TAI FOOK SECURITIES CO LTD v. KEYGOLD LTD

DCCJ5281/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5281 OF 2002

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J U D G M E N T

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Pleadings

1. The plaintiff is a stock broker. It says that the 1st defendant had opened a margin securities trading account with it on 3 July 2002. The account was opened in accordance with the plaintiff's margin account terms and conditions ("Terms and Conditions"). The plaintiff sues the 1st defendant for $479,258.99 being the debit balance of the margin account. It also sues the 2nd defendant as a guarantor of the 1st defendant's indebtedness to the plaintiff. The plaintiff also pleaded that the 1st defendant had, by a letter dated 1 August 2002 to the plaintiff, admitted to the debt and sought indulgence to pay the same. The 1st defendant had in fact paid two sums each of $20,000 on 8 and 21 August 2002. The plaintiff relies on clauses 5.1 to 5.4, 7.1, 14.1.1, 14.2, 14.3 and 28.6 of the Terms and Conditions which provide:

"5.1	The Client agrees to maintain such Margin and shall on demand pay such additional Margin by means of cash, securities or in such form and/or amounts and within such time as may be determined by the Company to be payable by the Client or by the Company on the Client's behalf in respect of such Margin or any other payment in connection with any transaction in Securities entered into on the Client's behalf under the terms of this Agreement.
5.2	The time for payment of any Margin is of the essence and if no other time is stipulated by the Company when making a demand then the Client is required to comply with such demand before 4:00 p.m. on the next following business day (or more quickly if required by the Company to do so). The Client also agrees to pay immediately in full and on demand any amount owing with respect to any of the Company's accounts. All initial and subsequent deposits and payments for Margin and other purposes shall be made in cleared funds and in such currency and in such amounts as the Company may in its sole discretion require.
5.3	The Company shall be entitled to revise Margin requirements from time to time in its absolute discretion. The Client shall be granted financial accommodation of up to such percentage as may be agreed from time to time of the market value of the collateral maintained with the Company. No previous Margin requirements shall establish a precedent and revised requirements once established shall apply to existing positions as well as to the new positions in the contracts affected by such revision.
5.4	For the avoidance of doubt, failure by the Client to meet Margin calls made by the Company by the time prescribed by the Company or any other accounts payable hereunder shall give the Company the right (without prejudice to other rights) to close the Margin Account(s) without notice to the Client and to apply the proceeds and any cash deposit(s) to pay the Company all outstanding balances owing to the Company. Any monies remaining after that application shall be refunded to the Client.
7.1	Unless otherwise agreed, in respect of each sale and purchase transaction executed on the Client's behalf, the Client will by the due date make payment to the Company against delivery of or credit to the Client's Margin Account(s) for purchased Securities, or make good delivery of sold Securities to the Company against payment, as the case may be.
14.1.1	The Clients failure to pay any deposits, margins or any other sums payable to the Company or submit to the Company any documents or deliver any Securities to the Company hereunder, when called upon to do so or on due date.
14.2	If an Event of Default occurs, without prejudice to any other rights or remedies that the Company may have against the Client and without further notice to the Client, the Company shall be entitled to:
	14.2.1	immediately close the Margin Account(s);
	14.2.2	terminate all or any part of this Agreement;
	14.2.3	cancel any or all outstanding orders or any other commitments made on behalf of the Client;
	14.2.4	close any or all contracts between the Company and the Client, cover any short position of the Client through the purchase of Securities on the relevant Exchange(s) or liquidate any long position of the Client through the sale of Securities on the relevant Exchange(s);
	14.2.5	dispose of any or all Securities held for or and on behalf of the Client and to apply the proceeds thereof any cash deposit(s) to settle all outstanding balances owing to the Company; and
	14.2.6	combine, consolidate and set-off any or all accounts of the Client in accordance with clause 16.
14.3	In the event of any sale pursuant to this clause:
	14.3.1	The Company shall not be responsible for any loss occasioned thereby howsoever arising if the Company has already used reasonable endeavors to sell or dispose of the Securities or any part thereof at the then available market price;
	14.3.2	the Company shall be entitled to appropriate to itself or sell or dispose of the Securities or any part thereof at the current price to any of the Company's Group Companies without being in any way responsible for loss occasioned thereby howsoever arising and without being accountable for any profit made by the Company and/or any of the Company's Group Companies; and
	14.3.3	the Client undertakes to pay to the Company any deficiency if the net proceeds of sale shall be insufficient to cover all the outstanding balances owing by the Client to the Company.
28.6	A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or future exercise of that right, power or privilege."

