DENIS M.P.C. HO AND ANOTHER v. CHAN KAM TIM AND ANOTHER

HCCW 36/1998
HCCW 37/1998

HEADNOTES

1. A broker is the agent of his client and owes the client fiduciary duties including the duty to account. Where the intention of a client and his broker is that the client's property is entrusted to the broker for any special purpose, such as the acquisition of certain securities, that property belongs to the client, and is regarded as covered by a trust.

2. When securities are acquired but have not been delivered to the client, the broker is obliged at all times to get into his possession and retain an equivalent quantity of those securities to satisfy his client's proprietary interest (Solloway v McLaughlin [1938] AC 247 applied)

3. Section 84 Securities Ordinance is consistent with the requirement that money paid by a client to a broker should be held under a trust. Section 84(3) does not mean that during the period of 4 bank trading days referred to in s.84, the broker can for its own purposes freely make use of its client's money. The period referred to in s.84(3) is merely a grace period within which the broker would not be at risk of criminal sanction if it fails to deposit the money into the trust account.

4. The fact that a broker was treated under the Central Clearing and Settlement System Rules as a principal did not mean that he was no longer an agent for the client. A person does not lose his capacity as an agent vis-a-vis his principal just because he has to contract with a third party as principal. Although he is a principal in relation to the third party, he remains an agent in relation to his principal (Teheran-Europe Co Ltd v S.T. Belton (Tractors) Ltd [1967] 2 QB 53, 60 applied).

5. In considering whether there is sufficient certainty of subject-matter for the creation of trust, one must have regard to what the subject-matter is. Segregation is not necessary for intangible things such as fungible shares ranking pari passu, so long as one knows the quantity of the shares which are to form the subject-matter of the trust (Re London Wine [1986] PCC 121 and Re Goldcorp [1995] 1 AC 74 distinguished, Hunter v Moss [1993] 1 WLR 934, [1994] 1 WLR 452 and Re Harvard Securities [1997] 2 BCLC 369 considered).

HCCW 36/98
HCCW 37/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) ACTIONS NO. 36 AND 37 OF 1998

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DECISION

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Yuen, J.:

1. This is an application by the Joint Liquidators of C.A. Pacific Finance Ltd (in liquidation) and C.A. Pacific Securities Ltd (in liquidation) for the determination of certain questions which have arisen in the course of the liquidations. The facts which have led to the present application are as follows.

Business of the companies

2. Both CA Pacific Securities Ltd and CA Pacific Finance Ltd were members of the C.A. Pacific Group.

3. C.A. Pacific Securities Ltd ("CAPS") carried on business in Hong Kong as a broker or dealer in securities. It was registered as a securities dealer under the Securities Ordinance, cap.333 and as such, was regulated by the Securities and Futures Commission ("SFC"). It was a member of the Hong Kong Stock Exchange and was a Broker Participant in the Central Clearing and Settlement System ("CCASS") operated by the Hong Kong Securities Clearing Co. Ltd ("HKSCC").

4. C.A. Pacific Finance Ltd. ("CAPF") carried on business in Hong Kong as a finance company. It was registered as a money lender under the Money Lenders Ordinance, cap.163. As it was not a registered securities dealer, it was not regulated by the SFC. As part of its operations, CAPF provided margin facilities to clients of CAPS.

5. As at January 1998, CAPS had some 11,000 clients, of which some 8,000 were also clients of CAPF, although not all CAPF clients traded on margin facilities. Indeed, a number of CAPF clients claim to be unaware that they had entered into contractual relations with that company at all.

Petitions for winding-up

6. In the late afternoon of 19 January 1998, a company within the C.A. Pacific Group presented a petition to wind-up CAPF on the basis of its inability to pay an inter-company loan. On 20 January 1998, the SFC presented a petition to wind-up CAPS on the grounds that it was insolvent and that it was just and equitable and in the public interest for it to be wound-up.

7. On the same day, Mr. Jan G.W. Blaauw and Mr. Denis M.P.C. Ho were appointed provisional liquidators of CAPS. On 21 January 1998, the same two persons were appointed provisional liquidators of CAPF as well.

8. It is not necessary for present purposes to recount the history of the petitions. Both companies were eventually wound-up unopposed on 4 June 1998. The Official Receiver applied for a regulating order, and the provisional liquidators were appointed liquidators for both companies.

The Title Question

9. On 18 June 1998, the Liquidators applied for directions concerning the question whether the clients of CAPS had any interest in the securities they had instructed CAPS to acquire and which were held by or to the order of CAPS.

