RE CHARK FUNG SECURITIES CO. LTD.

HCCW 362/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 362 OF 1998

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(Heard together)

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REASONS FOR DECISION

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1. I have before me an application taken out by the common liquidators of Chark Fung Securities Co. Ltd ("CFS") and Kee Fung Sing International Finance Co. Ltd ("KFS") in each of the winding-up proceedings for directions under section 200(3) of the Companies Ordinance, Cap. 32. In summary, the liquidators seek directions as to the following matters:

(1) the proprietary entitlement of the individual clients of CFS and KFS to the securities purchased on their instructions by CFS, currently held for the account of CFS at the Central Clearing and Settlement System ("CCASS") ("the first question");

(2) the priority, if any, among different clients of CFS and KFS in the distribution of the securities ("the second question");

(3) the method of allocation and distribution of the securities to the individual clients ("the third question");

(4) the allocation of the proceeds of sale of warrants and dividend income derived from securities held by or for the account of CFS and KFS ("the fourth question");

(5) the extent and nature of the right of subrogation of the Securities and Futures Commission ("SFC") arising from payments made out of the Unified Exchange Compensation Fund ("UECF") to the clients of CFS and KFS pursuant to section 118 of the Securities Ordinance, Cap. 333 ("the fifth question");

(6) the mechanics and conditions for the distribution and return of the shares or sale proceeds to the clients ("the sixth question"); and

(7) the incidence of the remuneration and disbursements of the liquidators for work carried out in relation to the securities ("the seventh question").

2. On 11 October 2002, I gave procedural directions for the hearing of the present applications. Pursuant to those directions, a circular has been sent to the relevant clients on 18 October 2002 in English and Chinese giving notice of the present applications and an opportunity to them to make submissions in writing. I say "relevant clients" because I have directed that the liquidators would not be required to issue such a circular to any client of CFS and KFS whose claim has been fully met by payments out of UECF as I have taken the view that the fully compensated clients do not have a commercial interest in these applications and it is the SFC who is fully subrogated to all their rights and remedies in relation to the securities. Written submissions have been received from some of the clients and they have all been placed before the court.

3. Mr Godfrey Lam appeared for the liquidators at the hearing. No other interested party has appeared. The SFC has set out its views on some of the questions to be considered and its letter has been produced by the liquidators.

4. I was taken by Mr Lam to various decisions given by Yuen J (as she then was) in which similar questions were raised upon the winding-up of companies dealing in securities and as decisions have been given by the court in the past, I was invited by counsel to resolve the questions in the present applications in a similar way. These decisions are as follows:

(1) Re CA Pacific Finance Ltd (in Liquidation) & Anr. (No. 1) [1999] 2 HKC 632 ("CAP No. 1");

(2) Re CA Pacific Finance Ltd (in Liquidation) & Anr. (No. 2) [1999] 2 HKC 652 ("CAP No. 2");

(3) Re CA Pacific Finance Ltd (in Liquidation) & Anr., HCCW Nos. 36 & 37 of 1998, unreported, 20 December 2000 ("CAP 20.12.00");

(4) Re CA Pacific Finance Ltd (in Liquidation) & Anr., HCCW Nos. 36 & 37 of 1998, unreported, 27 November 2001 ("CAP 27.11.01"); and

(5) Re Forluxe Securities Ltd (in Liquidation) & Anr., HCCW Nos. 310 & 311 of 1998, unreported, 20 December 2000 ("Forluxe").

5. At the end of the hearing, I made certain determinations on the questions raised above and an order was drawn up in each of the proceedings to reflect the determinations given and the consequential directions. The terms of the order are set out in the Schedule annexed hereto. I indicated that the reasons for my decision would be handed down in open court, as the decision would affect a large number of the clients of CFS and KFS. These are the reasons for my decision on the seven questions.

The background

6. CFS and KFS both belonged to the Ming Fung group of companies, which also comprised Ming Fung Bullion Co. Ltd ("MFB") and Winton Commence Ltd ("WCL"). All four companies are in liquidation and the liquidators, Messrs Gabriel Tam, Alan Tang and Nicholas Etches, are the joint and several liquidators of all four companies.

