Secretary for Justice for and on behalf of the Commissioner of Police v. Chun Ngai Jewellery Design Co Ltd (in Compulsory Liquidation) and Others

HCMP 1362/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1362 OF 2015

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BETWEEN

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D E C I S I O N

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INTRODUCTION

1.The Secretary of Justice commenced proceedings on behalf of the Commissioner of Police (“the Applicant”) for determination of the claims of various parties in respect of certain diamonds seized by the Police. The seizure was conducted by the Police in the course of their investigation of a suspected case of evasion of liability by deception/theft involving one Tsang Kam Hung Joseph (“Tsang”) of Chun Ngai Jewellery Design Co Ltd, the 1^st Claimant (“C1”), upon reports received from the 2^nd to 18^th Claimants.  A list was drawn up by the Police of the items seized (“List”) and the hearing before me relates to item no.10 on the List, a diamond with GIA certificate report no. 6147467156 (“the Diamond”).

2.Two parties now claim for the return of the Diamond, the 20^th Claimant and the 22^nd Claimant.  By an order of Master Hui dated 1 March 2016, the hearing of the claims between them was ordered to proceed to summary determination as to whether the Diamond is the property of the 22^nd Claimant as against the 20^th Claimant, with the 22^nd Claimant being the plaintiff and the 20^th Claimant being the defendant.  Hearing of this summary determination took place before me.  Mr Sebestian Hughes appeared on behalf of the plaintiff while Mr Bache Sit appeared on behalf of the defendant.

BACKGROUND

3.According to the affirmation of Hui Nok (“Hui Affirmation”) filed on behalf of the Applicant on 4 June 2015, investigations by the Police revealed that various diamonds and/or jewelleries had been sold or consigned to C1 or Tsang on different occasions; but payment had not been made and those diamonds and/or jewelleries had not been returned by C1 or Tsang.  Statements by or on behalf of the 2^nd to 18^th Claimants had been obtained by the Police from July 2012 to April 2014. 

4.18 out of the 658 items seized by the Police on 31 July 2012 were found pawned at two different pawnshops, one at a pawnshop operated by the 19^th Claimant (“C19”) and the remaining 17 items (nos. 3 to 19 of the List, ie including the Diamond) at the pawnshop operated by the defendant.  The Police took a statement from a Sin Wai Keung of C19 on 10 December 2012 and from Poon Kwok Keung (“Poon”) of the defendant on 22 November 2012.  The statement from Poon was in respect of the 17 items which were pawned by Tsang with the defendant for the period from 23 April 2012 to 21 June 2012.  There is no indication that any statement had been obtained by the Police from the plaintiff.

5.Tsang was arrested by the police on 31 July 2012 and various interviews were conducted by the Police with him from 31 July 2012 to 25 January 2013.  A note with summary of a video interview of Tsang conducted by the Police on 31 July 2012 was exhibited in the Hui Affirmation.  Tsang told Police in the interview that the Diamond was brought to Tsang by Yosef, a staff of IN Diamonds Limited, the 13^th Claimant (“C13”), on 22 May 2012 and that he had purchased the Diamond at HK$834,940 from C13 on 11 June 2012.  Tsang also stated that the diamonds involved in the various transactions he referred to, including the Diamond, had been sold to him by C13, and that, according to industry practice, he was responsible for payment and the diamonds could not be returned to the suppliers.  A cheque drawn on C1’s account had actually been issued in purported payment of the Diamond but it was dishonoured.

6.Upon the petition for his own bankruptcy, a usual bankruptcy order was made in respect of Tsang on 10 December 2012.  As regards C1, a winding up order was made against it on 10 October 2012.  Due to insufficient evidence, Tsang was released unconditionally by the Police on 9 May 2013.

7.Details of the enquiry conducted by the Police with potential claimants to the diamonds seized can be found in the Hui Affirmation.  It is stated in paragraph 12 of the Hui Affirmation that on 2 March 2015, the Police had written to 29 potential claimants of the items seized, including the 1^st to 21^st Claimants asking them to confirm in writing whether they intended to claim the ownership of any of the seized items and if so, to complete and return an attached confirmation from.  The letters are in more or less standard form and 29 such letters were exhibited.  The plaintiff was not among those to whom this letter of 2 March 2015 was sent. 

8.The completed confirmation forms received from the potential claimants are exhibited to the Hui Affirmation.  The plaintiff had not sent in a completed confirmation form.  Based on the responses to such enquiry, a summary of the claims confirmed by the various parties involved is set out in a table in paragraph 13 of the Hui Affirmation.  The table records six parties laying claims to the Diamond – C1, the 9^th Claimant, the 10^th Claimant, C13, the defendant and the plaintiff.[1] The only item that the plaintiff was shown to be interested in in this table is the Diamond.  There is however no explanation as to how the plaintiff communicated its interest to the Police given that it had not been sent the letter of 2 March 2015 and it had not filed a completed confirmation form.

