THE JOINT AND SEVERAL LIQUIDATORS OF NAVA SC SECURITIES LTD AND ANOTHER v. THE OFFICIAL TRUSTEE

HCMP 1038/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1038 OF 2008

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REASONS  FOR  DECISION

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Introduction

1.  On 19 June 2008, I heard three Originating Summonses issued by the Joint and Several Liquidators of Nava SC Securities Limited, Nava SC Nominees Limited and Nava SC Securities Finance Limited (“the Liquidators” and “the Companies” respectively).  The applications sought orders and directions to enable the winding up of the Companies to be brought to a conclusion, by enabling the Liquidators to divest themselves of certain securities and amounts of cash which were still in their possession and which they considered belonged, not to the Companies beneficially, but to former customers of the Companies.

Background

2.  The Companies were part of a group of companies known as the Nava Finance PCL group of companies.  In 1998, the business of that group was sold to a third party as part of a corporate restructuring, and the Companies, which had carried on the business of stockbroking, provision of securities nominee services and margin financing for the purchase of shares, ceased business, and were placed into members’ voluntary liquidation.

3.  As one would expect, the Companies held cash and securities on behalf of their clients.  Where possible, the Liquidators have distributed such cash and securities to the clients for whom they were held.  However, a range of securities, and an amount of cash remained unclaimed.  In some cases, although the client on whose behalf they were held had been identified, it had proved impossible to make contact with the client.  In other cases, the client in question was a company which had since been dissolved.  In yet other cases, it had proven impossible for the Liquidators to identify the client for whom particular securities or amounts of cash were held, owing to a lack of records which would enable this to be done (although it should be pointed out that, relative to the total amount of assets that had to be distributed, this was the case in respect of a relatively small amount).

4.  In 2002, the Liquidators applied for and obtained an order (“the 2002 Order”) dealing with the then remaining assets which were held for clients of the Companies.  That order was intended to allow the Liquidators to pay unclaimed cash and securities into court so that they could be administered by the Official Trustee pursuant to the Trustee Ordinance (Cap. 29), to sell unclaimed securities and pay in the proceeds, to facilitate the transfer and administration of the assets by the Official Trustee, and to provide for the payment of the Liquidators’ legal fees and expenses, and the Official Trustee’s administration charges.

5.  The process of dealing with the client assets of the Companies pursuant to the 2002 Order took a little time.  During this period, further assets came into existence, arising from dividends and bonus shares being paid and issued in respect of the securities that were held.  It seems that the Official Trustee took the view that the 2002 Order did not extend to such after-acquired assets, and suggested that the Liquidators should make a fresh application in respect of them.

6.  The Liquidators initially sought to make that fresh application under a liberty to apply provision in the 2002 Order.  However, the Official Trustee expressed doubts as to whether this was appropriate.  The Official Trustee also indicated that he was not prepared to take over assets in respect of which the client for whom they were held could not be identified.  In the circumstances, the Liquidators decided to proceed by issuing the three Originating Summonses which came before me on 19 June 2008.

The proceedings

7.  In HCMP 1038/2008 (the only one of the three Originating Summonses to which the Official Trustee was made a party), the Liquidators sought to deal with cash and securities held on behalf of identified but uncontactable clients (“Identified Clients”) by seeking declarations that such assets were trust assets, held on trust for such clients.  The Liquidators also sought orders pursuant to sections 67 and 68 of the Trustee Ordinance authorising the Liquidators to pay into court cash or securities currently held by them, or which might subsequently come into their hands as a result of their holding of such securities (i.e. future dividends and bonus shares), with a view to their being administered by the Official Trustee.  Finally, orders were sought to provide for the fees and charges of the Official Trustee, and for the fees, costs and disbursements incurred by the Liquidators.

8.  In HCMP 1039/2008, the Liquidators sought to deal with cash and securities held on behalf of clients who could no longer be identified (“Unidentified Clients”) by seeking declarations that such assets were also trust assets, notwithstanding that it was no longer possible to identify the beneficiary of the trust in these cases.  They also sought orders pursuant to section 62 of the Trustee Ordinance to authorise the Liquidators to pay such cash and securities (including any cash and securities that might arise in future from them) into court.  Orders were also sought to provide for the fees, costs and disbursements incurred by the Liquidators.

