COMMISSIONER OF CUSTOMSAND EXCISE v. KA SHING CAPITAL LTD. AND ANOTHER

DCMP 2157/1999

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS
NO. 2157 OF 1999

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JUDGMENT

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Background

1. This is an application by the Applicant, the Commissioner of Customs and Excise, for forfeiture of one set of compact disc replication system ("the System") and other related items pursuant to section 133 of the Copyright Ordinance, Cap. 528 ("the Ordinance").

2. The System and the other related items in issue were seized by the Applicant in exercise of his powers under section 122(1)(b) of the Ordinance as a result of a raid on the premises known as 7/F, China Aerospace Centre, 143 Hoi Bun Road, Kwun Tong, Kowloon ("the Premises"). During the raid, it was found that a factory was operated in the Premises producing infringing compact discs with the System. Further, infringing compact discs, stampers and silk screen printing equipment were also found in the Premises. Three persons arrested in the raid were charged with various offences under the Ordinance. Criminal convictions were entered after trial against two of them, and the third has absconded and cannot be located at this stage.

3. The Applicant has served Notices of Seizure in respect of the System and other related items on all the interested parties in accordance with the provisions of section 131(2) of the Ordinance. In response, the 1st Respondent, Ka Shing Capital Limited by a letter dated 20th July 1998 claimed for the return of "certain equipment/machinery for the production of VCD, CD and stampers". However despite the service of the Originating Motion herein, the 1st Respondent has neither appeared in the present proceedings nor filed any affidavit to support its claim. Hence for the purpose of this application, I can ignore the claim of the 1st Respondent.

4. The 2nd Respondent, a registered overseas company which carries on banking business in Hong Kong, has also filed a Notice to claim for the return of the System. According to the evidence presented by the 2nd Respondent, one Karsun International (Holdings) Limited ("Karsun") approached the 2nd Respondent some time in 1997 to apply for loan to finance the purchase of the System. By a debenture dated 28th October 1997, Karsun charged by way of first fixed charge all its interest in the System to the 2nd Respondent as security for the loan advanced to Karsun for the said purchase. As the 2nd Respondent is the chargee of the System, it has also lodged a claim for the return of such security.

5. The following matters are not in dispute:

(i) the 2nd Respondent is a person who has legal or equitable interest in the System, and so it has the right to claim for the return of the same under section 131(5) of the Ordinance; and

(ii) for the purpose of the present application, the System claimed by the 2nd Respondent consists of the machines and articles stated in Schedule I and item numbers 4, 10, 12, 13, 14, 16, 17, 27 and 28 of Schedule II of the Originating Motion.

6. According to the investigation carried out by the Applicant, it was found that the factory involved in the raid was operated by one Chau Kam Sun, who was the absconded defendant in the criminal proceedings. Apparently, he had hired the System from the 1st Respondent. Although there was a common director in the 1st Respondent and Karsun for a certain period of time, the actual relationship between the said two companies remains unknown. According to the 2nd Respondent, it had all along been dealing with Karsun alone and so it did not know about the existence of the 1st Respondent and the hirer Chau Kam Sun. As the 2nd Respondent had all along been an innocent party who was not involved in any criminal activities, Mr. Dykes for the 2nd Respondent argues that the System should be returned to his client.

Legal principles involved in the present forfeiture proceedings

7. It is accepted by the parties that the principle governing the exercise of discretion in forfeiture proceedings has been set out in the leading authority of R v. CEC Finance Ltd. [1993] 1 HKC 127, which was a case involving an application for forfeiture of a vehicle under section 28 of the Import and Export Ordinance, Cap. 60 and the claimant being a finance company. In the said case, Bokhary JA, as he then was, said the following:

"The discretion to order forfeiture being unfettered, the question whether or not to so order is to be approached from a neutral starting point with both parties on a level playing field, so to speak, and each with the onus of proving on a balance of probabilities any fact which he or she asserts if that fact is not admitted by the opposite party. That is how the question is to be approached. And it is to be answered by reference to what is just in all the circumstances as the magistrate finds such circumstances proved or admitted." (at 131 D-E)

