HKSAR v. Chu Ka Lok

CACC 69/2023, [2025] HKCA 951

On appeal from [2023] HKDC 393

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 69 OF 2023

(ON APPEAL FROM DCCC NO. 1037 OF 2021)

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J U D G M E N T

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Introduction

1.The applicant was convicted of two charges of theft[1] after trial before Deputy District Judge Amy Chan (“the Judge”) and was sentenced to 21 months’ imprisonment. He now seeks leave to appeal against conviction.

The charges

2.The two charges alleged that the applicant stole “choses in action, namely debts in the sum of [HK$323,314.40 (Charge 1)/HK$300,537.20 (Charge 2)], owed to the applicant by [Bank of China (Hong Kong) Limited in account numbered 012-874-1-109315-1 (“BOC account”) (Charge 1)/the Hongkong and Shanghai Banking Corporation Limited in account numbered 004-124-383753-833 (“HSBC account”) (Charge 2)], property belonging to Search Trading Limited”.

The prosecution case

3.These are undisputed facts. The applicant worked as a salesperson at GigaSports Nike Store (“the Store”). PW1 ran and owned Search Trading Limited (“the Company”) which conducted a sports shoes business. PW1 met the applicant in February 2018 while shopping in the Store. Thereafter, PW1 constantly purchased sports shoes for his business from the applicant. The way the transactions took place was that when informed of the new arrival of sports shoes, PW1 would place (bulk) orders with the applicant by depositing payments into the latter’s two personal bank accounts. The applicant would then arrange for the shoes to be delivered to the Company.

4.These transactions were set out in a table (exhibit P5B) prepared by PW1 and it showed that, since around April 2018, the applicant might on some occasions fail to deliver the requested quantity of shoes because the model was out of stock. The surplus payments resulting from the partially fulfilled orders would then be used to set off the amounts payable for the subsequent purchases. On 20 September 2018, the applicant told PW1 that he had resigned from the Store. By that time, there were still undelivered shoes payments for which had already been deposited into PW1’s bank accounts. The total value of the undelivered orders was to $623,851.60.

5.When cautioned after arrest, the applicant said “I was greedy, I took the money and used it for gambling.”

6.It was the prosecution case that the payments made by the Company were subject to a Quistclose[2] trust and section 6(2) of the Theft Ordinance was applicable. Section 6(2) provides that:

“Where property is subject to a trust, the person to whom it belongs shall be regarded as including any person having a right to enforce the trust, and an intention to defeat the trust shall be regarded accordingly as an intention to deprive of the property any person having that right.”

The defence case

7.The applicant elected not to testify or call any witnesses. The principal contention was that the prosecution was unable to prove that the respective choses in action were “property belonging to Search Trading Limited.” The existence of a trust arrangement was denied.

8.In particular, the defence prayed in aid R v Preddy[3] for the proposition that, upon the making of a bank transfer, the payee did not obtain a property from the payer, the credit balance of whose account was pro tanto extinguished or reduced, and a new chose in action belonging to the payee was created in his account. Reliance was also placed on HKSAR v Goh Swee Yan[4]where the Court of Appeal, differently constituted, held that section 6(3) of the Theft Ordinance could not rectify the difficulties identified in Preddy.

Reasons for Verdict

9.The Judge considered it unnecessary to apply the Quistclose trust principles while finding that a trust relationship existed by agreement between the applicant and the Company. The reasons were[5]:

“…the agreement was that the Company would purchase sports shoes from the defendant, and the defendant was legally obliged to provide the requested sports shoes. It is an undisputed fact that the defendant received the Company’s funds, which were to be used exclusively for purchasing the sports shoes. If, for any reason, the sports shoes were out of stock and the defendant could not deliver the required quantity, the remaining funds were to be returned to the Company. The defendant was not entitled to use these funds for any other purpose, now he uses it for gambling. Clearly, this constituted a breach of trust. Section 6(2) is applicable in this case, meaning the prosecution has proven that the two sums of choses in action belonged to the Company.”

10.The Judge then went on to consider section 6(3) of the Theft Ordinance, which provides:

“Where a person receives property from or on account of another, and is under an obligation to the other to retain and deal with that property or its proceeds in a particular way, the property or its proceeds shall be regarded (as against him) as belonging to the other.”

