TIEN SAU TONG MEDICINE CO (HONG KONG) LTD v. CHEUNG PO LING AND ANOTHER

CACV 249/2019

[2021] HKCA 1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 249 OF 2019

(ON APPEAL FROM HCA 400/2016)

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REASONS FOR JUDGMENT

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Hon Barma JA (giving the Reasons for Judgment of the Court):

1.  This was an appeal against the judgment of Coleman J (“the judge”) dated 14 May 2019, by which he found in favour of the plaintiff against the 1^st and 2^nd defendants on the plaintiff’s claim that the defendants had misappropriated some HK$5.8 million from the plaintiff. As against the 1^st defendant, the judge granted a declaration against the 1^st defendant that she was a constructive trustee of the HK$5.8 million that had been misappropriated, and that the plaintiff was entitled to follow or trace that sum. As against the 2^nd defendant, the judge granted a declaration (and certain consequential orders) that the property purchased with the HK$5.8 million was held by the 2^nd defendant as a constructive trustee for the plaintiff. The judge also dismissed the defendants’ counterclaim against the plaintiff, and ordered the defendants to pay the plaintiff’s costs, to be taxed if not agreed.

2.  We heard the appeal on 28 September 2021.  The defendants were represented at the hearing by Mr Ivan Law, who stepped in shortly before the hearing to take the place of Mr Arthur Yip, who had represented the defendants below, and had settled their Amended Notice of Appeal and prepared their written submissions, but was unfortunately unable to appear before us owing to illness.  The plaintiffs were represented by Ms Alison Choy (having been represented by Mr Kevin Hon below).  At the conclusion of the hearing, we dismissed the appeal with costs to the plaintiff and gave directions in relation to a payment into court by way of security for costs. We indicated that we would hand down our reasons for judgment in due course, and now do so.

Background

3.  The background to the plaintiff’s claim can be briefly stated.  The plaintiff company was founded over a century ago, and is in the business of producing and selling Chinese medicinal pills.  Its sole shareholder and director is Mr David Ng (“Mr Ng”), who is the grandson of the original founder.  The 1^st defendant is the mother of the 2^nd defendant.  She was first employed by the plaintiff in 2007, while the 2^nd defendant joined the plaintiff in 2013.  After she was employed by the plaintiff, the plaintiff’s business improved quite significantly.  It was common ground that Mr Ng, who was not a businessman but an artist, spent most of his time in the United States, and that he reposed considerable trust and confidence in the 1^st defendant, to whom he left much of the running of the plaintiff’s business, making her a sole signatory for the plaintiff’s bank accounts.

4.  The dispute arose out of the use by the 1^st defendant of HK$6,080,000 of the plaintiff’s funds for the purchase of a residential property in the name of the 2^nd defendant, for the use of the 2^nd defendant and his wife, at a purchase price of HK$5,798,000.  The funds were obtained by three cheques drawn on the plaintiff’s bank account between December 2014 and February 2015, each of which was signed by the 1^st defendant.  HK$280,000 was repaid to the plaintiff shortly before the last of these cheques was drawn, and a further HK$19,000 was paid back in December 2015.

5.  The plaintiff claimed that the withdrawals were unauthorized, and were misappropriations of its funds by the 1^st defendant in breach of her fiduciary duties towards the plaintiff.  The defendants were suspended from their employment with the plaintiff at the end of December 2015, and these proceedings were commenced on 17 February 2016.  Mr Ng made a complaint to the police in March 2016 about the alleged misappropriations, and the defendants were summarily dismissed in about March 2016.

6.  The defendants’ case was that Mr Ng, on behalf of the plaintiff, orally agreed with the 1^st defendant in a telephone conversation said to have taken place in about September 2013 that the 2^nd defendant could borrow money from the plaintiff to purchase a flat as his matrimonial home.  It was further contended that in about June 2014, Mr Ng authorized and directed the 2^nd defendant to go ahead with locating and purchasing a flat with a loan of up to HK$6,000,000 from the plaintiff, and that this was repeated by Mr Ng in a telephone conversation in early October 2014, when it was also agreed that the loan should be repaid by 10 equal annual instalments.  The judge noted at [65] of the judgment that there was “significant confusion” as to who was actually the borrower of the alleged loan.

