R. v. PAC-FUNG FEATHER CO. LTD.

IN THE SUPREME COURT OF HONG KONG

(Appellate Jurisdiction)

MAGISTRACY APPEAL NO.1232 OF 1996

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J U D G M E N T

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1. The appellant was convicted by its own plea of guilty of 20 summonses for causing to furnish information which were false or misleading in a material particular in respect of an application for an export licence. The magistrate dealt with the 20 summonses as one substantive offence and imposed a fine of HK$1.2 million.

2. The appellant was a garment manufacturer. Export licences were required in respect of 81,560 pieces of cotton wollen unfilled comforter shell for export to the United States by the appellant. The FOB value of the goods was HK$12,142,125. The profit after tax was HK$645,961.

3. Export of this type of goods to the United States was controlled by a quota system operated by the Trade Department. This system is necessary to ensure that international treaty entered between Hong Kong and the importing countries setting up restraint limits on the quantity of classes of goods to be exported to them is fully complied with.

4. The appellant was offered free quota in 1993 but they failed to fully utilise them and failed to give an explanation for that. As a result, the Trade Department took administrative action and barred the appellant from participating in the 1994 quota system for the first 3 months in 1994. This debarment prevented the appellant from meeting their orders from United States customers since without free quota they would not be able to obtain the necessary export licence. The appellant was also unable to obtain extra quota through the transfer market.

5. The appellant then resorted to asking Alltex Industrial Co. Ltd. ("Alltex"), an export company and Hop Lee Garment Factory ("Hop Lee"), a manufacturer, to apply for free quota export authorisation in the 1994 system. Alltex was to declare as exporter and Hop Lee as manufacturer. Both companies were genuine companies. They genuinely intended to fulfill the orders of the United States customers of the appellant. Free quota export authorisation was duly obtained but Hop Lee was unable to manufacture the goods. The appellant then manufactured all the goods and later caused Hop Lee to obtain the export licence on the basis of the free quota export authorisation granted to Hop Lee and Alltex and in so doing caused Hop Lee to declare that Hop Lee was the manufacturer of the goods.

6. The magistrate in imposing the fine of $1.2 million stated that he did not apply AG v. Marvel's Clothing Co. Ltd. [1987] HKLR 839. He did not fix the penalty at 40% of the value of the goods which was set down as guideline in Marvel's Clothing. The magistrate stated he followed the guideline of R. v. Gainheng Ltd. M.A. 1100/89 where 20% of the value of the goods was held as the appropriate penalty.

7. The appellant now appeals on the ground that the $1.2 million fine was wrong in principle and manifestly excessive.

8. It was submitted for the appellant that the magistrate should not have followed Gainheng which did not set down any guideline. In Gainheng, the appellant together with its associate company performed the 6 functions required in the application for export licence. But the appellant signed the application stating that all these were performed by the appellant. The magistrate following Marvel's Clothing imposed a fine based on 40% of the value of the goods. Ryan J. held that the "grave feature" in Marvel's Clothing that the goods were manufactured in China but certified to have been manufactured in Hong Kong was absent in that case and a reduction from 40% should be made. Ryan J. considered 20% appropriate and adopting R. v. Dutton Trading Ltd. and Another [1988] HKLR 565, he said :-

"The penalty to be imposed depends on the facts in each case and should be a sum which ensures the company derives no benefit from the transaction and imposes an additional penalty which reflects the company's culpability."

9. Mr Lee for the appellant submitted that Gainheng was wrongly decided in pegging the penalty with the size of the transaction and Gainheng being a case of a breach of the nominal letter of the quota system, a nominal fine would have been appropriate.

10. Reference was made to R. v. Video Technology Computers Ltd. MA 861/91 where the fine imposed by the magistrate was approximately 11.3% of the value of the goods. Duffy J. found a number of powerful mitigating factors. These included matters such as there was no deliberate deception, the offence was the result of a mistake which caused no damage to Hong Kong's international trading reputation and no extra profit was made as a result and in addition, the goods were readily exportable or an export licence would have been obtained if one was applied for. Further, there was full co-operation with and assistance to the Customs and Excise Department. Duffy J. reduced the fine to an amount equivalent to 2.26% of the value of the goods.

11. The next case referred to was R. v. Kawasaki (Hong Kong) Ltd. MA 834/93. This was a case where a nominal fine was substituted for the fine imposed by the magistrate. In this case, there was no damage to Hong Kong's trading reputation and the commission payable to the appellant was small. The goods in question were shipped without an export licence because the appellant did not ask if one was required. But the appellant took immediate steps to halt shipment when it realised that no licence had been obtained. The fine substituted on appeal worked out to be approximately 5% of the value of the goods.