11.Applying section 6(3) to the present case, the Judge said[6]:

“The funds for purchasing sports shoes were deposited into the defendant’s Bank of China account and/or HSBC account by the Company. Although PW1 never required the defendant to use a separate account for these funds, their transaction method involved placing orders via Whatsapp, with the defendant then arranging for the sports shoes to be provided to the Company. I believe that the relationship between the Company and the defendant was that of a customer and salesperson. The establishment of their relationship was based on the purchase of sports shoes. The sole purpose of the Company’s payments to the defendant was to have him buy sports shoes for the Company; the money was not to be used for any other purpose. The defendant clearly had an obligation to retain and deal with the property in a specific manner and could not use the funds for gambling.

I find that the property, namely the Company’s funds deposited into the defendant’s bank accounts, fully satisfies the requirement of section 6(3), Even if the defence argues that the choses in action are debts owed by the bank to the defendant, but under section 6(3), these choses in action must be regarded as belonging to the Company against the defendant.”

12.In respect of the decision in HKSAR v Li Ting Kit[7](which was said in Goh Swee Yan[8] to have been wrongly decided), the Judge considered that the issue was similar to the one in the present case, such that the Preddy principles have to be considered in conjunction with section 6(3)[9].

Grounds of appeal

13.Mr David Leung, SC, with him, Mr Brain Tsui and Ms Agnes Kwok, has raised two grounds of appeal. Ground 1 avers that the Judge erred in finding that the two choses in action belonged to the Company instead of the applicant himself. Ground 2 criticises the Judge for finding that the applicant’s dealings with the money in his own accounts amounted to appropriation.

The adjournment

14.At the hearing on 25 April 2024 (the applicant was not then represented by Mr Leung), the Court noted that a number of relevant authorities were not referred to in the parties’ submissions: HKSAR v Cheng Ying Kit, Vicky[10], HKSAR v Leung Wai Yip[11], HKSAR v Woo Mei Bo Mable[12] and HKSAR v Wong Cho Sum & Others[13] (which clarified Goh). As a result, parties were directed to file further written submissions and the hearing was adjourned[14].

Applicant’s submissions

15.By Ground 1, Mr Leung submits that PW1’s payments were not subject to any trust. Relying on Lewin on Trusts[15], it is argued that there was no express trust because the words, subject matter and object of the alleged trust were all uncertain. Absent any proven agreement or knowledge as to the payments being exclusively used to meet the orders, the mere fact that money was paid for a particular purpose did not support the contention that the parties intended a Quistclose trust to be put in place.

16.Mr Leung further contends that the applicant’s contractual obligation was simply to deliver sports shoes of the right model and quantity regardless of the source of the funds for such acquisition and it was contractual in nature. The fact that there was no specific condition imposed (such as opening a separate account for the funds) is also said to be of significance to counter the prosecution’s suggestion that there was a mutual intention to establish a trust.

17.Finally, contrary to the Judge’s finding that the excess payments (or remaining funds) should be returned, Mr Leung emphasises that the evidence showed otherwise: the surplus was intended to be used for future orders.

18.Regarding the application of section 6(3) of the Theft Ordinance, Mr Leung contends that when PW1/the Company effected the transfers to the applicant’s bank accounts, there were no actual transfers of property or choses in action. In other words, there was no receipt of the payer’s property. The transfers only extinguished or reduced the payer’s choses in action and correspondingly increased those of the applicant’s. Therefore, the newly-created choses in action in the applicant’s accounts should be regarded as new debts owed by the banks to the applicant as the account holder. Thus analysed, the first condition of section 6(3) was not met. The second condition, namely “(the person receiving the property) is under an obligation to the other to retain and deal with that property or its proceeds in a particular way” is also not satisfied for, according to Mr Leung, there was never such an obligation.

19.Mr Leung suggests that if any liability arose on the part of the applicant, it was a civil obligation to provide consideration for the Company’s payments and that if he failed to deliver the shoes ordered, he should repay the Company accordingly.

20.By Ground 2, Mr Leung emphasises that the applicant was only dealing with the money in his own bank accounts. Such dealings, despite the associated civil obligation to repay the Company if the shoes were not delivered, could not amount to criminal appropriation, particularly when there was no allegation of fraud or deception at the time when the transfers were effected by the Company. Further, the credit balances comprised deposits from sources other than the payments in question and were thus not traceable[16].

