HKSAR v. TANG TZE HOO ANTHONY

HCMA 775/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO. HCMA 775 OF 2008

(ON APPEAL FROM ESS 17322/2007)

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J U D G M E N T

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1.  The Appellant was convicted after trial before Special Magistrate Ms Veronica Heung, of one charge of Failing to Keep Books of Account of a Company throughout the period of 2 years immediately preceding the commencement of the winding up of the company, contrary to sections 274(1), 351(1A) and (2) of the Companies Ordinance, Cap. 32 (“the Ordinance”).

2.  The Appellant was fined HK$4,000 and ordered to pay costs of HK$5,000.  He appealed against conviction only.

Prosecution Case

3.  The prosecution alleged that the Appellant, who was one of five directors of a company, Sakar Consultants Company Limited (“the Company”), between 14 August 2001 and 15 September 2003 as an officer of the Company during the relevant period (13 March 2002 to 12 March 2004), wilfully and knowingly failed to keep proper books of account of the Company.

4.  A petition for the winding up of the Company had been filed on 15 September 2003 and a Winding-Up order was made on 12 March 2004.

5.  The prosecution called 3 witnesses.  PW1, the provisional liquidator of the Company gave evidence that he wrote to the directors of the Company several times asking them to provide him with documents including the books and records of the Company.  The Appellant replied that he was not responsible for keeping the books and records, but that Mr Chan Wah-wai, another director was.  He gave no other reply and took no action.

6.  PW2, an assistant clerk at the Official Receiver’s Office, (“the OR”), gave evidence that he received 3 boxes of documents on 30 September 2007, from a man who introduced himself as Mr Chan of the Company.  He confirmed that Mr Chan had telephoned and informed the OR that he would deliver such documents.

7.  PW3 was a Treasury Accountant at the OR.  She gave expert evidence that the books of account failed to comply with the requirements under section 274 of the Ordinance.  These were the financial statements and the general ledger from 1 April 2003 to 12 March 2004 and the accounting vouchers from 13 March 2002 to 12 March 2004.  She concluded that proper books of account had not been kept by the Company during the relevant period.  That fact was not challenged by the defence.

Defence Case

8.  The defence contended that the Appellant was not responsible for the administrative affairs of the Company, but was responsible only for marketing and that it had been agreed that Mr Chan Wah-wai was responsible for keeping the books.  The Appellant had no knowledge that the books of account were not kept properly.

9.  The Appellant gave evidence, as did one defence witness – an employee of the Company – who testified that from her observation and experience, it was Mr Chan Wah-wai who had been responsible for the day-to-day management and operation of the Company, including the issuing of cheques for all expenses.

Perfected Grounds of Appeal

10.  Perfected Grounds of Appeal against conviction were filed on 8 October 2008.  Originally there were three Grounds of Appeal, but Ground 3 was abandoned prior to the appeal hearing.

11.  Ground 1 alleged that even if the Magistrate had rejected totally the Appellant’s evidence (which was not the case), she had erred in fact and in law in ruling that there was sufficient evidence to prove all elements of the charge, in particular the elements of ‘knowingly’ and ‘wilfully’.

12.  Ground 2 alleged that during the trial, it had never been put to the Appellant, specifically, that he did have actual knowledge that the books were not being kept properly.

13.  The Magistrate summarised the evidence of the Appellant:

(a) he was responsible for marketing of the Company and went to the office only once or twice a week;

(b)    he was not responsible for keeping the books of account;

(c) he had agreed with Mr Chan, that Mr Chan should be responsible for keeping the books of account;

(d)    during the period of his being a director he had never seen the books of account;

(e) at various times he had asked Mr Chan for information about the books but he was never provided with any;

(f) he knew Mr Chan was an architect, but he was unclear whether he had any qualification to keep the books of account;

(g) the Appellant did not know if the Company employed any account clerk or accountant;

(h) he took no steps to ensure the books of account were duly kept;

(i)  he did not ask to check the books of account;

(j)  he knew that he had a duty to keep proper books of account;

(k)    he had asked Mr Chan at one point if the Company was making money and had been told it was not.  Thereafter he had not asked if the Company was suffering a loss;

(l)  in 2002, he had paid wages to the employees of the Company out of his own pocket; at the date of trial, the Company still owed him about HK$200,000 for that expenditure.

