TULLETT & TOKYO INTERNATIONAL SECURITIES LTD v. APC SECURITIES CO LTD

CACV 201/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO.201 OF 2000

(On Appeal from HCA No. 12467 of 1997)

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J U D G M E N T

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Hon Le Pichon JA :

1. This is an appeal from the judgment of Waung J who upheld two oral contracts made on 9 October 1997 between one Raymond Sim ("RS") of the defendant/appellant ("Dharmala") and Stephen Thompson ("ST") of the plaintiff/respondent ("Tulletts") whereby Dharmala agreed to purchase two lots of grey market shares of China Telecom from Tulletts at the price of $18.10 per share. Dharmala was held liable for the loss sustained by Tulletts as a result of Dharmala denying liability and refusing to take up the shares.

Background facts

2. RS was employed by Dharmala in 1996 as a dealer. At all material times, he was registered as a dealer's representative pursuant to section 50 of the Securities Ordinance. He was also registered by the Stock Exchange of Hong Kong Limited ("the Exchange") as a sales representative of Dharmala. Dharmala was itself a broker and a member of the Exchange. It was a subsidiary of Dharmala Capital (Asia) Limited which itself was a subsidiary of Dharmala Holdings Limited, a public company. Dharmala was registered under the Securities Ordinance as a dealer. Paul Leung ("PL") was a colleague of RS's and was also registered as a dealer's representative. They worked under Sam Wong who was their team leader.

3. Many private companies went public by means of Initial Public Offerings ("IPO") in 1997 and the grey market was a reference to the trading of the shares of these companies before they were officially listed and traded on the Exchange. There is a long delay between the opening of subscriptions on an IPO and the commencement of trading of the shares on the Exchange during which time market participants might wish to increase or reduce their exposure. The trade is agreed but payment would only be made and delivery of the shares would only take place once the shares have been listed on the Exchange. Typically, settlement would take place two days after the listing of the shares. If, for any reason, the listing does not occur, there would be no transaction. The first day of trading of the shares of China Telecom on the Exchange was 23 October 1997. But from late September onwards, the grey market in its shares were active and by early October they had become a "hot" item.

4. Tulletts is a well established British broker based in London and regulated by the Securities and Futures Authority. In April 1997, it had the intention of opening up a branch in Hong Kong. On 28 April 1997, it wrote to the Securities and Futures Commission ("the SFC") advising them of its intentions and explaining the two areas of products in which that branch would be involved. The first area concerned equity related products. The second was stated to be "the voice broking on a matched principal basis of .... IPOs". It went on to state that the branch's clients would be "market professionals operating in the equities market and at no point would the client base consist of individuals." Tulletts sought guidance from the SFC as to the regulatory requirements for the branch's proposed business. The SFC's reply dated 9 May 1997 only addressed the first of the two areas of business but the SFC did state its view that the exclusion contained in section 3(1) of the Ordinance "applies to a person dealing as principal." Accordingly, Tulletts did not register as a dealer under section 48 of the Ordinance and began trading, inter alia, in grey market shares. Its dealers were not registered as dealer's representatives and Tulletts was and is not a member of the Exchange.

5. From mid 1997, ST worked on the Equity Derivative Products desk which included IPOs. His job essentially involved matching buyers and sellers in, inter alia, IPO markets with Tulletts acting as principal in each of the trades. One of ST's colleagues on the desk at that time was Derek Wong ("DW") and one of his principal jobs was to find new clients with whom Tulletts could trade within the Hong Kong securities market. Before DW's departure from Tulletts on 8 October, the day before the trades in question were entered into, DW had drawn up a list of contacts ("the client list") he had made whom ST believed to be new clients of Tulletts. The list contained the names of the companies, the contact persons, the telephone and fax numbers. Dharmala was one of the many market professionals that featured on this list. The contact person shown for Dharmala was PL.

6. The judge found that "[PL] on behalf of Dharmala had traded with [DW] of Tulletts". This finding of fact was criticized by leading counsel for Dharmala but it was PL's evidence that by then (early October 1997) DW had been a client of his for some months and that PL knew that DW was with Tulletts and traded in grey market shares including China Telecom shares. It was against this background that the two oral agreements, which are the subject of this appeal, took place.

The two trades

7. On 9 October 1997, at 16:46 p.m., a call was received at the dealing room of Tulletts ("the 1st call"). The call which was from PL to DW was answered by ST who informed PL that DW had left Tulletts. In response to questions from ST, PL said that the call was about grey market shares in China Telecom and that it was a call from "Dharmala Securities". PL told ST that this was the first time he had tried to contact DW. Names were exchanged and PL gave his number which corresponded to that on the client list and, as noted above, PL was shown on the client list as the contact person for Dharmala. PL indicated an interest in purchasing China Telecom shares and a discussion about price ensued when ST was informed that Dharmala had just purchased some China Telecom shares at $17 something through somewhere else. After an indication of an offer from ST to sell at $18.50 per share, ST was asked to contact PL when he was in a position to make a firm offer to sell one million China Telecom shares.