Respondent’s submissions

21.Mr Derek Lau, Senior Assistant Director of Public Prosecutions, with him, Mr Steven Yip, Public Prosecutor, maintains the prosecution position at trial and submits that, when the evidence is viewed objectively, it was the parties’ common understanding that the choses in action particularised in the charges were held by the applicant on a Quistclose trust for a specific purpose, citing the recent decision of the Court of Final Appeal in China Life Trustees Ltd v China Energy Reserve and Chemicals Group Overseas Co Ltd[17] and the House of Lords’ decision in Twinsectra Ltd v Yardley and others[18](referred to in China Life Trustees Ltd) in support.

22.Since the Company still had a proprietary right and interest in the transferred property, the chose in action could be stolen from its beneficial owner by the applicant as the legal owner. Mr Lau suggests that this is consistent with section 6(1): a property can belong to different persons with different modes of ownership. Thus, the applicant’s obligation to return the money (in case of any unfulfilled orders), which was earmarked for the specific use for existing and/or future orders of sports shoes, was not contractual but was of a fiduciary character arising from a trust relationship.

23.Relying on R v Clowes and Another (No. 2)[19], Mr Lau also seeks to argue that a lack of segregation of funds is not fatal (nor is it necessary to require the payee to preserve the funds in its original form). What is important is that the applicant was required to keep a corresponding sum in each of the accounts for carrying out the specific purpose.

24.Once a trust is established, Mr Lau contends, it is unnecessary to resort to section 6(3) of the Theft Ordinance. Nonetheless, Mr Lau’s position is this: the applicant did receive the deposits made by the Company in the circumstances described in section 6(3). Therefore, when the applicant withdrew money from the accounts, he embezzled the same or the proceeds of the new choses in action deemed to belong to (or received on account of) the Company, to which the applicant owed the stated obligation as the agent of the Company.

25.In short, a theft was “technically” committed by the applicant on each occasion when he withdrew money, rendering the credit balance less than that required for the specific purpose.

26.As his fallback position, Mr Lau invites this Court to substitute for the verdicts of “theft” the statutory alternative verdicts of “evasion of liability by deception”[20].

Discussion

27.In this case, both parties agree that the Preddy principles render the increases in the credit balances of the applicant’s bank accounts new choses in action belonging to the applicant, not the Company. Thus, for the particular “belonging to Search Trading Limited” in the charges to be proved, it has to be shown how the new choses in action became property belonging to the Company, instead of the applicant.

28.The respondent’s contention is that the property was subject to a Quistclose trust and that the applicant was a mere trustee of the payments. It is argued that in this trust relationship, although the Preddy principles are applicable, the payer remains the beneficial owner of the new choses in action (in the payee’s bank accounts) created through the payer’s payments. This trust relationship, the argument continues, also sets in motion sections 6(2) and 6(3) of the Theft Ordinance. Therefore, the Judge was correct in holding that these two sections applied (albeit that the Judge considered it unnecessary to apply the Quistclose trust principles).

29.On the other hand, the applicant contends that the relationship between PW1/the Company and the applicant was merely one of an oral agreement for the sale of goods and was contractual in nature. No trust relationship ever arose and the prosecution’s contention was not borne out by the evidence.

30.Thus summarised, there is clearly not much dispute between the parties on the application of the relevant legal principles. The major issue, as Mr Lau submitted during the hearing, “is factually whether there was a trust”. The issue is joined as Mr Leung’s major, if not the only, contention is that there was no or insufficient evidence adduced at trial which showed that the parties’ intention was that the payments made to the applicant’s bank accounts should be subject to a trust.

A trust relationship?

31.On the issue of the asserted trust relationship, we note the following.

32.Firstly, although the Judge stated at paragraph 37 of the Reasons for Verdict that “If, for any reason, the sports shoes were out of stock and the defendant could not deliver the required quantity, the remaining funds were to be returned to the Company”, there was no evidence to support this finding.

33.During the brief examination-in-chief, PW1 was mainly asked to confirm the contents of a schedule, Schedule 1, which showed the payments made and the shortfalls of the sports shoes supplied. PW1 never said anything about the return of funds[21]. Under cross-examination, when asked about what would happen when the shoes were out of stock and his orders could not be fully fulfilled by the applicant, PW1 agreed that the remaining sums would be used to pay for the subsequent orders, referred to as the “rolling-over” arrangement by the parties at the hearing. Again, no mentioning of the return of funds.