[AB 92 para. 19]

14.  The Magistrate was aware that the prosecution had to prove all the elements of the summons and she took into account in her assessment of his evidence the Appellant’s clear record.  She found that the Appellant was an officer of the Company for the relevant period and the issue was whether he was “an officer who is in default”.  Section 351(2) of the Ordinance, defines an “officer who is in default” as, “any officer of the Company … who knowingly and wilfully authorizes or permits the default, refusal or contravention mentioned in such provision.”

15.  Counsel for the Appellant argued that there was no direct evidence of knowledge on the part of the Appellant, and that the Magistrate was wrong in drawing inferences of knowledge from the evidence.  In particular, as Mr Chan was accepted as having been responsible for day-to-day management of the Company, that undermined the Magistrate’s conclusion that the Appellant had knowledge.  Further, although the Magistrate knew that any inference must be “the only irresistible inference”, she failed to apply that principle.  The Magistrate, having accepted the evidence of the Appellant and DW1, should not have inferred the guilty knowledge of the Appellant.

16.  Counsel submitted that the Magistrate’s criticism of the Appellant for doing nothing about the accounts when he knew that there was a duty to do so, was insufficient to establish guilt, because he had not been charged with recklessly, or negligently, failing to keep proper books of record but with knowingly authorizing or permitting the default.

17.  In deciding whether the Appellant knowingly and wilfully authorized or permitted the failure to keep books of account, the court was entitled to look at all admissible evidence which could prove the elements of such failure directly, or could examine such evidence to see whether those elements could be inferred.

18.  The Appellant had been a director, an officer of the Company, from August 2001 and as a director he knew of the obligation to keep the books of account.  He claimed that the task had been delegated to Mr Chan.  The court was constrained to consider whether that was a proper delegation in the circumstances, or whether, it was a delegation whereby total overall responsibility had been sloughed off by the Appellant.  The Magistrate noted that whether a purported delegation was proper depended on the facts of each case.

19.  It is difficult to see how the delegation could be termed justified or proper when the Appellant, a director of the Company, did not know about and made no enquiry into matters obviously relevant to such delegation.  These would include whether Mr Chan had the ability to keep books of account; what books were kept; what other staff worked with accounts; what periodic reports would be given; whether inspections were made by officers of the Company; what auditing arrangements were in place, etc.

20.  When the Appellant, according to his evidence, did make desultory enquiries of Mr Chan about the accounts, he received no or inadequate answers or information, but took no action.  Even after he was told that the Company was not making a profit, the Appellant did not concern himself with the books of account.  When he had to pay staff wages from his own funds he was not prompted to check or inspect the books.  When enquiries were made of him by the provision liquidator he did not produce the books.

21.  Whilst the Appellant’s inertia might have been explicable or excusable in the initial stages of the alleged delegation arrangement, Mr Chan’s inability or unwillingness to answer his questions, eventually must have alerted the Appellant to the need to make enquiries or take action.  That he did nothing, enabled the court to infer that the Appellant was prepared to permit the situation to continue, despite his obligations as a director and an officer of the Company requiring him to take action.

22.  The Magistrate outlined the Appellant’s failure of responsibility.  He had not satisfied himself of Mr Chan’s background or training.  He did not know whether any accounting staff were employed.  He did not enquire whether the Company was suffering a loss.  He took no steps to ensure the accounts were duly kept.  He neither inspected nor checked the books of account.  He could not give particulars of the occasions on which, allegedly, he had asked Mr Chan for information about the books of account.