9.  In HCMP 1040/2008, the Liquidators sought (as an alternative to the orders sought in the other two proceedings) orders that would allow them to disclaim any shares which were not readily saleable, or which could not be sold or dealt with economically (for example, where the costs of sale or disposal would exceed any likely proceeds), pursuant to section 268 of the Companies Ordinance (Cap. 32).  This was, however, a fall back position on the part of the Liquidators, which they sought to resort to only in the event that some part of the assets in their hands remained to be dealt with following the disposition of HCMP 1038 and 1039/2008.

HCMP 1038/2008 – assets belonging to Identified Clients

10.  I shall deal first with HCMP 1038/2008.  This relates to assets held for Identified Clients.  There was no dispute between the Liquidators and the Official Trustee that such assets were held as trust assets.  This is, in any event, clearly right.  There is ample authority for the proposition that assets held by stockbroking and securities dealing companies on behalf of their clients are not the beneficial property of the companies, but of the clients for whom they are held (see e.g. Re Peregrine Futures Hong Kong Limited [2004] 1 HKLRD 856; Re C.A. Pacific Finance Limited (In Liquidation) & Anor. (No. 1) [1999] 2 HKC 632).

11.  In this case, it is clear from the client agreements which have been placed before me that where the Companies held assets on behalf of their clients, such assets were intended by the Companies and their clients to be regarded as beneficially the assets of the clients, so that the Companies were not free to deal with them as if they were their own.  There is therefore no difficulty in declaring that such assets are trust assets, held by the Companies for the Identified Clients.

12.  This being so, the Companies are to be regarded as trustees of such assets for the Identified Clients, and (subject to one point which I shall mention shortly) may take advantage of the provisions of sections 67 and 68 of the Trustee Ordinance to pay into court trust monies in their hands (pursuant to section 67) and transfer to the Official Trustee trust securities in their hands (pursuant to section 68), so that the cash and securities so transferred may be administered by the Official Trustee.

13.  The one complication was this.  While the Official Trustee was prepared to accept such monies and securities in relation to the Identified Clients, he was not prepared to do so where a particular Identified Client was a company which had by now been dissolved (as was the case in relation to three of the Identified Clients).

14.  It seems to me that the Official Trustee was justified in taking this position.  Where the beneficiary of the trust is a company that has been dissolved, the beneficiary no longer exists.  There is therefore no basis on which the Official Trustee should be called upon to take control of the trust property to administer it, since there would be no one for whom he should do so.

15.  There was, however, a simple solution to this problem – by virtue of the provisions of section 292 of the Companies Ordinance, property held on trust for a dissolved company is deemed to be bona vacantia, vesting in the Government.  I therefore directed the Liquidators to deal with such amounts as were attributable to the three Identified Clients which were dissolved companies as bona vacantia in accordance with those provisions.  In practical terms, this would mean that those amounts should be transferred to the Government rather than paid into court.

16.  I therefore made the declarations sought in HCMP 1038/2008, and directed the payment into court of funds or transfer to the Official Trustee of securities held by the Companies for Identified Clients, with the exception of the three clients that were dissolved companies.   In the case of the dissolved companies, the funds payable to them were directed to be dealt with in accordance with section 292 of the Companies Ordinance.

17.  Orders were also made to enable the Liquidators to effect such payment in or transfer, by authorising them to convert foreign currency into Hong Kong dollars, and, where it was thought by them to be desirable, to sell securities which could be sold.  Where it would be uneconomical to sell or otherwise deal with any securities, the Liquidators were authorised to deal with them as they saw fit, including by simply doing nothing further about them.

18.  Provision was also made for the Liquidators to recoup their costs out of the trust assets.  The basis on which such costs were to be recovered from the various groups of trust assets is a matter to which I shall return at the end of this judgment.

