The Commissioner of Customs and Excise v. Gold Way Enterprises Ltd and Another
Read the full judgment text of DCMP 3157/2004 on BabelCite. This District Court judgment.
1. The Applicant is the Commissioner of Customs & Excise. He applies by Originating Motion under s.133 of the Copyright Ordinance, Cap.528 for the forfeiture of five systems of optical-disc production machines (‘the machines’). There are two respondents resisting the application. The 1 st Respondent is Gold Way Enterprises Ltd; the 2 nd Respondent is Sino Turbo Ltd. The 1 st Respondent is the company having custody of the machines when Customs & Excise seized them on 19.2.2002. The 2 nd Responde
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DCMP 3157/2004 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION MISCELLANEOUS PROCEEDINGS NO. 3157 OF 2004 ----------------------- BETWEEN
----------------------- Before: Deputy District Judge Lam in Court Dates of Hearing : 26th October 2004 and 10th December 2004 Date of Handing Down Judgment: 31st January 2005
J U D G M E N T 1.The Applicant is the Commissioner of Customs & Excise. He applies by Originating Motion under s.133 of the Copyright Ordinance, Cap.528 for the forfeiture of five systems of optical-disc production machines (‘the machines’). There are two respondents resisting the application. The 1st Respondent is Gold Way Enterprises Ltd; the 2nd Respondent is Sino Turbo Ltd. The 1st Respondent is the company having custody of the machines when Customs & Excise seized them on 19.2.2002. The 2nd Respondent claims to be the owner of the machines and has been leasing them to the 1st Respondent since April 1999. 2.The particulars of the machines are set out in Bundle No. B3: four are of Krauss Maffei’s make; the remaining one is of Toolex’s make. At some stage, Counsel for the Applicant says the description of the Fi-Fo system mentioned in the 2nd Respondent’s affirmations and documents does not correspond with that of the Toolex machine. Later, after investigation, the Applicant accepts that the Toolex machine is part of the Fi-Fo system. In this judgment, I shall refer to the four Krauss Maffei machines as Machines 1-4 and the Toolex one as Machine 5. 3.The current forfeiture hearing arises from the criminal trial of DCCC 333/03. The 5 machines were seized in relation to that criminal matter. 4.The 1st Respondent is an optical-disc manufacturing company and is the 3rd Defendant in the criminal case. The 1st Defendant in the criminal case is its Factory Manager, Mr. Cheung Tsung Hung (‘Mr. Cheung’). 5.Customs & Excise raided the 1st Respondent’s premises on 19.2.2002. They found that the machines were being used or had been used in the production of a total of 90,934 video compact discs, which infringed copyright. Machines 1-5 were thus seized. 6.The 1st Respondent and Mr. Cheung were subsequently charged with various offences under the Copyright Ordinance, Cap. 528. After trial, I convicted them of Charges 1 & 2, namely, ‘Making for sale an infringing copy of a copyright work without the licence of the copyright owner’ [under s.118(1)(a)] and ‘Possession of an article specifically designed or adapted for making copies of a particular copyright work which article is used or intended to be used to make infringing copies of the copyright work for sale or hire or for use for the purpose of, or in the course of, any trade or business’ [under s.118(4)(d)]. The 2nd Respondent was not a party to the criminal proceedings. 7.In the trial of DCCC 333/03, I found beyond all reasonable doubts that the machines had been used by the 1st Respondent and Mr. Cheung in connection with the two convicted offences. When it came to the disposal of exhibits, the 3rd Defendant (the 1st Respondent) said it had no claim to the machines. The 2nd Respondent, however, emerged to resist Prosecution’s application for forfeiture. On 25.6.2004, it sent a solicitors’ letter (Bundle No. B34) to Customs & Excise to claim ownership of the machines. The Commissioner then took out the current application by motion on 3.9.2004 under ss. 132 &133 of Cap. 528. 8.The matter was originally scheduled for hearing on 26.10.2004. On that day, the 1st Respondent applied for adjournment, saying that the hearing should be adjourned till the conclusion of the final appeal of DCCC 333/03. The 2nd Respondent joined in the application. 