KO KIN HANG v. GUOTAI JUNAN SECURITIES (HONG KONG) LTD

HCA 1731/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1731 OF 2003

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J U D G M E N T

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1. This is an appeal by rehearing from a Master's decision following an application by the plaintiff for summary judgment under Order 14 rule 1 RHC, in which she gave the defendant unconditional leave to defend, with costs in the cause. The somewhat unusual facts of the case now follow.

2. The defendant is a licensed stockbroker in Hong Kong. During the afternoon of 9 August 2001 a prospective new client introduced himself to an officer of the defendant as Chung Kwok Wing. He produced an identity card in that name and a Bank of China credit card statement with his residential address.

3. In fact the man concerned was a fraudster. In due course it came to be known that the real Mr. Chung had reported lost his ID card. The imposter, name unknown, was wanted by the police in respect of a fraud perpetrated in an unrelated matter. For the sake of convenience I shall continue to call him by his assumed name Chung.

4. An account was opened for Chung and he deposited by cheque the sum of $3,400,000. He said he was proposing to purchase shares; he was told this would be done in compliance with his instructions subject to cheque clearance the following day.

5. On the same day at 3.59 p.m., just before the market closed, another broker communicated with the defendant to state that it represented the holder, the plaintiff, of 32 million shares in Dransfield Holdings Limited; that their respective clients, that is the plaintiff and Chung, had agreed a sale of these shares at $.125 each for a total of $4 m; the defendant was requested to confirm the trade. The defendant recorded the transaction into the Stock Exchange Trading System reserving to itself, according to the Exchange's rules, the right to reject it before the market opened the following day. Chung called in to confirm the transaction and was told of the steps taken including that completion was subject to good funds by 10 a.m.

6. The plaintiff then called on the defendant later that afternoon, identified himself as the vendor in the shares transaction and, in order to avoid rejection, offered to guarantee Chung's performance by covering his cheque and depositing the balance of the $4 m, namely $600,000. To this end he signed a letter of comfort to the defendant to the effect that he would:

(a) deposit $3.4 m 'good funds' by 9.30 a.m. to be used as collateral against Chung's cheque;

(b) issue a cheque for $600,000 in favour of the defendant to be utilized should Chung fail to settle the balance.

7. The plaintiff duly issued the cheque and by 9.30 a.m. deposited the requisite cash. The result of that was that the transaction proceeded, scheduled to be completed upon delivery to the defendant of the 32 million shares on 13 August being the next trading day.

8. Later that day, 10 August, Chung called in and ordered a sale of some of the shares. Acting on such instructions the defendant sold a total of 21,488,000 on the open market, netting $2,041,215.

9. Then it was on the same day, 10 August, Chung's cheque bounced. Subsequent inquiry revealed it had been drawn on an account already closed. Chung was notified and promised to follow it up. But he did not; the imposter has not been seen or heard of since.

10. The plaintiff was told of the bounced cheque and he turned up at the office with receipts to show that he had paid $950,000 into the defendant's account, with a direction that it be utilized to cover any shortfall. As a result the defendant did not bank the plaintiff's cheque for $600,000.

11. The buy and sell orders executed for Chung were settled respectively on 13 and 14 August. In the books of the defendant, the transactions were recorded as follows:-

cheque deposit		3,400,000
returned cheque	3,400,000
deposits [by plaintiff]		450,000
		500,000
purchase price (incl. commission)	4,014,900
sale price (net of commission)		2,041,215
partial deposit [from plaintiff's cash]		1,023,685
	7,414,900	7,414,900

12. Thus it was holding for Chung the remaining unsold shares being 10,512,000 shares; it was also holding the balance of the plaintiff's cash of $2,376,315, and the plaintiff's unbanked cheque for $600,000.

13. Subsequently Chung's dodgy past came to light and the Securities and Futures Commission instructed the defendant to freeze Chung's account pending the outcome of the investigation.

14. Meanwhile by letter of 29 August solicitors representing the plaintiff sought on his behalf a return in 5 days of the undisposed of shares and the balance of funds. The defendant declined to comply and subsequent correspondence failed to achieve settlement; so the plaintiff issued a writ.

15. In the statement of claim the plaintiff recited the history as I have summarized and then stated:-

"6.	The plaintiff will contend that the irresistible inference to be drawn from the above pleaded matters is that the defendant's aforesaid client [Chung] intended at all material times to obtain the shares [the 32 million shares in Dransfield Holdings Limited] and/or their value without paying for the same and to cause loss to the plaintiff.
7.	In the premises the shares and proceeds constituted the unjust enrichment of [Chung] which
	(i)	the defendant holds upon constructive trust for the plaintiff; and/or
	(ii)	the plaintiff is entitled to follow and/or trace into the defendant's hands, the defendant having no equitable claim to the same."