8. As to the exercise of such discretion, Kaplan J. in the case of R v. Kam Shek Kwong [1994] 1 HKC 681 also had the following to say:

"In CEC Finance, it was made clear that the discretion is unfettered and thus there can be no basis for a predisposition against financial companies or, for that matter, against any innocent owner. However, it seems to me that there has to be something in the facts of the case involving an innocent owner which can justify the exercise of this discretion and the making of a draconian order depriving the rightful owner of his property. A discretion was given to the courts. The legislation does not impose forfeiture in all cases as it could have done. Forfeiture of items belonging to those involved in a crime and used in a crime is one thing and can be seen as part of society's determination to be ruthless with criminals. Forfeiture of the property belonging to wholly innocent parties is quite another thing and the discretion to exercise that power should be exercised judicially and with great care." (at 685).

For my part, I agree with the observation made by Kaplan J. It would not be fair to deprive a wholly innocent party, who was not involved in any criminal activities and connived at no wrongdoing, of his property.

Exercise of the discretion

9. The present case then turns on whether the 2nd Respondent can be regarded as a "wholly innocent party". Mr. Wong for the Applicant submits that it is not. In determining whether to grant the loan to Karsun, the 2nd Respondent was only interested in the credit worthiness of its borrower, and it did not make any inquiry into the background of the borrower's business. According to Mr. Wong, the manufacturing of infringing compact discs was prevalent in 1997 when the loan was advanced to Karsun. As it was possible that the System might be used for such illegal purpose, the 2nd Respondent should have made more inquiries about the propriety of the borrower's business. For such inquiries, the 2nd Respondent could have asked Karsun to produce licences or letters of authorization from the relevant copyright owners, followed up with the making of further inquiries from those alleged owners. However, the 2nd Respondent has failed to make such kind of inquiries in the present case, and so it cannot be regarded as a wholly innocent party. Furthermore, Mr. Wong submits that if an order for forfeiture is not made in the present case, it is hardly conceivable that such an order will ever be made against a financial institution. In such circumstances, it will encourage such kind of institutions not to make any positive inquiry about the propriety of their clients' businesses, or otherwise, to turn a blind eye to copyright piracy.

10. I agree that copyright piracy is a serious problem in Hong Kong and should be stopped. However, one must also bear in mind that the 2nd Respondent was only a bank operating in Hong Kong without any power to investigate criminal activity on the part of its clients. Furthermore, the 2nd Respondent was subject to all sorts of duties, including duty of confidentiality, owed to its clients. With these limitations, it would not be practicable to expect the staffs of the 2nd Respondent to carry out extensive inquiry into the propriety of its clients' businesses, in particular there was no evidence which tended to suggest that the business operated by Karsun was an illegal one. Indeed, the staffs of the 2nd Respondent was only following general banking practice in checking the background of its client before granting the loan to Karsun.

11. Furthermore, it cannot be said that the 2nd Respondent had turned a blind eye about the propriety of the borrower's business. According to the evidence adduced by the 2nd Respondent, its staffs had taken the following steps to ensure that the System would not be used for illegal purpose:

(i) the 2nd Respondent made extensive inquiry about the background of Karsun, its owners Mr. and Mrs. Choy and the former company operated by them, Formative Way International (Holdings) Limited;

(ii) the 2nd Respondent inserted various clauses in the debenture to prevent Karsun to make material change to its business or to use the System for illegal purpose;

(iii) the 2nd Respondent instructed one of its staffs to visit the Premises and to inspect the System;

(iv) the 2nd Respondent inspected the letters of authorization from various copyright owners when Karsun applied for the new letter of credit facility; and

(v) in June 1998, less than a month after the Prevention of Copyright Piracy Ordinance, Cap. 544, came into force requiring optical discs manufacturers to hold a licence issued by the Applicant, the 2nd Respondent requested Karsun to produce a copy of such licence.