2. The defendants said in their amended defence and counterclaim that the debit balance in the account was caused by the plaintiff's wrongful and unauthorised disposal of the securities held by the plaintiff for the 1st defendant. They pleaded that the 1st defendant had opened the margin securities trading account with the plaintiff in accordance with the Terms and Conditions on 3 July 2002. Upon opening the account, Miss Cora Lau, PW1, a sales executive of the plaintiff, told the 2nd defendant that the plaintiff would provide the 1st defendant with credit facilities at 1.5 million for use by the 1st defendant for margin trading and that the 1st defendant was not required to pay for purchase of securities in the account so long as the limit was not exceeded.

3. On 4 July 2002, the 1st defendant deposited 60 million shares of Terabit Access ("Terabit") as collateral for financial accommodation. Terabit was listed as No. 491 in the Stock Exchange. On the same day the 1st defendant, through the plaintiff, bought 8,560,000 shares of Terabit at a total cost of $1,591.171.46. There was no further trading by the 1st defendant in that account until 26 July.

4. On 26 July the price of Terabit fell drastically from its highest of $0.168 per share to the lowest of $0.01 per share. That was the day when many penny stocks suffered drastically because of the publication by the Stock Exchange of a consultation paper on the delisting of penny stocks. In that morning the plaintiff's staff made no more than three phone calls to the 2nd defendant, asking him to pay money for the margin. One of the calls was by PW1, but PW1 did not tell the 2nd defendant when the payment had to be made. The defendants pleaded that according to clause 5.4 of the Terms and Conditions, since PW1 did not specify a time for the 1st defendant to pay, the deadline for the 1st defendant to pay was 4 p.m. on the next trading day, namely 29 July. However, the plaintiff had sold all the Terabit shares in the 1st defendant's account on 26 July, instead of waiting until after 4 p.m. on 29 July. The defendants therefore pleaded that the plaintiff had been in breach of the Terms and Conditions in selling the 1st defendant's shares prematurely. They say that the plaintiff should pay the 1st defendant its loss and damage.

5. They say that if the plaintiff were to properly sell the 1st defendant's shares, the plaintiff could only have done so on 30 July, after the deadline for the 1st defendant to pay had expired. The highest and lowest prices of Terabit on that day were $0.043 and $0.025 respectively. Thus assuming that the sale was at the average price, the total proceeds of sale would have been $2,331,000. Therefore the plaintiff was liable to pay the 1st defendant $739,828.54 after deducting the purchase price owed by the 1st defendant to the plaintiff. The defendants further pleaded that when the 1st defendant issued the letter of admission on 1 August and paid the plaintiff the two sums each on 20,000 on 8 and 21 August, they did not know that the plaintiff had disposed of the 1st defendant's shares in breach of the Terms and Conditions. The 1st defendant further counterclaimed from the plaintiff the two sums of $20,000 each. The 2nd defendant also pleaded that by reason of the plaintiff's breach of the Terms and Conditions, the 2nd defendant was discharged from his obligations in the guarantee.

6. The plaintiff, in its amended reply and defence to counterclaim, pleaded that financial accommodation was only granted to clients up to a percentage of the market value of the collateral maintained with the plaintiff pursuant to clause 5.3 of the Terms and Conditions. The plaintiff further pleaded that it had found Terabit shares not acceptable as a collateral and had not accepted it as such. The plaintiff therefore had not granted any credit accommodation to the 1st defendant. Hence, the daily statement issued to the 1st defendant dated 4 July 2002 stated that the acceptable securities value was $0 and the margin deficit was $1,591,171.46.

7. The plaintiff also pleaded that PW1 had on numerous occasions talked to the 2nd defendant and asked him to pay for the said purchase of Terabit shares or to sell those shares. Finally, on 26 July, when the 1st defendant did not pay, the plaintiff sold all the Terabit shares that were purchased by the 1st defendant, as well as those deposited by the 1st defendant with the plaintiff. The plaintiff then asked the defendants to pay the balance.

Evidence

8. The parties agreed that the witnesses could adopt their witness statements as part of their evidence-in-chief. The witnesses also supplemented their evidence-in-chief with oral evidence.