8. Less than two minutes later, ST called PL at the number that he had been given by PL which corresponded with that stated in the client list for Dharmala ("the 2nd call"). ST told PL that Tulletts could give an offer to sell one million China Telecom shares at $18 per share. ST was put on hold after which PL passed the phone to his colleague RS whom he introduced as "Raymond". RS told ST that he would take "half a million at 18". The following exchange then took place :

"ST: OK, erm, I mean, I'm going to have to, you understand, I have to charge you brokerage because I've got to cover my stamp duty.

RS: Yep that's fine.

ST: OK., so I can sell, I can sell, you 500,000 at 18.10.

RS: Right."

This constituted the first trade between Dharmala and Tulletts. A discussion then ensued with RS indicating that he was interested in another half a million, but at the price of $17.50.

9. Five minutes or so later at 17:02:07, ST called Dharmala and asked to speak to "Raymond" or PL ("the 3rd call"). He was put through to PL. ST told him that the market price for the China Telecom shares was $17.75 for the buyer and $18 for the seller. He was transferred to RS to whom he repeated the same information regarding the market price. RS enquired what the price was the day before, i.e. 8 October and was told that it was $20, $21. The following exchange then took place :

"RS: I tell you what, I'll take the other 500,000 at eighteen.

ST: OK sir, I can sell you another 500,000 at eighteen ten. So, that's ...

RS: Altogether, one mill.

ST: Altogether, one million at eighteen ten China Telecoms. All right Raymond, do you want to do anymore or is that ...?

RS: I'll think I'll wait for a while."

This was the second trade between Dharmala and Tulletts.

10. Twenty minutes later when ST made another call to Dharmala ("the 4th call") to speak to RS, RS had already left. ST then spoke to PL and told him that the market in China Telecom had moved up to $18.25.

11. Ten minutes after the 4th call, at 17:34:15, ST made another call to Dharmala ("the 5th call") as he had not been able to find the Customer Registration Form ("CRF") for Dharmala. ST spoke to PL and told him that he would be faxing a registration form which had to be completed and faxed back to ST. PL gave ST a fax number which corresponded to that on the client list. He also gave an alternative fax number. The information on the CRF was necessary for settlement procedures. In the hope that it might expedite matters, ST filled in as much of the form as possible and to that end consulted the Asia Pacific Securities Handbook for 1997 which is a trade reference book for, inter alia, members of the Stock Exchange. There was only one listing for Dharmala, namely, Dharmala Capital (Asia) Limited. ST wrote down that name and the address shown for it on the CRF as well as on the fax confirming the trade ("the confirmation fax") which was faxed at the same time as the CRF. The covering fax sheet was addressed to PL at Dharmala Capital (Asia) Limited while the confirmation fax was addressed to Raymond Ho, also at Dharmala Capital (Asia) Limited. As RS was introduced to ST simply as "Raymond", ST never knew his surname. When consulting the handbook, under the entry for Dharmala Capital, one "Raymond Ho" was listed as responsible for equity trading and equity sales. ST wrongly assumed that Raymond Ho was the "Raymond" to whom he had been talking.

12. Later that same evening, there were two telephone conversations between PL and RS which will be referred to later. A long weekend followed and when the market reopened the following Monday, the trend was downwards : in fact the fall in the stock market continued the whole week and the grey market of China Telecom shares was badly affected, falling from about $18 on 9 October to $14 on 16 October.

13. ST followed up on the CRF on Monday 13 October. He called PL who, after confirming the receipt of both the CRF and the confirmation fax, passed the call to RS. RS said that he was seeking confirmation from his client as to whether the shares and the two trades were to be transferred to Dharmala or to the client's company. ST informed RS what the then market price of China Telecom shares was : it had dropped significantly since the shares were purchased. Another week passed and the CRF had still not been returned. When contacted by ST, RS promised to send it. The following day (21 October) when ST called to follow it up, RS gave the excuse that he was having trouble with his client but was trying to sort things out. That afternoon RS asked for a meeting with ST to talk about it and a meeting was arranged for 5 p.m. the same day. At that meeting RS told ST and ST's boss Colin Heck that the client of Dharmala who had bought China Telecom shares had gone back to China and as the price had dropped so much, he feared that his client might not want the shares. He said that Dharmala was disowning responsibility for the purchase.

14. The following day, Colin Heck went to the offices of Dharmala and spoke with its Chief Financial Officer David Tsoi and Samuel Wong who was RS's boss. It was a negative meeting in that they could not confirm to Colin Heck whether RS was employed by Dharmala or whether they knew about the two trades. That same afternoon, Tulletts' solicitors wrote to Dharmala claiming the money due on the two trades. Dharmala through its solicitors denied liability.