9.Solicitors were subsequently instructed by the Applicant to seek further confirmation from various potential claimants, including C1 to C22, as to their wishes to claim the ownership of the seized items prior to the commencement of the present proceedings.  This they did in May 2015 and there were a total of 30 such letters that they sent out, 29 of the addressees are the 29 parties to whom the letter of the Applicant dated 2 March 2015 were sent, and the additional one was a letter sent to the solicitors of the plaintiff on 20 May 2015 (“First Letter”) in respect of the potential claim of the plaintiff to the Diamond.  The 30 letters were all in very similar terms and they all referred to the letter sent by the Applicant on 2 March 2015. 

10.The reply from the solicitors of the plaintiff dated 26 May 2015 (“Second Letter”) to the First Letter was then mentioned in paragraph 15 of the Hui Affirmation to show that the claim of the plaintiff had to be included in addition to those set out in the table referred to in paragraph 13 of the Hui Affirmation, although it had already been so included in the table. 

11.In the First Letter, apart from referring to the letter dated 2 March 2015 issued by the Applicant, there was also a reference to the instruction of the plaintiff that it would not claim the ownership of any of the items against the applicant.  In the Second Letter, solicitors of the plaintiff referred to the respective letters of itself and that of the solicitors of the Applicant, both dated 22 May 2015.  These two letters had not been produced.  

EVIDENCE OF THE PARTIES

12.The first affidavit of the plaintiff is one made by David Cohen, its General Manager, and dated 8 July 2015 (“First Cohen Affidavit”).  It is the plaintiff’s case that the Diamond was provided by the plaintiff to C13 on consignment.  The plaintiff and C13 subsequently entered into a sale and purchase agreement for the sale of the Diamond but C13 had not paid for the Diamond.  A copy of the invoice issued by the plaintiff to C13 dated 18 June 2012 (“Sale Invoice”) and a copy of an agreement said to be dated 13 August 2013[2], with the plaintiff and C13 named as parties (“Sale Agreement”) have been exhibited.  Both the Sale Invoice and the Sale Agreement record a sale price of USD102,340.

13.The head of the Sale Invoice has the logo, name and address of the plaintiff.  There are also places for some details of the transaction to be set out including the date and the name of the party to whom the invoice is addressed to.  What follows is the space for setting out the description of the goods covered by the invoice, where the description of the Diamond and the price aforementioned can be found.  Below this space are some terms in small print (“Invoice Provision”), which are reproduced verbatim as follows:

“The goods described and valued below are delivered to you for examination and inspection and are the property of Eliyahu Yona Diamonds Ltd. And subject to their order and shall be returned to them on demand. Such merchandise until returned to them and actually received, are at your risk from all hazards. No right or power is given to you to sell, Pledge, Hypothecate of otherwise dispose of this merchandise regardless of prior transactions. A sell of this merchandise can only be effected and title will pass only, if as and when the said Eliyahu Yona Diamonds Ltd. Shall agree to such sale and a bill of sale returned therefore.

We herewith declare that the above mentioned diamonds have been cut and polished in Israel.

Please note following:

The diamonds herein invoiced have been purchased from legitimate sources not involved in funding conflict and in compliance with united nations resolution.  The seller hereby guarantees that these diamonds are conflict free, based on personal knowledge and/or written guarantees provided by the supplier of this these diamonds.” 

The only other details appearing below the Invoice Provision on the Sale Invoice are the bank details of the plaintiff and a space for the buyer’s signature and chop.

14.In the Sale Agreement, the plaintiff is referred to as “The Seller” and C13 referred to as “The Company”.  There are 12 clauses in total and the pertinent ones are highlighted below:

“1) On 18^th June 2012 The Company make a purchase of Round diamond on the weight of 3.01ct, Color F and clarity VVS2 (GIA #6147467156) in value of $102,340 USD from The Seller. (Invoice #0116)

2) The Diamond was delivered on consignment by the Company to a shop in Wan Chai name of “Chun Ngai Jewellery” that run away.

3) …

4) The Company has contacted to all relevant departments and having a legal action against the shop in order to get the Diamonds back.…

5) The Company undertakes and commits to return the Diamond to the Seller immediately after recovering the Diamond from the police right away.

6) …

7) If necessary, after the judgment is given, and according to that, The Company will take care of all the payments charges with the pawnshop to get the Diamond back

8) The Seller agrees to allow as much time as needed for the Company to recover the Diamond and will not take any legal action against the Company before the Company recovers the Diamond.

9)   The Seller will not have any further request to The Company until The Company obtains final judgment against Chun Ngai and the pawnshop regarding The Diamond on the of 3.01ct, RB Color F and clarity VVS2 (GIA #6147467156)”

15.Reference is made in the First Cohen Affidavit to the record of the police interview of Tsang which shows that the cheque drawn by Tsang for the Diamond could not be cashed.  Since Poon told the Police in the statement he gave that the Diamond was pawned by Tsang to the defendant on 23 May 2012 for HK$450,000, Cohen pointed out that the defendant could not rely on the provisions of the Pawnbrokers Ordinance, Cap. 166 (“PO”) by operation of section 3 of the PO. 