PW1 Cora Lau

9. PW1, Miss Cora Lau, said she was a dealer's representative of the plaintiff. She came to know the 2nd defendant on 3 July through the introduction of a friend. She and the 2nd defendant had some telephone conversations before 3 July and an appointment was made for her to visit the 2nd defendant on 3 July to open a margin trading account. She visited the 2nd defendant on the appointed day at the latter's office and opened a margin trading account for the 1st defendant in accordance with the Terms and Conditions. Since the 1st defendant was a company incorporated in the British Virgin Islands, the plaintiff required a personal guarantee from the 2nd defendant and it was duly given.

10. After the margin account was opened, the 1st defendant on 4 July deposited 60 million Terabit shares with the plaintiff as collateral and bought 8,560,000 Terabit shares from the market at the price of $1,591,171.46. The daily statement of the plaintiff to the 1st defendant dated 4 July thus showed a debit balance at this sum. Miss Lau denied that she had agreed to provide credit facilities of 1.5 million to the 1st defendant for the purpose of margin securities trading. She said she knew that it was the plaintiff's standard policy that it would only consider providing financial accommodation to clients for margin trading if the collaterals provided by the clients were acceptable to the plaintiff. If the collaterals provided were acceptable, the plaintiff would grant financial accommodation to the client up to a percentage of the market value of the collateral.

11. In the case of the 1st defendant, Miss Lau said that the 2nd defendant had asked her on about 4 July to apply to the plaintiff for granting of financial accommodation and the 1st defendant offered the 60 million Terabit shares as collateral for the accommodation. Upon the 2nd defendant's request, Miss Lau applied to the plaintiff on the same day with an application form of the plaintiff and she proposed that 15 per cent of the market value of the shares proffered as security be accepted as the margin ratio.

12. On 8 July she was informed by her superior, Miss Angela Wong, that the 1st defendant's application for margin financing was rejected because the Terabit shares were not accepted by the plaintiff as an acceptable collateral.

13. The application form has been produced and in fact it had been considered by four directors of the plaintiff who were authorised signatories for the purpose of application for credit.

14. Mr. Andrew To the sales director on 4 July noted that "the stock shot up from $0.06 to as high as $0.27 since the beginning of 2002, typically a market maker stock, maximum 10 per cent margin financing and not applicable to single stock portfolio".

15. The director of operation, Mr. Fred Ho, said in Chinese, meaning that "the company had suffered loss for three years and there was never any declaration of dividend, the book value per share was merely $0.18". He also wrote in English the words "Not approved".

16. The finance director, Mr. Sammy Lau, also said that he did not agree with Terabit as a collateral and he noted that it had "high risk and not able to mortgage to bank".

17. Finally, the managing director, Mr. Peter Wong, also noted "Not agreed" on the form.

18. The rejection by the management of the plaintiff of the application for credit by the 1st defendant was notified by Miss Angela Wong to Miss Lau on 8 July. Miss Wong also asked Miss Lau to relay the rejection to the 1st defendant and to demand payment for the purchase price of the 8,560,000 shares.

19. Miss Lau said she was unable to contact the 2nd defendant on 8 July. In the morning of 9 July, when she was feeling unwell and was being treated in a hospital, she received a phone call from the 2nd defendant. She then advised the 2nd defendant about the rejection by the plaintiff of Terabit as a collateral for financial accommodation and also asked the 2nd defendant to make payment for the purchase price of the Terabit shares, or, alternatively, to sell those shares to settle the debit balance in the margin account.

20. Miss Lau further said that during this telephone conversation, the 2nd defendant asked her to request the plaintiff to allow the 1st defendant to purchase additional Terabit shares at the price of between HK0.5 million to HK$1 million. The 2nd defendant agreed that if the 1st defendant were allowed to effect these additional purchases, the total purchase could be sold before the due settlement date of the additional purchase, namely 11 July.

21. Miss Lau then relayed this request to her superior, Miss Angela Wong, but Miss Wong firmly declined this request. So Miss Lau returned a call to the 2nd defendant and told him of the plaintiff's decision. She, for the second time, demanded the 2nd defendant to make arrangements to either pay up or to sell the Terabit shares to settle the debit balance. In reply, the 2nd defendant said he would make arrangements.

22. Miss Lau further said that between 15 and 19 July she made another two to three calls to the 2nd defendant, asking him to either make payment for the purchase price of the 8,560,000 shares or to sell the same to settle the debit balance. On each occasion the 2nd defendant promised that he would make arrangements as soon as possible.

23. On 22 July Miss Lau received several telephone calls from the 2nd defendant who told her that a lot of Terabit shares were being sold in the market and he enquired with her on whether the plaintiff was selling the 1st defendant's Terabit shares.