HCMP 1039/2008 – assets belonging to Unidentified Clients

19.  Turning to HCMP 1039/2008, in respect of assets held for Unidentified Clients, the Official Receiver indicated that he was not prepared to accept responsibility for such assets under sections 67 and 68 of the Trustee Ordinance.  At one time, it seemed that he was also questioning whether such assets should be regarded as trust assets at all, since no beneficiary could be identified.

20.  I am satisfied that such assets should be regarded as trust assets notwithstanding this.  The evidence of the Liquidators, based on enquiries they have made with the Companies’ former management, is that all such assets were held for clients of the Companies, and were not part of the Companies’ own (beneficially owned) assets.  I do not think that the fact that the persons on whose behalves these assets were held can have lost their beneficial entitlement to them simply because the Companies are no longer able to identify them.  If they were to come forward and provide evidence of their beneficial ownership of the assets in question, there would seem to be no reason why that beneficial ownership should not be recognised because of a lack of records on the part of the trustees.

21.  However, I would accept that such assets should not be dealt with under sections 67 and 68 of the Trustee Ordinance.  Section 67(1) of the Trustee Ordinance requires funds paid into court pursuant to it to be paid by the Treasury into a bank to the account of the Official Trustee “in the matter of the particular trust (describing the same by the names of the parties”).  Where the names of the beneficiaries are unknown, as they are in this situation, there will be obvious difficulties in doing this.  Section 68 contains similar provisions in relation to securities.  That being so, I do not think that these provisions are apt to cover the situation where assets are known to be trust assets, but the identity of the beneficiary is unknown.

22.  There does not, however, seem to be any impediment to having resort to the provisions of section 62 of the Trustee Ordinance in this situation.  That section permits monies or securities belonging to a trust to be paid by the trustees into court.  Once such monies or securities are so paid in, they will be held against a possible claim to them by the persons entitled to them for a period of five years, after which they will be paid into the general revenue.

23.  I therefore declared the cash and securities held by the Companies on behalf of Unidentified Clients to be trust assets, and authorised the Liquidators to pay them into court pursuant to section 62 of the Trustee Ordinance.  As in the case of the assets held for Identified Clients, similar orders to those mentioned in paragraphs 17 and 18 above were also made in HCMP 1039/2008.

HCMP 1040/2008

24.  As all of the assets that were the subject matter of these applications were effectively dealt with under HCMP 1038 and 1039/2008, I made no order in respect of HCMP 1040/2008, there being no other assets in respect of which it was necessary to make an order in those proceedings.

The Liquidators’ Costs

25.  The final point that arose for consideration was as to the manner in which the Liquidators should meet their costs, fees and disbursements in relation to their dealings with the assets which were the subject of these applications, and their costs of these applications.

26.  Initially, the Liquidators proposed that all such costs should be met out of the assets of the Unidentified Clients, with recourse being had to the assets of Identified Clients only to the extent that there was any shortfall.  However, it seemed to me that it would be more equitable for the costs of the applications to be shared among all of the former clients of the Companies whose assets were the subject of these applications.  There was no reason why Identified Clients should have the benefit of these applications being made at the expense of Unidentified Clients.

27.  Although it was suggested that to allocate costs proportionately across the different groups of clients (i.e., the Identified Clients, Identified Clients which were dissolved companies, and Unidentified Clients) would involve considerable work and expense, I do not see that this would necessarily be the case.  Records exist from which it is possible to ascertain the value of the assets held for each of the Identified Clients, for the three Identified Clients that are dissolved companies, and the Unidentified Clients as a group.  It should therefore be possible to pro-rate the Liquidators costs (including the costs of these applications) across each of those groups, and (within the group consisting of Identified Clients, to each of the clients within that group).  It should therefore be possible to work out what proportion of such costs is attributable to each client or group of clients, and to deduct that amount from the funds in the liquidators hands prior to paying them into court or transferring them to the Government as bona vacantia.

28.  I therefore authorised the Liquidators to charge their fees and expenses rateably against each group of assets dealt with by these applications.