9.I considered that ground for adjournment as invalid. When the appeal would be heard and what its result would be were uncertain. On the other hand, s.132 of Cap. 528 says in no unambiguous terms that seized articles might be forfeited “whether or not the person charged is convicted of the offence with which he was charged”. I, therefore, viewed that the matter should be dealt with as it was. I rejected the two respondents’ joint application for adjournment. However, the 2nd Respondent had not yet filed evidence on rents received from the 1st Respondent over the leasing of the machines. I allowed the 2nd Respondent to adjourn the matter to submit such significant evidence. The hearing was adjourned to 10.12.2004 with the 2nd Respondent having to pay costs to the Applicant for the adjournment. 10.On 10.12.2004, the 1st Respondent renewed its application to adjourn the hearing on the same ground as it put forth in October. It was said that a relevant legal issue on proof of copyright ownership might be brought to the Court of Final Appeal for consideration in a similar case [HKSAR v Elegant Technology Limited (CACC 448/03)]. Counsel for the 1st Respondent said this court should wait for that appeal result, which would be relevant to the correctness of the conviction of the 1st Respondent and its Factory Manager. Counsel for the Applicant objected to the adjournment while the 2nd Respondent adopted a neutral stance. I refused the 1st Respondent’s application with costs to the Applicant for the same reason as I did on 26.10.2004. 11.Apart from applying for adjournment, the 1st Respondent has not submitted any affirmation or evidence to contest Customs & Excise’s application of forfeiture. Nevertheless, its counsel says the 1st Respondent would still object to any forfeiture against it. 12.The Applicant and the 2nd Respondent are content to deal with the matter by affirmation evidence. No witnesses are called by either side. 13.The Applicant relies on the testimony of Customs & Exercise Officer Wong Shek, whose affirmation is in Bundle No. A5-12. The various exhibits mentioned in his affirmation are in Bundle No. B1-110. 14.The Applicant’s case is that the machines were seized for their use in connection with offences contravening the provisions of Cap. 528. They are thus liable for forfeiture and ought to be forfeited. 15.Counsel of the Applicant draws to this court’s attention the relevant legal principles including:
16.Counsel for the Applicant also says each case has to be decided on its own facts. Even if the articles belong to wholly innocent owners, they may still be forfeited. He suggests that Mr. Cheuk’s buying the machines for the 2nd Respondent and the erratic payment of rents by the 1st Respondent indicate that the two respondents have been in joint enterprise. 17.The 2nd Respondent relies on the various affirmations (Bundle No. A13-21 & A28-40) of Zhou Yuanfan (‘Mr. Zhou’). The various exhibits mentioned therein are in Bundle No. B111-179 & B249-304. 18.Mr. Zhou is one of the two director-shareholders of the 2nd Respondent. He says that he and the other director-shareholder, Mr. Zheng Weicheng, are citizens of China. They formed the 2nd Respondent in February 1999 with the intention of setting up an optical-disc manufacturing business in Hong Kong. The director of the 1st Respondent, Mr. Cheuk Shing Wo (‘Mr. Cheuk’) is a friend of his. Mr. Cheuk is also the proprietor of one Yau Lee Trading Co (‘Yau Lee’). In 1999, Mr. Zhou asked Mr. Cheuk to buy Machines 1-4 for the 2nd Respondent from Germany through Yau Lee. In the course of setting up the 2nd Respondent’s maufacturing business in Hong Kong, Mr. Zhou learnt that Chinese citizens could not get the Optical Disc Manufacture Licence (‘ODML’), which was necessary for production. Mr. Cheuk indicated to him that the 1st Respondent also wanted to set up its optical-disc manufacturing business here and was in need of machines. He asked Mr. Zhou to lease Machines 1-4 to the 1st Respondent at a monthly rent of HK$150,000, starting from 1.4.1999 for two years till 31.3.2001. They subsequently entered into a written agreement (Bundle No. B168-172). 19.Machines 1-4, however, developed operation problems. After negotiation, both respondents agreed that rents were to be accrued only from 1.8.1999. They also agreed to the addition of a clause prohibiting the 1st Respondent to use the machines to produce illegal products (Bundle No. B260-262). 20.On 10.11.2000, the 2nd Respondent purchased another production system consisting of Machine 5 at HK$4.5M (Bundle No. B263-267). 