HKSAR v. Chiu Yu Man and Others

CACC000577/1999

CACC 577/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 577 OF 1999

(ON APPEAL FROM DCCC NOS. 157, 158 & 159 OF 1999)

Coram: Hon Wong, Keith and Woo JJA in Court

Dates of Hearing: 15 and 16 August, 2000

Date of Judgment: 12 October 2000

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J U D G M E N T

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Wong JA: (giving the judgment of the court)

1. I am authorized by Woo JA to say that he entirely agrees with the result of this judgment and the route by which it has been reached. Keith JA also agrees that the appeals should be dismissed but would like to add a few words of his own on the first ground.

Introduction

2. The applicants were respectively D2, D3 and D4 of 8 defendants in a charge sheet containing 6 charges of conspiracy to procure execution of valuable securities by deception, contrary to Common Law and s.22(2) of the Theft Ordinance, Cap. 210. For the sake of clarity, I shall refer to the applicants as D2, D3, D4 and the others as defendants according to their order and number as appearing in the charge sheet. D2, D3 and D4 were jointly charged with D1 in the first charge. D3 and D4 were not involved in the second and third charges. Only D2 was charged together with D1 and D5 in the second charge and with D1, D6 and D7 in the third charge. We are not concerned with the other three charges which only involved D1 and D8. All the charges were in similar terms, with the exception of the names of the parties and the dates, which alleged that the defendants named in the charges, with a view to gain for themselves or another, conspired together to dishonestly procure from the Bank of America (Asia) Limited (BA), the execution of irrevocable documentary Letters of Credit by deception. These were followed by four particulars of deception in each charge, all of which were similar in nature.

3. The trial took place before Deputy Judge Duggan in the District Court. D1 who was the sole proprietor of a trading company called "Oriental Associates" pleaded guilty to charges 2, 3 and 4 after certain records of interview were admitted at the conclusion of a voir dire. By agreement, charges 1, 5 and 6 were left on the file. D8 was a director and shareholder of a trading company called "Chan Yee Kee Plumbing and Sanitary Ware Company Limited" and he likewise pleaded guilty to charge 4 at the conclusion of the voir dire. Charges 5 and 6 with which D8 also faced were left on the file. D6 and D7 were shareholders and directors of Rever Hairstyling Salons Limited (Rever), which owned a chain of hair salons. D6 pleaded guilty to charge 3 and gave evidence for the prosecution. No evidence was offered against D7 and he was acquitted.

4. D2, D3, D4 and D5 all pleaded not guilty to the charge or charges which they faced and were convicted after trial. D2 was sentenced to imprisonment for 2 years and 9 months. D3 and D4 each received a term of imprisonment of 10 months. D5 has not appealed. D2, D3 and D4 all apply for leave to appeal against their convictions. D3 abandoned his application for leave to appeal against sentence at the outset of the hearing and was dismissed. However, D2 still proceeds with his application for leave to appeal against his sentence of 2 years and 9 months.

The Defendants in the respective charges

5. The facts to which charges 1, 2 and 3 relate can be summarized in this way. It is first necessary to identify the positions the defendants held and their respective businesses. D2 was an assistant vice-president of BA at its Central Branch in Hong Kong. D3 and D4 were at the relevant times shareholders and directors of "Cosmos Manor Development Limited" (Cosmos). Cosmos appeared in charge 1 as the applicant for the material letters of credit. D5 was at the relevant times the general manager of a trading company called "Sun Kwong Building Materials Company" (Sun Kwong), of which D5's father, YOUNG Kwing-kwong, was the sole proprietor. Charge 1 relates to two letters of credit, the subject of applications by Cosmos to BA. Charge 2 relates to 11 letters of credit, the subject of applications by Sun Kwong. Charge 3 relates to one letter of credit, the subject of an application by Rever.

The prosecution case

6. The prosecution case was that in each case the relevant defendants conspired to obtain the issue of letters of credit by BA on the basis of non-existent or bogus transactions. By such means credit for 90 days was obtained from BA. It is not in dispute that all letters of credit or trust receipt loans were settled and the bank suffered no loss.

Charge 1

7. This charge involved two letters of credit, namely LC 7071/95 and 7072/95 both of which were dated 29 November 1995. They were applied for by Cosmos by applications, exhibits P273 and P280. The first one was dated 20 November 1995 and the second was undated. They bore the chop of Cosmos and were signed by D3 and D4. LC 7071 was for an amount of $1,903,380 and LC 7072 for $490,000. The beneficiary in both letters of credit was Oriental Associates (Oriental) and payment was against a signed commercial invoice and a cargo receipt. The letters of credit were subsequently presented for payment by Oriental and the money paid out. Corresponding loans were notified to Cosmos. The date for the payment was 5 December 1995. The judge considered and analysed the evidence and submissions by counsel in some detail and concluded in his Reasons for Verdict at p.37P to p.38D of the Appeal Bundle :-

"After considering the evidence relevant to this charge, I come to the inescapable conclusion that D2, 3 and 4 were parties to this offence. The only inference to be drawn from the flow of funds was that this was a dishonest device reached by the parties to obtain credit from BA on the basis of bogus transactions for the sale and purchase of the goods in question. I find the elements of the charge proved against each of the parties accordingly. I find that D2, as account officer for Cosmos, was inextricably involved in the scheme as early as his recommendation to add Oriental to Cosmos' list of local LC beneficiaries. I found his denials to know anything about the LC transactions to be false. On the contrary, the inescapable conclusion is that he orchestrated the transactions from start to finish."