16.Poon made his first affirmation on behalf of the defendant on 29 October 2015 (“First Poon Affirmation”).  The First Poon Affirmation was made in support of the defendant’s claim to six items in the List, over which there are other claimant(s), including the plaintiff’s claim over the Diamond.  These items were pawned by Tsang between 24 April 2012 and 21 June 2012 for a total amount of $1,210,000[3].  Exhibit “PKK‑1” to the First Poon Affirmation is a copy of the records of the defendant in respect of the pawning of all these six items.  Five out of the six items were pledged for an amount over $100,000 while one of them was pledged for $50,000.

17.The records in Exhibit “PKK‑1” were handwritten in Chinese and each entry has 5 pieces of information – reference number; name and address of pawner; identity card number of pawner; description of the item; and amount of the loan advanced.  The records show that the Diamond was pledged by Tsang on 23 May 2012 for the amount of HK$450,000.  The address recorded for Tsang was the business address of C1.

18.In relation to the business of the defendant, Poon deposed to the defendant having operated a pawnshop business under the PO for 31 years.  Poon gave a brief description of the pawnshop business and the effect of some of the provisions of the PO.  In respect of loans that fall outside the PO because the amount involved exceeds HK$100,000, Poon averred that the unredeemed pawned item would become the property of the pawnshop pursuant to the pawn agreement between the pawnshop and the pawner.  As to what constituted such a pawn agreement, there is no explanation in the First Poon Affirmation and a sample of such pawn agreement has not been produced.

19.Also set out in the First Poon Affirmation is the history of the dealings between Tsang and the defendant.  Tsang started pawning items with the defendant in 2007 and his pawning record over the years was averred by Poon to have been a perfect one, having always managed to redeem the pawned items in the past[4]. Poon stated that the defendant had no reason to find anything suspicious regarding the pawning of the six items by Tsang.  He confirmed that a search of the record of stolen/lost property provided by the Police had been conducted in respect of the six items before they were accepted for pawning by the defendant. On this basis, Poon stressed that there had been no fault or carelessness on the part of the defendant in offering loans to Tsang.

20.In paragraph 12 of the First Poon Affirmation, Poon averred that the defendant had become the legal owner of all the six items, and so it would have the right to offer them for sale to other parties, because of the failure of Tsang to redeem any of those items.  There was no elaboration as to whether such right of the defendant was based on the PO or the pawn agreement, whatever it may be constituted of.

21.The second affirmation of Poon was made by him on 16 November 2015 (“Second Poon Affirmation”).  It was made specifically in response to the affirmations filed on behalf of the other competing claimants in respect of the six items referred to in the First Poon Affirmation, including the First Cohen Affidavit.  Of interest to note is the clear statement that the defendant is not relying on the provisions of the PO to substantiate its claim over the Diamond.  Instead, the basis of the defendant’s claim is that the Diamond became the property of the pawnshop pursuant to the pawn agreement between the defendant and Tsang, upon Tsang’s default in repaying the loan advanced to him.  As in the First Poon Affirmation, there was no explanation as to what constituted the pawn agreement between the defendant and Tsang and no pawn agreement was exhibited to the Second Poon Affirmation.

22.On the next day, David Cohen filed a second affidavit (“Second Cohen Affidavit”) in reply to the First Poon Affirmation.  Cohen stressed that the plaintiff had given no authority to C1, C13 or Tsang to deal with the Diamond and/or to assert rights as owner of the Diamond absent any payment under the sale and purchase agreement exhibited to the First Cohen Affidavit.  Cohen averred that Tsang was in possession of the Diamond without the knowledge or consent of the plaintiff and that he dealt with it without the knowledge and authority of the plaintiff. Specifically, the plaintiff denied Tsang ever acting as its agent or his ever being provided possession of the Diamond by the plaintiff on consignment.

23.A third affirmation was filed by the defendant on 4 February 2016 (“Third Poon Affirmation”), again in respect of the same six items on the List, including the Diamond.  In it, Poon produced a computer printout of the pawn record of Tsang since 2008 which shows that a total of 214 items had been pawned by him over the years. 

24.Poon went on to state that the defendant was unable to provide the relevant pawn tickets in respect of the record because of the sheer volume of the number of pawned items and the fact that the staff in charge was away on holiday during the period leading up to the Chinese New Year. He indicated that a supplemental affirmation could be filed to exhibit such pawn tickets should the need arise and should other claimants insist on their production.  Specifically in response to the queries that had been made by other claimants regarding the nature of the pawn agreements between the defendant and Tsang, Poon stressed that they were written agreements, as set out in various pawn tickets.  Poon then referred to the Exhibit PKK‑1 attached to First Poon Affirmation.

25.Poon also mentioned that in respect of the six items, Tsang had stated clearly that those goods belonged to him on each of those occasions when he pawned them with the defendant.  As regards the valuation of the items, Poon stated that the staff member of the defendant would make an immediate valuation based on his experience as well as the documents provided by the pawner; and the amount of the loans advanced would also take into account the credit of the pawner and the inherent risk that the loan might not be repaid.  He also pointed out that it would be impractical, given the nature of the business, to seek a third party valuation before entering into a pawn agreement and it is not a practice in the industry.