10. That question had arisen because CAPS had purchased securities on the Stock Exchange through CCASS, a computerised book-entry settlement system where unnumbered share certificates are "immobilised" and deposited with a central securities depositary.

11. Put simply, the question is whether CAPS' clients have any proprietary interest in the securities they have instructed CAPS to acquire, when the share certificates are in a central pool and have not been earmarked.

12. The question of title has now been confined and refined as a preliminary issue by agreement of the parties, and can be summarised as follows:-

"whether, on the basis of the contractual arrangements, the regulatory framework and the arrangements for the custody of securities set out in the evidence,

(i) clients who have paid for securities from their own resources and upon whose instructions CAPS purchased securities on the Hong Kong Stock Exchange settled through CCASS may have

(a) acquired;

(b) thereafter retained whilst subject to the arrangements for the custody of securities in CCASS;

(c) subsequently upon removal from CCASS acquired or re-acquired;

a proprietary interest in securities so purchased;

(ii) if so, what is the nature and basis of such proprietary interest."

Representative Respondents

13. Due to the large number of clients involved, directions were given for the appointment of two representatives.

14. The 1st representative respondent Mr. Chan represents those clients whose recovery in the winding-up would be maximised if it was determined that clients of CAPS had, in principle, proprietary claims to securities acquired and held by the company, and to cash held by the company. In Mr Chan's case, this is because there was no shortfall in scrip of Techtronic Industries Ltd, the shares he acquired through CAPS. So as far as securities were concerned, he would be able to achieve 100% recovery.

15. The 2nd representative respondent Miss Tsui represents those clients whose recovery in the winding-up would be maximised if it was found that clients of CAPS did not have any proprietary interest in the securities, even though they had paid for them in full out of their own resources. The Liquidators have informed the Court that Miss Tsui would only be able to achieve 2% recovery on a proprietary basis, as opposed to 60% recovery on the basis that all the securities held by CAPS or to its order were held as part of CAPS' general assets.

16. In any event, for the purposes of these proceedings, Mr Chan's and Miss Tsui's particular circumstances do not matter. The issues of principle to be decided are of general application.

17. I should add that although both Mr Chan and Miss Tsui were clients of CAPF, the Court has been asked to determine the issues at this hearing on the basis that they had both paid for securities in full out of their own resources. In this Decision, I have used the term "clients" to describe all such persons who had instructed CAPS to purchase securities and who had paid for them in full out of their own resources.

Issues

18. It may be helpful to consider the issues in this way:-

(I) Prior to the introduction of CCASS, did a client acquire a proprietary interest in securities he had instructed his broker to purchase for him?

(II) If the client did have a proprietary interest, what is the effect of the introduction of CCASS and the broker's acquisition of the securities under this system?

(I) Prior to the introduction of CCASS

Relationship between Broker and Client

19. It is clear that at common law, as recognized by the courts of Hong Kong, a broker is his client's agent. Although the broker/agent is not a trustee in the strict sense of the word (Re Strachan ex p Cooke (1876) 4 Ch D 123, 128), he owes fiduciary duties to his client/principal.

20. One such fiduciary duty is to account for the principal's property, whether it be money or securities, if it comes to the agent's hands, so that the agent holds the money or securities in trust for the principal.

Intention of parties

21. Of course it is not invariably the case that whenever a principal pays money to his agent, that money is held by the agent in trust for the principal (see e.g. Neste Oy v Lloyds Bank Plc [1983] 2 LL Rep 658). Whether the money is held on trust will depend on the intention of the parties (Re Multi-Guarantee Co .Ltd. (No.2) Fin. Times 15 August 1984 at p.5).

22. Where the intention of a client and his broker is that the client's property is entrusted to the broker for any special purpose, such as the acquisition of certain securities (as is the usual case), that property belongs to the client, and is regarded as covered by a trust. This enables the property (even money) to be traced, even at common law so long as it is capable of being identified and distinguished, albeit in changed form (Taylor v Plumer (1815) 3 M&S 562, Re Strachan ex p Cooke at p.128).

Client's proprietary interest

23. So in the traditional way, where a client puts his broker in funds for the purpose of acquiring certain securities, and those securities are acquired, the proprietary interest in the money and the scrip belong to the client. This is so even if the client has arranged with the broker that the securities would be deposited with the broker, to be delivered to the client if and when called for.

24. This is to be contrasted with the less conventional situation of a running account between the broker and the client, where the parties' intention was that the client would only be claiming money standing to his credit in the account he holds with the broker (e.g. in King v Hutton [1899] 2 QB 555, [1900] 2 QB 504, 507, Re Goode ex p Mount [1974] 4 ALR 579, 586).