34.Secondly, PW1 was the author of exhibit P5B[22] which was a table detailing 47 transactions covering the period from March to September 2018. It could be seen from this table that starting from 28 May, shortfalls in the supply of the shoes ordered which eventually constituted overpayments included in the charges started to surface. However, PW1 still paid for the full amounts in the subsequent orders between May and September unless it was remarked that the goods could not be delivered as scheduled.

35.In other words, despite the lapse of several months during which unfulfilled or partially fulfilled orders had already occurred, there was no evidence that PW1 had asked the applicant if the funds were intact in the bank accounts. It would seem that PW1’s focus was on the delivery of shoes and he was still expecting such delivery if the applicant had not told him on 20 September that he had stopped working for the Store. This was in line with paragraph 6 of the prosecution’s opening: “PW1 began to suspect the defendant and requested him to promptly deliver the undelivered sports shoes.” Not a word as to the whereabouts of the funds.

36.Given the above and that PW1 never instructed the applicant to put aside the payments solely for the restricted use of purchasing sports shoes, we could not see on what evidential basis the Judge found that “The defendant clearly had an obligation to retain and deal with the property in a specific manner… .”[23] With respect, this seems more like a statement instead of a conclusion reached based on the evidence adduced.

37.Thirdly, Mr Lau seeks to argue that the facts in this case were special as the applicant was not himself the supplier of goods but was PW1’s agent for the purchase of sports shoes from the Store. There was, however, no evidence whatsoever to support this alleged agency relationship. Nor was it advanced in the prosecution’s opening[24].

38.The undisputed facts were that the applicant and PW1 came to know each other when PW1 shopped at the Store. Thereafter, PW1 arranged to buy shoes through the applicant as the latter could get for him the high-end models.

39.According to the applicant, the workings were these: PW1 would ask if a specific model was available and whether there would be any special discounts. If the model was available, the applicant would offer PW1 the “employee discount” which was usually 20% for the regular-priced items. As for payments to the Store, the applicant would use his “employee coupons” and his own EPS to settle the purchases[25].

40.According to PW1, he did not require the applicant to disclose or account to him any bonuses, dividends or commissions that the applicant received from the Store arising from the transactions. On the question as to whether he required the applicant to get the supply from the Store, PW1 replied that he simply assumed that the applicant did so[26]. With this state of the evidence, we could hardly see how the applicant could be described as the agent of PW1/the Company.

41.Fourthly, we find the suggestion that the applicant was a trustee of the funds and could not use it for any purpose other than for the purchase of sports shoes difficult to understand given Mr Lau’s following concessions. Mr Lau accepts that if a payment was made to the Store direct for the order of shoes, the Store could not be liable for theft if it used the money to first pay for the shop’s other expenses. This is akin to the situation in R v Hall[27]. Mr Lau also accepts that as both the applicant and the Store were not the producers of the shoes, they are in no different position insofar as the procurement and supply of the goods are concerned. With such acceptance, it is difficult for Mr Lau to maintain the suggestion that the applicant somehow became a trustee of the funds and thefts were committed if the applicant withdrew money from his own bank accounts while there were still unfulfilled or partially fulfilled orders placed by the Company.

42.In China Life Trustees Ltd, Ribeiro PJ observed that,

“57. If, as a matter of fact, the evidence objectively establishes that the payer intended to pay the money to the recipient to be used for a specific purpose and no other, with the recipient agreeing to or acquiescing in that restriction, such finding carries with it the logical consequence that the money was not to be added to the recipient’s general assets or to be at the recipient’s free disposal. It would follow as a matter of legal consequence that the transferee did not acquire a beneficial interest in the funds and that the transferor retained a beneficial interest throughout, so that on failure of the specific purpose, the money would be held on resulting trust for the payer.”

43.From the very brief evidence given by PW1, one could hardly find anything indicating the Company’s intention as to any restricted use of the payments. Nor was there any assertion from PW1 in respect of an agreement or acquiescence on the part of the applicant as to the existence of a mutual intention. To put it bluntly, there was not a shred of evidence that the Company did not intend the payments to be added to the applicant’s general assets. In fact, as mentioned above, it would seem that PW1 or the Company did not care much about the funds in the applicant’s accounts, but just the delivery of the shoes ordered.