7.  Mr Ng (and therefore the plaintiff) denied that there was any oral loan agreement with the defendants and that the relevant funds were misappropriated from the plaintiff.

The judgment below

8.  In a detailed and comprehensive judgment delivered at the end of the trial, the judge accepted the plaintiff’s case and rejected that of the defendants, and accordingly found in favour of the plaintiff, granting the relief referred to in [1] above.  In the event, the property purchased in the name of the 2^nd defendant was (in accordance with the judge’s order) assigned to the plaintiff prior to the hearing of this appeal.

9.  The judge found that while the 1^st defendant probably did raise with Mr Ng the possibility of a loan from the plaintiff to assist the 2^nd defendant to purchase a property in 2013 and 2014, Mr Ng never agreed to make a loan for this purpose. Moreover, the judge was satisfied (and accepted Mr Ng’s evidence) that Mr Ng would not have considered or agreed to a loan by the plaintiff of the full purchase price of a property, although he might have been open to the possibility of a loan for a down payment.  However, while Mr Ng might have considered this as a possibility, the judge accepted that this was never in fact agreed.

10.  The judge rejected the defendants’ case that the loan had been agreed, and that Mr Ng had subsequently had a change of heart as a result of problems he had with the United States tax authorities arising from an investigation into his tax affairs in the United States.

11.  The judge also specifically dealt with the defendants’ reliance on the inclusion of the amount of HK$5,819,000 in the plaintiff’s financial statements for the year ended 31 March 2015, which had been signed by Mr Ng, as a “loan to staff”, accepting that Mr Ng had not noticed the entry, notwithstanding that Mr Ng had signed the accounts. The judge also took account of the defendants’ argument that the fact that Mr Ng had admitted having had a conversation or discussion with the plaintiff’s accountant about the rate of interest to be applied to a staff loan indicated that the loan had been made, but did not regard this as requiring him to reach a different conclusion.

12.  It was also noted by the judge that the inherent probabilities and circumstances pointed against a loan of the entire price of the property had been agreed, having regard to the “telling” evidence of the lack of the 2^nd defendant’s (or both the defendants’) ability to repay the loan within 10 years, even taking into account the combined earnings of both the defendants and the 2^nd defendant’s wife.

13.  Finally, the judge considered that it was inherently unlikely that Mr Ng would have volunteered to waive HK$800,000 of the loan, as the defendants alleged.

14.  Apart from upholding the plaintiff’s claim, the judge also dismissed the defendants’ counterclaim that Mr Ng had agreed to give the 1^st defendant 10% of the shares in the plaintiff.  This aspect of the judge’s decision was not the subject of any appeal.

This appeal

15.  In their Amended Notice of Appeal, the defendants raised the following grounds of appeal:

(1)  the judge ought to have paid sufficient regard to the evidence of a discussion between Mr Ng and the plaintiff’s accountant as to interest chargeable on a staff loan, and inferred from the fact of such a discussion that Mr Ng had authorized the making of a loan by the plaintiff to the defendants;

(2)  there was insufficient evidence to show that the 2^nd defendant must be taken to have known there was no prior approval of the loan;

(3)  in coming to his judgment, the judge failed to pay sufficient regard to the following facts:

(a)   that the loan was recorded in the financial statements of the plaintiff;

(b)   that Mr Ng signed on the page on which the loan appeared in those financial statements;

(c)   that Mr Ng discussed the interest rate for the loan with the accountant;

(d)   that the 1^st defendant had previously been requested to (and had agreed) act as “the guarantor of 3 properties owned by Mr Ng and the plaintiff”; and

(e)   that both defendants were employees who were admittedly special to the plaintiff.

16.  There was also a Respondent’s Notice filed by the plaintiff seeking a variation or a clarification of the judgment to the effect that the costs of the transfer of the property from the 2^nd defendant to the plaintiff should be borne by the 2^nd defendant.  However, at the hearing, Ms Choy confirmed that following the transfer of the property to the plaintiff, there were no outstanding issues as to such costs, and that the plaintiff therefore would not pursue its Respondent’s Notice.