PASSING OF PROPERTY IN THE DIAMOND

26.The Diamond had changed hands a number of times before ending up in the possession of the defendant.  The defendant will only succeed in its claim to the Diamond if property in it had passed from the plaintiff to C13, then from C13 to C1 and then from C1 to Tsang.  Any break in this chain will mean that Tsang had no authority to pawn the Diamond to the defendant. 

Sections 19 and 20 of the Sale of Goods Ordinance

27.Mr Sit referred me to section 19 of the Sales of Goods Ordinance (SOGO). It provides as follows:

“(1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

(2)  For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case.”

28.Although undated, because of the reference to the seizure of the various diamonds by the police, the Sale Agreement could only have come into existence after problems with Tsang had arisen.  The Sale Invoice is therefore the only contemporary documentary record relating to the transaction between the plaintiff and C13. 

29.In terms of the intention of the plaintiff and C13, Mr Sit submitted that there was no express provision to the effect that the parties intended that the property in the Diamond would not pass before payment and so it was never a term of the agreement between the plaintiff and C13 that property would only pass upon payment.  Mr Sit took the view that classic terms for retention of title like those quoted in paragraph 5‑042 of Benjamin’s Sale of Goods [5] have to be used before they can be effective.  He also stressed that the Invoice Provision did not say that property would only pass upon payment.

30.In Mr Sit’s opinion, the rules under section 20 of SOGO would kick in and assist the court in ascertaining the parties’ intention, with rule 4 (“Rule 4”) being highly relevant.  Extract of section 20 of SOGO is set out below –

“20. Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer –

…

Rule 4. When goods are delivered to the buyer on approval or “on sale or return” or other similar terms, the property therein passes to the buyer –

(a) when he signifies his approval or acceptance to the seller or does any other act adopting the transaction;

(b)  if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of such time, and if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact.”

31.According to Mr Sit, Rule 4 applies because the Diamond was first provided to C13 without it paying or giving any consideration.  By providing and later selling the Diamond to Tsang/C1, C13 had adopted the transaction with the plaintiff and so the property in the Diamond had passed form the plaintiff to C13.  Mr Sit quoted from paragraph 5‑047 of Benjamin’s Sale of Goods where it says:

“It is, however, now settled law that, if a buyer who has received goods on sale or return sells or pledges the goods to a third party, he thereby adopts the transaction and property passes to him.”

32.Mr Sit submitted that, although the sale of the Diamond by the plaintiff to C13, as recorded by the Sale Invoice, only took place after the pledge of the Diamond by Tsang to the defendant, such subsequent sale would ratify the title that was received by C13 and in turn by C1/Tsang.

33.Mr Hughes disputed the application of Rule 4.  He invited me to regard the Invoice Provision as an express term recording the parties’ intention that property in the Diamond would only pass upon payment.  Mr Sit took a contrary view on the basis of the use of the words “the goods described and valued below” in the Invoice Provision and the fact that the descriptions of the goods in the Sale Invoice were actually set out before and above the Invoice Provision and not below it.

34.On the effect of the Invoice Provision, Mr Sit submitted that, even if it applies to the Diamond, the two conditions stipulated in the Invoice Provision for the passing of property had been met.  The two conditions referred to by Mr Sit are based on the words “when the plaintiff shall agree to the sale” and “a bill of sale returned therefore (sic.)” that appear in the Invoice Provision.  Mr Sit put it to me that the Sale Invoice itself is the evidence showing that the plaintiff consented to the sale, as why would the invoice be issued to C13 if it was otherwise, when the invoice could only have been issued upon C13 indicating to the plaintiff that it wanted to purchase the Diamond.  Mr Sit also asked me to regard the Sale Invoice as the bill of sale since it is a document signifying the plaintiff was willing to sell the Diamond at the price stated. 

35.Mr Sit referred me specifically to subsection (2) of section 19 of SOGO which stipulates that the terms of the contract between the parties, the conduct of the parties and the circumstances of the case have to be taken into account for the purpose of ascertaining the intention of the parties.  Other factors considered by Mr Sit to be in support of the conclusion that property in the Diamond had passed are the fact that the plaintiff has not brought any action against C13 for conversion of its property and the Sale Agreement made between the plaintiff and C13 under which C13 agreed to take legal action against the defendant for the return of the Diamond.

36.In addition, Mr Sit pointed to the First Letter and the Second Letter mentioned in paragraphs 9‑11 above.  These letters, Mr Sit submitted, show that the plaintiff had not indicated to the Applicant its potential interest in the Diamond until May 2015 and so it means that there had been a change of mind on the part of the plaintiff, after almost 3 years from the seizure of the Diamond by the Police.

37.The terms of the Sale Agreement also, in the opinion of Mr Sit, support the case advanced by the defendant.  He pointed to Clauses 4, 5 and 7 of the Sale Agreement and suggested that there was no reason for the plaintiff and C13 to sign the agreement if the property in the Diamond had not passed from the plaintiff to C13. He questioned how C13 could claim for the Diamond against the defendant if it did not have any property in the Diamond.