Charge 2

8. This charge involved a total of 11 letters of credit transactions between Sun Kwong and Oriental. The applications were made over a period of four months between January and May 1996. It was the prosecution case that the applications made in May were for the purpose of repaying the loans made in January and February which had matured after 90 days. Accompanying charts were produced by the prosecution showing the movement of the money received by Oriental from BA. The money either went back to the account of Sun Kwong very soon afterwards or through D2 either by cheque or cash deposited into Sun Kwong's account. Proceeds from some of the letters of credit were also deposited into the account of Golden Harvest Restaurant Ltd (Golden Harvest), the account of Cosmos or D2's personal account. The judge having examined and evaluated the evidence made these findings :-

"As to the false nature of the transactions these are amply demonstrated by the fund flow as I have earlier set out and find to be amply demonstrated by the evidence pertaining thereto.

In dealing with fund flow, I have referred to D2's inextricable involvement. PW10's evidence concerning his role in returning monies from Oriental to Sun Kwong I find also to be truthful and accurate. I conclude that D2 was also involved in this scheme, again as early as his memo recommending that Oriental be added to Sun Kwong's list of local LC beneficiaries.

I find the elements of this charge proved against D2 and D5 accordingly."

Charge 3

9. This charge involved one letter of credit, i.e. LC 9183/96. The proceeds were paid by BA to Oriental on 26 March 1996. On 27 March Oriental issued a cash cheque for the bulk of the proceeds to be deposited into D2's personal account. On the same day D2 drew a cheque for the same amount, less $8,000 and deposited into Rever's account. The evidence against D2 on this charge came from two witnesses apart from documentary evidence. The first witness was PW16 who was D6 at the trial and the managing director of Rever. He said that his company had cash flow problems in late December 1995. He had discussion with PW18, the financial controller of Rever, who testified under immunity. PW18 spoke to D2 who was the account officer of Rever at BA. At a subsequent meeting, D2 suggested that the company could use letter of credit facility at the bank. He explained how this could be done. All the company had to do was to find a supplier so a transaction could be completed and the money would be transferred to the supplier who would then remit the money directly back to the company. No goods would be involved. Consequently a letter of credit was opened for $600,000 in respect of the purchase of salon equipment and Oriental was named as the supplier. No goods were supplied by or received from Oriental and Rever received $580,150 by cheque from D2. The judge found at p.46P-R :-

"I conclude therefore that D2 was indeed a party to the scheme between Oriental and Rever which resulted in the commission of the 3rd charge. His disavowal of the meeting or his subsequent role in the implementation, while understandable, is plainly false."

The evidence of D2

10. D2 gave evidence in his own defence but the judge disbelieved him. It is not necessary to go into the contents of his evidence, suffice it to say that it amounted to a denial of any knowledge or participation of the offences with which he stood charge.

The issue of law raised at the trial

11. On issues of law, it was submitted before the judge by counsel for the defendants at the trial that a letter of credit was not a valuable security for the purposes of s.22 of the Theft Ordinance, Cap. 210. The judge overruled the submission and held, following the decision of the English Court of Appeal in R v Benstead & Taylor [1982] 75 Cr.App.R.276, that a letter of credit was a valuable security in terms of s.22.

This appeal

12. Against the findings by the judge both on law and on facts, this matter is now before this court.

13. All three applicants are separately represented by both Senior Counsel and Junior Counsel. They were also legally represented at the trial. D2 was represented by Mr. Joseph Vaughan on the instructions of Messrs. Terry Leung & Lai. D3 and D4 were represented by Mr. Gary Plowman, SC and Ms. Po Wing Kay instructed by Messrs. Au Yeung, Cheng, Ho & Tin. Before this court, D2 is represented by Mr. Daniel Marash SC and Mr. Vaughan on the instructions of Messrs. Terry Leung and Lai, the same firm of solicitors. Mr. Plowman, SC, instructed by the original firm of solicitors, Messrs. Au Yeung, Cheng, Ho & Tin, appears with Ms. Po Wing Kay for D3. The same firm of solicitors which instructed Mr. Plowman and Ms. Po also instructs Mr. Lawrence Lok SC and Mr. Edward Shum to represent D4.

14. At the outset of the hearing, we were informed that Mr. Plowman would address us first on behalf of D3 as Mr. Plowman was Counsel for D3 and D4 at the trial and was more familiar with the background and evidence of the case. Moreover, the grounds of appeal, in particular Ground 1, were identical and common to all three applicants and both Mr. Marash and Mr. Lok indicated to us that they would adopt Mr. Plowman's submissions as their own. It was on this basis that Mr. Plowman addressed the court first.

Grounds of appeal

15. The first ground of appeal is this:

"The learned Deputy Judge erred in law in finding that an irrevocable letter of credit is a valuable security within the meaning of Section 22(2) of the Theft Ordinance. Cap. 210, or

Alternatively

If an irrevocable letter of credit can be a valuable security within the meaning of Section 22(2) of the Theft Ordinance, Cap. 210, the Prosecution failed to prove that Letters of Credit 7071/95 and 7072/95 were executed as valuable securities. "

The principal ground

16. As already indicated, this ground is common to the appeal of all three applicants. We will deal with the first part of this ground first. Section 22(2) of the Theft Ordinance, under which these charges were brought, provides: -

"Any person who dishonestly, with a view to gain for himself or another or with intent to cause loss to another, by any deception (whether or not such deception was the sole or main inducement) procures the execution of a valuable security shall be guilty of an offence..."

