Introduction

Breach of lease or other kinds of contracts is commonly understood to be a civil wrong. Under certain circumstances, however, concealing a breach may attract criminal liabilities. In the recent case of 香港特別行政區 訴 黎智英及另一人 [2022] HKDC 456, the Hong Kong District Court found the defendants guilty for fraud in concealing a contravention of lease conditions by the company they controlled or managed.

Facts

Hong Kong Science and Technology Parks Corporation (formerly known as Hong Kong Industrial Estates Corporation) (the “Lessor”) is a statutory corporation and it provides long leases of premises at science and industrial parks/estates at discounted rent to tenants with a view to advancing industrial and technological development.  

In August 1995, Apple Daily Printing Limited (formerly known as Maxhope Limited and Next Media Printing Limited) (the “Lessee”) applied for a lease of the premises (the “Premises”) in Tseung Kwan O Industrial Estate from the Lessor for the purpose of publishing and printing newspapers and magazines. An agreement for lease was signed in October 1995 and a formal lease (the “Lease”) was signed in 1999.

The Lease contains a “no alienation clause” whereby the Lessee was not allowed to underlet or part with the possession of the Premises or any part thereof, nor to permit any other party to occupy any part of the Premises by way of a licence. Subject to prior written approval of the Lessor, a subsidiary or associate company of the Lessee may be permitted to occupy or share the use of part of the Premises by way of licence on such terms as may be approved by the Lessor.

Dico Consultants Limited (“Dico”) is a private company controlled by D1 and held 49% shares in the Lessee from 1997 to 2001. From 1995 to May 2020, it occupied certain area of the Premises without applying for a licence. However, the Lessee has never applied for a license for Dico, despite having applied to the Lessor for licenses for various subsidiaries and associate companies of the Lessee from time to time since 1997.

D1 was at all material times the chairman and shareholder of Apple Daily Printing Limited and controlled various corporate entities under Next Digital Limited (the “Group”).

D3 was the Director of Administration of Next Media Management Services Limited. On 9 April 2020, D3 made a written reply to the Lessor’s enquiry, stating that “Dico does not occupy and is not operating on any part of the Lot”.

Charges

D1 and D3 were charged of fraud.  The Prosecution case is that D1 and D3 were under a duty to make disclosure to the Lessor at the material time. Yet they permitted Dico to occupy the Premises without informing the Lessor, knowing that this contravened the conditions of the Lease. Dico or the Group benefited from such omission whilst the Lessor was subject to prejudice or substantial risk of prejudice. Such omissions can therefore constitute fraud.

Defences

The defences were as follows:

1.       There is no breach of lease. The occupation by Dico was incidental to the Lessee’s operation or business at the Premises and should therefore be regarded as the Lessee’s ancillary office which is permissible under the Lease.

 

2.       Further, Dico only occupied 0.16% of the Premises. Its occupation did not vary the overall land use of the Premises. There was substantial compliance with the Lease conditions.

 

3.       D1 and D3 do not have any obligation to disclose the contravention of lease and hence their concealment (if any) cannot constitute fraud.

 

4.       The Lessee is a separate legal entity. D1 should not automatically be responsible merely by being its director and shareholder. D3 was not the Group’s senior management and was unaware of the restrictive conditions of the Lease. He was merely a contact person acting in accordance with instructions.

 

5.       D1 and D3 did not have any intent to defraud.

 

6.       There was no prejudice or substantial risk of prejudice to the Lessor.

Verdict and reasoning

The Court found D1 and D3 guilty. It is undisputed that Dico never got any licence to occupy the Premises and its business was not related to publishing or printing of newspaper and magazines. The Court took into account the context that the Lessee enjoyed discounted rent under the Lease.  In return, the Lessee has to fulfil the conditions set by the Lessor which matches Lessor’s objectives and policies. The Court therefore considered the Lease to be a special one. Under such context, an omission can constitute deliberate concealment and thereby a fraud.

Instead of pointing out to the Lessor that the occupation of Dico was incidental and did not require a license as argued in the defence case, the Lessee chose to conceal Dico’s occupation.

Further, the Court found that D1 was all along the controller of both Dico and the Lessee and cannot excuse himself merely by suggesting that he was busy overseeing the Group’s business and had very limited participation in the present case. The Court did not accept that D3 was merely a contact person with no knowledge about the affairs of the Premises.

The Court drew the only reasonable and irresistible inference that D1 and D3 knew all along the land use restrictions and the licencing system under the Lease, but still concealed Dico’s occupation of the Premises without any licence.

Takeaway

This case serves as a reminder that parties to a contract should not take it for granted that their conduct in relation to a breach of the contract will only lead to civil consequences. The special context of a contract, for instance where the party can only enjoy special benefit upon fulfilment of certain conditions, may give rise to a duty of disclosure. Deliberate concealment of its own breaches or other material facts may constitute fraud and attract criminal liabilities. Non alienation clauses are common in leases, tenancy agreements and mortgages. It is advisable to seek immediate legal advice if there are any questions regarding a breach or possible breach of such clauses.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022