15. All attempts to arrange to see the management at Dharmala to resolve the problem failed. So on 24 October Colin Heck paid another visit to Dharmala. Eventually he talked to David Tsoi who kept repeating that RS did not work for Dharmala. When Dharmala learned that the two trades had been taped, copies were requested. These were sent over the same day but Dharmala still refused to acknowledge responsibility. In those circumstances, on 24 October, Tulletts sold the one million China Telecom shares which Tulletts had purchased on 9 October from Peregrine and New China on the back of the sale to Dharmala. The loss to Tulletts was $7,569,572.38. This was the loss that Tulletts sought to recover from Dharmala.

16. The judge found that RS had actual authority (both express and implied) as well as apparent authority to make the two trades. Accordingly, he held Dharmala liable for the loss sustained by Tulletts. The judge further rejected the defence based on illegality. Dharmala had submitted that as Tulletts was in breach of one or more of the following provisions of the Securities Ordinance, namely sections 48(2), 20(2), 76(2) and 80(2) and as each of these carried criminal sanctions, the contracts entered into by Tulletts were unenforceable.

The issues

17. The issues which arise in this appeal are (1) whether RS had authority, actual or apparent, to place the two trades on behalf of Dharmala, and (2) whether Tulletts was in breach of one or more of the provisions of the Securities Ordinance, and if so, (3) whether the two trades were thereby rendered unenforceable.

Actual authority

18. In the court below, Dharmala's case was that its sales representatives had no actual authority to deal in any Hong Kong shares including grey market shares at any time albeit that the sales representatives might themselves be registered as dealer's representatives of Dharmala. That was the issue that the judge had to determine. He rejected the evidence submitted on behalf of Dharmala that the usual function of sales representatives such as RS and PL was confined to communications with Dharmala's own customers and did not extend to talking to or making deals with other brokers. The judge found that Dharmala's sales representatives had express authority to deal in securities for Dharmala including off exchange trading, that is to say, trading of Hong Kong listed shares outside Exchange hours (such as placements) and grey market trading of IPO shares done during or after Exchange hours, and that at the time the two trades were placed (i.e. 9 October 1997), no restrictions had been imposed by Dharmala on its sales representatives on grey market trading.

19. The crux of Dharmala's case on actual authority on this appeal is that the judge ought to have but failed to make the finding of fact that RS made the two trades on his own account and for his own benefit. It was further submitted by Mr Tong SC who appeared for Dharmala that as RS was acting for his own benefit, it was absurd to suggest that he had actual authority to place the trades. The submission raises two sub-issues : (a) whether the judge ought to have found that RS was acting solely for his own benefit and in that sense was "on a frolic of his own"; and if the answer is in the affirmative, then (b) whether such a finding necessarily negated actual authority.

20. Was RS acting for his own benefit?

21. Mr Huggins SC who appeared for Tulletts submitted that it would be quite wrong for the court to make such a finding. First, Dharmala never pleaded that the trades were unauthorised because they were made "solely for the personal benefit" of RS. Dharmala simply denied that RS had any authority to execute the two trades and the defence run below was that RS had no authority to do grey market trading. Second, the court did not have the benefit of the evidence of the experts as to the custom and practice in the securities industries where the trades were placed for the personal account and solely for the benefit of the agent concerned inasmuch as Dharmala's counsel never put it to the experts whether their evidence as to the usual authority of such representatives would be different if the agent was not acting for a customer. Third, as appears from the transcripts of taped conversations between ST and RS on 13 and 21 October concerning the two trades, RS made repeated references to his "client". At the meeting with ST in the afternoon of 21 October, RS made references to Dharmala's "client" being in the Mainland. That was ST's account of what RS said. Dharmala never called RS as a witness and produced no statement from RS that could have been adduced under the hearsay rules. Prima facie, therefore, RS was acting for and on behalf of a client of Dharmala's. Fourth, despite Tulletts' request, Dharmala had refused to disclose the statement of facts they had asked RS to sign by their letter of 1 November 1997. Several days into the trial it further emerged that in a different action to which RS was defendant, Dharmala as plaintiff had caused an affidavit to be filed in which it was revealed that RS had refused to sign that statement and that RS had told the deponent that Dharmala's officers had "wanted him to sign a statement which would get him into trouble." In his defence filed in that action, RS pleaded that if he did make the trade with Tulletts he only did so as dealer of Dharmala for Dharmala's customers.

22. In relation to the fourth point above, Mr Huggins SC prayed in aid the maxim omnia praesumuntur contra spoliatorem ("the maxim") sometimes referred to as the principle in Armory v Delamirie (1722) 1 Str 505. Excerpts expounding that principle from Wigmore on Evidence (Chadbourn Revision) (1979) Vol. 2, at paras. 285 and 291 were quoted in the judgment of Fuad JA in Hongkong and Shanghai Banking Corporation v Chan Yiu-wah and Another [1988] 1HKLR 457 at 467 C - H :

"285. Failure to produce evidence, as indicating unfavorable tenor of evidence: (1) In general. ... The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so; and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavorable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which make some other hypothesis a more natural one than the party's fear of exposure. But the propriety of such an inference in general is not doubted.