Discussion

17.  It was accepted by both Mr Yip (in the defendants’ written submissions) and by Mr Law (at the hearing) that this appeal is solely concerned with alleged errors by the judge in making his factual findings, and that no question of law arises.  Ms Choy referred us to a number of well-known cases dealing with the circumstances under which the Court of Appeal will intervene in the factual findings of the court below, including Ting Kwok Keung v Tam Dick Yuen & Others (2002) 5 HKCFAR 336, Beacon Insurance Co Ltd v Maharaj Bookstore Ltd [2014] 4 All ER 418, re B (A Child) [2013] 1 WLR 1911 and China Gold Finance Limited v CIL Holdings Limited and Others (CACV 11/2015, unreported, 27 November 2015).  Mr Law, for the defendants, did not dispute that the principles established in these cases are applicable here.

18.  These principles have recently been conveniently summarized by this court in Yu Man Fung Alice v Chiau Sing Chi Stephen[2021] HKCA 1456, where Kwan VP said at [33] to [34]:

“33. The principles for the appeal court to disturb the findings of fact of the trial judge are well settled. Palpable errors, whether or law or of fact, must be identified, and they must be sufficiently material to undermine the conclusions of the trial judge. In the absence of material errors, an appeal court will interfere with the findings of fact made by a trial judge only if it is satisfied that his decision cannot reasonably be explained or justified. What matters is whether the decision is one that no reasonable judge could have reached. That the judges in the appeal court may have reached a different conclusion is not a ground for intervention.

34. The principles for appellate intervention apply also to inferences of fact drawn from primary facts (unless the finding is based purely on inferences or otherwise has nothing to do with the witnesses’ demeanour of the trial judge’s having received the evidence at first hand), and findings of mixed fact and law, or an issue on which the judge had to come to a judgmental conclusion after taking a number of factors into account.  The correct approach in reviewing such a conclusion is to treat the judge’s decision with utmost respect, and refrain from interference unless satisfied that it proceeded upon some erroneous principle or was plainly wrong.  It is similar to an appeal against an exercise of discretion.”

19.  Applying those principles, we note first that grounds 1 and 3 of the Amended Notice of Appeal complain only of a failure by the judge to give sufficient weight to various matters.  This is not fertile ground for an appeal against factual findings.  It is well-established that matters of weight to be given to particular aspects of the evidence are quintessentially matters for the trial judge, and that an appellate court will only intervene where it can be demonstrated that something has gone palpably wrong, whether by some important evidence being overlooked, or by the decision being one which no reasonable judge could have reached, or otherwise.

20.  In the present case, each of the factual matters identified and relied on by the defendants in grounds 1 and 3 of the Amended Notice of Appeal has in fact been expressly addressed by the judge in his judgment, so that it cannot be said that the judge had failed to consider any important piece of evidence.  The judge addressed the appearance of the alleged loan in the plaintiff’s accounts and Mr Ng’s signature on the plaintiff’s financial statements at [52], [53] and [80] of his judgment.  He considered Mr Ng’s discussion with the accountant on the interest rate at [74] of his judgment.  The 1^st defendant’s agreement to stand as guarantor was considered at [24] of the judgment below, and the claim that the defendants were “special” employees was dealt with at [82] of the judgment.

21.  Quite apart from the fact that a complaint about the weight assigned to particular matters by the trial judge is not a good ground of appeal where it is apparent that the matters have been considered, we do not accept that the judge can be criticised for giving insufficient weight to any of the above-mentioned matters.  It is clear that the judge conducted a holistic evaluation of all the relevant evidence by assessing the credibility of the witnesses (in which respect he found, for reasons which he explained, Mr Ng to be a more credible witness than either of the defendants), and assessing available documents (which were few), while having regard to the inherent likelihoods and probabilities by reference to commercial business sense and ordinary common sense (see [9] of the judgment).  The judge also took account of the weaknesses in the plaintiff’s case (see for example the matters discussed at [55], [73] and [74] of the judgment) before coming to the conclusion that that Mr Ng was a largely reliable witness.

22.  In our view, the judge’s evaluation of the evidence was not merely within the bounds of reasonableness, but was clearly well justified.  It follows that there was no scope whatsoever for this court to intervene with the judge’s findings of fact and grounds 1 and 3 of the Amended Notice of Appeal necessarily failed.