7. The businesses previously carried on by the four companies were as follows. CFS was a registered securities dealer; KFS was a licensed money lender; MFB was a registered leveraged foreign exchange trader; and WCL was a registered futures dealer. Although these companies had carried on separate businesses, their affairs appeared to have been inextricably linked. Mr Chan Kwong Hung, the managing director of the group, was a director and 50% shareholder of each of the four companies.

8. On 26 May 1998, the SFC, following an investigation into the Ming Fung group, presented petitions to wind up the four companies. Provisional liquidators were appointed for the companies the same day. The companies were wound up by orders of the court dated 7 July 1998. On 2 November 1998, a regulating order was made under section 227A of Cap. 32 appointing the liquidators the joint and several liquidators of each of the four companies.

9. The accounting records showed that Chan Kwong Hung owed KFS HK$44 million and considerable sums had been advanced by the companies to Mr Chan's wife, Madam Lau Miu King, and related entities. As a result, the liquidators have commenced proceedings for recovery in the High Court against the parties concerned in the names of the companies.

10. As a registered dealer of securities on the Hong Kong Stock Exchange, the securities trading transactions conducted by CFS on behalf of its clients were conducted through CCASS, the computerised settlement system run by the Hong Kong Security Clearing Co. Ltd. CFS held an account with CCASS and was treated by CCASS as a principal. The client transactions of CFS on any particular day were aggregated and settled through CFS's account. Usually, no physical scrips would be involved in the transactions. In turn, vis-à-vis its clients, CFS was supposed to have kept a proper record of their individual transactions and accounts of their respective stock and cash positions.

11. CFS functioned as a trader and did not provide finance to its clients for the purpose of their securities trading. It was a related company, KFS, which was a licensed money lender, that had provided margin finance to the clients of CFS.

12. There were apparently three client documents used by CFS. A client had to enter into the following agreements upon opening an account with CFS: standardised contract for cash client, client contract and account opening information sheet.

13. Upon opening an account with KFS, a client was required to sign the following documentation: standardised contract for deposit client, contract for opening loan account for security trading, form of opening loan account for security trading, and facility application form. Moreover, a client opening an account with KFS was also required to enter into the standardised contract for cash client with CFS.

14. If the securities trading activities of CFS and KFS had been run properly, the securities held by them at CCASS should be equal to the securities stated in their records as being held for their individual clients' accounts. There is however a large overall deficiency in the securities presently held by CFS and KFS compared to the claims for securities by their clients. The deficiency varies from stock to stock.

15. As at the date of commencement of liquidation, i.e. 26 May 1998, CFS and KFS together had a shortfall in securities unaccounted for to the value of HK$246 million, being HK$290 million worth of clients' claims for securities less HK$44 million in stock actually held. Further, of the HK$44 million of stock held by or for the account of CFS and KFS, HK$33 million was unencumbered but HK$11 million had been pledged to the Wing Hang Bank Ltd as security for loans made to KFS. In late May to June 1998, the bank realised its security and recovered about HK$8.9 million (net of costs) to settle the indebtedness of KFS. The remaining pledged securities were subsequently returned to the liquidators by the bank.

16. The aggregate position of the stock held in CCASS for the account of CFS as at 26 May 1998 is shown in the CCASS stock checking report. Stock may be held in three differently way, at CCASS itself, by the client (or in transit to or from the client), or at "other locations". The liquidators have not been able to locate the quantities of stock which, according to that report, should be in "other locations". These missing shares correspond with the shortfall in the stock held by CFS.

17. CFS's individual clients' stock positions, as recorded in CFS's internal system, are shown in the margin position report obtained from the computer system of CFS, although it only shows the aggregate financial position of each client, without any breakdown into the individual stocks held on a particular client's account.

18. So far as the investigations of the liquidators reveal, the reason for the shortfall in the securities position of CFS would appear to be the misappropriation of the clients' stock by the management of CFS and KFS.