16. He claimed a declaration that the shares and proceeds are his and an order that the defendant transfer and pay them over.

17. The defence pleaded can be summarized as follows:-

(a) the shares once purchased were Chung's shares;

(b) the defendant was entitled to have recourse to the cash collateral to complete the transaction.

18. It was pleaded that it is open to the court to infer from the history of the transaction that "Chung" and the plaintiff acted in concert to cause loss to the defendant and benefit to the plaintiff. Further or in the alternative that the plaintiff took a calculated commercial risk in guaranteeing the transaction. In the result he is not entitled to the relief sought.

19. Meanwhile the plaintiff made his application for summary judgment.

20. In its original form as before the Master the summons sought inter alia a declaration that the 32 million shares in Dransfield Holdings Limited are the beneficial property of the plaintiff and thereafter a transfer of the shares and proceeds. This would presumably have required the joinder of the purchaser or purchasers of the shares sold, which was not pursued in argument before the Master or subsequently before me in the appeal. In the event I adjourned the hearing to enable an application for leave to amend the statement of claim and summons.

21. Leave having been granted (there being no substantive opposition) the plaintiff in the amended pleadings claimed in the alternative delivery up of the remaining shares, payment of the sale proceeds in respect of those sold and repayment of sums held to the credit of the plaintiff less that expended by the defendant from its own funds, amounting to $2,376,315. This was also pursued as an alternative by amendment to the Order 14 summons, together with a declaration of ownership in the plaintiff, interest and the return of the unbanked cheque.

22. When the matter came to be resumed I was told that the sum of $2,376,315 had been paid by the defendant to the plaintiff, as a reimbursement of that part of the collateral cash not utilized in the transaction. I was further told that the plaintiff was prepared to accept how the defendant carried out the transaction. The remaining matter thus is the plaintiff's claim for return of the remaining 10,512,000 shares, interest on the sum paid and the unbanked cheque.

23. Much of the argument put forward before the Master and me against summary judgment is based on there being disputes of fact; that the plaintiff's somewhat unusual role in putting up collateral to protect the transaction suggested a conspiracy or at least a relationship between Chung and the plaintiff which needed to be resolved at trial.

24. Whatever the true picture however, what does emerge is that the imposter I am continuing to refer to as Chung was and is a fraudster. Using an assumed name and a stolen identity card and a cheque book of a closed account, he sought to steal by this deception a large number of shares and the proceeds of sale of some of those shares. It also emerges that because the cheque was dishonoured before completion there has been no payment out to him or at his direction and no transfer to him of those of the shares bought for him and not already sold. The defendant has no claim to these shares; it merely queries the plaintiff's rights to them.

25. It seems to me and I so find that what has to be resolved is as to who is entitled to the remaining shares. It cannot be Chung. He is a crook and he has disappeared. He is not entitled to the proceeds of his fraud. It cannot be the defendant. It has recovered the cost of the shares it was instructed by Chung to buy and the commissions on purchase and sale. The remaining participant is the plaintiff; in pocket for the sale price of the shares but out of pocket for guaranteeing the purchase price.

26. Whatever the dispute of facts this is not a matter that warrants a trial; there is nothing more that could be put before the trial judge that is not now before me. As I understand the defence case it is that it has a lien over the unsold shares to protect the shortfall occasioned by the sale proceeds plus the cash input of $950,000 being less than the purchase price by the sum of $1,023,685. The way forward would be, subject to resolution of factual issues, for the shares to be sold, and Chung's account then liquidated, the balance if any to be returned to the plaintiff as a refund of his cash collateral, and if insufficient for appropriate recourse to the cash collateral.

27. But as the accounting reveals there has already been recourse to settle this indebtedness. If the defendant had a lien over the remaining shares that was discharged upon settlement.

28. What remains is the right for the plaintiff to recover his property in restitution arising because of the fraud in which he became the victim. On the undisputed facts, the defendant as I find holds the shares in trust for the plaintiff, and now must return them.

29. The appeal is allowed. The order of the Master giving unconditional leave to defend is substituted with an order that the defendant deliver the shares to the plaintiff and a declaration that they are his beneficial property. He is entitled to interest on the sum of $2,376,315 at prime from 15 May 2003 (the date of issue of the writ) until the date of payment thereof. He is also entitled to a return of the unbanked cheque.

30. The following order for costs having been without the benefit of argument is nisi at first instance.

31. The plaintiff has succeeded in his appeal. But the manner in which the matter was pleaded as amended before me was different from that before the Master and before me prior to the amendment. In the circumstances I order costs to the plaintiff save that in respect of the Order 14 proceedings here and below the order shall be for one half of the costs.