24. After making some enquiries, Miss Lau returned a call to the 2nd defendant on the same day and told him that the plaintiff had not been selling the 1st defendant's Terabit shares. Miss Lau also told the 2nd defendant that the Terabit shares could not be mortgaged to any bank and that is why the plaintiff had been demanding the 2nd defendant to either pay up or to sell the shares so as to settle the debit balance. She again demanded the 2nd defendant to sell the shares or to pay up.

25. On 24 July, after the market was closed, Miss Angela Wong again enquired with Miss Lau on whether the 1st defendant had settled the debit balance in the margin account. When she learned that the debit balance had not been settled, she immediately asked Miss Lau to contact the 2nd defendant and to deal with the matter forthwith. Miss Lau, in the presence of Miss Wong, telephoned the 2nd defendant and asked him to sell the shares or to pay up, and the 2nd defendant's response was that he would make arrangements.

26. On 25 July, after the market was closed, Miss Lau again found that the 1st defendant's account had not been settled. She therefore telephoned the 2nd defendant immediately and repeated the plaintiff's demand, but the 2nd defendant gave the same response, that he would make arrangements.

27. On 26 July, between 9.30 am to 10 am, Miss Lau had made numerous attempts to contact the 2nd defendant but was unable to reach him. At about 10.30 am on that day the price of Terabit had tumbled drastically. Miss Angela Wong therefore asked her to contact the 2nd defendant and demand action immediately.

28. Miss Lau then telephoned the 2nd defendant and reiterated the plaintiff's demand that the 1st defendant should either pay up or sell the shares to settle the debit balance. Miss Lau said that she had emphasised to the 2nd defendant that the 1st defendant had to comply with the plaintiff's demand forthwith.

29. She said despite her telephone call, the 1st defendant did nothing to settle the margin account. Later on the same day, close to 11 o'clock, the price of Terabit continued to drop drastically and large quantities of this share were being offered in the market with almost no purchase to support the tumbling of the price. She immediately tried to contact the 2nd defendant but in vain. She then made a report to Miss Wong and Miss Wong decided to dispose of all these shares and liquidated the 1st defendant's account. As a result of the liquidation, the 1st defendant owed the plaintiff HK$518,002.63, as stated in a letter dated 1 August 2002, from the 1st defendant to the plaintiff.

30. I would also add that the daily statement dated 4 July 2002, issued by the plaintiff to the 1st defendant, show that the acceptable margin ratio for the Terabit shares was zero and the margin deficit was at the full amount of the purchase price, namely, $1,591,171.46.

31. Miss Lau also said, in a supplemental statement and her oral evidence that she had, on 3 July, given the 2nd defendant a copy each of a booklet called "Cash Account Terms and Conditions", a booklet containing the said Terms and Conditions, and another booklet called "Explanatory Notes to Stock Investment".

32. In cross-examination she said that the 1st defendant deposited the 60 million Terabit shares with the plaintiff and the 2nd defendant asked her to apply for credit facilities for the 1st defendant. She then applied for 15 per cent of the market value as security for the margin. She firmly denied that she had promised the 2nd defendant that the 60 million Terabit shares would secure a credit of 1.5 million for the 1st defendant. She said she had no power to do so and could not have promised the 2nd defendant the alleged credit. She also said that she dared not grant the 1st defendant the credit as the company might not approve the application and she would then be in trouble. She was also firm that she had told the 2nd defendant on 26 July that the 1st defendant had to pay up or otherwise the plaintiff would sell the 1st defendant's shares. She said that it was impossible for her not to have told the 2nd defendant about this as it was an important matter for the plaintiff to sell the client's shares.

33. PW2, Chang Chow Kam Wen Margaret, was the plaintiff's director of credit control. She explained the plaintiff's stock financing approval procedure. It started with an application submitted by a dealer for stock financing. The application would then be submitted to the assistant director of the particular dealer for vetting. If passed, the application would be commented upon by the research director who's an authorised person. He would then pass it to three other authorised persons for approval. The form would then go back to the credit control department. If the application was approved by the majority of the authorised persons, a memo of notification would be prepared and the plaintiff's records updated. But if the application was rejected, the dealer and his or her senior would be notified about it. She said the 1st defendant's application in this case had been approved by only one authorised person and was thus rejected by the plaintiff.