38.There is no information on when the Diamond was passed from the plaintiff to C13, but since it was passed from C13 to C1 on 22 May 2012, it would have to be prior to this date.  This means that the Sale Invoice was issued after possession of the Diamond had been passed to C13 by the plaintiff, but before the Police began receiving reports about suspected cases of deception or theft involving Tsang.  The Sale Invoice is thus the document closest in time to when the plaintiff passed the Diamond to C13. 

39.I am unable to read the Invoice Provision in the manner suggested by Mr Sit.  The document was clearly not drafted by someone with legal knowledge.  There are also a number of grammatical mistakes.  The interpretation that Mr Sit made of the words “the goods described and valued below” is overly restrictive and not appropriate where legal precision cannot be expected. 

40.The only piece of goods described and valued in the Sale Invoice is the Diamond.  In the second paragraph of the Invoice Provision, there is a reference to “the above mentioned diamonds” and in the third paragraph, the words “the diamonds herein invoiced” are used.  Although a total of three different sets of wording have been used, they can refer to no other goods but the invoiced items.  Looking at the Invoice Provision in its entirety, I find that, notwithstanding the reference to “diamonds described and valued below” in the first paragraph of the Invoice Provision, the phrase would be understood and was intended to refer to the Diamond, the only item set out in the Sale Invoice.

41.I do not think the classic terms for retention of title quoted in paragraph 5‑042 of Benjamin’s Sale of Goods are the only type that works.  In the latter part of that paragraph 5‑042, the learned author has indicated that “It is a question of construction in each case whether or not the particular words used … are a condition precedent to the passing of property”.  Each drawn up term therefore has to be considered on its own.  The Invoice Provision clearly stipulated when a sale of the merchandise would occur and when title would pass.  The intention of the parties was clearly set forth. 

42.Rule 4 applies only where a different intention does not appear.  There is no reason for the plaintiff and C13 to record in the Sale Invoice an intention that was different from what it really had been.  The two conditions stipulated in the Sale Invoice are conditions precedent for the passing of property in the Diamond.  I therefore find the application of Rule 4 to be ousted in the present case because a different intention appears.

43.What remains is thus the question of whether the conditions for sale stipulated in the Invoice Provision have been met.  This is core to the alternative argument advanced by Mr Sit. On this point, I am unable to agree with him that the conditions had been satisfied.  There is no reason for the Sale Invoice to refer to a separate bill of sale if it itself was intended to be such document.  The same goes for the requirement of the plaintiff’s agreement to a sale.  If the Sale Invoice was meant to represent such agreement on the part of the plaintiff, there would no longer be any reason for the related condition in the Invoice Provision to be inserted. 

44.That the Sale Agreement was made after the Police had commenced investigations of Tsang is also inconsistent with the theory of property in the Diamond having passed from the plaintiff to C13.  Had property indeed been passed, the plaintiff could simply sue C13 for the price of the Diamond.  Why would it want to be entangled with the process of claiming it back from the defendant and go to all the trouble in entering into the Sale Agreement with C13?  Why not leave the mess to C13 alone?  There would not be any reason for the plaintiff to be concerned with the attempts of C13 to get back the Diamond from the defendant. 

45.As to why the plaintiff has not commenced any action against C13, an explanation can be found in Clause 8 of the Sale Agreement.  The agreed position under that Clause was to allow C13 as much time as it might need to recover the Diamond.  This position has no doubt been varied given that it is now the plaintiff and not C13 who is pursuing a claim in the present interpleader proceedings.  When and why this change in position occurred is not known, but it can account for the late communication by the plaintiff of its potential claim over the Diamond to the Applicant.

46.I also find the significance of the First Letter and the Second Letter to be overrated by Mr Sit.  In light of the Sale Agreement, the plaintiff would have got wind of the police investigations no later than August 2013.  As noted in paragraph 8 above, C13 had earlier put in a claim for the Diamond.  This is consistent with the position provided under the Sale Agreement as noted in the preceding paragraph, with C13 being responsible for the recovery of the Diamond from the Police or the defendant.  There is no information on what led to the plaintiff taking up the task of recovery of the Diamond now, but the Sale Agreement does not support the argument that the plaintiff did not intend to get back the Diamond before the date of the Second Letter.  I therefore do not accept the suggestion that there had been a change of mind on the part of the plaintiff almost three years after the seizure of the jewelleries by the Police.

47.That being the case, as between the plaintiff and C13, I find that there had been no transfer of title in the Diamond.  Thus, although on the basis of the statement given by Tsang to the police, there had been a sale of the Diamond by C13 to C1, C13 had no title to transfer to C1.  There can also be no ratification of the transfer of title in the Diamond from C13 to C1 by the subsequent transaction between the plaintiff and C13 as recorded by the Sale Invoice and/or the Sale Agreement.

Section 27(2) of Sale of Goods Ordinance

Section 3(1) of Factors Ordinance

48.The chain of transfer of property from the plaintiff to C1 or Tsang is thus broken.  Nonetheless, Mr Sit sought to draw assistance from section 27(2) of SOGO and section 3(1) of the Factors Ordinance, Cap 48 (FO) (collectively the “Two Provisions”).  I set out the Two Provisions below:

“Section 27(2) of SOGO

(2) Where a person having bought or agreed to buy goods obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title, under any sale, pledge, or other disposition thereof, to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods, shall have the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner.