19. I turn to the questions for determination.

The first question

20. The securities now controlled by the liquidators on account of CFS had a value of HK$33,121,971.92 as at 26 May 1998, representing a shortfall of some HK$257 million (HK$246 million + HK$11 million) against clients' claims of HK$290 million. As far as CCASS is concerned, these securities were held for CFS's account. An important question in the liquidations of CFS and KFS is how the shares held by the companies are to be dealt with. This depends in part upon the status of the securities held by the companies, whether they form part of the general assets of the companies or whether they are trust assets held on behalf of the clients. The corollary is whether the clients can assert a proprietary interest in the securities held by the companies or whether they have a mere claim in personam, in which case they would rank pari passu as unsecured creditors.

21. This gives rise to the first question. Such a question arose in similar circumstances in the decisions mentioned earlier and was determined in CAP No. 1 and Forluxe. It was held that all clients, including margin clients, on whose instructions shares were purchased by the broker, acquired a beneficial interest in the shares, subject to any lien or charge in favour of the broker for any unpaid amount due to the broker. In the present case, the essential feature of the agency relationship, i.e. the broker purchasing securities for and on behalf of the client, was present. Similar documentation was entered into by the clients of CFS and KFS. The same set of rules and agreement governed the participation of CFS in CCASS. I accept that the contractual provisions in the client documentation are consistent with the beneficial interest in the securities being vested in the clients on whose behalf the securities were purchased. I hold that the nature of the clients' proprietary interest should be in the form of separate trusts in favour of the clients individually, instead of in the nature of a tenancy-in-common of a pool of securities, following the decision in CAP No. 1, at 650D to H.

22. I have therefore made an order in terms of paragraph 1 of the Schedule.

The third question

23. I propose to deal with the third question before I consider the second.

24. On the basis that the clients are entitled to assert a proprietary claim to the remaining securities held on account CFS and KFS, given that there is an enormous deficiency of securities in relation to the clients' claims, it has to be determined how the shares or their sale proceeds are to be returned to the clients. In particular, given that the extent of deficiency in relation to each line of stock may be different, it has to be determined how each line of stock is to be distributed to the clients.

25. As in the previous decisions, the liquidators have divided the different types of securities held by CFS and KFS into five categories depending on their level of deficiency as compared to the clients' claims:

Category	Description
A	the number of shares held matches the shares claimed by clients
B	the number of shares held is less than the shares claimed by the clients
C	there are claims but no share is held
D	the number of shares held exceeds the shares claimed by clients
E	there are shares but no claim

26. Categories A and D present little difficulty. In respect of shares in these categories, the clients should receive either shares or cash equivalent of shares claimed by them in full, subject to conditions about payment of expenses (see CAP 20.12.00, pages 11R to 14G; Forluxe, pages 6Q to 7C).

27. Category C is also straightforward. For this category, clients will receive no distribution of cash or share and will have to prove in respect of their entire claims as unsecured creditors in the liquidation against the companies' free assets (see Forluxe, page 8B to E). The free assets of the companies would include the proceeds of sale of shares in category E and the surplus shares in category D.

28. The main difficulty lies with shares in category B. The shares of individual stocks held at CCASS on account of CFS and KFS are held without distinction as to individual clients. The securities are expressly treated under the rules of CCASS as fungibles, i.e. as interchangeable units for the purposes of transfer or delivery. There is thus a mingling of the trust property of different clients in the form of shares of each line of stock. There are tremendous difficulties in trying to unravel and ascertain the transactions between the time of purchase of the securities and liquidation, which resulted in a shortfall in the securities, and to determine their precise effect upon the proprietary entitlement of each of the clients individually.

29. Where following into a specific part of a mixture has become impossible, for instance, where the contributions are fungibles indistinguishable from one another, the law nevertheless allows an individual contributor, in the absence of wrongdoing, to assert that his contribution exists in any part of the mixture, subject to the right of other contributors to do likewise. Thus, where there has been a diminution of the mixture, the loss will be borne by contributors in proportion to their contribution (see The Law of Tracing, by Lionel D Smith, 1997 ed., page 73).

30. In CAP 20.12.00, various methods of allocation of the remaining securities were discussed (see page 16H to T). The choice of rules for the distribution of mixed trust property would appear to be a matter of choice of fictions with a view to promoting justice and fairness between competing claimants, having regard to the expense involved and the practicalities.

31. In the present case, it was urged upon me that in view of the relatively modest amount of assets held by CFS and KFS, it is important to have regard to the expenses involved of any proposed course of action so that the funds available for distribution to clients or other creditors are not unnecessarily depleted.