23.  From all the evidence, the Magistrate concluded that the only irresistible inference she could draw was that the Appellant knew that proper books of account were not being kept, and in the free exercise of his will, authorized or permitted this failure to keep proper books of account.  Although the Magistrate accepted the evidence of the Appellant and the defence witness, DW1, she concluded that it showed that the Appellant knew his obligations, but that his delegation of the responsibility was well in excess of acceptable limits.

Ground 2

24.  The second ground of appeal, was that during the trial it was never put to the Appellant that he had actual knowledge that the books were not being kept properly.  Counsel for the Appellant prayed in aid Browne v Dunn (1984) 6R 67 in which Lord Hershell stated the requirement for cross-examining counsel to sufficiently put his case to a witness as follows:

“Now, my Lords, I cannot help saying that it seems to me to be absolutely essential to the proper conduct of a cause, where it is intended to suggest that a witness is not speaking the truth on a particular point, to direct his attention to the fact by some questions put in cross-examination showing that that imputation is intended to be made, and not to take his evidence and pass it by as a matter altogether unchallenged, and then, when it is impossible for him to explain, as perhaps he might have been able to do if such questions had been put to him, the circumstances which it is suggested indicate that the story he tells ought not to be believed, to argue that he is a witness unworthy of credit. … Of course I do not deny for a moment that there are cases in which that notice has been so distinctly and unmistakably given, and the point upon which he is impeached, and is to be impeached, is so manifest, that it is not necessary to waste time in putting questions to him upon it.  All I am saying is that it will not do to impeach the credibility of a witness upon a matter on which he has not had any opportunity of giving an explanation by reason of there having been no suggestion whatever in the course of the case that his story is not accepted.”

25.  This principle had been approved by the Court of Final Appeal in Lo Chun Nam v HKSAR (2001) 4 HKCFAR 1 and defence counsel submitted that it would be wrong in principle for the court to infer or conclude that the Appellant did have the requisite knowledge, as he had not had the opportunity of giving an explanation to a specific question.

26.  Browne v. Dunn was examined by the Court of Appeal in HKSAR and Wong Wang Sang Stephen and Wong Pui Sing CACC 310/2006.  While the court recognized the principle and approved it, the court also made it clear that a measure of common sense must guide its practical application.

“Compliance with the principle of Browne v. Dunn does not require counsel to indulge in a mantra of questions with witness after witness in a formulaic display.  All that is required is that counsel puts his case in such a way as to challenge the witness on those salient points of his evidence with which issue is taken.  That challenge does not have to be express.  It can be inferential so long as it is made clear that those particular aspects of the witnesses’ evidence are not accepted: see HKSAR v. Lo Chun Nam [2001] 4 HKCFAR 1.  [per McMahon J]”

27.  The transcript of evidence shows that the Appellant was cross-examined by prosecuting counsel in a manner that ensured he would know what the allegations against him were and know too that the prosecution did not accept that his inactivity and what could be regarded as wilful blindness showed lack of knowledge.  There is no substance in this ground.

28.  Section 274 of the Companies Ordinance, Cap. 3 provides a statutory defence if the officer who is in default, as described in section 351(2), i.e. any officer of the company or any shadow director, who knowingly and wilfully authorizes or permits the default, refusal or contravention mentioned in such provision, shows that he acted honestly and that in the circumstances in which the business of the company was carried on the default was excusable.

29.  The Appellant relied on his inactivity as demonstrating his honesty, but in the circumstances in which the Company was operating that inactivity was not excusable.  The Magistrate was entitled to infer from the evidence that the Appellant had knowingly and wilfully authorized or permitted the default or contravention.  The Magistrate found that the defence had not been established on the balance of probabilities.

30.  The Magistrate considered all the relevant matters and there is no justifiable basis for any interference with her decision.

31.  Accordingly, this appeal is dismissed.