COPYTRON (HONG KONG) LTD v. LEE CHIN LEONG

Date of Hearing: 27 October 2006

Date of Judgment: 7 November 2006

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J U D G M E N T

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Hon Tang JA (giving the judgment of the Court):

1.  The plaintiff (Copytron (Hong Kong) Limited) (“Copytron”) is the Hong Kong arm of a Singaporean company controlled by one Mr Terry Tan.  The defendant was in Copytron’s employ from March 1997 to February 2002.

2.  Copytron’s claims against the defendant amounted to serious allegations of fraud.

3.  The amended statement of claim was issued on 11 April 2003 and included the following seven claims,

A     a claim for $193,463.61 being moneys taken by the defendant from Copytron to pay for his credit card debts.

B     a claim for $7,750 being moneys taken by the defendant from Copytron to pay for his personal telecommunication needs.

C     a claim for $73,150 being moneys taken by the defendant from Copytron involving one So sheung-ming and Universal Well Development Company Limited.

D     a claim for $878,762 being moneys taken by the defendant from Copytron.

E     a claim for $113,370 being value of goods taken by the defendant from Copytron involving Chung Wah Industrial Company.

F     a claim for $258,428 being the price of Copytron’s goods sold to one Jie Teng Commercial Company Limited of Hong Kong.

G     a claim against the defendant for HK$100,480.00 being value of goods taken by the defendant from Copytron involving Improvement Company.

4.  On 6 November 2003, the defendant filed a notice of intention to defend.

5.  On 27 November 2003, Copytron gave notice of intention to enter judgment in default of defence.

6.  On 11 December 2003, final and interlocutory judgment (the judgment) was entered against the defendant for:

“1.     the sum of HK$1,411,553.61 together with interest thereon at the rate of 8% per annum from 11th April 2003 to the date hereof and thereafter at judgment rate until payment;

2.      damages to be assessed for the Defendant’s conversation of the goods as pleaded in paragraphs 32 and 44 of the Statement of Claim;

3.      damages to be assessed for the Defendant’s breach of his duties owed to the Plaintiff as pleaded in paragraph 8 of the Statement of Claim; and

4.      costs of this action to be taxed.”

7.  Para. 1 of the judgment, which was a final judgment for HK$1,411,553.61, was made up of Copytron’s claims A to D and F.

8.  Para. 2 of the judgment, which was an interlocutory judgment for damages to be assessed, covered claims E and G.

9.  On 6 September 2004, the defendant took out a summons to set aside the judgment in default.

10.  On 24 November 2005, Master Au Yeung made a conditional order to set aside Copytron’s judgment in relation to claims D and F on payment into court of HK$1,137,190, being the total amount of claims D and F within 21 days from the date of the order and payment into court of HK$350,000 as security for Copytron’s costs up to the stage of discovery within 21 days from the date thereof.

11.  In addition, the defendant was ordered to pay the costs of the application to set aside the judgment, including all related costs reserved, at a gross sum of $250,000, payable forthwith.

12.  The defendant appealed.  On 20 January 2006, Deputy Judge Carlson set aside the judgment as well as the orders of Master Au Yeung.  The defendant was granted leave to defend on condition that he paid into the court within 21 days, the sum of HK$1.2 million.

13.  The defendant has appealed to us.

14.  This is what the judge said about the merits of the defence:

“My conclusions on the affirmations

25.    This is not an easy case.  On the one hand the defendant has allowed the action to go by default, and he did not even bother to reply to the letter before action, which tells against him on the question of the general credibility of his assertions.  Nevertheless, it seems perfectly clear that the plaintiff, run as it was by Mr Tan, had been operating illegally by dealing in counterfeit products, for which convictions have been entered in two jurisdictions.  This fact would not of itself disentitle it to judgment, provided the evidence was there to support it.  Having stood back from the factual dispute, and considered its overall effect, I am left with a sense of unease about the whole operation of the plaintiff’s business.  Nevertheless Mr Chan’s analysis of the evidence in support of the judgment I have found to be persuasive.