32. I accept the submission that it would not be appropriate to adopt the rule in Clayton's case (i.e. first in first out, or last in last out) as a method of allocation to resolve the problem of shortfall in the securities. This method was rejected in CAP 20.12.00, pages 17 to 19. I agree with the reasoning there. The rule is based on a presumption of intention and may be displaced by circumstances giving rise to a different presumption. Here, it is difficult to presume any intention on the part of the clients that the securities bought on their behalf should, for the purposes of the withdrawals of securities leading to the ultimate shortfall, be treated on a first in first out basis vis-à-vis other clients. The application of this rule to the present case may produce capricious and arbitrary results, as a client who gave instructions for the purchase of securities at a time near the liquidations but who had not yet paid for the purchase would obtain priority over a client who had deposited shares of the same stock with CFS for years. Further, this rule does not apply where the trust property of more than one beneficiary is mingled otherwise than in a current bank account (In re Diplock [1948] 1 Ch. 465 at 555). Lastly, the work required to be done if this rule were to be applied is so cumbersome and prohibitively expensive that the court should not adopt it as a method of allocation in the present case, having regard to the size of the estates.

33. I accept the submission that the "pari passu ex post facto" approach should be adopted here as the method of allocation. Under this approach, the clients claiming shares in each line of stock would share rateably in the shares available. This would seem to be a fair and convenient method and would achieve a degree of proportional equality. In view of the relatively small value of the securities held in CCASS for CFS, it would not be appropriate to adopt more sophisticated methods of allocation (Forluxe, page 7L to S).

34. To give effect to the above determination of the third question and the determination of the second question, which I am about to deal with, I have made an order in the terms of paragraphs 2 and 3 in the Schedule.

The second question

35. Out of 2,716 clients of CFS, 775 were also clients of KFS in that they had accounts with KFS and signed contract documentation of the latter. They have been referred to as the margin clients. They had consented to KFS using the shares as security for borrowing. This potentially gives rise to a distinction between cash clients and margin clients which may justify treating them differently in terms of the priority of their proprietary claims to the remaining securities, as was done in CAP 20.12.00, pages 23 to 27, but was not adopted in Forluxe, pages 5 and 6.

36. I agree with the liquidators that priority should not be given to cash clients in the present case, which has similarities with Forluxe in that the shortfall in securities had resulted primarily from the misappropriation of the management rather than from the exercise by Wing Hang Bank of the shares of the margin clients pledged to the bank as security for the loans made to KFS. This should be contrasted with the situation in CAP 20.12.00 pages 7T to 8F, in which it is apparent that the shortfall in shares was due largely to the sale by the lenders of shares delivered to them under the pledge by the finance company.

37. Further, out of 778 lines of stock held by CFS, only 24 lines were pledged to the Wing Hang Bank and claimed by both cash and margin clients. To give priority to cash clients in respect of the 24 lines of stock would involve very complicated mechanisms, where the actual sums in question may be quite small. It does appear that the administrative costs would exceed the possible benefit to be derived from such an exercise, not to mention difficult disputes that may arise as to how a client should be classified as a margin client. I note that for the purpose of UECF, only those clients who had utilised their margin facilities within six months prior to the appointment of the provisional liquidators for CFS and KFS were not entitled to compensation from UECF, whereas those clients who had not used margin facilities within that six-month period would be treated as cash clients for the purpose of compensation.

38. For the above reasons, I have declined to give priority to cash clients over margin clients. In dealing with securities in category B, all clients' claims should rank pari passu.

The fourth question

39. I adopt the suggestion of the liquidators that the proceeds of sale of warrants should simply be distributed pari passu among the relevant clients with claims to the warrants. As for the dividend income received on account of the shares held by CFS and KFS, they are notionally attributed to the relevant shares. I adopt the suggestion that the dividends be distributed in accordance with the distribution of the shares, and that the cash credit on account of dividends be used to set off against the processing fee to be levied.

