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Taking Assets from Your Own Company Could Land You in Jail

2014-04-01

Introduction
Very often, especially in desperate times, directors would attempt to find ways to remove assets from their own company. In many cases, these directors would also engage in conducts which may attract criminal liability. Considering the high ranking position of directors in the company, the court has traditionally imposed a severe sentence on such directors upon conviction. We provide below a summary of the recent case of香港特别行政區 v 陳海林, DCCC 84/2011 as an illustrative example.

DCCC 84/2011
The defendant, Chan Hoi Lam (“Chan”), was the chief executive officer and managing director of Climax International Company Limited (“Climax”). Chan was charged with 1 count of fraud (“Fraud Charge”), 2 counts of using a false instrument (“False Instrument Charges”) and 1 count of theft (“Theft Charge”). The Fraud Charge and the False Instrument Charges were based on his various acts in obtaining cash advances from Climax and his use of false instruments to support the legitimacy of such cash advances. The Theft Charge was based on Chan taking funds under a loan to Climax for his personal use.

Prosecution Case
In respect of the Fraud Charge, the prosecution’s case was that, through Chan’s fraudulent misrepresentations towards the Assistant Chief Financial Officer (“ACFO”), the auditors and the Audit Committee of Climax, Chan obtained several cash advances from Climax amounting to HK$10.54 million. The prosecution submitted that Chan, with the intent to defraud, induced the ACFO, the auditors and the Audit Committee of Climax to believe in his representations, which resulted in benefit to Chan or in prejudice or risk of prejudice to Climax.

In respect of the False Instrument Charges, the prosecution’s case was that Chan used false instruments, namely an agreement entered into between Climax and a company known as 寶利萊有限公司 (“Supplier“) for the purchase of C2S papers (“Supplier Agreement”) and a deposit receipt for the alleged purchase under the Supplier Agreement (“Receipt”), when the ACFO asked for documents in support of the cash advances.

In respect of the Theft Charge, the Prosecution alleged that Chan obtained a loan of HK$4 million from Hong Kong Finance Company Limited (“HK Finance”) in the name of Climax and converted the loan to his personal use.

Defence Case
Chan alleged that the cash advances were reimbursement by Climax to him for expenses he paid on behalf of Climax. Chan claimed that HK$3 million of the said cash advances was in relation to the refurbishment expenses of a wholly owned factory of Climax in the PRC (“Factory“) in March to July 2006, and HK$6 million was in relation to the deposit payment made under the Supplier Agreement. Such payments were made to his brother, a certain person known as Yau, and Leung Wai Chung (transliteration) (“Leung”), in cash. Chan further claimed that the remaining HK$1.54 million cash advances were in relation to entertainment expenses for the purpose of liaising and negotiating with the Chinese authorities (which was authorized by the Climax’s board of directors).

As to the Supplier Agreement, Chan expected the costs of C2S papers would increase and after his brother consulted him and obtained his approval, Chan paid his brother in advance to purchase the C2S papers from the Supplier. Chan alleged that he did not deal directly with the Supplier, and the Supplier Agreement was signed by his brother. He alleged that he was only aware of the existence of the Supplier Agreement when Climax’s auditors made inquiries.

As to the loan from HK Finance, Chan explained that Climax intended to invest in a gold mine after its businesses went downhill. Since the banks tightened credit control after Climax’s businesses deteriorated, Climax reluctantly borrowed from moneylenders. Chan alleged that Climax’s board of directors consented to obtaining the loan and having the funds obtained thereunder handled by Chan. After Climax ceased interest in investing in the gold mine, Chan took over the investment project including the responsibility of repaying the loan. He explained that as the investment could affect Climax’s share price, the matter was kept confidential and unknown even to Climax’s staff.

Analysis of Evidence
The Court accepted the evidence given by prosecution witnesses as credible. On the contrary, the Court rejected the various allegations made by Chan, in particular:-

1.         In relation to the refurbishment of the Factory, the Court found that Chan’s inconsistent evidence, his recklessness in handling advanced payments to his brother, Yau and Leung, and the lack of records, all put his defence into doubt. Further, the alleged billboard erected at the Factory as part of the refurbishment was not seen by any of the relevant prosecution witnesses.

2.         The purchase of C2S papers from the Supplier using advanced payment from Chan was in breach of Climax’s purchasing procedure and contrary to common sense. The Supplier Agreement, being an important agreement, should have been stored in the file room. It did not make sense for Climax to purchase a large batch of C2S papers with a new supplier having no prior business dealings. The Court also found that the Supplier could not have delivered 2,000 tonnes of C2S papers to Climax in accordance to the alleged Supplier Agreement.

3.         The Court found it hard to believe that Climax would consider investing in gold mines given the financial circumstances of Climax at the material time. The Court also found it suspicious that Climax (being a listed company) would borrow from HK Finance at a high interest rate of 48% per annum. There was no documentation in Climax’s finance department in respect of the HK$4 million loan. It was also found that Chan used HK$3.1 million of the loan to settle his personal debts and that the monies used to repay the loan came from Climax, which was contrary to Chan’s allegation that the monies came from him.

Conviction

Fraud Charge
The Court held that the alleged refurbishment of the Factory and agreement with the Supplier under the Supplier Agreement were non-existent. The representations made by Chan, knowing those representations were false, amounted to fraud as defined under section 16A of the Theft Ordinance (Cap. 210).

False Instrument Charges
The Court held that Chan used the Supplier Agreement and the Receipt, which he knew were false instruments, to induce the ACFO to accept that they were true and to pass it to the auditors, and thereby misled them in their accounting and auditing works.

Theft Charge
As the loan from HK Finance was obtained in Climax’s name, it belonged to Climax. By using HK$3.1 million of the loan to settle his personal debts, he appropriated the loan being the property of Climax. In addition, the monies used to repay the loan principal and interests all came from Climax. In light of this background, Chan was held to have the intent to permanently deprive Climax’s property. Chan’s acts were dishonest according to the standard of a reasonable honest person. Chan, being well-educated and experienced, must have known that his acts were dishonest.

In the circumstances, Chan was convicted of all the 4 charges against him.

Sentence
In determining the sentence, the Court took into account of Chan’s breach of the trust Climax reposed in him, the senior position of Chan in Climax and the length and substantial amounts of monies involved under the 4 charges. Chan was sentenced to 62 months’ imprisonment for the Fraud Charge and 44 months each for the False Instrument Charges (all to be served concurrently). As for the Theft Charge, he was sentenced to 56 months imprisonment, 12 months of which to be served consecutively with the other charges. In aggregate, Chan was sentenced to 74 months’ imprisonment.


For enquiries, please contact our Litigation & Dispute Resolution Department:

E: criminal@onc.hk

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T: (852) 2810 1212

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IMPORTANT: The law and procedure on this subject are very specialized 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.

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Senior Partner
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