Subsection 4 of the same section defines "valuable security" as "any document creating, transferring, surrendering, or releasing any right to, in or over property, or authorizing the payment of money or delivery of any property, or evidencing the creation, transfer, surrender or release of any such right, or the payment of money or delivery of any property, or the satisfaction of any obligation."

17. The main issue in this appeal is whether a letter of credit is a valuable security in terms of section 22(2). If the answer is "no" the case of the prosecution will fail and the appeal must be allowed.

R v Benstead & Taylor

18. There is only one decided case directly on this point and that was R v Benstead & Taylor (1982) 75 Cr.App.R.276 which was relied upon by the deputy judge for support of his conclusion. Benstead dealt with a charge brought under section 20(2) of the English Theft Act, which was identical to section 22(2) of our Theft Ordinance and the facts in that case were on all fours with the instant appeal. In giving the reasons of the Court for dismissing the appeal on 12 March 1982, Dunn L.J. said firstly at p.279:-

"In the Court below, the Crown put their case in a number of different ways, but in this Court they relied principally on the submission that the irrevocable letter of credit created a right in property, namely, a right in the beneficiary Max Glen Ltd. to sue the bank on its undertaking to pay. That was a chose in action. Alternatively, the letter of credit evidenced the creation of such a right. It was submitted on behalf of the appellants that there was no contract between the bank and the beneficiary until the goods were shipped, and the shipping documents presented, that until that event occurred the beneficiary had no right to sue the bank and hence, since the goods had never been shipped, the letter of credit had not of itself created any right in property."

Having identified the issues and arguments of both sides, the learned Lord Justice dealt with a number of decisions and the first one was Hamzeh Malas & Sons v British Imex Industries Ltd [19581 2 Q.B. where Jenkins L.J. remarked that :-

"a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not."

In Trans Trust S.P.R.L. V Danubian Trading Co. Ltd. [1952] 2 Q.B. 297 at p.305 Denning L.J. (as he then was) stated that a letter of credit was a chose in action. In Stein v Hambros Bank Ltd. (1921) 9 Ll.L.R. 433, Rowlatt J said at p.507 :-

"The obligation of the bank is absolute, and is meant to be absolute, that when the documents are presented they have to accept the bill. That is the commercial meaning of it."

Dunn L.J. continued at p.280 :-

"In this case the bank had no right to rescind the obligation pending compliance with the condition."

He concluded :-

"In our view, the obligation of the bank created a corresponding right in the beneficiary to enforce payment of the ￡90,000 on presentation of the specified documents. That was a chose in action and so a right in property. The fact that the payment was conditional on the presentation of documents did not affect the existence of the right which was created by the irrevocable letter of credit and evidenced by it. In our judgment, therefore, the letter of credit was a valuable security within the meaning of section 20(2) of the Theft Act and for these reasons the appeal against conviction was dismissed on 8 March 1982."

Criticism of Benstead by academic writers

19. This decision has been criticized by academic writers. Prof. Sir John Smith in his "The Law of Theft" 8th edition had this to say at Para. 6-19 :-

"The words, 'any right to, in or over property', seem to assume some existing property, a right to, in or over which is created, transferred, surrendered or released. In the case of a letter of credit there is no existing property to, in or over which a right is created. The letter of credit no doubt creates a right, but it is not a right to, in or over property. It is no answer to say that the thing in action created by the letter of credit is itself property because the subsection does not include a document creating property. If the decision is taken to its logical conclusion, any written contract is a valuable security because, being an enforceable contract, it creates a thing in action."

Similar views were expressed by Professor Edward Griew in "The Theft Acts", 7th edition, the learned authors of Arlidge and Parry on Fraud, 2nd edition and Dr. A.T.H. Smith on "Property Offences", 1st edition.

20. Mr. Plowman submitted that Benstead was wrongly decided and should not be followed. It was argued that firstly no right was created, transferred, surrendered or released by the letters of credit and secondly, if a right had been created, transferred, surrendered or released by the letters of credit, that right was not a right "to, in or over property." In dealing with the first part of his argument, Mr. Plowman submitted that the letter of credit did not create the enforceable right in the beneficiary to obtain payment of the sums payable under the letter of credit. It was the presentation of the draft demanding payment that did and the letter of credit was simply the mechanism pursuant to which the draft was created.

21. I am unable to agree. This argument puts the cart before the horse because without the letter of credit the draft demanding payment would never have come into existence. The draft demanding payment has no independent status or existence and it is only an off-spring born out of the letter of credit. It is true that the bank's obligation to pay does not crystallise until the draft demanding payment has been presented and accepted. But this does not mean that the obligation to pay was not created by the letter of credit. The draft demanding payment is only one of the conditions subsequent to be fulfilled before the bank pays out the money. I reject this part of the argument.

22. I turn now to the second part of the argument and that is if the letters of credit created any rights, are those rights, "to, in or over property."? Mr. Plowman relied on the passages from Prof. Sir John Smith and the other academic writers and submitted that the letters of credit did not create any such right as there was no existing property to, in or over which a right was created. Mr. John Reading SC for the Respondent argued that the words "any right to, in or over property" did not assume some pre-existing property, and that it was sufficient for the document itself to be the mechanism by which the property came into existence. He further argued that if the words in fact assumed pre-existing property, the credit lines or facilities made available to the applicants for the letters of credit by the bank prior to the issue of the letters of credit would satisfy that requirement.