(3) In this section, “mercantile agent” has the same meaning as in the Factors Ordinance (Cap. 48).

Section 3(1) of FO

“(1) Where a mercantile agent is, with the consent of the owner, in possession of goods or of the documents of title to goods, any sale, pledge, or other disposition of the goods, made by him when acting in the ordinary course of business of a mercantile agent shall, subject to the provisions of this Ordinance, be as valid as if he were expressly authorized by the owner of the goods to make the same:

Provided that the person taking under the disposition acts in good faith, and has not, at the time of the disposition, notice that the person making the disposition has not authority to make the same.” ”

The definition of “mercantile agent” under section 2 of the FO is also set out below:

““mercantile agent” means a mercantile agent having, in the customary course of business as such agent, authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods”

49.C13 was, according to Mr Sit, a buyer in possession of the Diamond with the consent of the plaintiff, and thus the mercantile agent envisaged under the Two Provisions.  It is the defendant’s case that Tsang was a bona fide purchaser without notice, since there is no evidence that Tsang/C1 had notice of the interest of the plaintiff or that the Diamond was sold to Tsang at an undervalue.  The application of the Two Provisions means that the sale to Tsang/C1 was valid and the defendant would in turn obtain a good title to the Diamond from Tsang/C1.

50.In support, Mr Sit referred to the judgment of the Privy Council in Pacific Motor Auctions Pty v Motor Credits (Hire Purchase) [1965] 2 WLR 881 where it was held, at 886D that:

“…The object of the section (the equivalent of section 27 of SOGO in New South Wales) is to protect an innocent purchaser who is deceived by the vendor’s physical possession of goods or documents and who is inevitably unaware of legal rights which fetter the apparent power to dispose. Where a vendor retains uninterrupted physical possession of the goods why should an unknown arrangement, which substitutes a bailment for ownership, disentitle the innocent purchaser to protection from a danger which is just as great as that from which the section is admittedly intended to protect him?”

51.Mr Hughes did not dispute that the Two Provisions offer protection to the innocent purchaser.  He submitted though that the events in this case are one step removed from those contemplated by the provisions.  He pointed out that for the protection to be afforded to the defendant, the Diamond had to be pledged or sold not to C13, but by C1/Tsang to the defendant with the consent of the plaintiff and there was no such consent in this case. 

52.Mr Hughes also pointed to another condition missing, it being the requirement of good faith on the part of the person relying on the provisions.  In his opinion, the defendant had turned a blind eye and did nothing to ascertain the legitimacy of the title or authority of C1/Tsang.  Mr Hughes also disputed Tsang’s redemption record as being perfect, since a vast number of diamonds were pawned in a two months’ period from April to June 2012 and they were of a substantial worth.

53.It is apparent from counsel’s submissions that Mr Hughes was considering the application of the Two Provisions to the question of whether property was transferred from Tsang/C1 to the defendant, whereas Mr Sit focused on whether property was transferred from C13 to Tsang/C1.  In this regard, I accept the approach of Mr Hughes rather than that of Mr Sit.  The party seeking to rely on the protection under the Two Provisions has to be the party taking under the disposition that is being challenged and it is also the fides of this party that has to be considered.

54.The equating of Tsang with C1 was a point strongly challenged by Mr Hughes.  When Mr Sit referred to the statement given by Tsang to the Police in a cautioned interview that the property in the diamonds had already been passed to him by C13 and that he had to pay for the diamonds in any event, whether or not he managed to re-sell the diamonds eventually to other parties, Mr Hughes pointed out that Tsang referred to payment for the Diamond by way of a cheque drawn on the account of C1 and not that of Tsang.  Mr Hughes stressed that C1 and Tsang are separate legal entities and any purported transfer of property in the Diamond from C13 could only be from C13 to C1 and not to Tsang.

55.Mr Sit was asked to specifically address this point.  His response was that since Tsang was the sole director and shareholder of C1, C1 was controlled by Tsang and what Tsang did must be with the authority and permission of C1 and what Tsang did would bind C1.

56.At the hearing, in order to show that consignment of jewelleries is very common in the industry, Mr Sit read out various parts of the police statements taken from other claimants, including the 2^nd, 4^th and 6^th claimants.  All these claimants stated that they did business with C1, not Tsang.  The same is the case with the Sale Agreement between the plaintiff and C13.  The Diamond was stated as having been consigned by C13 to C1 and both the plaintiff and C13 talked about the recovery of the Diamond from C1 and the defendant, and not from Tsang. 

57.Although a corporate entity must act through its individual officers, an individual person who holds an office in a corporate entity can act in his own personal capacity and not as an agent or representative of the company.  There is also no evidence to show that C13 had been dealing with Tsang instead of C1.  That all along the defendant had been dealing with Tsang in his personal capacity is clear from the pawning records of the defendant and the three affirmations of Poon that had been filed.  There is no board resolution of C1 authorizing Tsang to pledge the Diamond.  Nor is there any evidence showing the acquisition of property in the Diamond by Tsang from C1.  I therefore see no basis from the evidence before me to find that there had been any consent, whether on the part of the plaintiff or that of C13, to the transfer of the possession or the property of the Diamond to Tsang, as opposed to C1.