25. In the traditional conventional transaction, the broker has no general property in the securities he has acquired on behalf of his client. His only interest in the securities may be by way of a lien if the client owes him any money (Re London and Globe Finance Corp. [1902] 2 Ch 416, 420-1).

26. The existence of a broker's lien is a recognition that the general property in the securities belongs to the client, because it is the characteristic of a lien that it is a special claim over property belonging to someone else, viz. the client.

Broker's obligations regarding securities acquired

27. So, it is clear that when a broker, acting on his client's instructions, acquires certain securities on the market, he has to hold them on trust for the client.

28. It has been recognised by the Privy Council in Solloway v McLaughlin [1938] AC 247 that a broker need not retain the very shares that the selling broker had handed to him in that specific transaction, but he must get into his possession and retain an equivalent quantity of those securities to satisfy his client's proprietary interest. If he deals in the securities and fails to retain at all times an adequate quantity of those securities to meet his client's proprietary interest, he would be guilty of conversion, even though he may be able to purchase the necessary quantity of securities from the market and supply them when the client calls for delivery.

29. So that is the traditional position of the client regarding the securities he has instructed his broker to acquire on the market with funds provided by him. The issue in these proceedings is whether there has been any change of that position.

Section 84 Securities Ordinance

30. Before I consider CCASS, it is first necessary to see whether s.84 Securities Ordinance has any effect on the traditional obligations of the broker to its client as discussed above.

31. This is because one of the submissions of Mr Robert Hildyard QC, counsel for the 2nd Representative Respondent, is that on his construction of s.84, money received by a broker is not held on trust for the client until the expiry of 4 bank trading days after its receipt by the broker. If this money is not held on trust, so the argument goes, then it is at least possible that securities purchased by the broker were not held on trust.

32. Section 84 provides:-

"(1) A dealer shall establish and keep at a licensed bank one or more trust accounts designated or evidenced as such into which he shall pay -

(a) all amounts (less brokerage and other proper charges) which are received for or on account of any person (other than a stockbroker) from the sale of securities, except those amounts paid to that person or in accordance with his directions within 4 bank trading days after their receipt;

(b) all amounts (less brokerage and other proper charges) which are received from or on account of any person (other than a stockbroker) for the purchase of securities, except those amounts attributable to the purchase of securities which are delivered to the dealer within 4 bank trading days after receipt of the amounts;

(c) subject to any agreement to the contrary, all amounts derived by way of interest from the retention in a trust account of any amount mentioned in paragraph (a) or (b).

(2) All amounts required to be paid into a trust account shall be kept there by the dealer until they are paid to the person on whose behalf they are being held or in accordance with his directions or, as the case may be, until they are required to complete payment in respect of the purchase of securities on behalf of any such person.

(3) Money required by this section to be paid into a trust account shall be so paid within 4 bank trading days after it is received by the dealer.

(4) All sums derived by way of interest from the payment of money by a dealer into a trust account under this section shall, subject to any agreement to the contrary, belong to the person to whom the dealer is accountable.

(5) No amount other than an amount referred to in subsection (1)(a) or (b) shall be paid into a trust account.

(6) Every dealer shall keep records [etc]

(7) A person who -

(a) without reasonable excuse contravenes any provisions of this section shall be guilty of an offence [etc.]"

33. Section 84 is followed by s.85 which stipulates that money held in a trust account shall not be available for payment of the debts of a dealer or be liable to be paid or taken in execution, nor shall any person to whom the money is paid obtain title to it.

34. As I read it, s.84 is completely consistent with a trust of the client's money at all times. The section provides that all amounts for or from the client must be deposited into the trust account. The amounts exempted in s.84(1)(a) and (b) are consistent with that intent, because the amounts exempted there are used in the actual execution of the trust - in the case of s.84(1)(a), in payment of money to the client; and in the case of s.84(1)(b), in the purchase of securities for the client.

35. Section 84(3) does not mean that during the period of 4 bank trading days referred to, the broker can for its own purposes freely make use of its client's money which had been paid to it for the specific purpose of acquisition of securities. It should be read consistently with the purpose set out in s.84(1), not as an exception to it. The period referred to in s.84(3) is merely a grace period within which the broker would not be at risk of criminal sanction if it fails to deposit the money into the trust account.

36. Accordingly, s.84 does not change in any way the traditional obligations of the broker to its client as discussed above. The next consideration is whether any change has been effected by trading through CCASS.