12. A further case referred by the appellant for the court's consideration is R. v. Dutton Trading Ltd. and another [1988] HKLR 565 where the director of the appellant declared that the company supplying the quota had supplied the goods whereas in fact the director's own company supplied the goods. It was held that the case of Marvel's Clothing was not applicable but a fine imposed should ensure the company derive no benefit from the transaction and at the same time properly reflect its culpability. The fine which was substituted on appeal worked out to be approximately 13.7% of the value of the goods. However, the profit in the transaction was 10% of the value of the goods so that the penalty worked out to be approximately 3.7% of the value of the goods.

13. In A.G. v. Chan Kin Yam [1986] HKLR 115, the Court of Appeal held that in assessing the fine, the court should follow the principle of removal of profit and there should be an additional penalty.

14. The Crown referred to R. v. Broadway Sportswear Ltd. MA 493/92 where the Appeal Court accepted that a fine equivalent to 11% on the value of the goods was not inappropriate in offences of this kind.

15. The appellant submitted that in the present case, no damage was caused to exporter/manufacturer/trader in Hong Kong since the relevant free quota were not the object of competition among these businessmen in Hong Kong. It was also submitted that there was no damage to Hong Kong's international trading reputation and overseas United States buyers were satisfied since their orders were fulfilled. Thus, following the cases cited earlier, a nominal fine would have been the appropriate penalty.

16. Be that as it may, one must remember the facts of the present case are readily distinguishable for those in the cases cited. Each case must be determined according to its merits. The culpability of the appellant in the present case lies in its attempt to defeat the free quota system. By its own fault, it was debarred from participation in the 1994 free quota system for 3 months. Instead of reflecting itself on its mistake and abide by the consequences, it attempted to circumvent its debarment by exporting its goods through Hop Lee who was not the real manufacturer of the goods. What was done defeated the purpose of ensuring full compliance by Hong Kong with international treaty with importing countries. That would adversely affect Hong Kong's trading reputation. It was not true that the appellant made no benefit out of this since if the appellant had not resorted to this circumvention, the appellant could not have fulfilled its orders which probably would affect its trading relationship with its United States customers.

17. There were of course mitigating factors, some of which were similar to those in Dutton such as full co-operation with the Trading Department, a clear record for 12 years and there was the plea of guilty to all the summonses. All these would go to reduce the penalty.

18. The FOB value of the goods as I mention at the beginning of this judgment was HK$12,142,125 and the post tax profit was HK$645,961. The profit came to approximately 5% of the value of the goods. The appellant's general profit margin was 5.32%. This profit was within its general profit margin so that there was no extra or illicit profit gained by the appellant out of this transaction.

19. The magistrate in imposing the fine of HK$1.2 million took into consideration, among other matters, that the goods were not manufactured outside Hong Kong. This fine worked out to be approximately 10% (9.8% to be exact as calculated by the appellant) of the value of the goods. This would be equivalent to 5% of the value representing the profit and 5% of the value to reflect the culpability of the appellant. However, he arrived at this figure after he adopted Gainheng, taking 20% of the value of the goods as the starting point. As has been discussed above, Gainheng did not set down any guideline and it would not be correct for the magistrate to adopt 20% as the starting point.

20. Nevertheless, the result of HK$1.2 million arrived at by the magistrate, i.e. 9.8% of the value of the goods, was below the level of 11% accepted in Broadway and slightly higher than the percentage in Chan Kin Yam which worked out to be 8.7%. Bearing in mind that in Broadway 11% was after trial, the magistrate's conclusion would appear to be on the high side for a plea.

21. Then there were mitigating circumstances which if they were before the magistrate, he might have reduced the fine and these related to the reason why Hop Lee found itself unable to fulfil the orders and if Hop Lee could manufacture the goods, there would not have been these offences.

22. In my opinion, the fine should be one which would have the effect of removing the appellant's benefit or profit of the transaction, i.e. the removal of the $645,961 profit and there shall be an additional sum to reflect the appellant's culpability. Following Dutton and Chan Kin Yam, my conclusion is that approximately 3% of the value of the goods would properly reflect the appellant's culpability and this works out to be approximately $365,000. Together with the profit removed, the fine would come up to HK$1 million. This is some 8% of the value of the goods. This is less than the percentage accepted in Broadway. The difference is to take into account the appellant's plea of guilty, clear record and co-operation and assistance rendered to the Trade Department by the appellant.

23. In the circumstances, the appropriate sentence should be a fine of HK$1 million. The appeal against sentence is allowed. The fine of HK$1.2 million is set aside and a fine of HK$1 million is substituted.