58.Even if I were to put aside the question of whether there had been consent from the plaintiff to the pledge of the Diamond by Tsang to the defendant, I am unable to find that the defendant had acted in good faith.  The valuation of the Diamond by the defendant is a cause of concern.  The defendant had given an explanation as to how evaluation of a pawned item was carried out.  There is however no challenge from the defendant on the true worth of the Diamond, as claimed by the plaintiff, or any information on the experience of the staff who handled the pawning of the Diamond. The fact remains though that the loan advanced by the defendant was substantially lower than the sale price of the Diamond.

59.According to the Third Poon Affirmation, the credit of the pawner and the inherent risk that the loan might not be repaid are factors that would affect the amount of the loans advanced.  Since Poon regarded the past record of Tsang as perfect, such factors would have worked in favour of Tsang in getting a good valuation of the Diamond, but that was not the case.  The defendant’s account of how it sets the amount of the loan advanced does not add up to a full explanation of what had happened in the pledge of the Diamond.

60.Another red flag is the fact that the defendant is a veteran in the pawnshop business, having over 30 years’ experience.  I would therefore expect the defendant to know the provisions of the PO inside out.  At this juncture, it is necessary for me to mention some of the relevant requirements of the PO.

61.The parties are not in dispute that the provisions of the PO do not apply to the pawn of the Diamond by Tsang to the defendant, because of the provisions of section 3(1) and the First Schedule of the PO.  Section 3(1) is set out below:

“3(1) Nothing in this Ordinance shall apply to a loan by a pawnbroker of more than the sum specified in the First Schedule or to the goods pawned as security for that loan, or to the pawnbroker or borrower in relation to that loan or the goods so pawned.”

The amount specified in the First Schedule of the PO is HK$100,000.  Since the Diamond was pawned for $450,000, the pledge is not governed by the PO. 

62.Two other provisions of the PO, sections 12 and 13, are worthy of note in the present case.  Section 12 requires a pawnbroker to keep a general book in the prescribed form in respect of every loan and to enter into such book the details specified in the form, before advancing any money on loan.  Section 13 requires a pawnbroker to deliver to the borrower a ticket in the prescribed form on the date of advancing any money on loan.  Both sections prescribe criminal liability for non-compliance.

63.The forms prescribed by sections 12 and 13 of the PO are respectively Form 3 and Form 4 in the Pawnbrokers Regulations, Cap. 166A. The heading for Form 3 is “ENTRY IN GENERAL BOOK” and that for Form 4 is “Pawn Ticket”.  Both forms require entry of the following details:

(a) No. of loan

(b) Date of advancing money on loan

(c) Name of borrower

(d) Number and type of identity document of borrower

(e) Home address of borrower

(f) Description of goods

(g) Rate of interest

(h) Amount of loan

(i) Duration of loan

64.It can be seen from the pawn records of the six items shown in Exhibit PKK‑1 of the First Poon Affirmation that some of the prescribed details are not included.  They are the rate of interest and the duration of the loan.  Thus, there appears to be non-compliance with the statutory requirement under section 12 of the PO. 

65.Since the defendant had not produced one single pawn ticket, I cannot tell whether the requirement under section 13 of the PO has been complied with.  That notwithstanding, I find it hard to believe that the importance of such pawn tickets could have escaped a pawnshop operator as experienced as the defendant.  After all, according to the Third Poon Affirmation, the pawn ticket represents the pawn agreement that the defendant is seeking to rely on.

66.The defendant has nonetheless produced a computer printout of the details of the pawning by Tsang throughout the years, a total of 214 items.  The computer printout was clearly purposely prepared for the present case.  Although the task can be completed with the assistance of computer programs, it would still take some time and efforts to have it compiled.  That being the case, I cannot help being baffled by the reason proffered by the defendant for its failure to dig out the pawn tickets.  The defendant was only facing competing claims in respect of six jewellery items in this matter and they were pawned by Tsang within a relatively short period of about two months in 2012.  Instead of deploying its staff to find the six relevant pawn tickets from the relatively recent past, the defendant chose to prepare the computer printout of such vast number of entries which went to about four more years back in time.

67.One of the reasons advanced by the defendant for not regarding the pawning of the various items seized by the Police as being suspicious was the perfect pawning record of Tsang in the past.  However, the computer printout tells a different picture.  There are in total 36 of the listed transactions which have the words ‘未贖’ marked against them, meaning that the pawned items had not been redeemed.  The earliest of such transactions dated back to 29 August 2008.  In addition, there are 15 other transactions with the remarks ‘留號’, including the transactions relating to the six items dealt with in the three affirmations of Poon.  What this entry stands for is unclear, but since it appears in the column where the date of redemption of the pawned item is to be inserted, it would mean that the pawned items have not been redeemed. The earliest entry noted with such remark was a pledge of a diamond on 20 May 2010.  I do not see how the pawning record of Tsang can be described as perfect. 