34. The 2nd defendant gave evidence for the defence. He also adopted his witness statements and supplemented it with oral evidence. He said the 1st defendant opened the margin account with the plaintiff through Miss Lau on 3 July in accordance with the Terms and Conditions. The 1st defendant also opened a cash account with the plaintiff at the same time. On that occasion Miss Lau on behalf of the plaintiff also gave the 1st defendant $1.5 million margin credit facilities for use in the purchase of shares in return for the 1st defendant's deposit of securities with the plaintiff as collateral and the 2nd defendant's personal guarantee of the 1st defendant's debt to the plaintiff. In his oral evidence, he further said that he had told Miss Lau that the 1st defendant would deposit 60 million Terabit shares as collateral and Miss Lau said that the plaintiff could give the 1st defendant a credit of $1.5 million on the then open market price of the Terabit shares. Miss Lau never said that there was any need for the plaintiff to approve those shares as collateral. He denied of having received any of the three booklets that Miss Lau said she had left with him.

35. The 1st defendant then deposited 60 million of Terabit shares with the plaintiff and bought on the plaintiff's credit 8,560,000 Terabit shares. Miss Lau never told him that she had to apply to the plaintiff for acceptance of the shares as collateral for margin finance, or that the plaintiff had rejected Terabit as collateral. He then said that Miss Lau had no further contact with him until 26 July at about 10 a.m. and asked him to pay up for the 1st defendant. The price of Terabit at that time had gone down rather substantially but Miss Lau did not tell him the amount to pay or when he should pay. Since the price of Terabit had gone down, he accepted that the 1st defendant had to make payment into the margin account. He thought that the amount that had to be paid was the difference between the purchase price of $1,591,171.46 and the market value of all the 1st defendant's Terabit shares held by the plaintiff. His calculation was thus on the basis that the plaintiff had to accept 100 per cent of Terabit's market value as collateral for the margin finance.

36. Since Miss Lau had not told him the deadline to pay, he thus thought that according to clause 5.2 of the Terms and Conditions, the deadline for the plaintiff to pay was 4 p.m. on 29 July. He then contacted the person behind the 1st defendant, one Mr Lam Tin Chun, and asked him for funds to pay the plaintiff. But before funds had been paid, the plaintiff had sold all Terabit shares in the 1st defendant's account. He then received a demand letter of 31 July from the plaintiff and he replied for the 1st defendant that the 1st defendant would pay but needed indulgence of a month. The 1st defendant then paid two sums of 20,000 each to the plaintiff on 8 and 21 August. But he was then advised that the disposal of the Terabit shares by the plaintiff was wrongful and in breach of the Terms and Conditions. The 1st defendant thus counterclaimed as set out in the amended defence and counterclaim. The 2nd defendant also said that he was discharged from the guarantee by reason of the plaintiff's breach of the Terms and Conditions.

37. Regarding the daily statement which said that the 1st defendant had a margin deficit of $1,591,171.46 and that the margin ratio for the Terabit shares was zero, he said he only picked up the letter some eight to 10 days after 4 July. When he read the statement, he only focused on the facts that the 1st defendant had deposited 60 million Terabit shares with the plaintiff and purchased another 8,560,000 Terabit shares. He did not pay much attention to the particulars about the margin ratio or the margin deficit. He also said that the Terabit shares had a margin security value of between 30 per cent to 70 per cent of its market price, depending on different brokers. For the 60 million shares, its margin security value would vary from over $3 million to over $7 million, subject to the overall credit limit imposed by the particular broker. If he was right, it was only necessary for the 1st defendant to deposit 30 million Terabit shares with the plaintiff as collateral for the $1.5 million credit as 30% of the then market value was over $1.5 million.

38. The defendants' case stands on two main issues: namely the plaintiff had on 3 July through Miss Lau granted credit of 1.5 million to the 1st defendant so that the 1st defendant did not have to make any payment and Miss Lau had not asked the 1st defendant for any payment until 26 July when the price for Terabit shares fell drastically. Secondly, when Miss Lau called the 2nd defendant for payment on 26 July, she did not impose any deadline for payment and hence the deadline for the 1st defendant to pay was 4 p.m. on 29 July. But the plaintiff prematurely sold the 1st defendant's Terabit shares just before 11 a.m. on 26 July and is thus liable to the 1st defendant for breach of contract.