44.Gummow NPJ in China Life Trustees Ltd also cautioned that,

“105. Fourthly, as late as 1996 Lord Browne-Wilkinson observed:[28]

‘wise judges have often warned against the wholesale importation into commercial law of equitable principles [given] the certainty and speed which are essential requirements for the orderly conduct of business affairs.’

106. That caution has appeared in decisions subsequent to Quistclose itself. For example, in Twinsectra Ltd v Yardley Lord Millett stressed that payments are routinely made in advance for particular goods and services but they do not constitute trust moneys in the recipient’s hands.[29] …”

45.We are certainly not suggesting that a Quistclose trust could never arise in a commercial transaction, but on the evidence adduced in the present case, we do not agree that the prosecution had successfully proved the existence of a trust. Accordingly, the increases in the credit balances of the applicant’s accounts belonged to the applicant himself, not to the Company.

Sections 6(2) and 6(3) of the Theft Ordinance

46.Following from the above analysis and given the state of the evidence, sections 6(2) and 6(3) are not applicable in this case. The Judge erred in finding that they are applicable.

Other Observations

47.As accepted by Mr Lau, the chose in action particularised in each of the two charges was the aggregate value of the undelivered goods, payments for which had been made to the two bank accounts respectively. This stated chose in action was purely artificial and was never in existence. Initially, Mr Lau sought to explain that the charges were particularised in this way as the prosecution could not say for sure when dishonesty occurred and therefore, relying on the doctrine of general deficiency, the charges were said to be in order. However, Mr Lau later conceded that the doctrine did not apply to the present case but he went on to suggest that even if the particular incidents could be identified, laying some 18 or 19 charges would overload the charge sheet.

48.The change came about in this way. We note from the bankers’ affirmations and the relevant documents that there were occasions when, after a withdrawal was made, the balance in the account fell below the amount represented by the outstanding order at that particular juncture. Such a withdrawal would amount to appropriation if the assertion of the prosecution was that there was a trust and that the funds could not be put to other uses. This, coupled with the applicant’s admission that he had gambled the money away, should not render it difficult for each of the particular thefts to be identified. We therefore enquired with Mr Lau what the difficulties were and why it was that the charges were particularised as an artificial chose in action representing the global amount allegedly stolen from each account. In reply, Mr Lau suggested that even if the incidents could be identified, laying such a large number of charges would overload the charge sheet.

49.Since we have concluded that the evidence in this case did not support the prosecution’s contention that the applicant held the funds in trust for the Company, we need not dwell further into these and we should not be taken to have expressed any views on whether the charge can or cannot be formulated in this way. Nonetheless, these are matters to which the prosecution might wish to pay attention when they next come to draft charges with a similar factual matrix.

Alternative Offence

50.Mr Lau urges upon this Court that should we not be satisfied of the correctness of the theft convictions, the offence of “evading liability by deception”, which is a statutory alternative to theft, should be substituted. In this connection, Mr Lau argues that the deception was that by behaving as he previously did in the transactions, the applicant “was representing by his conduct that his previous intention, namely, the sums paid into his bank accounts would be used for the purchase of sports shoes, continued.” Using Mr Lau’s words, as a result of the applicant’s “positive acquiescence”, the Company was “induced to wait for payment instead of demanding for the return of the funds from [the applicant] forthwith.”

51.We have outlined PW1’s very short evidence above. There was certainly no assertion from him as to the “inducement”. We also have grave doubts as to whether the evidence could prove the other elements of this alternative offence, not to mention the difficulties concerning when the liability was said to have arisen – what was (were) the particular point(s) in time and why. In the circumstances and given that this alternative, albeit a statutory one, would be a radical change from the prosecution case of theft, we do not agree that no unfairness would be caused to the applicant. We therefore would not order any substitution of offences.

Conclusion

52.For the reasons given above, leave is granted and the hearing is treated as the appeal proper. The appeal against conviction is allowed with the sentence set aside.

Mr Derek Lau, SADPP and Mr Steven Yip, PP (on 15 May 2025) and Mr Andrew Li, SPP (on 25 April 2024) of the Department of Justice, for the Respondent

Mr David Leung, SC (on 15 May 2025) leading Mr Brian Tsui and Ms Agnes Kwong instructed by M/s Chak & Associates LLP, assigned by the Director of Legal Aid, for the Applicant