23. By equating a letter of credit to any written contract, I am of the view that the learned authors, with respect, were advancing far too general and far too wide a proposition and ignored a number of practical considerations. The comparison is not apt. A letter of credit is a special kind of contract which imposes an absolute obligation on the bank to pay the seller of goods. No bank would grant a letter of credit to an applicant without, prior to the issue of the letter of credit, the applicant having paid the full amount or provided sufficient security to the bank in satisfaction of the amount to be drawn on the letter of credit. This is accepted commercial and banking practice. In this case, a credit line or overdraft facilities would have been granted to Cosmos, Sun Kwong and Rever before the letters of credit were issued. This, in my view, satisfies the requirement that the property was already in existence at the time of issue of the letters of credit. An ordinary contract in writing is subject to the law governing ordinary contracts and the uncertainties and litigation that such a contract may bring. In my view, a letter of credit is no less a valuable security than a cheque. One often hears about breaches of contract or bounced cheques, but seldom is there a case of breach of a letter of credit between a bank and the seller or still less a bounced letter of credit. There are clearly distinctions between an ordinary contract in writing and a letter of credit.

Judgment of Jenkins L.J. in Hamzah Malas & Sons v British Imex Industries Ltd

24. For my part, I am satisfied that Benstead was correctly decided and should be followed. It was a reasoned and considered judgment which took account of previous authorities, albeit not exactly identical, and commercial and banking practice as Jenkins L.J. observed in Hamzeh Malas at p.129:-

"An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this court in the present case to interfere with that established practice. There is this to be remembered, too. A vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price. That is of no mean advantage when goods manufactured in one country are being sold in another. It is, furthermore, to be observed that vendors are often reselling goods bought from third parties. When they are doing that, and when they are being paid by a confirmed letter of credit, their practice is - and I think it was followed by the defendants in this case, to finance the payments necessary to be made to their suppliers against the letter of credit. That system of financing these operations, as I see it, would break down completely if a dispute as between the vendor and the purchaser was to have the effect of 'freezing', if I may use that expression, the sum in respect of which the letter of credit was opened."

I respectfully agree.

25. This disposes the principal argument on the first ground. In view of the conclusion I have reached on the first limb, it becomes unnecessary for me to decide the second and third limbs of the statutory definition under s.22(4) of the Theft Ordinance although I am inclined to the view that the letters of credit also evidenced the satisfaction of an obligation (of the purchaser to pay the price of the goods supplied by the supplier) under the third limb.

Alternative argument to the first ground

26. The alternative argument to the first ground was founded on the premises that even if the letters of credit were valuable securities, the prosecution had failed to prove that they were executed as valuable securities. It was argued that the time of execution must mean the time when BA signed the letters of credit, following the wording of "making" in s.22(3) of the Ordinance. But the letters of credit could only have the effect of passing any right to the payment of money (by BA accepting the bill of exchange drawn by the supplier) subject to the satisfaction of the conditions mentioned in the letters of credit by the supplier (such as the provision of documents like cargo receipts etc) upon the letters of credit being delivered or communicated to the supplier. Therefore the letters of credit would only become effective to confer any right in a chose in action to the supplier (to require BA to accept the bill of exchange) when it was communicated to the supplier. In other words, before the communication of the letters of credit to the supplier, the supplier could not even start to have any right to satisfy the terms of the letters of credit and require BA to accept any bill of exchange or to pay on the letters of credit. It followed that the letters of credit when executed by BA, but before communicated to the supplier, was not a valuable security. This is, in my view, a fallacious argument. If a person is defrauded or deceived into issuing a cheque, the fact that the cheque has not reached the hands of the fraudster or has not been presented to the bank for payment does not alter the nature of the cheque as a valuable security. If there is any substance in this argument, then it can only be argued that the execution of the letters of credit only took place when it was received by the supplier. That would only affect the time of its execution, and would be quite irrelevant as to whether it was a valuable security.

27. It is plain from the evidence and this was never in dispute that BA made payments to the purported sellers pursuant to the letters of credit. The judge found that the underlying transactions were bogus and on that basis he was entitled to draw inferences from that finding that the letters of credit were duly and properly executed as they would have been but for the fact of the deceit practised by the defendants.

28. I also reject this argument.

Other grounds of appeal

29. The other grounds of appeal advanced and argued by Mr. Plowman relating to the judge's finding of facts.

The second ground reads:-

"The learned Judge failed to make findings in relation to all the elements of the offence in that he failed to make any findings in relation to Particular (2) of the charge."

It is undisputably correct that in order to obtain a conviction, the prosecution must prove beyond reasonable doubt that the applicants conspired to dishonestly procure the execution of the letters of credit from BA by deception. It was submitted that the judge should have found proved all the elements of the offence prior to the execution of the letters of credit. The complaint here is that the judge had failed to make any finding in relation to one of the elements of the offence, i.e. deception. In my view, this criticism is not well founded. In the course of submissions, the judge was referred by defence counsel to the decisions in R v Kassim [1991] 3 All ER 713 and in R v Kwan Ping-bong [1979] HKLR 1 which he dealt with in his Reasons for Verdict at p.29K to p.30D. He had this to say :-

" I was referred to the decision in R v Kassim [1991] 3 All ER 713, a decision of the House of Lords, as authority for the proposition that the relevant point in time for determining the existence of a conspiracy and the required intent was that preceding the execution of the letter of credit, and that the offence is complete upon the execution of the letters of credit by BA. While accepting this as a correct proposition, I note that actions and words both before and after such point in time may be relevant to determining whether the elements of the offence were present at such time.