39. I am asked not to believe in Miss Lau for the following reasons: firstly Miss Lau was confused regarding a requirement of deposit of money equivalent to 30 per cent of the purchase price in margin trading before a client would be allowed to effect a margin purchase order. Secondly, she could not remember if the 2nd defendant had requested for a margin ratio of 15 per cent on the Terabit shares but the fact is that she did write '15 per cent' on the application form. Thirdly, she could not remember if she had told the 2nd defendant to sell the Terabit shares when the price had gone up during the week from 15 to 19 July. Fourthly, she could not remember if she had told the 2nd defendant that the plaintiff could sell the Terabit shares if the defendant should fail to settle the debit balance. Finally, she was very confused on 26 July and could not be sure whether she had talked to the 2nd defendant on the phone once or twice and she only mentioned one successful phone call in her written witness statement.

40. I do not regard these factors, whether individually or collectively, as sufficient to convince me not to accept Miss Lau as an honest witness. She might not have been an exemplary sales representative. She might have been sloppy in some minor matters in the discharge of her duties. She might have forgotten about some minor matters because of lapse of time, but the 2nd defendant's performance on minor matters is no better than her. The 2nd defendant cannot even recall where he was on 26 July.

41. I would say that on the whole Miss Lau was not shaken by the vigorous cross-examination. She was firm that she had not told the 2nd defendant that the plaintiff would grant the 1st defendant any credit. She also maintained that between 9 to 26 July she had telephoned the 2nd defendant repeatedly and asked him to pay up the purchase price or to sell the Terabit shares. She was also firm that on 26 July she had told the 2nd defendant that he had to make payment immediately, otherwise the plaintiff would sell the 1st defendant's Terabit shares.

42. The defendants also do not accept that the plaintiff had a mandatory system for vetting applications for credit. On this point I accept the evidence of Miss Lau and PW2, Mrs. Chang, that the plaintiff indeed had such a system. The plaintiff had a form for application for credit and the form had been used by Miss Lau in the 1st defendant's case. Indeed, for a stock broker that allows his customers to trade on margin financed by the broker, it would be extremely risky for the broker not to have a mandatory system to vet the creditworthiness of the collaterals as may be furnished by the customers. Without such a system, the broker may be placed in a grave financial situation at any time without any forewarning.

43. There is also no dispute that Miss Lau and the 2nd defendant had only known each other on 3 July. Prior to that they had been introduced to each other by a mutual friend and had some telephone conversations which led to their meeting on 3 July. Miss Lau thus did not know much about the 1st or the 2nd defendant. Even if I am wrong to conclude that the plaintiff had a mandatory system of vetting for credit application, the plaintiff at least had such credit vetting system for use at the option of its staff. Assuming that the plaintiff's system was merely an optional one and Miss Lau had a discretion in granting credit to the 1st defendant, I still do not accept that Miss Lau would have granted the 1st defendant a credit of 1.5 million without seeking the advice or agreement of her superiors.

44. Regardless of whether the vetting system was mandatory or optional, the fact is that Miss Lau did submit an application for credit for the 1st defendant on 4 July. If the vetting system was mandatory, I see no reason why she would have granted a credit to the 1st defendant on 3 July without getting approval from the plaintiff. I accept her evidence that if she had granted a credit and the application was later rejected by the plaintiff, she would be in trouble.

45. I therefore accept that she had not granted the 1st defendant any credit on 3 July. I come to this conclusion also because the daily statement of 4 July clearly stated that the margin ratio for the Terabit shares was zero and the margin deficit in the 1st defendant's account was $1,591,171.46. I also consider the possibility that Miss Lau indeed had the power to and had in fact granted the 1st defendant credit on 3 July, but if that was the case, I see no reason why she should have made the application on 4 July as the rejection of the application would have put her in a difficult position.

46. I therefore hold that Miss Lau had not granted the 1st defendant any credit on 3 July even if I am wrong in holding that the plaintiff's vetting system was mandatory.

47. Counsel for the defendants also suggests that since Miss Lau had written '15 per cent margin ratio' in the application form, it showed that she had orally given credit to the 1st defendant on that basis. I cannot agree with that. That was only evidence that she had not given any credit for the 1st defendant but was only applying for it in favour of the 1st defendant. That is insufficient as evidence to show that Miss Lau had given credit and then tried to rectify the position by retrospectively applying for it.

48. Counsel for the defendants also submitted that since the plaintiff had bought 8,560,000 Terabit shares for the 1st defendant on credit, the plaintiff should have gone through the credit approval procedure. But there is no evidence of such approval. The documentary evidence as produced shows that the application had been rejected. And, at most, it only shows that there was a gap in the plaintiff's security system, namely the plaintiff's preparedness to purchase shares on behalf of a client in the margin account before credit had been formally approved.