"CCASS"

37. It is first necessary to describe briefly what CCASS is. It is a computerised settlement system run by HKSCC, which was introduced to the Hong Kong Stock Exchange in 1992.

38. It operates for those securities which have been selected by HKSCC as "Eligible Securities", which are presumably the more popular securities which account for the greatest volumes of trade on the exchange. There are far less non-Eligible Securities than Eligible Securities, and trading in non-Eligible Securities is effected in the traditional way. I have been told that some 99% of the trades on the Hong Kong Stock Exchange is in Eligible Securities, which have to be traded through CCASS.

39. All brokers on the Hong Kong Stock Exchange are required to be participants in CCASS (Stock Exchange Rule 358). The relationship between the brokers and HKSCC concerning the operation of CCASS is governed by a Broker Participation Agreement in prescribed standard form and by a set of rules called the CCASS Rules.

Aspects of trading through CCASS

40. There are two main aspects of the trade in securities through CCASS. The first concerns the buying and selling of securities on the exchange. In the traditional way, a broker who has instructions to buy certain shares at a certain price, contracts on the floor of the exchange with another broker, who has instructions to sell those shares at the same price.

41. Under CCASS however, a computerised system matches the buying and selling orders when the prices meet. HKSCC is then interposed between the buying broker and the selling broker, so that the shares are deemed to be sold to HKSCC, and HKSCC is deemed to on-sell those shares to the buying party, at the price agreed between the brokers. In law, a novation is effected, so that the original contract is superceded by two new contracts, with HKSCC being the buyer in one, and the seller in the other (CCASS Rule 3301).

42. Under the CCASS Rules, the brokers are treated as principals in these two new contracts (CCASS Rule 402).

43. The second aspect of CCASS concerns the holding of the securities bought through this system. HKSCC also acts as the custodian of the securities, which are registered in the name of HKSCC or its nominees, and the scrip (with transfer forms) are kept by depositaries of HKSCC. A client wishing to hold actual scrip may, however, through the broker require delivery to him of certificates for the appropriate quantity of securities.

No beneficial interest of HKSCC in securities

44. Since all scrip in CCASS are registered in the name of HKSCC or its nominees, HKSCC is the legal owner of the securities. However it has asserted quite clearly that it has no beneficial interest in the securities deposited into CCASS.

45. Mr. Hildyard has (in addition to his original submission that HKSCC has no beneficial interest in the securities) submitted as an alternative contention that HKSCC could well be the beneficial owner of the securities in CCASS. Although this alternative contention was not fully developed, it is necessary to consider the materials to see if it can be established.

46. CCASS Rule 802 provides:

"Eligible Securities deposited into CCASS by Participants will be held in safe-custody upon the terms and subject to the provisions of the Rules.

For the avoidance of doubt, HKSCC acknowledges and confirms that, save as otherwise provided in the Rules, HKSCC has no proprietary interest in the Eligible Securities deposited into CCASS, in particular, Eligible Securities in the Stock Segregated Accounts of Participants."

47. CCASS Rule 817 provides:

"HKSCC may from time to time appoint one or more banks, custodians, trust companies or other entities as its Appointed Depositary to perform or to assist in the performance of the depositary, nominee and custodian services contemplated herein in respect of all or part of the Eligible Securities held in CCASS

...

HKSCC shall procure that each Appointed Depositary acknowledges and confirms to the effect that it shall have no proprietary interests in the Eligible Securities so held by it in its capacity as Appointed Depositary."

CCASS Rule 1102 provides:

"HKSCC shall not be authorised or entitled to exercise rights or entitlements accruing to Eligible Securities in CCASS belonging to Participants for its own benefit or purpose and except as expressly provided in the Rules, shall not exercise such rights or entitlements without instructions of Participants save in the case where HKSCC considers it will be in the interest of Participants to do so."

48. HKSCC's assertion is that it has no beneficial interest in the securities deposited into CCASS. This may be distinguished from the situation when it is actually trading in the securities under the novated contracts.

As Trader

49. Under the novated contracts, HKSCC stands in the shoes of the original counterparties (although in practice, the original counterparties are still identified in the statements). As such, HKSCC, as the seller of the securities being traded, has to pass the property in the securities.

50. It may be that in the sale of securities to HKSCC and the on-sale by it, there is a scintilla temporis whereby the beneficial interest in the securities is passed to HKSCC, which directly passes it on to the purchaser of the securities. There would then be a constructive delivery and re-delivery of the securities by CCASS as vendor to CCASS as custodian without the securities actually changing hands (cf. Dublin City Distillery Ltd v Doherty [1914] AC 823 referred to in Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74, 92).