68.In light of the above analysis, I fail to see how the defendant can be regarded as having accepted the pledge of the Diamond by Tsang in good faith.  Hence, I do not consider the defendant to be eligible to the protection under the Two Provisions. 

Pawn agreement

Money Lenders Ordinance (Cap. 163)

69.Mr Hughes has advanced the plaintiff’s case largely on the basis of the provisions of the Money Lenders Ordinance (Cap. 163) (“MLO”). The main complaint of Mr Sit is that this was raised only at the last minute in the skeleton submissions of Mr Hughes and no mention of them was made in the evidence from the plaintiff.

70.Mr Hughes also criticized the deliberate choice of the defendant in not putting the terms of the pawn agreement before the court.  Mr Sit opined that so long as the existence of a pawn agreement has been established, even though the pawn agreement itself was not produced by the defendant and there is an evidential lacuna in respect of the terms of this agreement, the defendant would still be able to rely on a common law right under the pawn agreement to sell the Diamond upon default in payment.  This, he said, would be the case even in the absence of any express provisions to that effect in the pawn agreement. 

71.In light of my finding above, there is no further need to examine the terms of the agreement between Tsang and the defendant, and the effect or enforceability of such agreement, under the MLO or otherwise. I will not therefore deal with the submissions of counsel on these points. 

POLICY CONSIDERATIONS

72.Mr Sit was very thorough in his submissions and he asked me to take into account various policy considerations when deciding between the competing claims of the plaintiff and the defendant.  They are the past pawning records of Tsang, the lack of knowledge of the actual value of the Diamond on the part of the defendant, that the plaintiff is the party to blame for adopting an industry practice that has such inherent risks, and the fact that the defendant would only be left with a claim against the bankrupt Tsang and C1, which had been wound up, while the plaintiff has a claim against C13.

73.Contrary to what Mr Sit suggested, the discussions above have demonstrated that the past pawning record of Tsang is far from being an unblemished one.  This factor is of no help to the defendant.

74.The actual value of the Diamond is much higher than the loan advanced by the defendant to Tsang.  As pointed out in paragraph 58 above, to substantiate its case of lack of knowledge, it would be incumbent on the defendant to adduce evidence about the experience of the staff in question.  Against the information that the defendant is an old hand in the field and the number of diamonds that had been through the hands of the defendant as a result of the pawning activities of Tsang, as revealed by the computer printout exhibited to the Third Poon Affirmation, it is difficult to come to a conclusion that the substantial difference in value is justified. 

75.The industry practice adopted by the plaintiff does indeed have inherent risks.  That however is true also of the business of the defendant.  Poon himself mentioned the impracticability of seeking third party valuation before accepting a pawn because of the nature of the pawnbroker business.  Different businesses have their own different difficulties and they develop their own different industry practice in handling such difficulties.  I do not find it appropriate for me to make any adverse findings based on either party having followed its own business practice.

76.Whilst on the subject of industry practice, I would add that, not having been favoured with sight of the relevant pawn tickets, I cannot say whether the defendant had done its part in observing the statutory requirements of its business operation, which should form part of its industry practice.  When making such an observation, I have not lost sight of the fact that the pledge of the Diamond is not governed by the PO.  However, as pointed out in the above when I set out the evidence of the parties, all three affirmations made by Poon relate to six items on the List and one of the items was pawned as security for a loan of $50,000 only. Thus, in respect of this particular item, the PO applies; yet the defendant has not adduced the corresponding pawn ticket that is statutorily required to be issued.

77.It is true that the defendant will have to join the queue of unsecured creditors of Tsang, while C13, the party against whom the plaintiff will have to seek redress if it fails to recover the Diamond in the present proceedings, is as far as we know not plagued by insolvency.  Even assuming the plaintiff will be successful in its claim against C13, accepting the suggestion of Mr Sit would then mean that the buck is to be passed on to C13, who will in turn have to claim against a company that is being wound up. The innocence or guilt of C13, or the extent of its carelessness, is not the subject matter of the current proceedings and laying the ultimate burden on C13 without such an assessment is neither a fair nor sound move.

78.For the above reasons, I do not find the policy considerations raised by Mr Sit to be of sufficient force in persuading me to decide otherwise.

79.I therefore order that: –

(1)  the Diamond (item no. 10 of Pol 69A) is the property of the plaintiff as against the defendant;

(2)  the Diamond (item no. 10 of Pol 69A) be returned to the plaintiff (22^nd Claimant);

COSTS

80.I award costs, including all costs reserved, to the plaintiff, to be taxed forthwith if not agreed, with certificate for counsel.  In respect of the agreed costs of the Applicant under paragraph 39 of the Order of Master Hui dated 8 September 2015, 25% shall be paid by the defendant in respect of the competing claims between the plaintiff and the defendant.  The order on costs is made on a nisi basis.  If any party applies for variation of the costs order nisi within 14 days from the date of this decision, a hearing for 30 minutes shall be fixed for arguments.

Mr Sebestian Hughes, instructed by Munros & Co, for plaintiff

Mr Bache Sit, instructed by Ivan Tang & Co, for defendant