26.    All of this having been said, it seems to me that this is a dispute that should go to trial, but on terms.  Whilst the defendant has demonstrated that he should not be driven from the judgment seat, the case put forward by him has an all-pervading mantle of suspicion which requires me to impose terms, as the master did.  For my part, I consider that the whole judgment should be set aside, really as a matter of logic.  The general defence that has been put forward covers all of the claims, and whilst claims A and B, in particular, may be said to be, on their face especially impressive, the fact remains that the defendant has offered a global explanation, which should go to trial.”

15.  The fourth sentence in para. 25 of the judgment is unclear.  It may be that the word ‘not’ has been inserted by mistake.

16.  It is clear from the ruling on costs which was handed down on 2 March 2006 that Deputy Judge Carlson regarded the defence as shadowy.  Some of the suspicion was generated by the fact that the defendant permitted the action to go by default and that he did nothing until June 2004, when Copytron applied to the Supreme Court of Singapore to register the judgment with a view to its enforcing it there.  But principally, it was based on counsel’s “analysis of the evidence in support of the judgment”.

17.  In considering the strength or otherwise of the defence, it is important to remember that different claims have been made against the defendant.

18.  We would for the purpose of this judgment deal with claims A and B separately from claims C to G.

19.  So far as claims C to G are concerned, the defence is simple and consistent, namely, that the defendant had on Mr Tan’s directions and on Copytron’s behalf systematically dealt in counterfeit goods.  For example, in relation to claim D, the largest of the claims, this is what the defendant said in his 1^st affirmation which was filed 8 September 2004 in support of his summons to set aside.  He said:

“… These should be the purchases for parallel (not genuine/original) Japanese goods produced in PRC and Mr. Tan did not want the details to appear in the records of the Plaintiff in order to avoid discovery if investigated upon by the authorities.  To the best of my recollection, these payments were made to the suppliers or Copytron and/or the Plaintiff of purchases of such kinds of goods.  Hence the payments went into my personal account to enable me to make these payments on behalf of Copytron or the Plaintiff.  Although the goods were delivered to the Plaintiff’s warehouse and there were delivery orders, they were not reflected in its accounts.  Subsequently, through internal account set-off, Mr. Tan would have reconciled the Plaintiff’s accounts for these payments with other goods purportedly sold to the Plaintiff at high prices.  Mr. Tan knew well what these payments made to me represented and there exist all supporting documents including delivery notes of purchases and receipt of delivery of goods in all these cases.”  para. 24

20.  Again, in relation to claim F, this is what he said:

“… More importantly, Mr. Tan and the Plaintiff made use of my account to buy and sell parallel goods and in this way they avoided having these being reflected in their records in anticipation of investigations that may be carried out by the authorities.  It was also the way in which Mr. Tan used my account to avoid declaring profits made in Hong Kong and PRC.  A single cheque for such a large sum of money could not have avoided detection by Mr. Tan or the auditors of the Plaintiff.”  para. 26

21.  His defence is supported by the fact that there were criminal convictions in Hong Kong as well as in Singapore, for infringement of intellectual property rights.  The Singaporean infringement is particularly relevant because it was Mr Terry Tan’s evidence that the infringement of intellectual property rights in Hong Kong, in relation to which Copytron were convicted, was the result of the defendant’s unauthorized action, and entirely the defendant’s fault.  Mr Tan’s lack of frankness in relation to the Singaporean infringements and the fact that there were such in Singapore, which could not have been the responsibility of the defendant, would in due course be relevant to the assessment of the relative credibility of Mr Tan and the defendant.  The defendant’s case is also supported by faxes from Singapore from Mr Tan to the defendant, where against the model numbers of products to be purchased the terms “JC” or “No. 2” were used, which accordingly to the defendant, referred:

“… to parallel goods that were not Japanese products but produced in China and ‘No. 2’ means that they are not the original.”  See para. 26 of his 1^st affirmation.