The non-production of evidence that would naturally have been produced by an honest and therefore fearless claimant permits the inference that its tenor is unfavorable to the party's cause. Ever since the case of the Chimney Sweeper's Jewel [Armory v. Delamirie] this has been a recognised principle.

291. (3) Documents or chattels destroyed or not produced. The applicability of the general principle to an opponent's non-production or suppression of documents or chattels has always been assumed. In England from the beginning of the recognition of the principle, some sort of inference has been acknowledged to be legitimate. In this country, similarly, the tradition has been continued and steadily enforced, in numerous instances, where the opponent has destroyed, suppressed, or refused or failed to produce a document or chattel whose contents or quality came into issue or became relevant under the issues."

23. There is no doubt that the statement of facts exists. The letter dated 1 November 1997 from Dharmala to RS stated as follows:

"5. We would ask you to sign and return to us the enclosed statement of facts that you have told us represents an accurate summary of the alleged dealing in China Telecom shares."

Although the letter itself was included in the hearing bundles before the trial judge and is before this court, the enclosure is not. Dharmala has had ample opportunity to produce the statement: not only has it not done so, it has chosen not to explain its non-disclosure. In those circumstances, Mr Huggins SC submitted, in my view, correctly, that the maxim applies and the proper inference is that the statement contained assertions of fact which Dharmala wished RS to prove which would have been favourable to Dharmala e.g. that the two trades were for RS's personal benefit and not for Dharmala's clients but which assertions RS refused to make because they were untrue.

24. Leaving aside, for the moment, the maxim and its application, and focusing on the two telephone conversations between PL and RS after the 5th call upon which Mr Tong SC relies, was the evidence such that the judge was wrong in disregarding it?

25. The two conversations took place between PL and RS approximately an hour after the 5th call. As was the case with the 1st to 5th calls, these calls were also taped and the transcripts of the tapes were in evidence. It was submitted by Mr Tong SC that the transcript of the exchanges between PL and RS showed that the two trades were for the personal account of RS and entirely for his own benefit.

26. The inference that the court is invited to draw is largely based on two matters: RS's references to making "a gamble" and RS's request to PL not to disclose the trades to Sam Wong his superior. But fairly read, the transcripts do not support any inference that Sam Wong did not know that RS had entered into the two trades and had bought a million China Telecom shares. That leaves only RS's references, inter alia, to his making a gamble from which to draw the inference. Whilst, absent any reasonable explanation on the part of RS, those references are capable of a supporting such an inference, the fact remains that RS was never called. There was thus no opportunity for any explanation to be given. It is not uncommon for a dealer's representative in informal conversation to identify his client with himself. This is particularly so in the case of discretionary accounts. Hence the importance of RS's explanation (if any). In this connection, the statement of facts he apparently refused to sign is obviously significant. Yet Dharmala has studiously refrained from producing it. In these circumstances, it would be quite wrong to draw the inference suggested by Dharmala even without resorting to the maxim which in my view is plainly applicable.

27. It has also to be borne in mind that it was never Dharmala's case below that the two trades were for RS's personal benefit: PL who was party to these conversations and who gave evidence on Dharmala's behalf never dealt with that point in his evidence. It was never suggested, whether by PL or the other witnesses called by Dharmala, that the lack of authority was based on the fact that RS was trading for his own personal benefit.

28. In my judgment, these constitute cogent and compelling reasons why a new finding of fact should not be made.

29. An agent's "frolic" and actual authority

30. Even if (contrary to my view) a finding ought to have been made by the judge that RS was acting on his own behalf and was placing the trades for his own personal benefit, it would not necessarily follow that RS could not have had actual authority. The underlying premise of Mr Tong SC's submission in this regard is that actual authority cannot extend to acts which an agent performs for his own personal benefit; that the two are mutually exclusive. As a general proposition, it would not appear to be correct. A similar submission had been made in Mackay v Commerical Bank of New Brunswick (1874) L R 5 PC 394. In that case the Privy Council had to consider the liability of a principal for the fraudulent acts of his agent "acting within the scope of his authority." The meaning of that expression i.e. the scope of the agent's authority was discussed and Sir Montague Smith observed (at 411) :

"... it may be generally assumed that, in mercantile transactions, principals do not authorize their agents to act wrongfully, and consequently frauds are beyond 'the scope of the agent's authority' in the narrowest sense of which the expression admits. But so narrow a sense ... would be opposed as much to justice as to authority. A wider construction has been put upon the words. Principals have been held liable for frauds when it has not been proved that they authorized the particular fraud complained of or gave a general authority to commit frauds : at the same time, it is not easy to define with precision the extent to which this liability has been carried."

