TSO, LOIE DORA v. CHINA LIGHT & POWER CO. LTD.

1989, No.A7468

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. A member of the staff of the 5th Party misbehaved himself. As a consequence, a great many shares were transacted with Transfer Forms and Powers of Attorney improperly signed or executed. These shares were sold from the 4th Party to claimants or brokers who are now being represented by the representative Third Party. The share scrips together with the Transfer Forms and Powers of Attorney were sent to the Registrar and they were duly registered. The forgeries were not discovered until after the registration of these shares. New share scrips had been issued. I shall call them the "fault scrips". The brokers involved may be divided into three groups: one have purchased replacement shares for the fault scrips in their routine trading. Another group have similarly bought replacement shares but after the date of the rectification of the register, made pursuant to an order of Godfrey J. dated 8th March 1993. The last group have not acquired any replacement shares at all. It was finally settled before Godfrey J. that they were fault scrips. The date of rectification pursuant to the said order of Godfrey J. fell on 18th March 1993.

2. The parties to these proceedings have all compromised. The brokers have also compromised with the 4th Party and the 5th Party. The groups, other than the one who had duly purchased replacement shares before the date of rectification on 18th March 1993, reserve their right to apply to this court for deciding the measure of damages by reference to, so they claim, the date of judgment in the instant application. The compromise between the Representative Third Party, the 4th Party and the 5th Party is evidenced by an agreement dated 7th March 1994. The terms of the compromise are, I am told, confidential, but I would, in particular, incorporate clauses 2(1), (2), (3) and (6)as part of this judgment. I do not propose to repeat the contents of those sub-clauses, being part of a confidential document. They nevertheless form part of this judgment.

3. What can best be described as the test case by which all the brokers have agreed to be bound is the claim of the Representative Third Party in respect to the 46,000 shares of the Representative Defendant company. It is said that these 46,000 shares represented by fault scrips remain in the pool of scrips to which the Representative Third Party has access.

4. Those remaining two groups of brokers, represented by the Representative Third Party, seek to take advantage of Rule 554 which has been superseded by the current rules 554 and 554A, as well as certain legal propositions set out at p.650, para.1048 of McGregor on Damages, 15th Edn.

5. Those are the facts in broad terms, the details of which could be gleaned from the Agreed Facts supplied by Mr Stone, counsel for the Representative Third Party, as well as the statements referred to therein together with the viva voce evidence of Mr Raymond Leung.

6. The question posed for my consideration can be shortly answered thus: first, it is submitted by Mr Stone that whatever the real cause or causes of action vested in the Representative Third Party is, the same has been subsumed in the compromise agreement dated 7th March 1994. I do not propose to recount the possible causes of action canvassed between counsel and bench in the course of these proceedings. Suffice it for me to say that whilst it is quite true that liability is accepted by the 4th Party and the 5th Party in the compromise agreement, admission of liability is made within the terms of that document. I do not propose to delineate the precise limit of the admitted liabilities contents of that document are said to be confidential. I would simply say that the admitted liability as specified in the compromise agreement would not support the contention of Mr Stone that the necessity for identifying the real cause or causes of action of the Representative Third Party had been removed by the alleged subsumption of the same in the compromise agreement. The compromise agreement does not have the effect of relieving the Representative Third Party from identifying their true cause or causes of action in order to provide them with the locus in the pleaded case for the instant application. I have to direct attention to clause 2(6) of the compromise agreement. Without divulging more than necessary, it is evident that only designated parties are qualified to apply, at the hearing of the trial (and I emphasize the word "trial"), to ascertain the date for assessment of damages. It is, of course, also essential for Mr Stone, counsel for the Representative Third Party, to identify the class of claimants and establish those the Representative Third Party represent as falling within the pleaded case in these proceedings. Counsel for the 4th Party and the 5th Party are critical of the attempt made on the part of the Representative Third Party so to do, and their contention is that it would be a futile exercise as all represented by the Representative Third Party are now bound by the test case on the 46,000 fault scrips.