22.  So we are of the view that there is nothing shadowy about the defendant’s defence in relation to claims D and F.

23.  Although we have not dealt with claims C, E and G separately, we are satisfied in relation to each of them, that the defendant’s defence is no less plausible.  Indeed Mr Kam Cheung, who appeared for Copytron, has correctly accepted that claims C, E and G cannot be distinguished from claims D and F.

24.  As for claims A and B, claim B relates to telecommunication charges of $7,500.  This is what the defendant had to say about claim B, in para. 22(b) of his 1^st affirmation:

“(b)   I recall I did install a phone line for internet usage in my own flat and for communication with my family and friends but I also used the line to contact customers of the Plaintiff.”

25.  We do not believe it is possible to say that this is a shadowy defence.

26.  Claim A covered a total of 28 payments in relation to the defendant’s credit cards.  Mr Kam Cheung, took us to some of the documents (presumably the same was done before the judge by counsel then appearing for Copytron).  The documents show, for example, that expenses incurred by the defendant on his credit card were paid for by Copytron.

27.  In the American Express statement of account dated 14 April 1997 for the sum of $1,114.70 (page 322), made up of Dan Ryan’s Chicago Grill’s charge of $524.7 and Bossini in the sum of $590 (Bossini is a well-known chain of garment store in Hong Kong).  Payment for Copytron was covered by a payment voucher dated 23 April 1997 and described as “entertainment”.

28.  In another statement dated 14 July 1997 (page 328) for the sum of $6,682.66 which included a payment of $1,477.85 for a purchase at Louis Vuitton in Singapore.  There is a corresponding payment voucher but only for $6,000 dated 1 August 1997 described as for “entertainment/general expenses”.

29.  More problematical is another statement dated 12 August 1998 in the sum of $10,728.62 which seems to have been paid for by a cheque supported by a payment voucher dated 26 August 1998 made out in favour of Wai Keung-chung and HK Cargo in the sum of $10,729 for “transportation fees”.

30.  Then in another statement of account dated 12 November 1998 in the sum of $4,810.58, the payment voucher is dated 3 December 1998 in respect of payment to Wai Tat Transportation in payment of “Transports”.

31.  In an affirmation which was filed subsequent to the hearing before Deputy Judge Carlson dated 6 October 2006, but in relation to which no objection was taken, this is what the defendant said:

“(d)   Settlement of my personal accounts with the Plaintiff

Terry Tan, the Plaintiff and myself sat down from time to time to settle our accounts.  I believe the personal expenditures and my salaries and allowances together with all other related charges were adjusted periodically.  All claims under my credit cards were processed from time to time between us and settled.  The accounts staff employed by Terry Tan must have obtained approvals of Terry Tan to set them off.  I recall sitting down month by month with him to review my personal accounts.  I could not have left the Plaintiff without having resolved all the accounts with Terry Tan and the Plaintiff’s auditors.  At each of our discussions on expenditures, he always accepted my credit cards expenditure were incurred for the Plaintiff or his office in Singapore or set off between my personal account and him after which he would give instructions to his accounts staff to process them.  As he had approved the expenditures, the Plaintiff’s auditors accepted them.  The details of the credit card expenditures were all in my personal files that Terry Tan had and has with him.”  para. 5(d)

32.  It may be that it was claim A which persuaded the judge that the defence was shadowy.  Although, in the defendant’s 1^st affirmation, in para. 19, he claimed that the credit cards were used mainly to pay sundry expenses incurred on behalf of Copytron in respect of the office products, it could be said with some justification that the defendant’s defence in relation to claim A was weak, or even shadowy.

33.  But with the benefit of the affirmation of 6 October 2006, we would not describe the defence to claim A as shadowy, though it is not strong.  However, having regard to the serious allegations made, and looking at the matter globally, we would not order the defendant to pay part of the money claimed under claim A into court.

34.  This is a case where not only are the allegations made against the defendant serious, the defendant’s counter-allegations made against Copytron are also serious.  This is a case which should go to trial.  Since the judgment appealed against was based on the judge’s perception that the entire defence is shadowy, we believe we are entitled to interfere.