As Custodian

51. In any event, the question of title before the Court now relates to the proprietary interest in securities which have already been acquired by CAPS through CCASS. The assertion by HKSCC that it has no beneficial interest in the securities it holds as custodian is clear and easier to rationalize.

52. Those securities have been paid for by the client, not by the broker nor by HKSCC. Although there is a continuous netting system in operation, title to the securities purchased would not pass until settlement day (Transaction +2 days), when the purchasing broker's Money Ledger Account with CCASS would be debited with the purchase price (see Clause 6 of the Broker Participation Agreement). These funds would have come from the client, because CAPS required its clients to put it in funds before the transaction is put through, or at the latest, by T+2. If the client fails to put it in funds, CAPS is entitled to sell the securities contracted to be bought. This is not a "contango" situation: the broker does not provide the funds first to finance the client in his purchase.

53. Since it is the client who had paid for the acquisition of the securities, there is a natural presumption that he, not his broker nor HKSCC, is the beneficial owner of the securities. So it would appear that HKSCC is correct in its acknowledgment that it has no beneficial interest in the securities deposited into CCASS.

Consistency with purpose and practice

54. This is consistent with the purpose and the practice of CCASS. The stated purpose of its establishment was to provide more efficient and more secure trades which would be of benefit to investors. There would be less, not more, security for investors if securities acquired on their instructions and with their funds have become, by a side-wind, the property of their brokers or HKSCC, neither of whom have paid the money in exchange for those securities.

55. Further, HKSCC does not take any part in corporate activities such as voting or rights issues without specific instructions from the brokers who had acquired the relevant securities. Dividends are not kept by HKSCC, but are passed on to the relevant brokers. Bonus issues and similar entitlements accruing to Eligible Securities are deposited into Stock Segregated Accounts, not the Stock Clearing Accounts, which (except in exceptional limited circumstances) are not accessed by HKSCC.

56. Moreover, there is no evidence that HKSCC has ever complied with any reporting requirements which would have been necessary had it been the beneficial owner of substantial quantities of securities held through CCASS.

57. These factors are all consistent with my finding that HKSCC has no beneficial interest in those securities deposited into CCASS which had been purchased by CAPS on the instructions of and with funds provided by its clients.

58. The next and most important question for present purposes is whether the beneficial interest is held by the broker (CAPS) or by its clients. I have set out above how traditionally, where a client puts his broker in funds for the purpose of acquiring certain securities, and those securities are acquired, the proprietary interest in the money and the scrip belong to the client. Has any change been effected by the introduction of CCASS?

(II) No change in Client's proprietary interest

The Client Agreement

59. To see if there has been any change, one must logically start with the Client Agreement which governed the relationship between CAPS and its clients. The Client Agreement used by CAPS was in the standard form prescribed by Stock Exchange Rule 532.

60. The language of the Client Agreement shows clearly, in my view, that the intention of the parties was that the broker is the client's agent, and that securities acquired by the broker on the instructions of the client and with the client's funds are the beneficial property of the client. No distinction is made between trades effected through CCASS and non-CCASS trades (i.e. trades in non-Eligible Securities).

61. The intention that the client is the principal and has the proprietary interest in the securities is manifested throughout the Client Agreement.

62. Clauses 1 and 4 refer to transactions in securities "for or on my behalf". As noted in Castlespring Enterprises Ltd v Core Resource (HK) Ltd [1989] 1 HKC 283, the words "for and on behalf of" are a well-known formula for indicating agency.

63. Clause 6 contains an agreement that all securities acquired by the broker for or on behalf of the client shall be subject to a general lien for the discharge of the client's obligations to the broker arising from the business of dealing in securities. As noted previously, the existence of a lien is a recognition that the beneficial property belongs to the client, because a broker's lien would simply be nonsensical if the securities already belonged beneficially to it.

64. Clause 9 contains provisions for securities purchased by the broker and deposited with it "for safe-keeping".

65. Clause 10 provides for the crediting of the client's account with dividends in respect of securities held on the client's behalf.

66. Clause 11, which is significant (and which Mr Hildyard accepts applied to CCASS trades), provides that the broker shall not, without the client's prior written consent, deposit any of the client's securities as security for loans or advances or lend or otherwise part with the possession of any such securities for any purpose. It can be seen that the restrictions imposed by this clause are inconsistent with the securities being the beneficial property of the broker, and are consistent with the securities being the beneficial property of the client. The Client Agreement goes on at Clause 16 to warn the client against the risks of authorising the broker to deposit securities as collateral for loans or advances made to the broker.