The prosecution in this case asked the court to draw inferences based on the evidence adduced. In this regard, defence referred me to R v KWAN Ping-bong [1979] HKLR 1 and the passage from the judgment of Lord Diplock at page 5:

" The requirement of proof beyond all reasonable doubt does not prevent a jury from inferring from the facts that have been the subject of direct evidence before them the existence of some further fact such as the knowledge or intent of the accused which constitutes an essential element of the offence; but the inference must be compelling - one (and the only one) that no reasonable man could fail to draw from the direct facts proved."

I bear this proposition in mind when proceeding to deal with the evidence in this case."

30. Deception, like intention, is hardly an element of the offence to be proved by direct evidence. It is often than not proved by indirect evidence or inferences to be drawn from primary facts. This is clearly the case here. There is an abundance of evidence for the judge to draw the inference from what was described as the "fund flow" that the transactions underlying the applications for the letters of credit were non-existent and false. Once this is established, it must follow, like day follows night, that the participants in the conspiracies were acting dishonestly to procure the execution of the letters of credit from BA by deception.

31. The judge reminded himself at the end of his consideration of each charge that he found the elements of the charge proved. This shows that he clearly had all the elements of the offence in his mind when he considered his verdict before finding the defendants guilty in each charge.

32. In particular he said at p.37 of the Appeal Bundle when he was dealing with the first charge :-

"After considering the evidence relevant to this charge, I come to the inescapable conclusion that D2, D3 and D4 were parties to this offence. The only inference to be drawn from the flow of funds was that this was a dishonest device reached by the parties to obtain credit from BA on the basis of bogus transactions for the sale and purchase of the goods in question. I find the elements of the charge proved against each of the parties accordingly."

33. It cannot be more clear from this passage that the judge had no doubt that not only the defendants were acting dishonestly but also fraudulently.

34. It needs no reminder that there is no requirement for a District Court Judge to deal with every point or all the evidence in his reasons for verdict, see HKSAR v LAM Chun-sun [1998] 2HKC214; R v Sheik Abdul Rahman Bux & Others [1989] 1 HKLR 1.

35. This ground also fails.

36. The third ground is in these terms :

"the learned Deputy Judge erred in that he dismissed documents which supported the existence of genuine underlying transactions between Cosmos and Oriental as not convincing - when there was no evidence to show that the documents were false."

37. Mr. Plowman identified four documents which he contended were genuine documents to support the existence of genuine transactions under the two letters of credit. These documents were a pro-forma invoice issued by Oriental to Cosmos regarding the purchases of kitchen ware, Exh. P151; a pro-forma invoice issued by Oriental to Cosmos for the purchase of two sets of walk-in freezers, Exh. P131; a copy of receipt of goods issued by Golden Palace Night Club, Exh. P128 and an undated note of delivery which contained a list of the same items as appear in Exh. P151. The total value of the goods in the two pro-forma invoices amounted to $2,418,380.

38. The judge dealt with this issue in his Reasons for Verdict at p.36C-L of the Appeal Bundle. He said:-

"Defence points to the supporting documentation relating to the letters of credit, invoices, cargo receipt, delivery note, and submits that there is nothing on their face to suggest that they do not disclose a genuine transaction. That may well be so, but it is hardly a convincing point. Parties to the non-genuine transaction will ensure that documents appear to be in order. Some point was made over the evidence of D2 that D4 contacted him to ensure that delivery of the goods to the PRC would be acceptable to the bank and was told it would be permissible. This hardly helps the defence. I have noted that in the BA memo which I am satisfied was prepared by D2 in seeking approval to add Oriental to the list of local LC beneficiaries, mention was made of the need of Cosmos to upgrade catering facilities in its Hong Kong establishments. If carried out, it would be very easy to check the existence in Hong Kong of some $2 million worth of catering equipment. Thus, the delivery of goods to PRC can assist in disguising the existence of the goods. "

The passage not only demonstrates that the judge was fully aware that some of the documents might be genuine or there was no evidence to prove that they were false, he also considered them with great care, and having done so, rejected them in the face of overwhelming circumstantial evidence that the underlying transactions were bogus. In my view, he reached the correct conclusion which is fully supported by the evidence.

39. There is no substance in this ground.

40. The fourth ground of appeal complains that :

"The learned Deputy Judge erred in law and in fact in the drawing of inferences."

As I have discussed in some detail on the evidence and the drawing of inferences when dealing with previous grounds, nothing is to be gained from repetition. It is accepted that there was no direct evidence to prove that the underlying transactions were false. The judge relied on the flow of funds through the accounts of the companies and D2, which he found to be directly related to the proceeds of the letters of credit. This means that the proceeds of the letters of credit received by the beneficiary were paid by the beneficiary to the applicant's associates which eventually paid the applicant for it to repay BA. The first inference that can be drawn from that finding of fact is that the beneficiary under the letters of credit did not make use of the funds, which the beneficiary made available to the applicant or the applicant's associated companies, sometimes through the bank account of D2. Following this, the second inference drawn by the judge is inevitable, that there was no sale as represented to BA in respect of which BA opened the letters of credit, for otherwise there was no conceivable reason for the beneficiary to pass along the proceeds to the applicant's associates. The transactions underlying the applications for the letters of credit were, in the circumstances, non-existent and false.