35.  Ms June Wee, who appeared on behalf of the defendant, also submitted that the judgments were irregular.

36.  She made two points.  First, final judgment should not have been entered in relation to claims A to D and F because they were not claims for liquidated sums.  We do not agree.  It is clear that they were claims for money had and received.  Indeed, expressly so claimed in relation to claims A, B, D and F.  As for claim C, the claim as pleaded is that the defendant:

“… without the knowledge, consent and authority of the plaintiff, drew a cheque (no. 530618 on the plaintiff’s HSBC account for a sum of HK$73,150.00 made payable to one So sheung-ming of Universal Well Development Company Limited (‘Universal’).”

37.  It was also pleaded that Copytron was never indebted to Universal.  This is clearly a claim based on conversion and it is clear from the authority referred to us by Mr Kam Cheung, namely, G L Baker Ltd v Barclays Bank [1956] 1 WLR 1409, that this could be regarded as a liquidated claim.

38.  The second point relied on by Ms Wee is that, having recovered the final judgments, the interlocutory judgments were duplications.  It is clear that the para. 2 of the judgment, is not duplicitous.  They relate to claims E and G.

39.  As for the 3^rd order, although having regard to the final judgment already obtained, damages recoverable for breach of the duties might be nominal, we cannot say that this claim was impermissible.  In any event, it is clear from the authorities that even if this was a mistake, it could be remedied by an amendment to the judgment.  Muir v Jenks [1913] 2 KB 412.

40.  For the above reasons, we allow the appeal and set aside the judgment, though regular, unconditionally.

Costs

41.  We also make a costs order nisi that the defendant is to have the costs before the judge as well as in the Court of Appeal.  So far as the costs before the master are concerned, the defendant should pay those costs.  However, in the circumstances of this case, we order that all those costs are to be payable in any event.

Ms June Wee, instructed by Messrs John Ip & Co. for the Defendant/ Appellant.

Mr Kam Cheung, instructed by Messrs Chiu, Szeto & Cheng, for the Plaintiff/ Respondent.

Date of Hearing: 30 August 2006

Date of Decision: 30 August 2006

Date of Handing Down Reasons for Decision: 31 August 2006

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REASONS FOR DECISION

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Hon Le Pichon JA:

1.  This is the plaintiff’s application for security for costs on the grounds that the defendant is impecunious and reside out of the jurisdiction with no assets in Hong Kong.  Either of those grounds if made out would constitute “special circumstances” warranting the making of an order for security for costs.  At the conclusion of the hearing, the application was refused for written reasons to be handed down later which I now do.

2.  The defendant who resides overseas is not in court today but he has filed an affirmation opposing the application.  Whilst he denies that he is impecunious, the tenor of his evidence is that he does not have the means to meet the costs of the appeal in the event of the appeal being unsuccessful which, for the purposes of Order 59, r.10(5), is the meaning of “impecuniosity”.  In any event, it is undeniable that not only is he resident out of the jurisdiction he has no assets in Hong Kong and, subject to what is said below, it has long been the practice of this court to order provisions of security in such circumstances.

3.  Notwithstanding the fact that one or more of the recognised heads of “special circumstances” has been established, the court retains a residual discretion to decide that security should not be awarded.  The question is how the residual discretion is to be exercised, the relevant considerations in the present case being the merits of the appeal and whether an order for security would effectively stifle the appeal.

4.  I should add here that this application was made rather late in the day.  The appeal itself is due to be heard in 8 weeks’ time having been set down at the beginning of March.  The explanation proferred at the hearing for that delay was the change in the handling solicitor within the same firm.  In my view, that is hardly an excuse.  Further, the application was taken out with unseemly haste, only a week after the written request for security was made when the plaintiff must have known that the defendant is not only resident out of the jurisdiction but also travels a lot for his work.  I would observe that at the end of the day, though not of themselves weighty, these are matters that the court is entitled to take into account.