40. I have therefore made an order in the terms of paragraph 4 of the Schedule.

The fifth question

41. Many clients of CFS have been paid monetary compensation out of UECF under the provisions in Part X of the Securities Ordinance, up to a maximum of HK$150,000.00 per client. The compensation procedure involved a determination of the claims submitted by the clients to the Stock Exchange. No client had lodged an appeal against the determination of his claim. Further, some of the clients had claims for less than HK$150,000.00 and have since been paid compensation to the full extent of their claims. I have dispensed with giving notice to such clients of the present applications.

42. By virtue of section 118 of the Securities Ordinance, the SFC has a statutory right of subrogation to the rights of the clients to the extent of the compensation paid to them. It was held in Forluxe, pages 14 and 15 that the SFC is entitled under this provision to be subrogated to a client's right in the proportion which the compensation payment bears to the loss claimed and that the loss claimed for this purpose should include the reasonable costs of and incidental to the making and proving of the claim. I agree with this ruling.

43. I have made an order in the terms of paragraph 5 of the Schedule to give effect to the above determination.

The sixth question

44. I turn to the actual mechanics and conditions for the distribution and return of the shares or the proceeds of sale to the clients.

45. I have endorsed these proposals of the liquidators. Each of the clients who have not been compensated by payments out of UECF wholly or partially will be given three options which will allow him to either receive his shares or the cash equivalent on the basis set out below:

(1) to have all the shares allocated to his account delivered to him in specie subject to conditions authorised by the court and SFC's right of subrogation; or

(2) to have all the shares allocated to his account sold and the proceeds paid to him subject to deductions authorised by the court and SFC's right of subrogation; or

(3) to have all the shares within category B allocated to his account sold and the proceeds paid to him subject to deductions authorised by the court and SFC's right of subrogation and to have the other shares allocated to his account delivered to him in specie subject to conditions authorised by the court and SFC's right of subrogation.

46. In the case of clients whose claims have been partially compensated by payments out of UECF, they will be given the further option of having all the shares allocated to each of their accounts delivered to them in specie, subject to conditions authorised by the court, provided that they pay in advance to the liquidators such additional sums as represent the cash value of SFC's subrogated entitlement to the securities allocated to the clients' accounts as at the date of the "allocation statement" mentioned below. By fixing a value as to SFC's subrogated entitlement with reference to a specific date, the clients will bear the risk of any fall in the value of the shares between the date of the allocation statement and the date of delivery of the shares and obtain the benefit of any rise in the value of the shares in the interim, if he should choose this option.

47. To give effect to the above proposals, the steps to be taken would be as follows:

(1) An advertisement will be placed in the newspapers within 14 days asking clients whose admitted claims for compensation have not been fully paid out of UECF or have been excluded from compensation, who have not received the liquidators' letter sent pursuant to the order dated 11 October 2002, to contact the liquidators and provide them with an up to date correspondence address. This is to cover the possibility that the liquidators may not have the up to date addresses on record for all the clients affected by these applications.

(2) The liquidators will send a circular to each of the clients affected informing them of the outcome of the present applications together with an "allocation statement" and a "schedule of return options" setting out the options stated above and inviting the clients, within 30 days, to select one of the options.

(3) If no response is received from the client as to which option to choose, a further notice will be sent to him informing him that if no response is received within the next 30 days, he will be deemed to have consented to the sale of his shares. A notice to this effect will also be advertised in the newspapers.

(4) The securities will then be returned to the clients as appropriate or sold and their proceeds of sale will be distributed to the clients subject to the conditions authorised by the court.

48. I turn to the conditions upon which the securities are to be returned to the clients, and the payment of the sale proceeds of securities and warrants and dividend income. I have authorised the following conditions, adopting similar measures as in CAP 20.12.00, pages 12R to14G and CAP 27.11.01, paragraphs 25 and 30:

(1) payment of any outstanding debts owed by the client to CFS or KFS;

(2) payment of brokerage fees and administrative fees for withdrawal or transfer of the securities;

(3) the SFC's right of subrogation; and

(4) payment of the liquidators' fees and expenses as a provisional processing fee, such fee when received to be placed by the liquidators in a separate interest bearing account, provided that on completion of the taxation of the legal costs and assessment of the liquidators' remuneration and expenses, any excess in the provisional processing fee paid with interest accrued is to be paid back to the clients.