41. It was submitted by Mr. Plowman that the judge was not entitled to draw an inference based on another inference because an inference must be drawn against "direct facts proved". In support, he cited the passage in R v Kwan Ping-bong to which we have earlier referred. Plainly, the case cannot be authority for the proposition that Mr. Plowman advanced. Once an inference has been drawn from primary facts, further inference or inferences can be drawn from that inference provided that the inference drawn is equally compelling and the only reasonable inference that can be drawn.

42. Finally, Mr. Plowman submitted that the judge was wrong to draw the inference that Cosmos and its associate company, Golden Harvest were having cash flow problems. He contended that this was not supported by the evidence because the accounts of the monies these companies had in banks, in current and savings accounts as well as in fixed deposits, as produced in evidence at the trial, show that Cosmos and Golden Harvest did not have any such problems. This was further borne out by the fact that the money from the letters of credit was not paid to Cosmos until the time very close to the maturity of its obligation to repay BA. Would Cosmos have waited for so long to have the money if Cosmos and Golden Harvest were actually having cash flow problems and urgently in need of money? There is certainly force in this argument. Be that as it may, this does not invalidate the convictions. All the prosecution was required to prove is that there was the conspiracy as alleged in the charges. The prosecution did not have to prove the purpose of or the motive behind the conspiracy. So long as the prosecution was able to prove that the underlying transactions for which the letters of credit were issued were false, this would be very strong evidence on which the judge could find a conspiracy joined by the defendants to procure the execution of the letters of credit.

Stance and submissions of other counsel

43. At the conclusion of Mr. Plowman's submissions, Mr. Marash stood up to tell the court that he adopted everything Mr. Plowman had said in relation to the first ground, which was the only ground that D2 relied upon in the appeal. Mr. Marash did address the court briefly but added nothing of substance. Mr. Lok informed us that he simply adopted Mr. Plowman's submissions and abandoned his own skeleton argument to the extent that it differed from Mr. Plowman's submissions. He made a short submission in reply which, in my view, was identical to one made by Mr. Plowman in his reply. Mr. Plowman and Mr. Lok were instructed by the same firm of solicitors and there was clearly no conflict of interest between D3 and D4. I am bewildered why was it necessary to instruct two sets of Senior and Junior Counsel to argue identical grounds while it could have been done by one set of Counsel.

Conclusion

44. We are indebted to Mr. Plowman's for his very able and forceful submissions although we are unable to agree with them. We would grant leave and treating the application as the hearing of the appeal, dismiss the appeal.

45. D2 also applies for leave to appeal against his sentence. The application will be heard on a date to be fixed in consultation with counsel's diaries.

Keith J.A.:

46. I agree entirely with the comprehensive judgment of Wong J.A. that the Defendants should be granted leave to appeal against their convictions, but that their appeals should be dismissed. I only wish to add a few words of my own on the difficult question whether the irrevocable documentary letters of credit in the case came within the definition of the term "valuable security" in section 22(4) of the Theft Ordinance (Cap. 210).

47. In order to decide whether these letters of credit came within that definition, it is first necessary (as Lord Lane CJ said in R. v. King [1992] 1 QB 20 at p. 30D) to identify what the letters of credit actually did. In that connection, it is important to remember what letters of credit generally seek to do. They seek to provide security for the seller of goods while providing temporary finance for the purchaser of goods. That is achieved by a bank promising to pay the seller of goods when the seller presents certain documents to the bank, usually the bill of lading evidencing the shipment of the goods to the purchaser. That promise to pay will have been contained in a letter of credit issued by the bank on the application of the purchaser (usually its customer) to the seller. This credit arrangement is independent of the underlying contract of sale between the purchaser and the seller.

48. There is no dispute as to what the letters of credit in the present case actually did. They created an irrevocable obligation on the part of Bank of America (Asia) Ltd. ("the Bank") to pay to the companies to whom the letters of credit were issued ("the beneficiaries") the full invoice value of the goods which the beneficiaries were said to be selling to the Bank's customers who had applied for the letters of credit ("the applicants") when (a) the documents specified in the letters of credit and (b) drafts demanding immediate payment of the sums due were presented to the Bank.

49. Having identified what the letters of credit actually did, the question then is whether the letters of credit came within the statutory definition of the term "valuable security" in section 22(4). That provides that:

".... 'valuable security' means any document

(i) creating, transferring, surrendering, or releasing any right to, in or over property, or

(ii) authorizing the payment of money or delivery of any property, or

(iii) evidencing the creation, transfer, surrender or release of any such right, or the payment of money or delivery of any property, or the satisfaction of any obligation."

(I have taken the liberty of adding numbering to the statutory provision to make more apparent the three separate and alternative limbs of the definition.) The prosecution contended that these letters of credit fell within all three limbs.

50. So far as the first limb is concerned, two points were taken by Mr Gary Plowman SC for the 3rd Defendant, though Mr Daniel Marash SC for the 2nd Defendant and Mr Lawrence Lok SC for the 4th Defendant adopted his arguments. First, it was said that no right was created, transferred, surrendered or released by the letters of credit. Secondly, it was said that if a right had been created, transferred, surrendered or released by the letters of credit, that right was not a right "to, in or over property".