49. I also find that Miss Lau had told the 2nd defendant on 9 July that the plaintiff had rejected the 1st defendant's application for credit with the use of the 60 million Terabit shares and she had told him repeatedly from 9 to 26 July that the 1st defendant had to either pay up or, alternatively, sell the shares. I have no doubt that Miss Lau had been advised of the rejection of the application and that she should ask the 1st defendant to pay. I see no reason for her not to have advised the 2nd defendant about these. Since the credit application was rejected and the 1st defendant had failed to pay, I find it natural that Miss Lau would have called up the 2nd defendant and asked him between 9 to 26 July to pay or to sell the shares, and I accept her evidence on this.

50. I also refer to the daily statement which called for payment by the 1st defendant. The contents of the statement were in line with Miss Lau's evidence. I do not believe the evidence of the 2nd defendant that he had only noted the deposit and purchase of a total of 68,560,000 Terabit shares but had not paid any attention to the margin ratio and the amount of margin deficit. I hold that the 2nd defendant was fully aware of the margin deficit and the need to pay this sum to the plaintiff. He was made aware of these both by reading the daily statement and by his telephone conversations with Miss Lau since 9 July. If the 2nd defendant was right, then there was a coincidence of Miss Lau's failure to tell him about the plaintiff's rejection of credit and his failure to note the same from the daily statement. I think such coincidence was unlikely and I rely on this as an additional reason for accepting Miss Lau's evidence and the rejection of the 2nd defendant's evidence.

51. On whether Miss Lau had on 26 July asked the 2nd defendant to pay up forthwith, I again find in favour of the plaintiff and reject the case of the defendants. On 26 July the market price of Terabit fell drastically. Not only that the 1st defendant's account had a margin deficit of 1,591,171.46, whatever financial comfort the plaintiff had with the deposit of the Terabit shares was also vanishing at a great speed. There was no reason for Miss Lau not to ask the 2nd defendant to pay up forthwith, despite it was a confusing morning and I find that she did.

52. She gave the 2nd defendant a few phone calls chasing for payment and it was obvious that the plaintiff was anxious for payment and she was desperate. It was only natural that she would have asked the 2nd defendant to pay up forthwith.

53. I also find that the 2nd defendant knew that the 1st defendant had to pay up the whole sum used to purchase the 8,560,000 Terabit shares, not only because of my reasons above. I disbelieve the 2nd defendant when he said that he thought that the 1st defendant only had to pay the plaintiff the difference between the market price of all the Terabit shares and the sum of 1.59 million-odd. That would mean that the plaintiff was giving the Terabit shares a hundred per cent of the market price as the margin ratio. That was utterly unreasonable. For someone like the 2nd defendant, who in July 2002 already had 10 years' experience of trading in securities with margin, I do not accept that he would have expected a hundred per cent margin ratio.

54. I also do not accept the 'forthwith' point put forward by counsel for the defendants. It is counsel's submission that 'forthwith' means 'without delay or loss of time'. Counsel says that the liquidation was premature as the 2nd defendant had already told his boss to arrange for payment. But that was not making payment forthwith or making payment without delay or loss of time. There was no evidence on what else the 2nd defendant had done or what his boss had done.

55. I note that there was a lapse of almost half an hour between the demand by Miss Lau and the disposal of the shares by the plaintiff. That was ample time for the 2nd defendant to go to a branch of the plaintiff's bank and to effect payment without delay or loss of time. And, in any case, it is not the defendants' case that payment was being arranged, or had been arranged, or arranged shortly after the sale was effected by the plaintiff.

56. Finally, I also note that after the shares were sold, the only question from the 2nd defendant to Miss Lau was 'At what price or prices were the shares disposed of?' and I also rely on the letter of admission dated 1 August by the 1st defendant to the plaintiff and the two payments of 20,000 each on 8 and 21 August. I do not accept the 2nd defendant's explanation that when he wrote the letter and made the two payments, he was not aware that the plaintiff's disposal of the shares was wrongful. I repeat that the 2nd defendant was already a very experienced person in margin trading and he was not ignorant of the plaintiff's rights or the 1st defendant's liabilities.

57. Since I have come to the above finding, I therefore hold that the liquidation of the 1st defendant's account was rightful and in accordance with clauses 5.4 and 14.2 of the Terms and Conditions. I also find that the 1st defendant had failed to answer the plaintiff's repeated calls for payment since 9 July which culminated in the final call at about 10.30 am on 26 July for immediate payment or liquidation.