49. To give effect to the above, I have made an order in terms of paragraphs 6 to 16 in the Schedule.

The seventh question

50. I was asked to give an indication in principle that the liquidators' fees and expenses in respect of the securities be paid out of the securities, i.e. trust assets not beneficially owned by the companies. It is envisaged that a further application will be made to sanction the amount sought once further details of the work done by the liquidators are compiled. This type of order, called a Berkeley Applegate order, after the case of this name reported in [1989] Ch. 32 at 48H to 51B, was made in CAP No. 2 at 657G to 658B and Forluxe, page 8. I will do likewise and permit the fees and expenses of the liquidators to be paid out of the securities.

The Schedule

1. The individual clients of Chark Fung Securities Company Limited (in liquidation) ("CFS") and Kee Fung Sing International Finance Company Limited (in liquidation) ("KFS") upon whose instructions CFS purchased securities acquired and, insofar as such securities are currently held for the account of CFS or KFS at CCASS or otherwise, retain an individual proprietary interest in the securities so purchased on their behalf.

2. Where the Joint Liquidators are satisfied that there are sufficient numbers of securities within each particular line of securities now held by or for the account of CFS and KFS to meet all the verified claims of clients of CFS and KFS to securities within that particular line of securities, the Joint Liquidators shall be at liberty to allocate such securities to such clients in accordance with their verified claims.

3. Where the Joint Liquidators are satisfied that there are insufficient numbers of securities within each particular line of securities now held by or for the account of CFS and KFS to meet all the verified claims of clients of CFS and KFS to securities within that particular line of securities, the Joint Liquidators shall be at liberty to allocate such securities as are now held to and among such clients pari passu in accordance with their verified claims.

4. The Joint Liquidators shall be at liberty to allocate the sale proceeds of warrants and dividend income received on account of securities held by CFS and KFS to the clients of CFS and KFS pari passu in accordance with their verified claims for such warrants and dividends, and shall be at liberty to distribute such sums to such clients accordingly subject to deductions authorized by the Court.

5. The allocation of securities and sale proceeds of warrants and dividend income referred to in paragraphs 2, 3 and 4 above shall, in the case of each client, be subject to the right of subrogation of the Securities and Futures Commission ("SFC") under Section 118 of the Securities Ordinance to the extent any payment to the client made out of the Unified Exchange Compensation Fund ("UECF") in respect of his verified claims bears to his verified claimed loss (including the reasonable costs of and incidental to the making and proving of the claim).

6. The Joint Liquidators do cause to be advertised within 14 days hereof, a notice substantially in the form of the draft exhibited at tab 20, page 846 of "GCKT-3" to the 3rd Affirmation of Gabriel Chi Kok Tam dated 8th November 2002 once in The Standard and the Sing Tao Daily Newspaper in English and Chinese respectively.

7. The Joint Liquidators do send to those clients of CFS and KFS whose verified claims have not yet been fully compensated by payments out of the UECF and to those clients whose claims have been excluded from such compensation on the basis they had utilized margin facilities of KFS:-

(1) a Circular Notice informing them of the outcome of the hearing of the application herein;

(2) an Allocation Statement each substantially in the form exhibited at page 845 of "GCKT-3" to the 3rd Affirmation of Gabriel Chi Kok Tam dated 8th November 2002 setting out the prima facie entitlement of the particular client to securities allocated or to be allocated to his account as a consequence of and in accordance with these directions; and

(3) a Schedule of Return Options inviting the particular client, within 30 days, to select (a) the option of having all the shares allocated to his account delivered to him in specie subject to conditions authorised by the Court and the SFC's right of subrogation, (b) the option of having the shares within category B allocated to his account as shown in the Allocation Statement (i.e. stock in respect of which shares held for the account of CFS and KFS are insufficient to meet all the claims of their clients), sold and the proceeds paid to him subject to deductions authorised by the Court and SFC's right of subrogation and having the other shares allocated to his account delivered to him in specie subject to conditions authorized by the Court and the SFC's right of subrogation, or (c) the option of having all the shares allocated to his account sold and the proceeds paid to him subject to deductions authorized by the Court and the SFC's right of subrogation.

