge giving rise to "knowing assistance"

22. Mr Chang's point that was pursued to the end was that there was no evidence to show that Chan had the requisite knowledge to render him liable for giving "knowing assistance" in relation to the breaches of trust.

23. The judge said at paragraph 88 of the judgment:

"I would not repeat what I have said on the law as to the requisite state of mind in the context of the claim against Chau. Given the level of co-operation given by Chan, he must have known that he was participating in the process of money laundering. Not only did he allow his accounts to be used for channelling of funds, he actively assisted AT by subscribing to transactions to give outsider a false impression of what happened. In the process, he signed documents including borrowing notes, sale and purchase agreement and share transfers to create a façade. Given his commercial background, he could not have missed the illicit nature of these sham transactions. As I have explained in Paragraphs 26 to 29 above, PBM was not required to prove that Chan knew that the monies came from funds misappropriated from PBM. It is sufficient that Chan knew that he was assisting AT in concealing properties from their rightful owner. On my finding of facts, Chan must have had such knowledge when he gave his assistance to AT regarding these transactions. Notwithstanding the high level of probability required, I conclude that he was plainly dishonest under the combined test of Lord Hutton. Chan was therefore liable on the ground of knowing assistance for loss occasioned to PBM arising from the RTIL transaction."

24. In my view the judge's approach was fully justifiable. Chan's dishonesty in giving his evidence did not, of itself, show that he had the requisite knowledge, but the absence of any other possible explanation can only lead to the conclusion that Chan was dealing with money received from Tang and that he was doing so to disguise Tang's possession of it. The 3 handwritten notes which were said to show that loans were made by Chan were not only shown to be false but the fact that they were used at all and produced at a time when the plaintiff was seeking recovery of its money adds to the conviction that Chan was assisting Tang in concealment of the monies from the true owner.

25. Accordingly I see no merit in this appeal and consider that it should be dismissed with an order nisi for costs in favour of the plaintiff.

Hon Le Pichon JA:

26. I agree.

Hon Sakhrani J:

27. I agree.