21.On 1.8.2001, both respondents formed another agreement (Bundle No. B269-270), under which the 2nd Respondent was to lease Machines 1-5 and some other machines to the 1st Respondent at the same rate of HK$150,000 per month until 31.3.2003. The other terms (as in the previous contract) were unchanged. 22.On 1.4.2002, both respondents varied their contract to such extent that the 2nd Respondent was to lease machines including Machines 1-5 to the 1st Respondent at a higher rent of HK$200,000 per month from 1.4.2002 until 31.3.2003. This contract stipulated that the other terms would remain unchanged (Bundle No. B272-273). 23.On 1.4.2003, both respondents agreed for the 2nd Respondent to lease machines including Machines 1-5 to the 1st Respondent at an even higher rent of HK$250,000 per month from 1.4.2003 until 31.3.2005. The contract also said the other terms would remain unchanged (Bundle No. B178-179). 24.Mr. Zhou says he visited the factory of the 1st Respondent about once a month but he had no idea that Customs & Excise raided the place on 19.2.2002. He only learnt of the verdict in June 2004 from the Factory Manager, Mr. Cheung, and that Prosecution intended to forfeit the machines. Mr. Zhou immediately asked the same solicitor acting for the 1st Respondent to write to Customs & Excise to state that the machines were (and still are) owned by the 2nd Respondent. 25.Mr. Zhou says the 2nd Respondent was innocent and had taken effective measures to safeguard any misuse of the machines. He produces the audited accounts of the 2nd Respondent for the years of 1999-2003 (Bundle No. B119-167) to convince this court that his company had been running a proper business. 26.Mr. Zhou says he had known Mr. Cheuk for a few years before he contemplated starting business here. He knew Mr. Cheuk enjoyed a good reputation in the disc-manufacturing field both in China and in Hong Kong. He also knew Mr. Cheuk had no criminal record. He thought Mr. Cheuk was honest and reliable, so he entrusted him with the purchase of the machines. 27.Mr. Zhou knew from Mr. Cheuk that Mr. Cheung held the ODML of the 1st Respondent. He understood Custom & Excise would scrutinize any ODML application carefully, so he held the belief that Mr. Cheung was conducting a proper business for the 1st Respondent. 28.The 2nd Respondent has put in a ‘prohibition of illegal business’ clause in all the agreements with the 1st Respondent since 1.12.1999. Its director, Mr. Zhou, visited Hong Kong frequently. He would go to the 1st Respondent about once a month to chat with Mr. Cheuk. He noticed there was a tray containing copyright authorizations for the production of discs. Mr. Cheuk told him that Customs & Excise would check those documents. Mr. Zhou says he had examined them himself. From his experience, he thought they were genuine. 29.Mr. Zhou is able to produce a number of records of payment made by the 1st Respondent to the 2nd Respondent between July 2000 and Feb 2003 (Bundle No. B279-304). He has also prepared for this hearing a summary of those rents received against those rents outstanding between 1.8.1999 and 1.3.2003 (Bundle No. B275-277). 30.Mr. Zhou admits the rents were not paid on a regular basis and there was quite a sum outstanding at all times. He explains that it was because the two companies had a good business relationship, so he gave Mr.Cheuk indulgence. Mr. Zhou points out that such financial information had been accurately recorded in all the annual audited statements of the 2nd Respondent. The leasing of the machines is a genuine operation. He also states that the 2nd Respondent had taken sufficient measures by inserting a prohibition clause into the leases at an early stage to forbid the lessee to use the machines for illegal business. He regularly visited the 1st Respondent’s factory. He inspected the copyright authorizations and was satisfied they were genuine documents. Counsel for the 2nd Respondent contends that his client is wholly innocent. Any wrongdoing of the 1st Respondent had nothing to do with the 2nd Respondent, which did not know of the former’s misdeed until June 2004. 31.Counsel for the Applicant has fairly and comprehensively stated the law regarding forfeiture. The standard of proof for issues in dispute is on balance of probabilities. The court has unfettered discretion to decide whether it is just to forfeit the goods in question. The discretion must be exercised judicially. Finally, each case must be decided on its own facts. 