67. So it will be seen that the Client Agreement does not effect any change in the traditional relationship between broker and client as agent and principal, nor in the legal position that securities acquired on the instructions of and with the funds of the client belong beneficially to the client.

Broker an agent vis-a-vis the client, although a principal vis-a-vis HKSCC

68. Mr Hildyard sought to overturn this analysis at its foundation, by relying on the fact that under the CCASS Rules, the broker is not regarded as an agent, but is treated as the principal in its trades through CCASS. He relied on the following rules.

69. CCASS Rule 402 provides:

"So far as the rights and liabilities between HKSCC and each Participant are concerned, a Participant using any of the services of CCASS shall be treated as acting as principal and not as agent, and shall be liable to HKSCC as such.

In rendering its services, HKSCC shall be under no obligation to recognize any right or interest which any person other than a Participant may have or claim to have in relation to all matters concerning CCASS (including, without limitation, Eligible Securities deposited into CCASS and transactions to be settled thereunder) and the operation thereof by HKSCC".

CCASS Rule 805 also provides:-

"...

Except as otherwise provided in the Rules, HKSCC may regard each Participant as having full authority and control in respect of the Eligible Securities in its Stock Accounts and HKSCC shall be under no obligation to recognize any right or interest which any person other than the Participant may have in such Eligible Securities".

CCASS Rule 3302 also provides:-

"...

The benefit of the performance by HKSCC of such obligations [obligations whether as seller or buyer under Market Contracts under the terms of the Novation] is conferred upon Broker Participants as principals and not upon any other person whatsoever".

70. However, a person does not lose his capacity as an agent vis-a-vis his principal just because he has to contract with a third party as principal. An agent can conclude a contract on behalf of his principal in a number of ways, and one of those ways is by creating privity of contract between himself and the third party, but no such privity between the third party and his principal. When he does that, he is a principal in relation to the third party, but he remains an agent in relation to his principal (Teheran-Europe Co Ltd v S.T. Belton (Tractors) Ltd [1967] 2 QB 53, 60).

71. Thus, CAPS was capable of dealing with HKSCC as principal, whilst acting as agent for its clients in the purchase of securities through CCASS. There is nothing in the Client Agreement which prohibits that. On the contrary, as discussed above, the Client Agreement shows clearly that the broker was intended to act as agent only.

72. Further the standard form Broker Participation Agreement entered into between brokers and HKSCC recognises that the broker may be acting as agent for its clients.

73. Clause 4 of the Broker Participation Agreement provides:-

"The Participant shall, in relation to all its matters dealings and transactions in CCASS or with HKSCC or in relation to all Eligible Securities standing to its credit in CCASS be liable to HKSCC as a principal notwithstanding that it may be acting as the agent or the trustee of another person or otherwise in a fiduciary capacity." [my emphasis]

74. Further, in all the Contract Notes which have been prepared pursuant to the requirements of s.75 Securities Ordinance, CAPS has stated that it has contracted as agent in the transactions and not as principal.

75. Accordingly, I conclude that when CAPS contracted with its clients to execute orders through CCASS for the purchase of securities on the instructions of and with the funds of the clients, CAPS was acting as an agent. It follows that when such securities were acquired, the law would regard the client as having the beneficial interest in them, unless there is anything which refutes that position.

Declaration of trust not necessary

76. Mr Hildyard submitted that a trust of the securities in favour of the client is not capable of being created or taking effect. His first submission was that there was no certainty of words, because the Client Agreement did not amount to a proper declaration of trust. He submitted that this was no more than a commercial transaction from which a trust should not be created, and in any event, even if the Client Agreement were a declaration of trust, a trust could not have been validly created then, because no trust property would have existed yet at the time the Agreement was signed.

77. In my view, the Client Agreement does not need to be read as a declaration of trust for the purposes of the 1st Representative Respondent's case. The client's proprietary interest in the securities arises simply from the fact that those securities had been acquired with his funds and on his instructions by his agent the broker. The Client Agreement was simply the document which articulated the relationship of principal and agent between client and broker.

Certainty of subject-matter

78. Mr Hildyard's further submission was that there could be no trust because immobilized shares with unnumbered share certificates in CCASS cannot be the subject-matter of a trust for want of certainty.

79. It is the case that after a purchase of securities through CCASS, scrip deposited with HKSCC do not physically change hands unless and until a purchasing client requires delivery of the scrip. There is no ear-marking of the scrip, by number or otherwise. Section 65A of the Companies Ordinance cap. 32 provides that where shares are fully paid up and rank pari passu for all purposes, none of those shares need have a distinguishing number.