Sir Montague Smith went on to say that the best definition of the expression is to be found in Barwick v English Joint Stock Bank (1867) L R 2 Ex 259 at 266 :

"In all these cases it may be said, as it was said here, that the master had not authorized the act. It is true, he has not authorized the particular act, but he has put the agent in his place to do that class of acts, and he must be answerable for the manner in which that agent has conducted himself in doing the business which it was the act of his master to place him in."

It is also clear from the speech of Lord Macnaghten in Lloyd v Grace, Smith and Co. [1912] AC 716 that he agreed with the approach adopted by Sir Montague Smith in the Mackay case. He rejected the narrow interpretation put on the scope of an agent's authority and (at 736) accepted the observations Wilde B made in Udell v Atherton (1861) 7 H. & N. 172 at 180 to the effect that fraud itself could fall within the actual authority of an agent.

31. Lloyd v Grace, Smith and Co. itself was a case of actual authority. There the managing clerk was authorised to receive deeds and carry through sales and conveyances and to give notices on the defendant's behalf. He took advantage of the opportunities so afforded him to get the plaintiff to sign away the properties she owned and pocketed the proceeds. Liability for the fraud of the agent is not dependent on whether the agent had actual authority or only apparent authority. As stated by Earl Loreburn LC (at 725):

"... If the agent commits the fraud purporting to act in the course of business such as he was authorized ... to transact on account of his principal, then the latter may be held liable for it. ..."

The basis of liability is explicable on the ground that:

"...every person who authorises another to act for him in the making of any contract, undertakes for the absence of fraud in that person in the execution of the authority given, as much as he undertakes for its absence in himself when he makes the contract."

See per Bramwell L.J. in Weir v Bell (1878) 3 Ex D 238 at 245.

32. Kooragang Investments Pty Ltd v Richardson & Wrench Ltd [1982] AC 462 relied on by Mr Tong SC is not an authority to the contrary. In that case, the defendant was not liable or responsible for the negligence of an employee who had carried out the valuations in question in his own interest, without any connection with the defendant's business. The issue which arose was whether the employee had actual authority. Although the acts performed were of the same kind as those which it was within the employee's authority to do, he was expressly ordered by the defendants not to do business with the GB Group. The employee carried out the valuations not as an employee of the defendant but as an employee, or associate, of the GB Group and on their instructions. The Privy Council held that the defendant was not liable for the negligence of the employee as he was acting "without any authority from the defendants". Factually, therefore, that case is distinguishable from the present inasmuch as the employee carried out the valuations during a period when the GB Group were not in a client relationship with the defendant. In the present case, the judge found that Dharmala had not imposed any restrictions on its dealer's representatives/sale representatives to carry out grey market trading for China Telecom shares at the material time. RS had actual authority to deal on Dharmala's behalf and such actual authority extended to grey market trading.

33. In the light of the authorities, I am unable to agree with Mr Tong SC's proposition. In my judgment, as a matter of law, the fact that an agent is acting for his own benefit does not necessarily negate actual authority and on the facts, the judge was right in holding that RS did have actual authority to deal in grey market shares on behalf of Dharmala, irrespective of whether or not RS intended to benefit himself. He placed the trades in question in Dharmala's name in the course of his employment and Dharmala is therefore liable.

34. It follows that Dharmala cannot succeed in reversing the judge's findings on actual authority (express or implied). This effectively disposes of the appeal on the issue of authority.

Apparent authority

35. Given the conclusion that I have reached on actual authority, it is not necessary to consider the judge's alternative finding on apparent authority and I do not propose to do so.

Was there a breach of the Securities Ordinance?

36. In the court below, Dharmala argued that Tulletts was in breach of sections 20, 48, 76 and 80 of the Securities Ordinance. The judge held that none of those provisions had been breached. No appeal is made against that holding as regards sections 76 and 80. That leaves sections 20 and 48 to which I now turn.

37. Section 20

38. This section prohibits the setting up of a secondary stock market. "Stock market" is defined in section 2 as

"A place where persons regularly meet together to negotiate sales and purchases of securities (including prices), or a place at which facilities are provided for bringing together sellers and purchasers of securities but does not include ... "

It is common ground that Tulletts does not fall within the three exemptions listed in the definition. The thrust of Mr Tong SC's submissions was that Tulletts' office provided facilities for "bringing together" sellers and buyers of securities.

39. But what the evidence shows is that Tulletts dealt with its counterparties on a one-to-one basis. The counterparties' relationship was with Tulletts and no one else. Tulletts may have sought to match its trades. Nevertheless, it did so on a principal-to-principal basis.