23.  Turning briefly to ground 2 (which was not really pressed by Mr Law), the complaint here was that “[t]here was no sufficient evidence showing that the 2^nd defendant must be taken to have known of the fact that there was no prior approval of the loan”.  We have some doubt as to how this ground really assists the defendants.  First, the defendants’ only defence run against the plaintiff’s claim for tracing of the dishonestly appropriated funds was that there was an oral loan agreement with Mr Ng, and that defence failed.  There was no separate argument based on the alleged absence of knowledge by the 2^nd defendant.  In any event, given that the 2^nd defendant was a volunteer, we are unable to see that such a defence could have any prospect of succeeding.  We therefore reject this ground of appeal as well.

24.  For the reasons explained above, this appeal was wholly devoid of merit, and accordingly it was dismissed with costs to the plaintiff to be taxed on the party and party basis if not agreed.

25.  We should also record that the defendants have paid $310,000 into court as security for costs for the appeal pursuant to this court (Barma JA and Au JA)’s order dated 9 October 2020.  Following taxation (or agreement) in relation to the plaintiff’s costs of appeal, that sum should be applied first to the payment of the plaintiff’s costs, and thereafter, any funds remaining should be repaid to the defendants.

CACV249/2019

[2020] HKCA 808

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 249 OF 2019

(ON APPEAL FROM HCA 400/2016)

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D E C I S I O N

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Hon Barma JA (giving the Decision of the Court):

1.  This is an application for security for costs by the plaintiff against the defendants. Having considered the documents before us, we came to the view that the application could be dealt with on paper without an oral hearing.

Judgment below

2.  The facts of this case were summarized by Coleman J in his judgment dated 14 May 2019 at [1] – [5], as follows:

“1. The plaintiff company is wholly owned by its sole shareholder Mr David Ng, who is also its sole director. Mr Ng is not a businessman but an artist, and he spends the majority of his time in the United States.

2. The 1^st defendant had been employed by the plaintiff since 2007, and the 2^nd defendant (who is the son of the 1^st defendant) had been employed by the plaintiff since 2013.

3. There is no dispute that Mr Ng (and so the plaintiff) reposed considerable trust and confidence in the 1^st defendant, who dealt with much of the day-to-day management and administration of the plaintiff and its business (as well as some of Mr Ng’s personal administration, during his lengthy periods out of Hong Kong). For that purpose, the 1^st defendant had been granted signing rights as an authorized sole signatory for the plaintiff’s bank accounts…

…

5. The question arises in the undisputed context that the 1^st defendant used approximately $6 million of the plaintiff’s funds to purchase a property in the name of the 2^nd defendant (‘the Property’), for his and his wife’s residential use. The funds were obtained by 3 cheques drawn on the bank account of the plaintiff, each signed by the 1^st defendant only.”

3.  The plaintiff’s case was that each of the 3 cheques was an unauthorised withdrawal.  The defendants’ case was that Mr Ng, acting on behalf of the plaintiff, orally authorised the making of an interest-free loan to the defendants in October 2014.  The loan was made to enable the 2^nd defendant to purchase a home after his marriage, and was to be repaid by 10 annual instalments over 10 years (see [42] of the judgment).

4.  The judge noted that there was no serious contest about the law and that both parties were in agreement on a number of factual issues ([8], [12] – [36] of the judgment).  He noted that there was “rather little documentation which is likely to assist much in resolving the dispute” and that the case would turn on the credibility of the witnesses, the available documents, and the inherent probabilities by reference to commercial business sense or ordinary common sense ([9] of the judgment).

5.  The judge held that Mr Ng was a “broadly reliable witness” and that the defendants were not “terribly convincing” witnesses ([38] – [41] of the judgment).  The judge accepted the plaintiff’s evidence and rejected the defendants’ contention that there was an oral loan agreement.  The judge granted, inter alia, a declaration that the 1^st defendant was a constructive trustee of the $5.8 million withdrawn by the 3 cheques and that the 2^nd defendant was a constructive trustee holding the property paid for by the $5.8 million.  The judge also dismissed the defendants’ counterclaim.

Application for security for costs

6.  By a notice of appeal dated 10 June 2019, the defendants appealed against the judgment. The plaintiff filed a respondent’s notice and a summons seeking security for costs on 2 July 2019.