8. In the case of those clients of CFS and KFS whose verified claims have been partially compensated by payments out of the UECF, they shall be given the option of having all the shares allocated to his account delivered to him in specie subject to conditions authorized by the Court, provided that the clients pay in advance to the Joint Liquidators such additional sums as represent the cash value of the SFC's subrogated entitlement to the securities allocated to the client's accounts as at the date of the Allocation Statements.

9. The Joint Liquidators do send to the SFC the Allocation Statements mentioned in paragraph 7(2) above in relation to the accounts of clients of CFS and KFS who have received full compensation from the UECF in respect of their verified claims and invite the SFC instead of the individual clients to select the preferred option amongst the options set out in paragraph 7(3) above.

10. If any client or the SFC to whom the documents mentioned in paragraph 7(1), (2) and (3) above have been sent does not reply within 30 days of the date of such documents, (1) the Joint Liquidators do send to him a further notice stating that in the absence of any contrary election within the next 30 days, he will be deemed to have elected the sale of the shares allocated to him and the payment of the proceeds to him subject to deductions authorised by the Court; (2) the Liquidators do cause to be advertised a notice once in The Standard and the Sing Tao Daily Newspaper in English and Chinese respectively informing such client that in the absence of any contrary election within the next 30 days, he will be deemed to have elected the sale of the shares allocated to him and the payment of the proceeds to him subject to deductions authorised by the Court.

11. If any client or the SFC to whom such further notice mentioned in paragraph 10 above has been sent does not reply within 30 days of the date of such further notice, he shall be deemed to have elected the sale of the shares allocated to him and the payment of the proceeds to him subject to deductions authorised by the Court and the Joint Liquidators shall be at liberty to proceed accordingly.

12. The delivery of securities referred to above shall, in the case of each such client, be subject to:-

(1) any lien or charge in favour of CFS or KFS for any unpaid amounts due to any or both of them;

(2) payment of such of the Joint Liquidators' costs and expenses as shall have been authorised by the Court as a provisional processing fee, such fee when received to be placed by the Liquidators in a separate interest bearing account, for which an account is to be supplied to the Official Receiver and the Committees of Inspection (if any), at periods to be decided by the Official Receiver provided that upon the completion of the taxation of the legal costs and an examination and assessment of the Liquidators' remuneration and expenses, any excess in the provisional processing fee paid with interest accrued is to be paid back to the clients; and

(3) payment of the expenses of actual distribution of the securities to the client, including brokerage fees and any administrative fees for withdrawal or transfer.

13. The payment of the sale proceeds of securities and warrants and dividends referred to above shall, in the case of each such client, be subject to:-

(1) deductions for any unpaid amounts due to any or both of CFS and KFS;

(2) deduction of such of the Joint Liquidators' costs and expenses as shall have been authorised by the Court as a provisional processing fee, such fee when deducted to be placed by the Liquidators in a separate interest bearing account, for which an account is to be supplied to the Official Receiver and the Committees of Inspection (if any), at periods to be decided by the Official Receiver, provided that upon the completion of taxation of the legal costs and an examination and assessment of the Liquidators' remuneration and expenses, any excess in the provisional processing fee paid with interest accrued is to be paid back to the clients; and

(3) deduction of the expenses of actual distribution of the securities to the client, including brokerage fees and any administrative fees for withdrawal or transfer.

14. Subject as aforesaid, the Joint Liquidators shall be at liberty to deliver securities in specie to the clients of CFS and KFS or sell securities and pay the sale proceeds to such clients in accordance with their entitlement pursuant to these directions and their election or deemed election.

15. Where securities are to be sold pursuant to the above directions, the sale of such securities by the Joint Liquidators is to be effected as soon as practicable in such mode as the Liquidators see fit and at such prices as determined by them upon taking advice from such stockbrokers or financial advisers as they consider proper.

16. Where securities are to be divided or apportioned pursuant to the above directions resulting in fractional shares, the Joint Liquidators shall be at liberty to round down the fractions to the nearest whole number of shares as they consider proper.

17. The Joint Liquidators shall be at liberty to apply for further directions generally concerning the conduct of the allocation or delivery of securities or the sale of securities or the payment of the sale proceeds and the terms of this Order.

18. The costs of this application be reserved.