80. Indeed, the securities are expressly treated under the CCASS Rules as fungibles, in other words, as interchangeable units for the purposes of transfer or delivery (see CCASS Rule 809).

81. However, it does not follow that there is no certainty of subject-matter. There are strict recording requirements at each level to show what securities are held for whom. All transactions for sale and purchase through CCASS are recorded in detail. The quantities of each type of securities held for the account of each broker is recorded by HKSCC. And the quantities of each type of securities held for the account of each client is recorded by the broker.

82. Even though the net quantity of securities of a particular type standing in a broker's Stock Clearing Account with CCASS may not change at the end of the day because the broker had effected purchases and sales of the same quantity of shares, each such transaction is recorded by CCASS and entered into its books. Similarly, the brokers are required under s.83 Securities Ordinance and Stock Exchange Rule 424 to record each transaction for each of its clients in its own books.

83. Short sales are in general not permitted (see s.80 Securities Ordinance), so in effecting each sale order, the broker would have to have ready the securities available to fulfil that order. A situation would not arise where securities purchased by one client and held in CCASS would be depleted by a sale order of another client.

84. Thus in this system, each purchaser of securities would have his quantity of scrip available with HKSCC's depositary, even though he would not be able to point to any particular tranche of shares as his own. I would add that it is not suggested that there has been any shortfall of scrip in CCASS.

Consideration of the nature of the subject-matter

85. Mr Hildyard submitted that there was no certainty of subject-matter of the trust, because there has been no appropriation of securities to each client. He relied heavily on the decisions in In re Wait [1927] 1 Ch 606, In re London Wine Company (Shippers) Ltd [1986] PCC 121 and Goldcorp, supra.

86. It is correct of course that certainty of subject-matter is essential to the creation of a trust. But in considering whether there is sufficient certainty of subject-matter, one must have regard to what the subject-matter is.

87. For certain types of goods, such as wheat in Re Wait, wine in London Wine and bullion in Goldcorp, segregation or appropriation is the means of identifying the goods which have been made the subject-matter of the trust. But in my view, it does not follow that segregation or appropriation is necessary for all things.

88. What is required is not segregation for the sake of segregation. What is required is certainty of the property over which it is intended there should be a disposal of the beneficial interest. What is necessary is the means of identifying or distinguishing the subject-matter of the trust.

89. How one identifies or distinguishes things must depend on the nature of the thing. For tangible goods, that is done by segregating one parcel from the rest of a bulk. Each parcel has its own characteristics and would be subject to its own risks (e.g. corking of the wine in London Wine). But for intangible things such as fungible shares ranking pari passu - which enjoy exactly the same rights, which have no separate characteristics and no inherent risks (as HKSCC takes responsibility for replacing any defective securities in CCASS: CCASS Rule 815) - it is difficult to see why segregation is necessary, so long as one knows the quantity of the shares which are to form the subject-matter of the trust.

Nature of tangible goods

90. In Re Wait, London Wine and Goldcorp, the persons who were asserting a trust were purchasers who had failed to obtain the passing of legal title to goods, due to a failure to appropriate goods to the contracts of sale. In Re Wait, there was a sale of goods ex-bulk, but even that feature was not present in Goldcorp, where it was held that there was only a sale of unascertained generic goods.

91. Even if there had been actual goods which could have been appropriated, however, a trust could not be validly created unless the beneficial interest has been properly "hived off" from the legal and beneficial interests owned by the vendors before the transaction. It was in this "hiving off" process that difficulties were faced by the purchasers in those cases.

92. I should add that I note that in London Wine, Oliver J dealt with an argument that the trust was of a proportion of a homogeneous mass and rejected it due to the absence of clear words, especially when the numerical whole was not known. I would however agree with respect with Rimer J's view in Hunter v Moss that it is not really possible to have a homogeneous mass of tangible assets, because tangible assets are inherently physically separate, and so distinguishable one from the other.

Nature of shares

93. In our case, however, the subject-matter is shares. It is well-established that shares are simply bundles of intangible rights against the company which had issued them. Share certificates are not valuable property in themselves - they are just evidence of the true property, which are the proportionate interests of the shareholders in the ownership of the company.