51. The first of these arguments was considered by the English Court of Appeal in R. v. Benstead and Taylor (1982) 75 Cr. App. R. 276, which had to consider an identical definition of the term "valuable security" in section 20(3) of the Theft Act 1968. In that case, an irrevocable letter of credit had been executed by a bank in favour of a company, the drafts thereunder to be honoured on presentation of specified documents. It was therefore indistinguishable on the facts from the present case. It was argued that there had been no contract between the bank and the beneficiary until the goods were shipped and the documents presented, and that the letter of credit had not in itself created any right in property. The prosecution submitted that the letter of credit had created a right in property, i.e. a right in the beneficiary to sue the bank on its undertaking to pay. In delivering the judgment of the court, Dunn LJ said at p. 280:

"In our view, the obligation of the bank created a corresponding right in the beneficiary to enforce payment of the [amount in question] on presentation of the specified documents. That was a chose in action and so a right in property. The fact that the payment was conditional on the presentation of documents did not affect the existence of the right which was created by the irrevocable letter of credit and evidenced by it."

Accordingly, the court held that the letter of credit came within the definition of "valuable security" in section 20(3) of the Act.

52. The essence of Mr Plowman's criticism of Benstead boils down to one simple proposition. It is not the letter of credit which creates the enforceable right in the beneficiary to obtain payment of the sums payable under the letter of credit. It is the presentation of the draft demanding payment of the sums payable which creates the enforceable right to payment when the documents specified in the letter of credit are provided. The true "chose in action" (to adopt the language of the court in Benstead), i.e. the document which actually creates the enforceable right to payment, is that draft, and the letter of credit is simply the mechanism pursuant to which the draft is created.

53. I cannot go along with this argument. I accept, of course, that the bank's obligation to pay does not crystallise until the draft demanding payment has been presented. But that does not mean that the obligation to pay was not created by the letter of credit. The obligation to pay was created by the letter of credit, even though the performance of that obligation was not triggered until the presentation of the draft. In other words, the obligations created by the letters of credit in the present case, to the extent that they related to the payment by the Bank of the sums due under them, were subject to the fulfilment of conditions subsequent, one of which was the presentation of drafts demanding payment. Accordingly, it was the letters of credit in the present case, rather than the drafts, which created in the beneficiaries the right to payment from the Bank.

54. I turn, then, to the second part of the argument on the first limb of the statutory definition: if the letters of credit created rights, i.e. the rights of the beneficiaries to enforce payment from the Bank, were those rights, "to, in or over property"? In Benstead, the court simply asserted that they were rights in property, but it did not say why. That view has been questioned by Prof. Sir John Smith QC in "The Law of Theft", 8th ed., para. 6-19:

"The words, 'any right to, in or over property', seem to assume some existing property, a right to, in or over which is created, transferred, surrendered or released. In the case of a letter of credit there is no existing property to, in or over which a right is created. The letter of credit no doubt creates a right, but it is not a right to, in or over property. It is no answer to say that the thing in action created by the letter of credit is itself property because the subsection does not include a document creating property. If the decision is taken to its logical conclusion, any written contract is a valuable security because, being an enforceable contract, it creates a thing in action." (Emphasis supplied)

(I digress to point out that in the words emphasised Prof. Smith did not go along with the first part of Mr Plowman's argument on the first limb of the statutory definition.) Prof. Smith's view was noted in Griew, "The Theft Acts", 7th ed., para. 12-19 (without comment as to whether the author agreed with Prof. Smith's conclusion), but at least one other author has shared Prof. Smith's view that the words assume some pre-existing property. Thus, in A.T.H. Smith, "Property Offences", 1st ed., para. 24-17, it is said:

".... the definition of 'valuable security' contained in section 20(3) assumes some pre-existing property, over which the new document creates rights (or transfers, releases or surrenders them). Where a letter of credit is executed, it creates rights by bringing into being a document that amounts to a chose in action, but not 'in or over property' as the section in terms requires. That would certainly seem to be a better reading of the Act."

55. I cannot accept this argument. Having read and re-read section 22(4) a number of times, I am highly sceptical of the assertion that the first limb of the definition of "valuable security" does indeed assume some pre-existing property. I note that neither Prof. Smith nor Dr. Smith actually say why, in their view, the definition assumes some pre-existing property. But even if it does, I am quite unable to read the first limb of the definition as excluding property created by the document which is said to constitute the valuable security. I appreciate that the first limb of the definition does not speak of a document creating property, but a document creating a right to, in or over property. But I do not read that as excluding from the definition a document which is itself the mechanism by which the property came into existence - provided that the property came into existence pursuant to a right created by the document. In the present case, the rights of the beneficiaries to enforce payment from the Bank arose from the rights created by the letters of credit, i.e. the right to the actual payment from the Bank of the sums due under the letters of credit. The primary right is the right to payment. The secondary right is the right to enforce that primary right by action.

56. Another criticism of the view in Benstead that the rights of beneficiaries under letters of credit are rights "to, in or over property" appears in Arlidge & Parry on Fraud, 2nd ed., para. 4-170, where it is said:

"In Benstead [the term 'valuable security'] was held to include an irrevocable letter of credit, because such a document confers on its beneficiary a right to payment and is therefore a document creating a right to property (i.e. money). This is, with respect, a surprising interpretation: the phrase 'any right to, in or over property' surely refers to a proprietary right (a right to specific property), not a personal one. The reference to the payment of money in clause (2) above is conspicuously absent from clause (1), yet it seems that a document creating a right to the payment of money is within clause (1). In that case virtually any written contract must be a valuable security."