32.In the present case, Counsel for the Applicant correctly points out that Mr. Cheuk (being one of the two director-shareholders of the 1st Respondent) was involved in the purchase of Machines 1-4 for the 2nd Respondent in 1999. Bundle No. B176 shows there was also a Mr. Cheuk acting on behalf of the 2nd Respondent in November 2000 in the purchase of the system containing Machine 5. Most probably, it would be the same Mr. Cheuk Shing Wo. 33.Machines 1-4 were leased to the 1st Respondent, almost as soon as they were delivered by the manufacturer from overseas. (The invoices stated that the date of delivery was 16.3.1999 while the first lease of machines was dated 1.4.1999). Machine 5 was included in the second lease dated 1.8.2001. 34.The payment of monthly rents was quite erratic. Instead of receiving the rents month by month, the records (Bundle No. B279-304 with summary in B275-277) show that the 2nd Respondent received the first payment of HK$300,000 only in July 2000 – fifteen months after Machines 1-4 were given to the 1st Respondent to use! Mr. Zhou says the 1st Respondent was granted a rent-free period of four months because of the problems developed in the machines. Allowing for this, it was still almost a year after 1.8.1999 when rents began to accrue. Since July 2000, the 2nd Respondent received payment more frequently from the 1st Respondent but still not regularly. The total rents in arrears were often more than $1.5M. The arrears came to the lowest at $900,000 in April 2001 but reached the highest at $2.4M in September 2002. By March 2003, there was still $1.2M in arrears. 35.Counsel for the Applicant suggests that all these point to the fact that the two companies were in joint enterprise: the 1st Respondent held ODML for manufacturing while the 2nd Respondent provided the finance for the machines. He says the two Respondents are, after all, 2-dollar companies. 36.It is a fact that the two respondents are 2-dollar companies. However, they are properly set up under registration. In fact, many registered companies are 2-dolloar companies. This fact per se is not suspicious. 37.The payments were not regular and somewhat erratic. One would pause to wonder why a company would let another owe it $1-2M for quite some time. However, in commercial reality this is not uncommon. The evidence shows that between July 2000 and February 2003, the 2nd Respondent did receive a total of $6M from the 1st Respondent. That represents five-sixths of the total rent accrued for the period of August 1999 to March 2003; the amount outstanding is merely one-sixth. 38.The revenue of $6M is roughly one-third of the invested value of the machines. (Machines 1-4 cost about $15M while Machine 5 is part of a system costing $4.5M.) It was received in a matter of 3 years and 8 months (from August 1999 to March 2003) with another $1.2M due. The return is not a bad one from a commercial point of view. It is acceptable for Mr. Zhou to say the two companies had been enjoying a good business relationship (which in fact is still subsisting). 39.The business of the 2nd Respondent does not seem to be a sham. The account statements show that its bank accounts over the years had registered multiple entries of substantial sums in and out, apart from those payments received from the 1st Respondent. The 2nd Respondent had also recorded all the outstanding rents in its annual audited statements. 40.One should also note that the sums paid by the 1st Respondent were all multiples of $150,000. This would suggest that the payments were really for rents originally set at $150,000 per month. 41.From 1.4.2002, the rent had been increased to $200,000 per month but the 1st Respondent continued to pay in multiples of $150,000. One should, however, note that the rents for the previous months were still in arrears then. The $1.65M owed as at 31.3.2002 was only cleared by the end of that year but further arrears were accrued. Since then, the 1st Respondent still paid in multiples of $150,000 rather than in multiples of $200,000. It could be that a trade practice had been developed between the two companies which allowed the 1st Respondent to pay as it could, in multiples of $150,000, albeit late and in arrears. 