94. One pari passu share is exactly the same as another. This was recognized in Solloway v McLaughlin, where the Privy Council held that the broker need only have retained an equivalent quantity of stock in its possession, and in the more recent cases of Hunter v Moss [1993] 1 WLR 934, [1994] 1 WLR 452 and Re Harvard Securities Ltd [1997] 2 BCLC 369. Therefore, each share certificate with HKSCC's depositary evidences the same bundle of rights, and each bundle of rights can satisfy the client's proprietary interest as any other.

Client's beneficial interest at inception of trade through CCASS

95. Mr Hildyard further submitted that in an insolvency situation, a court would not assist a party who had a contractual right to have a trust fund set up, but who had failed to enforce that right prior to insolvency (Mac-Jordan Construction Ltd v Brookmount Erostin Ltd. [1992] BCLC 350). So if CAPS' clients are to enjoy a proprietary interest in the securities, they would have had to acquire it before CAPS collapsed.

96. There is no difficulty here, because the broker (CAPS) never had the beneficial interest in the securities. The beneficial interest starts and remains with the client, because the securities had been acquired by the broker as his agent with money provided by him. There is no need to set up a trust fund with money belonging originally to another (as in Mac-Jordan), or to "hive off " the beneficial interest from legal and beneficial interests originally vested in the same person (as in the failed sale of goods cases).

97. In Goldcorp, Lord Mustill remarked at pp100H-101A:-

"The facts of the present case are however inconsistent with any such trust. This is not a situation where the customer engaged the company as agent to purchase bullion on his or her behalf, with immediate payment to put the agent in funds, delivery being postponed to suit the customer's convenience. The agreement was for a sale by the company to, and not the purchase by the company for, the customer."

98. What Lord Mustill said was not the situation in Goldcorp is exactly the situation in our case.

99. Since Goldcorp dealt with unascertained generic tangibles, and Hunter v Moss dealt with intangible shares, it is clear that different considerations applied to the question of certainty of subject-matter. It is therefore not surprising that leave to appeal to the House of Lords was refused in Hunter v Moss after the report of the Privy Council decision in Goldcorp (see Harvard Securities p.381a).

Conclusion

100. In conclusion, therefore, I find that neither the Client Agreement nor the non-segregation of securities in CCASS effects any change. The fungibility of the securities in CCASS does not pose any challenge to the position that the proprietary interest in the securities belongs to the client; on the contrary, the fungible nature of such securities permits the client to retain a proprietary interest in them without the need for appropriation. Such a finding is also consistent with the trust of money referred to in s.84 Securities Ordinance.

Nature and basis of proprietary interest

101. Having found that the client had acquired and retained the proprietary interest in the securities in CCASS, the issue is what is the nature and basis of that proprietary interest. Does each client have a beneficial interest in a quantity of securities held in CCASS, or do all clients with interests in a particular type of securities have a beneficial tenancy-in-common of the entire pool of those securities?

102. A tenancy-in-common has been postulated in a number of academic publications as the best solution. That solution has been employed for cases where there has been an accidental mixing of goods (e.g. in Spence v Union Marine Insurance Co. (1868) LR 3 CP 427,Indian Oil Corp v Greenstone Shipping [1987] 3 All ER 893, Re Stapylton Fletcher Ltd. [1994] 1 WLR 1181). It has apparently also been used in cases where the mixture was intentional (The South Australian Insurance Co v Randell (1869) LR 3 PC 101).

103. However I find it difficult to infer a tenancy-in-common of a pool of securities (which may change in quantity from day to day) when the language of the Client Agreement is in terms of an individual proprietary interest. And as recognised by Oliver J in London Wine, where the numerical whole is unknown because of its ever-changing nature, it would be even more difficult to infer an intention of the client that his interest would be that of a tenant-in-common of an ever-changing proportion of an unknown quantity.

Determination on Summons

104. I conclude therefore that the Specified Clients as defined in paragraph 7C of the 9th Affidavit of Mr Blaauw have acquired and retained proprietary interests in the securities so purchased, and that they hold their proprietary interests as individual beneficiaries.

105. I appreciate that a finding of individual proprietary interests may pose extremely difficult (or at least cumbersome) administrative problems which will take substantial time and money to unravel, and indeed may lead to an unjust result. The rule in Clayton's case is however only one of convenience, and it may be that this is a suitable case where some other form of arrangement may be fairer and less expensive. However I should not at this stage attempt any formulation of a proposal before hearing from the liquidators and possibly opposing camps of individual beneficiaries.

106. Finally as a matter of completeness, I record that as requested by the parties, I have adjourned the hearing of paragraph 2 of the Summons.

107. I shall hear the parties further as to costs.

108. It only remains for me to thank counsel for their assistance.