I can see some merit in this argument if the only rights under the letters of credit were the rights of the beneficiaries to enforce payment from the Bank. But as I have said, the beneficiaries' right to sue the Bank on the letters of credit if the Bank failed to pay was only a secondary right. Their primary right was to be paid the sums due under the letters of credit. If the property is regarded as being the sums due under the letters of credit, rather than the beneficiaries' right to sue for the payment of those sums if payment is not made, the letters of credit can properly be regarded as creating a proprietary right to specific property, i.e. creating a right in the beneficiaries to be paid the sums due.

57. In these circumstances, it is unnecessary for me to deal with the attempt of Mr. John Reading SC for the prosecution to overcome the hurdle presented by Prof. Smith's and Dr. Smith's view, but in the interests of completeness I propose to do so. Mr Reading contended that there was property already in existence prior to the execution of the letters of credit. That property was the line of credit granted to the companies who applied for the letters of credit. I can see how the right of action created by this line of credit (being a right of action which the applicants had against the Bank) might have preceded the execution of the letters of credit, but I cannot see how the letters of credit, which amounted to contracts (between the Bank and the beneficiaries) for the payment of money on the presentation of documents, were documents which created, transferred, surrendered or released any right to, in or over the right of action by the applicants against the Bank. As Mr Plowman succinctly put it in his written reply:

"A letter of credit is a contract between the Bank and the seller. The buyer has no privity to this contract. What property he has is irrelevant to the rights and obligations between the Bank and the seller established by the letter of credit."

However, for the reasons I have given, I cannot go along with the academic criticism of Benstead, and I conclude that the letters of credit in this case came within the first limb of the definition of "valuable security".

58. Again, it is unnecessary for me to deal with the arguments relating to the second and third limbs of the definition, but in deference to the careful and comprehensive arguments which were advanced to us, I propose to do so. The argument in relation to the second limb of the statutory definition is straightforward. The letters of credit undoubtedly required "the payment of money" to the beneficiaries on presentation of the appropriate drafts and documents, but did that requirement mean that the letters of credit were "authorising" the payment of money? Dr. Smith, op. cit., para. 24-17 thinks so:

".... an irrevocable letter of credit represents a definite undertaking by the bank to pay (or that payment will be made), which appears to fall within the expression 'any document .... authorising payment of money'."

Prof. Smith is not so sure. He expressed the view (op. cit., para. 6-19) that the words "any document ... authorising the payment of money" probably includes a letter of credit.

59. I am not able to go along with this view. In my opinion, a document authorising the payment of money is not the same as a document requiring the payment of money. In the former, the payment of money is a power conferred by the document. In the latter, the payment of money is a duty imposed by the document. If the drafters of the legislation had wanted to include in the definition of "valuable security" a document under which there was an obligation to pay money, it would have been easy for the words "or requiring" to be added after the word "authorising". I am simply not prepared to construe the word "authorising" as referring not merely to a document in which a power is conferred but also to a document in which a duty is imposed. I therefore conclude that the letters of credit did not come within the second limb of the definition of "valuable security".

60. The only basis on which it is said by Mr Reading that these letters of credit were covered by the third limb of the definition is that they evidenced the satisfaction of an obligation. The obligation on which Mr Reading relied was the Bank's obligation under the letters of credit to pay the beneficiaries the sums due upon presentation of the drafts and the documents. But I fail to see how the letters of credit can be said to evidence the satisfaction of that obligation, when the letters of credit simply created the obligation. The letters of credit cannot evidence the fact that, pursuant to their terms, payments were indeed made to the beneficiaries when the drafts and the documents were presented. I therefore conclude that the letters of credit did not come within the third limb of the definition of "valuable security" on what Mr Reading contended the obligation to be.

61. However, that does not mean that a letter of credit can never be a valuable security within the third limb of the definition. Take a letter of credit in a case in which there is a genuine underlying contract for the sale of goods. As I have said, a letter of credit is usually opened on the application of the buyer, inter alia, to provide the seller with security for the purchase price of the goods. If the underlying contract requires the buyer to apply for a letter of credit to be opened in favour of the seller, the opening of that letter of credit will constitute the satisfaction of that obligation, and the letter of credit itself could be said to evidence the satisfaction of that obligation. An argument along these lines was not developed in the course of the hearing. That may have been because it would have been inconsistent with the prosecution's case that there were no genuine underlying contracts. But since no argument along these lines was developed, it would not be appropriate for me to address it.

Representation:

Mr. J Reading, SC, SADPP and Ms. C Fung, SGC of the Department of Justice, for the Respondent

Mr. D Marash, SC & Mr. J Vaughan, instructed by Terry Yeung & Lai for 1st Applicant

Mr. Gary Plowman, SC & Ms. Po Wing Kay, instructed by Au Yeung, Cheng, Ho & Tin for 2nd Applicant

Mr. L Lok, SC & Mr. E Shum, instructed by Au Yeung, Cheng, Ho & Tin for 3rd Applicant

Appeal by the 1st, 2nd and 3rd Applicants to Court of Final Appeal dismissed. Please refer to FACC1/2001 and FACC2/2011 dated 29 October 2001