40. The way the two trades in question were transacted illustrates the point. When Tulletts entered into the first trade, it did not have the 500,000 China Telecom shares it contracted to sell at $18.10 per share. It acquired 700,000 such shares at $17.50 per share from New China Hong Kong Securities Limited after the first trade. It was therefore "long" 200,000 shares. It then entered into the second trade and again only acquired the additional 300,000 shares after the second trade. The further purchase was from Peregrine Capital Limited at $17.20 per share. Tulletts was principal and not agent vis-à-vis both New China and Peregrine. It was not acting as anyone's agent and although it succeeded in matching those trades, neither Dharmala nor New China and/or Peregrine knew from whom or to whom Tulletts had acquired or sold the shares. By acting as a matched principal, Tulletts used its own capital to purchase instruments from one party and sell them to another, thus guaranteeing anonymity which is a feature of matched principal trading. That was the effect of the evidence of Andrew Hadley, the registered Compliance Officer for Tulletts who was the author of the 28 April 1997 letter to the SFC and also of Richard Witts, Tulletts' expert which evidence the judge accepted.

41. The judge further found that "throughout", not only in relation to the two trades but in respect, for example, of "all China Telecom transactions effected over the first half of October 1997", Tulletts was only acting as principal, incurring liabilities personally which an agent would not.

42. This is to be contrasted with brokers who trade on the Exchange. They are "intermediaries" who, as agents, "bring together" buyers and sellers of securities and for their services receive remuneration by way of a commission. In the present case, there was no "bringing together" of buyers and sellers. Since the key ingredient has not been established, it follows that there has been no breach of section 20.

43. In so far as it is suggested that the purpose of section 20 is to prohibit all trades effected other than through or at the Exchange, that is plainly misconceived. Section 20 was intended to protect the Exchange's monopoly. The trades in question and indeed grey market trading do not undermine the Exchange's monopoly since all those trades cannot be completed except through the Exchange when the shares become listed.

44. In conclusion, the judge's holding that section 20 had not been breached must be upheld.

45. Section 48

46. Section 48 provides as follows:

"48. Registration as a dealer

(1) A person (whether an individual or a body corporate, or a member of a partnership or director of a body corporate) shall not carry on a business in Hong Kong of dealing in securities, or hold himself out as carrying on such a business, unless he is registered as a dealer under this Part."

"Dealing in securities" is defined in section 2 as meaning:

"in relation to any person (whether acting as principal or agent), subject to section 3(1), means making or offering to make an agreement with any other person, or inducing or attempting to induce any other person to enter into or offer to enter into any agreement -

(a) for or with a view to acquiring, disposing of, subscribing for or underwriting securities;

..."

47. Mr Tong SC's submitted that it is not necessary to consider whether section 3(1) applies since that section only exempts specific transactions from falling within the meaning of "dealing in securities". He further submitted that the evidence showed that Tulletts was holding itself out as carrying on a business of dealing in securities, and as the judge had found that it had never registered as a dealer or a dealer's representative, Tulletts was in breach of section 48.

48. I do not agree that that is the correct approach in construing section 48. The prohibition contained in section 48 is the carrying on of a business in Hong Kong of "dealing in securities" or of holding oneself out as carrying on such a business without being registered. The business to which section 48 is directed is defined but the definition is made "subject to section 3(1)". Section 3(1) is thus part and parcel of the definition: one cannot meaningfully ascertain the parameters of the "business" for which registration is required without taking into account section 3(1). If one has to have regard to section 3(1) in ascertaining the meaning of "dealing in securities", I do not see how section 3(1) can be disregarded when one has to ascertain whether someone is holding itself out as doing such a business.

49. Where a trader carries on a business which is within section 3(1) so that the trader need not register as a dealer or dealer's representative, he must implicitly be holding himself out as carrying on such a business. Logic and common sense require that the exemption covers both the actual conduct of the business as well as the holding out by the trader as carrying on the business. To hold otherwise would render the exemption meaningless. That cannot have been the intention of the legislature and is not a construction that would commend itself to the court.

50. As will become apparent later, the two trades in question were within section 3(1). The judge so found and the evidence amply supported that finding. No doubt for this reason Mr Tong SC was anxious not to focus on the two trades but to invite the court to infer from what was actually said in the 1st to 4th calls, specifically, the references to having "a seller on the line" and to "commission" and "brokerage" that there was "a holding out" that Tulletts was acting as agent, that such holding out meant that Tulletts should have been registered as a dealer and that therefore it was in breach of section 48.

51. The fallacy in the submission is that the alleged "holding out" cannot be determined divorced from context. What was Tulletts holding itself out as able to do? What was the business in respect of which such holding out was made? If the business (as was the case) that Tulletts was holding itself out as doing consisted of principal-to-principal trades, both that business as well as the holding out of doing that business would fall within the exemption contained in section 3(1).

52. There was no evidence that would have warranted a finding that Tulletts was holding itself out as dealing in securities as an agent. In so far as reliance was placed on Tulletts' letter dated 28 April 1997 to the SFC, properly understood, that letter does not provide any basis for reaching such a conclusion. The relevant part of the letter reads as follows:

"The first area the branch would be involved in is the voice broking of Equity Financing Products ...

For clarification the types of Equity Financing transactions entered into will be

1) ...