12. All these steps show the 2nd Respondent was concerned that the System would not be used for illegal purpose. For my part, I do not accept that such steps were only "window dressing" ones. As I have mentioned above, the 2nd Respondent had its limitations and so it would not be practicable to expect it to make extensive inquiry into the businesses operated by its clients. With the benefit of hindsight, one can easily say that the 2nd Respondent could have asked Karsun to produce letters of authorization at an earlier time when the loan was first advanced to Karsun, and the 2nd Respondent could have kept copies of the letters of authorization for record purpose. However, the staffs of the 2nd Respondent had followed prudent and general banking practice in making proper inquiry about the background of the borrower's business. In the absence of any evidence which tended to suggest that the business operated by Karsun was an illegal one, I do not accept that the 2nd Respondent should be deprived of its property simply because its staffs performed the task of credit verification in a manner which can only be described as slightly less than perfect.

13. Indeed, the 2nd Respondent was probably dealing with organised criminals in the present case. Although the System was used for the production of infringing compact discs, Karsun was able to supply letters of authorization from some "copyright owners" to the 2nd Respondent when it applied for the new credit facility. This certainly involved an elaborate plan to deceive the 2nd Respondent and to cover up the illegal use of the System. With such kind of plan in place, I wonder whether the 2nd Respondent would ever be able to find out the real use of the System even if it had carried out extensive inquiry into the operation of Karsun's business.

14. I also do not accept that my decision not to order forfeiture of the System will encourage financial institutions to turn a blind eye to copyright piracy. After the enactment of the Prevention of Copyright Piracy Ordinance in 1998, financial institutions would now be expected to inspect licences from its clients if they have to take the machines for the production of compact discs as securities. Unlike the situation prior to the enactment of the said ordinance, financial institutions at least now have clearer guideline to follow. Indeed, the Applicant, with all the powers made available to him in the said ordinance, would be in a much better position to control these compact discs production plants. To require the 2nd Respondent, who does not possess any statutory power of investigation, to supervise the businesses operated by their clients is, in my view, too onerous a duty to be imposed on such kind of institutions.

15. Finally, there is also one more reason why a forfeiture order should not be made against the 2nd Respondent in the present case. To secure the loan, Karsun had also mortgaged the Premises, in which the System is now kept and detained, to the 2nd Respondent. As Karsun was in default in the repayment of the loan, the 2nd Respondent had obtained an order for possession of the Premises on 3rd September 1999. However because of the present forfeiture proceedings, the System was detained in the Premises and the 2nd Respondent could not exercise its right to sell the latter security. As Karsun had already been wound up by the court, the prospect of the 2nd Respondent to recover all the outstanding loan owed by Karsun is very slim. Hence by precluding to exercise the right to sell the Premises, which is a security quite unrelated to the System, the 2nd Respondent has suffered additional prejudice by reason of the present forfeiture proceedings. In my judgment, the court is also entitled to take this factor into account in refusing the application for forfeiture of the System.

16. Under section 133(13) of the Ordinance, the court is not entitled to make an order for the return of an article to any interested party if the article is one which is specifically designed or adapted to make infringing copies of copyright works. However unlike articles such as stampers and infringing compact discs, there is no evidence to show that the System itself contains such kind of feature, and hence there is nothing to preclude the court from making an order for the return of the System to the 2nd Respondent.

17. By reason of the aforesaid, I make the following order:

(i) the articles referred to in Schedule I and item numbers 4, 10, 12, 13, 14, 16, 17, 27 and 28 of Schedule II of the Originating Motion be returned to the 2nd Respondent; and

(ii) all the other items referred to in Schedule II of the Originating Motion be forfeited.

I also make the following order nisi:

(i) the Applicant do pay to the 2nd Respondent the costs of the application relating to the claim of the 2nd Respondent with certificate for one counsel, and such costs to be taxed if not agreed; and

(ii) the 1st Respondent do pay to the Applicant the costs of the application relating to the claim of the 1st Respondent with certificate for one counsel, and such costs to be taxed if not agreed.

The order nisi is to be made absolute after the expiration of 14 days from the date of the handing down of this judgment.

18. Finally, I would like to express my gratitude to counsel for both parties for their able and well-researched submissions.