58. On the relatively minor matter of whether Miss Lau had left the three booklets with the 2nd defendant, I do not think this a matter of great moment. But I would accept the evidence of the Miss Lau despite the fact that the acknowledgement of account opening did not state that she had left with the 2nd defendant any one of the booklets. I think it unlikely that the 2nd defendant would have just signed the account opening form without asking for at least a copy of the said Terms and Conditions which govern the operation of the margin account. I also accept Miss Lau's evidence that it was her habit in providing all three booklets to customers, even if the customers did not require all of them. I do not accept the 2nd defendant's evidence that he had not been given any one of these booklets.

59. I now deal with an unpleaded point raised by counsel for the defence during the trial which relates to subsections 81A (4) and (5) of the Securities Ordinance. This section was repealed on 1st April 2003 by section 406 of Ordinance No. 5 of 2002. The subsections provided:-

"(4) If securities collateral is deposited with a dealer, or with another person to facilitate the provision of financial accommodation by the dealer, by or on behalf of a client of the dealer, the dealer must take reasonable steps to ensure that the relevant securities are not deposited, transferred, lent, pledged, repledged or otherwise dealt with except as provided by subsections (2) and (6). (5) Subsection (4) does not affect the right of a dealer to dispose of the securities collateral of a client in settlement of:-

(a)	the client's obligation to maintain an agreed level of margin; or
(b)	any liability of the client to repay or discharge the financial accommodation provided by the dealer; or
(c)	any liability of the client to settle a transaction in securities against which liability securities collateral has been provided by that client; or
(d)	any liability owed by the client to the dealer for dealing in securities which remains after the dealer has disposed of all other assets designated as collateral for securing the settlement of that liability,
but only with the written authority of the person or as permitted by Commission rules."

60. Counsel firstly submitted that the 60 million Terabit shares were not collaterals since the plaintiff had not accepted them for the purpose of securing the margin finance. I do not agree. Though the plaintiff had considered the shares and applied to them a zero margin ratio, it does not mean that the 60 million Terabit shares did not furnish some financial comfort to the plaintiff. In fact, it is the defendants' pleaded case that these shares had been deposited with the plaintiff as collaterals. Since they were collaterals, they could be disposed of by the plaintiff in accordance with the Terms and Conditions.

61. I was then referred to section 81A(5) of the Ordinance and asked to find that the plaintiff had not provided any financial accommodation to the 1st defendant and hence could not have disposed of the 60 million Terabit shares. I again cannot agree with that submission because the purchase price for the 8,560,000 Terabit shares had been advanced by the plaintiff to the 1st defendant as a loan and 'a loan', by definition, is a financial accommodation for the purpose of section 81A of the Ordinance. The plaintiff was therefore entitled to dispose of those shares in accordance with the Terms and Conditions.

62. In making this point, the defendant relied on paragraph 11(d) of the plaintiff's amended reply and defence to counterclaim which reads:

"By reason of the plaintiff's refusal to accept the defendants' shares in Terabit Access maintained in the margin account as collateral, the plaintiff did not grant any financial accommodation to the 1st defendant."

63. Counsel for the defendant thus submits that no financial accommodation had been granted. I respectfully disagree with him on this and I would say that a better way to plead this paragraph is to say that:

"By reason of the plaintiff's refusal to accept the defendants' shares in Terabit Access maintained in the margin account as collateral, the plaintiff therefore wanted the defendants to pay and discharge the financial accommodation already granted to the 1st defendant."

64. In any case, I have not been misled by this pleading and I am not aware that the defendants have been prejudiced by it. I therefore find that the plaintiff has advanced a loan and hence is entitled to dispose of the shares in accordance with the Terms and Conditions and the disposal had not been prevented by section 81A(5).

65. I therefore hold that the 1st defendant is liable to the plaintiff for the sum of $479,258.99. I also order the 1st defendant to pay the plaintiff interest at the judgment rate on this sum from 22 August 2002 to the date of payment.

66. Since I have found that the 1st defendant is liable to the plaintiff and therefore the plaintiff has not breached the Terms and Conditions, I therefore also find that the 2nd defendant is liable under the guarantee to the plaintiff for the same sum of money and the same rate and amount of interest. And, finally, I order that the defendants do pay the plaintiff costs of the action and the counterclaim. I also order Certificate for Counsel.