5) Agency Broker or Dealing Agent

The facility to provide transaction execution services buying and selling securities on a matched principal basis as an Agent for clients. Such trades will be booked 'off market' on an OTC basis.

The second area will be the voice broking on a matched principal basis of Far Eastern Convertible Bonds, Global Depository Receipts (GDR's) and Initial Public Offerings (IPO's). This will involve incorporating the group's existing desk as stated earlier."

The "first area" of business consisted of five types of equity financing transactions and those listed under the paragraph numbered 5 constitute the only agency activities of Tulletts. The last of the paragraphs set out above is not part of the five types of equity financing transactions discussed in the "first area" of business. Rather, IPOs and grey market trading is within the "second area" of activity. The author of that letter gave evidence which the judge accepted that Tulletts only acted in the agency broker or dealing agent capacity in equity financing products and not in IPOs and therefore not in grey market trading. There is no basis for upsetting that finding of fact.

53. Section 3(1)

54. Section 3(1), in pertinent part, provides as follows:

"3. Saving for certain transactions

(1) For the purpose of determining whether or not a person has dealt in securities or has communicated an offer to acquire or dispose of securities, no account shall be taken of an act done on behalf of that person by, or of an offer made by that person to, a registered dealer, a dealer's representative ... or of his having as principal, acquired, subscribed for, or underwritten securities, or effected transactions with a person whose business involves the acquisition and disposal, or the holding, of securities (whether as principal or as agent)." (emphasis added)

Counsel's submissions focused on the meaning of the phrase "effected transactions" in the second part of the sub-section appearing after the break. However, it seems to me that the first part of sub-section (1) is no less relevant. The offer by Tulletts through ST for the two trades plainly falls within "an offer made by that person to a registered dealer, a dealer's representative ..." since Dharmala was a registered dealer and RS a registered dealer's representative.

55. What if that offer culminates in a transaction? It is here that the second part of section 3(1) set out above (i.e. after the break) becomes relevant. There is a clear link between those two parts of section 3(1). An offer is exempt so long as it is made, inter alia, to "a registered dealer" or "a dealer's representative" and by definition the offeree would be a person "whose business involves the acquisition and disposal, or the holding, of securities (whether as principal or as agent)" referred to in the second part. What is clear is that not every transaction resulting from an offer that is itself exempt under section 3(1) is within the exemption. It is only where the offeror (i.e. the person who made the offer) does so as principal that the transaction itself is exempt. So, if an unregistered person acting as agent were to make an offer to a dealer or a dealer's representative, the offer itself is within the exemption. What section 3(1) does is to exempt the offer in every case if made to a registered person and to exempt the trade culminating from such an offer if and only if the offeror was acting as principal. There is no exemption from registration where the offeror is transacting as agent.

56. For this reason, I am unable to accept the construction put forward by Mr Tong SC that the only relevant part of section 3(1) for the purposes of this appeal is the second part commencing with the words "of his having as principal, etc". It was on that basis and without reference to the earlier part of section 3(1) that he grounded his submission that that part of the exemption focused on the "acquisition" rather than the "disposal" of securities. He submitted that the words "effected transactions" must be read sui generis with the words preceding i.e. "acquired, subscribed for, or underwritten" which denote activities that concern acquiring an interest, and that the words "effected transactions" must therefore be construed as referring to other commercial activities concerning gaining an interest in securities like taking a charge or mortgage, swap, doing the acquisition, lending, etc. in relation to securities. For the reasons stated above, I do not consider that to be the true construction of section 3(1).

57. It follows that the two trades effected as they were by Tulletts as principal with a registered person fell within the exemption contained in section 3(1).

58. To counter that conclusion Mr Tong SC resorted to section 3(1A) which gives an extended meaning to "dealing in securities" to which I now turn.

59. Section 3(1A)

60. This subsection provides:

"(1A) Without prejudice to the generality of the definition of 'dealing in securities (證券交易) in section 2(1), a person shall be regarded as dealing in securities if in return for a commission, rebate or other remuneration, he -

(a) receives from another person an offer to effect a dealing or to acquire or dispose of securities, and communicates it, either in his name or in the name of the person from whom the offer is received, to a registered dealer, a dealer's representative, an exempt dealer or an exempt dealer's representative;

...

(c) on behalf of another person -

(i) effects a dealing through a registered dealer, a dealer's representative, an exempt dealer or an exempt dealer's representative; or

(ii) makes an offer to a registered dealer, a dealer's representative, an exempt dealer or an exempt dealer's representative to acquire or dispose of securities,

and subsection (1) shall be construed and have effect accordingly."