7.  In support of the application, the plaintiff contended that the defendants were impecunious, and that this was shown by the fact that their combined income and available assets (excluding the subject property) are less than the $5.8 million in dispute.  The plaintiff also relied on an unsatisfied default judgment against the 1^st defendant in DCCJ 4380/2016 in the sum of HK$386,800 plus interest as evidence of impecuniosity.

8.  The defendants resisted the application.  They claimed that the intended appeal is meritorious and that the application was part of a series of litigation designed to stifle the appeal through exhaustion of the defendants’ financial resources.  The defendants claimed that their current financial situation was caused by the termination of their employment by the plaintiff and the various legal proceedings between themselves and the plaintiff, including a claim by the defendants for outstanding wages said to be owed by the plaintiff to the defendants.

Discussion

9.  The approach to an application for security for the costs of an appeal are clearly stated in Chung Kau v Hong Kong Housing Authority [2004] 2 HKLRD 650 at [14]:

“The power of the Court of Appeal to order security for costs in an appeal derives from RHC Order 59 rule 10(5). This Rule reads :

‘The Court of Appeal may, in special circumstances, order that such security shall be given for the costs of an appeal as may be just.’

The relevant principles, in particular the treatment of impecuniosity as a special circumstance are summarized in Hong Kong Civil Procedure 2004 Volume 1 at paragraphs 59/10/28 - 59/10/29. In this context, however, I would emphasize the following:-

(1) The fact that an appellant is impecunious does not lead automatically to an order that security for costs must be provided. The court is entitled to consider other relevant factors such as the strength of the appeal to determine whether or not it would be just to order that security for costs be provided.

(2) That said, as a matter of practice, once an applicant for security can demonstrate that impecuniosity (or some other factor such as difficulty or expense in enforcing a costs order) exists, while the court retains an overall discretion whether or not to make the order, it would then generally be up to the party resisting the application for security to demonstrate countervailing factors which would militate against such an order being made. A common countervailing factor to resist applications for security are the merits of an appeal.

(3) On a consideration of the merits of the appeal, while a detailed examination is not required (or desirable, even if possible on the materials before the court at this stage), the court should form some sort of preliminary, even instinctive, view. Where the merits appear to go strongly one way or the other, this may by itself be a decisive factor. Thus, an appeal which is very strong would often be a very good reason not to order security. The converse of course also applies. A hopeless appeal may even by itself justify an order for security. However, if the court takes the view that the appeal could really go either way, then generally it will look to the existence of any other factors to tilt the balance, in the absence of which security will be ordered. This is of course on the assumption that a factor such as impecuniosity has already been demonstrated.

(4)  As I have said above, the overriding consideration for the court is to consider, as the rule requires, whether ‘special’ (not exceptional) circumstances exist making it ‘just’ to order security.”

10.  So far as impecuniosity is concerned, the defendants have put forward little material to contradict the plaintiff’s contention that they do not appear to have sufficient financial resources to meet any costs order against them should their appeal be unsuccessful, having regard to their lack of known assets (apart from the property which has been determined to be held on trust for the plaintiff), and their substantially reduced income since their dismissal from employment with the plaintiff.  This appears to us to sufficiently demonstrate impecuniosity on the part of the defendants, such that the plaintiff is likely to encounter difficulty in enforcing any costs order that may be made in his favour if the appeal fails. 

11.  Additionally, the plaintiff relies on the unsatisfied default judgment in DCCJ 4380/2016 as evidence of impecuniosity.  In her affirmation of 16 July 2019, the 1^st defendant said that she had never been served with the default judgment and that it had not been executed.  In paragraphs 14 to 15 of the 2^nd affirmation of Chan Pui Yin Gloria (the solicitor acting for the plaintiff) dated 23 July 2019, the plaintiff responded it had initially withheld service and execution of the default judgment because of then ongoing settlement negotiations, and that after these broke down, the plaintiff did not see any purpose in attempting to execute the judgment against the defendants, who apparently did not have the means to satisfy it.