7. However, whatever the true cause or causes of action of the Representative Third Party is and whether or not any of the brokers falls squarely within the pleaded case, the matter may be resolved by the contentions advanced on the terms of Rule 554 as well as on the legal propositions set out in McGregor with which Benjamin on the Sale of Goods does not seem to be wholly in agreement. Rule 554 of the Rules of the Stock Exchange reads as follows:

"554. The selling member is responsible for good delivery of the share scrip together with the relevant instrument(s) of transfer duly executed by the transferor and bearing the endorsement as required by the Stamp Duty Ordinance either by the collector of stamp revenue or by a member if the transferee is unable to effect registration of the transfer of the shares purported to be transferred by the transferor under the instrument(s) of transfer by reason of any defect in the instrument(s) of transfer or in the title to the shares the selling member shall, immediately take steps to rectify such defect including, if necessary, completing a replacement, within seven days thereof, and shall be responsible for any expense or loss suffered by the transferee as a result of the transfer of shares which are incapable of being registered." (Emphases added)

It is certainly not a rule without complexity. But what is sought to be decided is whether the words "unable to effect registration" mean "unable to effect physical registration" or "unable to effect registration for passing good title."

8. Even assuming the capacity in which the Representative Third Party can properly rely on this superseded Rule 554 has been soundly established for the instant application, and also assuming that the cause or causes of action has been sufficiently pleaded when identified, the crucial words in Rule 554 admit of no obscurity. Those plain words convey and connote no more than the ordinary meaning they carry. The emphasis is on registration. The Registrar is unconcerned with validity of title. There is, in my view, no warrant for inserting the word "physical" before "registration", less for the words "for passing good title" after it. Shares were and were effectively registered. Once completed, the registration must have been more than physical or nominal. It became effective registration with new scrips issued. Otherwise the parties concerned would not have had to appear before J. for the shares to be de-registered and for the Register to be rectified. That was precisely what the judge was invited to do on the 8th March and why the Register had to be rectified on 18th March 1994. On Rule 554, counsel for the 4th and 5th Parties further submit that on the clear admission in the viva voce evidence of Mr Raymond Leung, the Representative Third Party were not in any case a broker. However, the Representative Third Party are quick to assert, through counsel, their right to represent wider interests among the brokers than that of themselves. As I have said, counsel for the 4th and the 5th Parties promptly respond to that submission by directing the court's attention to proceedings and orders by which the representative proceedings came to be constituted and the significance of a test case. Mr Stone also relies on the admitted fact that the Representative Third Party have a brokering arm in Wardley-Thomson (Securities) Ltd. Counsel contends that it would be over-pedantic to be restricted to the personal capacity of the Representative Third Party in these proceedings. I am inclined to favour the counter arguments advanced by Mr Bleach and Mr Barma, but that is not a point on which I need express any concluded view. Suffice it for me to focus on the clear language of Rule 554, dealing with inability to register, which is not the case here before me in the instant application. It is unnecessary for me to examine the other peripheral submissions advanced either by Mr Stone or Mr Bleach or for that matter by Mr Barma. The Representative Third Party are clearly not entitled to take advantage of Rule 554.

9. Mr Stone leans heavily on the passage in para.1048 at p.650 of McGregor. It is convenient to set out below the relevant passage so critically relied upon by counsel:

"The time at which the market price is to be taken is the contractual time for delivery. In general the principles worked out in the sale of goods cases apply here: of the several possible situations few have been adjudicated upon in relation to the sale of shares, but the cases that there are indicate an application of common principles while at the same time bringing out small differences. (1) Where the market price has risen between the date of breach and the date of judgment in the action, it was held in Shaw v. Holland that the time of judgment was not to be taken in preference to the time of breach by not delivering.

Parke B. said that the action was more akin to one for non-delivery of goods than to one for not replacing stock, since 'the plaintiff had his money in his own possession, and might have gone into the market and bought other shares as soon as the contract was broken.' This rationale disappears where the purchase price has been paid in advance; and it has been submitted that in the case of goods the buyer should then be entitled to recover for any increase in the market price between breach and judgment."

