Introduction

A manager will often delegate and entrust his subordinates with various tasks. Usually, a manager is accountable for things that happen within his team. However, it may not be possible for the manager to scrutinise every single detail of the work delegated. What if a subordinate, who is entrusted with certain tasks by the manager, abuses his position and commits fraud against the employer? Will the manager be held responsible? Can the employer summarily dismiss the manager for his failure to identify fraud committed by his subordinates? The relevant legal principles have recently been discussed by the Court of First Instance ("CFI") in Qvist Henrik v Clatronic Far East Limited & Anor [2019] HKCFI 2464.

Background

The relevant employees

The plaintiff, Mr Henrik Qvist ("Qvist"), was employed by the 1st defendant employer ("Company") as its Managing Director since 2009 with a monthly salary of HK$110,000.

Mr Tang Lap King ("Tang") was employed by the Company as its Administration Manager since May 2011. His main duties included the management of petty cash use and the preparation of cheques for Qvist, who was a signatory to the Company's bank account, to sign.

The present disputes arose out of Tang's frauds perpetrated on the Company using the Company's cheques and Qvist's failure to spot them. The Company had, at any one time, three cheque books issued for its bank account, and Qvist let Tang kept all three cheque books as well as the company chop used on cheques. Qvist conducted regular spot checks of the Company's bank account and, in particular, recurring payments such as office monthly rental payments. If Qvist spotted some unusually large sum (about HK$20,000 or more), he would locate a copy of the cheque and the relevant invoice to confirm that the payment made was proper.

Frauds perpetrated by Tang

It turns out that Tang was a crook. Despite Qvist had carried out regular spot checks, for a span of almost two years (between December 2012 and November 2014), Tang was able to procure the issuing of 50 cheques, where he forged Qvist's signature, and paid out a total of approximately HK$1,440,000 from the Company's bank account to either himself or a company owned and controlled by him. Tang would from time to time use these funds to make payments to some of the service providers when they complained about non-payment of bills to cover his tracks. Tang pocketed around HK$660,000.

Discovery of Tang's frauds 

Tang's fraudswere discovered when the Chief Financial Controller of the 2nd defendant (the parent company) raised questions with Qvist regarding certain payments for the month of November 2014. One of them was regarding a payment for HK$93,223.40. Qvist checked with Tang, who informed Qvist the payment was for the Company's rent for November 2014. In fact, November 2014 was a rent-free month and it was Qvist who negotiated the tenancy agreement for and on behalf of the Company. Upon further investigations, Qvist discovered Tang's fraud. Tang confessed his wrongdoings and the Company summarily dismissed Tang.

Shortly after, the Company summarily dismissed Qvist pursuant to section 9 of Employment Ordinance (Cap. 57) on the ground that he was habitually neglectful in his duties as a managing director. Qvist commenced proceedings against the Company for wrongful dismissal, claiming damages for the sum of approximately HK$1,673,000 (being lost wages in lieu of notice, long service leave pay, and damages for 13th month salary, health insurance and air tickets as outlined in his employment contract) plus interest.

Did Qvist's mistakes justify summary dismissal?

At the trial, the Company argued that Qvist's habitual neglect of his duties justified his summary dismissal on the basis that Tang was able to produce 50 faked cheques. In relation to summary dismissal on the ground of habitual neglect of one's duties, the CFI stated that the neglect must be (1) substantial and (2) habitual for Qvist's summary dismissal to be lawful. The onus to prove these elements was on the employer and not the employee.

Was the neglect substantial?

On substantiality, the Company had to show that Qvist had disregarded the essential conditions of his employment contract. The test was whether Qvist's conduct amounted to a sufficiently serious breach of his employment contract such as to indicate that Qvist no longer intended to be bound by it. The court needed to balance the impact of the summary dismissal on Qvist (including loss of wages in lieu of notice, etc.) with the effect of the misconduct on the Company. On this issue, the CFI held that the Company suffered monetary loss of relatively modest amounts, no danger to any persons was caused and there was no serious harm to the Company's business. Thus, the Company failed to prove that Qvist's mistakes were of sufficient seriousness to justify his summary dismissal.

Was the neglect habitual?

Regarding the issue of whether the neglect was habitual, the CFI was of the view that the neglect of duties must have happened more than once. Whether a series of similar neglects amounts to "habitual" neglect is an issue of fact and degree, and the greater number of such neglects (and perhaps with great regularity), the more likely it is that an employee is habitually neglectful. Out of the 50 faked cheques produced, the CFI only held that Qvist had breached his duty of due care and skill in failing to spot four of them (namely, faked cheques produced for the Company's rent payment during four rent-free months), as he ought to have at least a general recollection of the rent-free period when conducting his spot checks. This was a case of negligence with no prior warning, and the Company was unable to show that Qvist was flouting or disregarding his contractual obligations, such as deliberately acting contrary to some specific rule or direction, or ignoring warnings. The CFI did not find Qvist to be showing an intention not to be bound by his employment contract.

The CFI found Qvist's summary dismissal to be wrongful, and Qvist was entitled to damages (of approximately HK$1,673,000) plus interest.

Takeaways

The Qvist case serves as a reminder that summary dismissal is a serious disciplinary action. It only applies to cases where an employee (including a managing director) has committed very serious misconduct or fails to improve after repeated warnings. In relation to summary dismissal on the ground that an employee is habitually neglectful of his duties, the neglect must be (1) substantial and (2) habitual for the summary dismissal to be lawful, and the employer has the burden to prove that. An employer needs to consider whether an employee's failure to perform his duties is sufficiently serious that justifies a summary dismissal. Where there has been no prior warning given to the employee or where the impact of the fraud on the employer is not so serious, even if the employee has failed to perform his duties, this may not justify a summary dismissal. Therefore, it is always advisable for employers to consult their lawyers before deciding whether to summarily dismiss an employee in order to avoid a possible claim for wrongful dismissal by the employee.