12.  In a letter dated 6 October 2017 (exhibited to the affirmation of Ms Chan), from the defendants’ solicitors to the plaintiff’s solicitors, the defendants’ solicitors complained that the default judgment was obtained “mala fide” in breach of the settlement negotiation and that they would apply to set aside the default judgment on the ground that the amount claimed had already been repaid to Mr Ng. Notwithstanding this, no steps were taken to set aside the default judgment which has remained outstanding since 10 July 2017.  This therefore seems to us to provide a further basis for inferring impecuniosity on the part of the 1^st defendant.

13.  We are therefore satisfied that the plaintiff has made out a case of impecuniosity against both defendants.

14.  As for the suggestion that the application was part of a series of litigation designed to exhaust the defendants’ resources and thus to stifle the appeal, we do not consider that this suggestion is justified.  The various proceedings between the plaintiff and the defendants arise out of separate incidents giving rise to claims by the plaintiff.  The plaintiff was successful in two of them, while the rest are still on foot.  One of the claims is by the defendants against the plaintiff for unpaid salary.  The claim for an injunction is part of the attempts at execution of the judgment under appeal.  None of the plaintiff’s actions seem to us to be obviously unmeritorious, and we are therefore unable to see a basis for contending the plaintiff is attempting to exhaust the financial resources of the defendants through litigation.

15.  We turn next to the merits of the appeal.  As stated in Chung Kau (supra), where, on a preliminary assessment, an appeal appears to have strong prospects of success, this will often be a sufficient reason to refuse an order for security for costs.  The 1^st defendant, in her affirmation in opposition to this application, states that the grounds of appeal “should be real and substantial” (paragraph 3 of her affirmation) and that the appeal “should [have] substance” and “[a] sufficiently good chance of success” (paragraph 5).  It may be noted that the 1^st defendant does not appear to suggest that she has been advised that the appeal has very strong prospects of success.

16.  In our view, this is not surprising.  It is apparent from the notice of appeal dated 10 June 2019 that all of the defendants’ grounds of appeal relate to the judge’s findings of fact, and complain about the sufficiency (or lack of it) of the evidence to support the judge’s findings, and the judge’s assessment of allegedly contrary evidence and the weight (or lack of it) accorded to such, and the inferences drawn by the judge from the primary evidence.  The complaints relate to three broad areas, namely:

(1)  whether there was any discussion between Ng and the 1^st defendant in late 2015 relating to interest payable on a loan;

(2)  whether the 2^nd defendant should be taken to have known that there was no prior approval of the loan; and

(3)  whether any loan had been made by the plaintiff to the defendants and whether the withdrawals were made without approval.

17.  It is well established that in order to succeed in an appeal based on challenges to factual findings by a trial judge, an appellant faces a difficult task, and will have to show that the judge’s conclusions were plainly wrong.  Complaints (as in this case) regarding the sufficiency of evidence and the proper inference to be drawn from the evidence will generally be difficult to establish.  Having considered the judgment with some care, we are unable to say that this appeal can be said to have very strong prospects of success.  In saying this, we do not express any final view as to the merits of the appeal, but we are quite satisfied that it cannot be said that the prospects of success are so strong as to justify the refusal of security for costs where it would (as we think is the case here) be otherwise appropriate to order security to be provided.

18.  There is therefore no countervailing factor against an order for security for costs.

19.  Having considered the skeleton bill put forward by the plaintiff, we are of the view that many of the items claimed for time spent by the plaintiff’s solicitors are excessive, and consider that the appropriate amount of security should be HK$310,000, including the costs of this application.

20.  We would therefore grant the application and make an order that the defendants do within 28 days of this Decision give security for the plaintiff’s costs of this appeal in the sum of HK$310,000, in default of which the said appeal shall stand dismissed without further order. 

21.  So far as the costs of this application are concerned, we make an order nisi that these should be paid by the defendants to the plaintiff in any event.  Having considered the statement of costs lodged by the plaintiff, we find the time spent on the application by the solicitors to be excessive in many respects, and can see no basis for allowing a refresher to counsel.  We therefore assess such costs on a gross sum basis in the amount of HK$110,000.

Mr Kevin Hon, instructed by Alex To & Co. Solicitors, for the plaintiff

Mr Arthur Yip, instructed by Lennon & Lawyers, for the 1^st and 2^nd defendants