It was submitted that Tulletts' activities fell within section 3(1A), specifically paras (a) and/or (c), and therefore gave rise to a breach of section 48. In my judgment, neither paragraph (a) nor (c) assists Dharmala's case. As regards paragraph (a), as noted earlier, Tulletts acquired the shares at $17.50 and $17.20 from New China and Peregrine respectively. It certainly never offered New China or Peregrine $18 or for that matter $18.10 per share, the latter being the price Dharmala agreed to pay. Therefore, paragraph (a) is inapplicable. So far as paragraph (c) is concerned, as appears from the evidence considered earlier, the sequence of events demonstrated beyond doubt that Tulletts acted on its own account and not on behalf of anyone else in acquiring and disposing of the China Telecom shares. Paragraph (c) is thus also inapplicable.

61. That disposes of section 3(1A) without having to consider whether or not Tulletts earned any commission or remuneration out of the trades which is another pre-requisite before section 3(1A) would be engaged. Suffice to say that the evidence amply justified the judge's finding that Tulletts' profit in entering into the two trades was represented by the difference between the price Dharmala agreed to pay and the cost to Tulletts in acquiring the one million China Telecom shares. Despite the reference made to "brokerage" by ST during the calls when adding 10 cents to the price of $18.00, as the judge found:

"a true and realistic view of what happened is that it was a salesman's device used by [ST] to add 10 cents to the price he was selling to [RS]. He was therefore able to sell to [RS] at $18.10 instead of $18.00. There was in fact no commission charge to the buyer Dharmala or to the seller Tullett."

62. Conclusion

63. In conclusion, having regard to the meaning of "dealing in securities" as defined in section 2(1), the scope of the exemption contained in section 3(1), the extended meaning given to "dealing in securities" by section 3(1A) and the true nature of the two trades in question, the judge was plainly right in holding that Tulletts was not in breach of section 48 by entering into the two trades.

Civil unenforceability

64. In the circumstances, the question whether the contracts were rendered unenforceable because of a breach of sections 20 and/or 48 does not arise. Had it been a live question, I would have found that the contracts were not rendered unenforceable. Put shortly, my reasons are as follows.

65. In the course of his argument, Mr Tong SC cited many authorities including Yango Pastoral Co. Pty. Ltd v First Chicago Australia Ltd [1978] 139 CLR 410, Shaw v Groom [1970] 2 QB 504, Cope v Rowlands (1836) 150 ER 707, Cornelius v Phillips [1918] AC 199 and Phoenix Insurance v Halvanon Insurance [1988] 1 QB 216. But ultimately, the question is one of statutory construction:

"... Primarily, then, it is a matter of construing the statute and in construing the statute the court will have regard not only to its language, which may or may not touch upon the question, but also to the scope and purpose of the statute from which inferences may be drawn as to the legislative intention regarding the extent and the effect of the prohibition which the statute contains."

See per Mason J in Yango case (at 423).

66. Sections 20 and 48 provide for criminal sanctions only. That is also the effect of breaches of, for example, sections 21, 22, 49, 49A - D, 50 and 80 of the Securities Ordinance. No civil consequences attach to breaches of those provisions. In stark contrast, section 76 (which prohibits a dealer from transacting or holding himself out as being prepared to transact any dealing in securities which is completed later than the end of the next trading day after the dealing was entered into) expressly provides for criminal sanctions as well as civil consequences. Section 76(2) deals with criminal sanctions but section 76(4) reads:

"(4) A contract entered into in contravention of subsection (1) shall not be enforceable by either the dealer or the other contracting party."

That is the only provision in the whole of the Securities Ordinance that contains an express provision for civil consequences in addition to criminal penalties for breach.

67. The judge cited with approval the following passage from the judgment of Bokhary J (as he then was) in Richardson Greenshields of Canada (Pacific) Ltd v Chow Paul [1989] 1 HKC 261 at 270:

"The fact that a statute expressly provides for civil consequences in regard to some breaches tends to suggest that the legislature did not intend civil consequences in regard to breaches for which no such consequences are expressly provided. This is the view taken by the Court of Appeal in Cheng Ah Hung Bernard v Chintung Commodities Ltd [1985] 1 HKC 318, which deals with Commodities Exchanges (Prohibition ) Ordinance (Cap 82) and the Commodities Trading Ordinance (Cap 250). It is also the view taken by Duffy J in James Capel (Far East) Ltd v So (3171/87, 31 May 1988, unreported), which deals with the Securities Ordinance (Cap 333). Lord Justice Sachs took the same view in Shaw v Groom (supra) at p 525E, where he uses the illuminating formula, 'any intended result on civil liabilities'."

Applying that reasoning, the judge attached considerable weight to that very significant factor. He was obviously right.

Conclusion

68. In view of the conclusions I have reached on the issues of authority and illegality, this appeal must be dismissed. I propose that there be an order nisi for costs in favour of the respondent.

Hon Keith JA :

69. I have read in draft the judgment of Le Pichon JA. I am in agreement with it and with the orders which she proposes. There is nothing which I can usefully add.

Hon Rogers VP :

70. I agree with the judgment of Le Pichon JA. The appeal will be accordingly dismissed and there will be an order nisi that the costs of this appeal be to the plaintiff/respondent.