1. The Appellants, who were civil servants, were charged with conspiracy to defraud and using documents, namely applications for Private Tenancy Allowance (“PTA”), with intent to deceive their principal, namely the Hong Kong Government. 2. Under the Civil Service Regulations, civil servants were entitled to apply for PTA for a refund of a portion of rent they paid for premises they leased privately, provided that they did not own or have a financial interest in the property leased. 3. In 1985, the 1st Appellant (“Mak”) (and his wife) became the registered owners of Flat 21E and the 2nd Appellant (“Tsang”) (and his wife), the registered owners of Flat 22E, both in Block 9, City Garden, North Point (“Flat 21E” and “Flat 22E”). Mak leased Flat 22E from Tsang, and Tsang leased Flat 21E from Mak. Both Appellants applied for and received PTA. 4. Tsang in 1990 moved into Government Quarters. By then both Appellants had ceased to receive PTA. In 1990, Tsang sold Flat 21E (under a power of attorney granted by Mak), with Tsang keeping the proceeds. In 1992, Mak sold Flat 22E (under a power of attorney granted by Tsang), with Mak keeping the proceeds. 5. The Prosecution case was that the Appellants had conspired to defraud the Government by obtaining PTA that they knew they were not entitled to. The Prosecution alleged that Mak was actually the beneficial owner of Flat 22E and Tsang actually the beneficial owner of Flat 21E and that they had agreed to pretend they were renting each other’s flat, concealing their financial interests in order to obtain PTA. This arrangement was referred to as “cross-holding”. 6. The Defence case was that neither Appellant had any financial interest in the flat each was leasing and it was common ground that the leasing of one another’s property, a practice known as “cross-leasing”, was not unlawful. In 1990, Tsang wished to sell Flat 22E but since there was an existing tenant there he had agreed with Mak to swap flats, so that he could sell with vacant possession. This happened only after both Appellants had ceased receiving PTA. 7. The Appellants were convicted in the District Court. HH Judge Johnny Chan found that it was Mak who provided the purchase money for Flat 22E, and Tsang the purchase money for Flat 21E, giving rise to a beneficial interest in each Appellant in the flat leased. The Judge therefore found that they dishonestly conspired to obtain PTA. 8. The Court of Appeal held that the Judge’s finding that each Appellant had provided the purchase money for the flat that they leased was erroneous, as the evidence actually showed that contrarily, each Appellant had provided the purchase money for the flat that they were the registered owner of. Nonetheless, the Court of Appeal upheld the conviction holding that, despite the error, no miscarriage of justice had occurred. The Court of Appeal held that the conviction was justified given the Judge’s finding that there had been an agreement to hold the flats on trust for each other. 9. There was no direct evidence that the Appellants agreed to a cross-holding arrangement, making themselves trustees of the flats they legally owned as opposed to a permissible cross-leasing arrangement. For the conviction to be upheld, the inference that they had indeed entered into such an arrangement had to be irresistible, that is, the only reasonable inference to be drawn on the available evidence. 10. The Court reasoned that since claiming PTA through cross-leasing was permissible, it was implausible that the Appellants would enter into a cross-holding arrangement to obtain PTA unlawfully. 11. The Court held that various matters relied on by the prosecution in support of inferring that there had been a cross-holding agreement were at least as consistent with the existence of a permissible cross-leasing arrangement, making the inference urged by the prosecution far from irresistible. 12. The prosecution had relied heavily on the cross retention of the sale proceeds as evidence of cross-holding. However, the Court found there was contemporaneous evidence in support of the Appellants’ case that each Appellant had agreed to grant each other the right to sell their respective flats in 1990, providing a plausible and innocent explanation for the retention of the sale proceeds. 13. For these reasons, the Court held that the inference of a cross-holding agreement giving the Appellants a financial interest in the flats they leased was implausible and unsustainable. The convictions were quashed.