As earlier stated, Benjamin does not see eye to eye with McGregor. In para. 17/007 of Benjamin, the following relevant passage appears:

"Damages when price paid in advance. It could possibly be argued that the time specified in section 51(3) is not appropriate when the buyer has paid the price to the seller in advance of the time fixed for delivery, and the market price rises between the time when the seller fails to deliver and the judgment in favour of the buyer. The buyer might say that only the amount of the higher market value at the time of judgment would put him into the same financial position as he would have been in if there had been no breach by the seller: since he has already paid the price, his financial position at the date of the seller's breach is to that extent worse than the normal situation where the price would be paid only if delivery were made. Although some support for this argument may be found in old decisions on the defendants' failure to replace stock and in an early case on the sale of goods, in another early case on sale of goods the court refused to follow the cases on the purchase of stock and thus refused to award the buyer damages in respect of the higher market price at the date of its judgment. It is submitted that the latter case should be followed, since the buyer should normally be able to borrow to finance a purchase in the market at the time of the seller's breach."

10. Quite clearly, Mr Stone cannot take advantage of the situation of "not replacing stock". I have decided against the Representative Third Party on their contended interpretation of Rule 554. The Representative Third Party have never been, and are not entitled to replacement stock.

11. Turning to the second proposition in McGregor with which Benjamin disagrees, it is quite evident that the Representative Third Party have laid out no actual fund in respect of these 46,000 shares. There is no evidence that any replacement shares had been acquired or borrowed at the pecuniary expense of the Representative Third Party. It has not been suggested nor indeed proved that the Representative Third Party or its brokering arm were at any time out of pocket. Moreover, even if the second proposition set out in para.1048 of McGregor were good law, the position of the Representative Third Party could hardly put them inside that proposition. They were not out of pocket. Moreover, the involvement of the Representative Third Party in respect to the fault scrips for the 46,000 shares has not been demonstrated to be unconnected with other commitments of the Representative Third Party in its capacity as broker or otherwise. In fact, the reverse is more true. As a matter of law, the beneficial owners of the fault scrips might very well be left on their own to pursue their claims. Not only has the involvement of the Representative Third Party as known not been shown to my satisfaction to be exclusively tied to the purchase of these 46,000 shares, it was disclosed in the course of the submission of Mr Stone that the Representative Third Party had other good or commercial reasons for facilitating the sales of the equity represented by these 46,000 fault scrips. It would seem that such an involvement had a purpose of its own to serve. Further, the Representative Third Party involved themselves after registration, if not also after Rule 554 had been superceded. In conclusion, the 2nd proposition in para. 1048 of McGregor could not come to the rescue of the Representative Third Party.

12. Lastly, it is trite law for at least conversion and tort that damages flow from the time of conversion or the time of loss. In the circumstances of this case, as conceded by Mr Stone that there being no direct authority in point, it would not appear to be impractical or unreasonable to be guided by the like principle. The disputed shares were lost to the brokers, more accurately to their customers, as at the date of rectification ordered by Godfrey J. The date of rectification fell on 18th March 1993. The measure of damages should be, in my view, the market value as at the date of the rectification. The other parties all seem to be content with 18th March 1993. The circumstances of this case do not suggest that any injustice would be caused to the agreeing brokers or(barring Rule 554) those now represented by the Representative Third Party in this application. In the absence of other realistic alternatives, that, in my view, should be or should be taken as the yardstick for assessing damages to the brokers.

13. The 4th and the 5th Parties have never denied their liability to cover the loss sustained by these brokers. The argued date for measuring damages stemmed apparently from the understanding of the Committee within the Wardley-Thomson group, of which Mr Raymond Leung has been a member.

That understanding is, I have ruled, wholly misconceived. The application therefore fails and I order it to be dismissed with costs in favour of the 4th and the 5th Parties against the Representative Third Party.