42.Mr. Zhou says that he bought Machines 1-4 to start his own disc- manufacturing business in Hong Kong but only to learn later that he could not get ODML, as he was not a Hong Kong citizen. Mr. Cheuk also wanted to set up his business, so Mr. Zhou just leased the machines to the 1st Respondent. This saying is plausible. It is not unreasonable for Mr. Zhou to proceed with the purchase of Machines 1-4 and then lease them to the 1st Respondent. Under the agreement dated 1.4.1999, his company would be entitled to $150,000 each month for an investment of about $15M. That was quite a good return of around 12% per annum. As such, it is not surprising that the 2nd Respondent would purchase another system containing Machine 5 at $4.5M through Mr. Cheuk again to lease it to the 1st Respondent. The rent was increased from $150,000 to $200,000 in April 2002. The return was thus slightly increased to about 12.3% per annum. Even though the 1st Respondent was late in payment and was always in arrears, the portion paid as at March 2003 was five-sixths. The return actually received was still not bad. I find nothing suspicious. I accept all the leases of the machines are bona fide commercial transactions. 43.It is not strange that Mr. Cheuk should handle the purchase of the 5 machines for the 2nd Respondent. Mr. Zhou and the other director of the 2nd Respondent are Chinese citizens. They had to enlist the assistance of Mr. Cheuk in Hong Kong. It is perfectly normal. In the commercial world, companies often cooperate. They may be contemplating business or merely establishing good relationship. Again, there is nothing suspicious. 44.There is no evidence to show that the 1st Respondent is a subsidiary or associated company of the 2nd Respondent, or that the former is in fact an agent of the latter as far as manufacturing discs is concerned. Thus, this is not a case where one company is found to have used another to hold expensive machines in order to evade forfeiture or confiscation. As I say, the rent payments, the bank records and the audited statements all suggest that the 2nd Respondent has been running a genuine business in a proper manner. I would accept Mr. Zhou’s evidence in relation to the purchase and leasing of the machines. 45.As to Mr. Zhou’s visiting the factory of the 1st Respondent and inspecting thereat the copyright authorizations for production, there is no evidence to say it was not the case. 46.Mr. Zhou says he did not know about the infringing incident occurred on or around 19.2.2002. There is no evidence on when he last visited the 1st Respondent’s factory before that day. It would be absurd to suggest that he could or should visit and inspect his lessee’s place day by day simply because he had leased some production machines to the other. The 90,934 infringing discs certainly could not be made in one day but it need not take a month either. One cannot dispel the possibility that they were made by the 1st Respondent between Mr. Zhou’s monthly visits to evade his notice. 47.Mr. Zhou says the 2nd Respondent only knew of the criminal matter in June 2004 when Mr. Cheung told him. This is not surprising. The 1s Respondent might not want the 2nd Respondent to know that it had breached the prohibition clause and thus withheld the criminal proceedings from the latter until after conviction. It then had to inform the 2nd Respondent because Prosecution asked for forfeiture of the machines. (Before that, Customs & Exercise still let the 1st Respondent use the machines and is still letting it use them now.) 48.There is indeed no evidence to show that the 2nd Respondent knew before June 2004 the 1st Respondent was doing any infringing copyright business. The criminal trial reveals that the 1st Respondent has been manufacturing discs since 1999 and this is its first conviction. The 2nd Respondent had no reason to suspect the 1st Respondent before it knew of the latter’s conviction. 49.Counsel for the Applicant expresses his surprise at the fact that the 2nd Respondent first engaged the 1st Respondent’s solicitor to write the letter on ownership. I do not find it strange, however. On the contrary, it is quite natural for the 2nd Respondent to ask the same solicitor to handle the matter as the latter had full knowledge of what had been going on. There is no conflict of interest between the two respondents as far as forfeiture is concerned. Both object to the application and want to retain the status quo. 50.Having heard both parties, I am satisfied on balance of probabilities that the 2nd Respondent is a bona fide lessor leasing the machines to the 1st Respondent. Before June 2004, it had no knowledge of the 1st Respondent’s wrongdoing committed on or around 19.2.2002. I also find that Mr. Zhou of the 2nd Respondent had taken sufficient measures by including a prohibition clause in the leasing agreements and had regularly visited the 1st Respondent’s factory and checked on the propriety of its business. I find that was all he could do in the circumstance. Mr. Zhou was not able to find out that the 1st Respondent was breaching copyright on or around 19.2.2002 but fault-proof supervision would be impracticable in reality. 