5.  The defendant was the plaintiff’s former employee.  The plaintiff is controlled by a Mr Terry Tan who, like the defendant is a Singaporean  The plaintiff’s claim against the defendant, if made out, necessarily involves fraudulent and/or criminal conduct on the part of the defendant as appears from the nature of the 7 heads of claim described by the judge at paragraph 11 of his judgment to which reference should be made.

6.  The plaintiff obtained a judgment in default for the sum of approximately $1.4 million in respect of 5 of the 7 heads of claim and for damages to be assessed in respect of the remaining 2 claims.  On the defendant’s application to set aside the default judgment, the master set aside part of the final judgment on terms, namely that the defendant should pay into court approximately $1.1 million within 21 days as well as $350,000 as security for the plaintiffs costs.  She made other costs orders including assessed costs of $250,000 being the plaintiff’s costs grossed up for the application before her.

7.  The defendant appealed.  Central to his defence before Deputy High Court Judge Carlson, as noted in paragraph 22 of the judgment, was that the plaintiff and he, on the plaintiff’s behalf, on Mr Tan’s directions had systematically dealt in counterfeit goods for which convictions had been entered both in Hong Kong and in Singapore and it was that that had driven much of what he had done and, indeed, explained much of what he had done.  The judge’s conclusions appear from the following passage:

“25. This is not an easy case.  On the one hand the defendant has allowed the action to go by default, and he did not even bother to reply to the letter before action, which tells against him on the question of the general credibility of his assertions.  Nevertheless, it seems perfectly clear that the plaintiff, run as it was by Mr Tan, had been operating illegally by dealing in counterfeit products, for which convictions have been entered in two jurisdictions.  This fact would not of itself disentitle the plaintiff to judgment, provided the evidence was there to support it.  Having stood back from the factual dispute, and considered its overall effect, I am left with a sense of unease about the whole operation of the plaintiff’s business.  Nevertheless Mr Chan’s analysis of the evidence in support of the judgment I have found to be persuasive.

26. All of this having been said, it seems to me that this is a dispute that should go to trial, but on terms.  Whilst the defendant has demonstrated that he should not be driven from the judgment seat, the case put forward by him has an all-pervading mantle of suspicion which requires me to impose terms, as the master did.  For my part, I consider that the whole judgment should be set aside, really as a matter of logic.  The general defence that has been put forward covers all of the claims, and whilst claims A and B, in particular, may be said to be, on their face especially impressive, the fact remains that the defendant has offered a global explanation, which should go to trial.”

(Pausing here, I would observe that there must have been a typographical error in paragraph 25: the word “not” has no place in the fourth sentence of that paragraph having regard to what is said in paragraph 26.)

8.  Mr Chan who appeared for the plaintiff submitted that there is a respondent’s notice to the effect that the judge was wrong in holding that the general defence put forward covers all of the claims and that this would undermine the merits of the appeal.  Be that as it may, given the impending appeal, it would not be appropriate for me to say more than that as a matter of first impression at the very least, the defendant has a good chance of succeeding on the appeal.  The defence cannot be said to be either shadowy or without substance and it could well be established at trial should the defendant come up to proof.  In those circumstances, it seems wrong in principle to impose a condition that would normally reflect a high degree of doubt as to the viability of the defence.

9.  The defendant has filed evidence as to his means for the purposes of the stay application.  See his sixth affirmation.  In the light of that and his latest affirmation, I am satisfied that he is unable to raise the funds to meet the security sought.  Although for the purposes of the stay application the judge came to the conclusion that the defendant, who is currently earning HK$45,000 a month should have no difficulty in raising $1.2 million, I confess that the basis of that conclusion entirely escapes me.  I am more than satisfied that he cannot raise the security sought from his own financial resources, that it is impossible for him to raise the funds from elsewhere, be it his employer or his family and friends.  To order security in those circumstances would be tantamount to ensuring that the defendant whose defence might well be established at trial would be unable to undertake the appeal from a judgment that is necessarily premised on his having engaged in serious misconduct without the plaintiff having to prove his case.  That cannot be right.