51.Forfeiture provisions are meant to be a powerful weapon to prevent contravention of the Copyright Ordinance. However, the legislature knows that there are hire-purchase or leasing agreements in the commercial world. If it were minded to impose strict requirement on the innocent lessor or vendor, it would say so clearly by making forfeiture of hire-purchase or leased goods compulsory in all cases. It has not. The case law has not said so either. In fact, the higher courts say the legislature has conferred unfettered discretion on the court to decide whether it is just in the circumstance to forfeit or not and that each case is to be decided on its facts. 52.In the present case, I find it is only just that the machines should be returned to the 2nd Respondent. To deprive a bona fide and innocent owner of its valuable properties is not only unjust but also detrimental to the survival of proper business entities such as the 2nd Respondent. It would suppress hire-purchase and leasing transactions. The society does not call for this. I, therefore, exercise my discretion to order the five machines be delivered to the 2nd Respondent. However, I would impose certain conditions. 53.The 1st Respondent is only minded to adjourn the present forfeiture hearing. It has not tendered any ground as to why the forfeiture should not be ordered against it. In the criminal trial, I found beyond reasonable doubts that it had used the machines to make infringing copies. The 1st Respondent and Mr. Cheung elected not to testify in the criminal trial and, therefore, failed to raise any defence. They were each convicted of two strict-liability offences under the Copyright Ordinance. After conviction, they also failed to raise any mitigation as to why they had contravened the law. 54.Although there is no evidence that the 1st Respondent has repeatedly contravened the copyright law, that single occasion in 2002 was of scale – involving the five machines and 90,934 infringing discs. I do not think the 1st Respondent should be entitled to use the machines anymore, lest it would use the same to break the law again. In fact, by using the machines for illegal business in February 2002, the 1st Respondent had already breached the prohibition clause in the leasing agreement. The 2nd Respondent could have rescinded the lease. 55.In normal circumstance where the intervention of the court is not necessary, it would be up to the 2nd Respondent to treat the lease as repudiated or not. In the present situation, the 2nd Respondent has not exercised its discretion to rescind the lease but let the 1st Respondent use the machines still. Customs & Exercise has also let the 1st Respondent use the machines since their seizure on the 1st Respondent’s undertaking as contained in Bundle No. B2, awaiting the court’s order for their disposal. 56.The machines had been used in connection with the contravention of the copyright law as provided by Cap. 528. s.133(12) of the ordinance empowers the court to order delivery of the machines liable for forfeiture subject to conditions, which the court may specify. In the circumstance of this case, I think the purpose of Cap. 528 can only be served if the 1st Respondent should be deprived of the use of the machines further. I, therefore, order the five machines to be delivered to the 2nd Respondent on condition that it should cease its leasing of the machines to the 1st Respondent and remove such machines from the 1st Respondent within 60 days from the date of this order, and never let the 1st Respondent use them again. If the 2nd Respondent fails to comply with the court’s order to any extent, the five machines shall be forfeited to the Government. 57.The 1st Respondent fails in objecting forfeiture against it. Therefore, it should pay costs to the Applicant. However, the Applicant should pay costs to the 2nd Respondent, which succeeds in its claim. Both the Applicant and the 2nd Respondent have engaged counsel. I would grant counsel certificate to them. The order on costs will be in the aforesaid terms and such order nisi will become absolute 14 days later, if there is no application from any party to vary it.
Mr. Russell COLEMAN instructed by The Commissioner of Customs and Excise for Applicant Mr. F. SZETO of M/S Pang Wan & Choi for 1st Respondent Mr. Henry MA instructed by M/S To, Lam & Co. for 2nd Respondent |
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