STRONG OFFER INVESTMENT LTD (In Liquidation) v. NYEU TING CHUANG

CACV 384/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 384 OF 2004

(ON APPEAL FROM HCa NO. 10541 OF 2000)

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J U D G M E N T

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Hon Woo VP:

Introduction

1. This is an appeal by the defendant against the judgment given by Chung J on 9 November 2004 in favour of the plaintiff in the sum of $41,220,569.84, together with interest and costs.

2. The judge handed down his Reasons for Judgment on 3 December 2004. 

Background

3. The plaintiff was at all material times a licensed moneylender.  Its claim against the defendant for the judgment sum arose out of loans advanced to the defendant for the purchase and sale of listed shares in Hong Kong through Okachi Investment (HK) Co. Ltd (“Okachi HK”), a stockbroker who was also a sister company of the plaintiff, both being subsidiaries of Okachi & Co Ltd, a company incorporated in Japan.

4. In about April 1995, the defendant, a permanent resident of Taiwan, was introduced by one whom he called “uncle”, Mr Fan Che On (“Fan”) to Mr Ying Chau Fung (“Ying”), an account executive of Okachi HK.  

5. On 10 May 1995, the defendant signed a Cash Client’s Agreement with Okachi HK, thereby opening a securities dealing account with Okachi HK (“the shares account”) and a General Commercial Agreement and Memorandum of Deposit with the plaintiff (“the plaintiff’s agreement”) for opening a margin finance account with the plaintiff to obtain margin finance from the plaintiff for the operation of the shares account.  This margin account was numbered M3001 (“M3001”). 

6. In about November 1996, after trading for 1½ years through Okachi and using M3001 to borrow money for financing the shares account, the defendant opened a second set of accounts, ie, a second stock trading account with Okachi HK and a second margin finance account with the plaintiff, numbered M3480 (“M3480”).  M3001 and M3480 are collectively referred to as the “margin accounts”.

7. The judge summarised succinctly the relevant facts that gave rise to the plaintiff’s claim, as follows:

“7.   The defendant spent most of his time outside Hong Kong.  He instructed Ying to operate the said margin accounts for him.  In short, Ying was to buy and sell shares through the said margin accounts and to fax the daily activities of the said margin accounts to Taiwan.  He did so mostly on a daily basis.  The faxes contained information relating to the stocks bought or sold and the prices at which they were transacted.  Further, detailed statements of Okachi HK would be sent to Taiwan at the end of each month.

8.    The plaintiff liquidated the said margin accounts in December 1998.  The amount claimed in this action represents the loss suffered from the stock trading activities of the said margin accounts.

9.    There were 4 payments into the said margin accounts in the months February to April 1998: 3 payments by Fan in the respective sums of $750,000 (on 4 February 1998), $750,000 (on 11 March 1998) and $500,000 (on 29 April 1998) and one payment by the defendant in the sum of $499,900 (on 26 March 1998).”

8. The defendant raised a number of defences before the judge, which were all rejected. 

9. The judge found that the witnesses for the plaintiff were honest and reliable whilst the defendant and those who gave evidence for him were the opposite.

10. In particular, the judge rejected the defence evidence that in early October 1997 and later in November 1997, the defendant instructed Okachi HK (through Ying) to sell off all the shares in the margin accounts and close them.  He also rejected the evidence that the four partial payments referred to in paragraph 9 of his Reasons were made without the defendant’s consent or knowledge. 

11. The judge also dealt with two discrete defences, one based on the Money Lenders Ordinance, Cap 163 and the other based on the plaintiff’s duty to mitigate loss.  Despite finding certain breaches of the Ordinance by the plaintiff, the judge exercised his discretion to enforce the loans.  He also found that there was nothing unreasonable in the plaintiff’s decision to liquidate the margin accounts in December 1998 and not earlier.

Grounds of appeal

12. Four grounds of appeal are raised.  The first three grounds deal with matters relating to the Ordinance and the fourth ground concerns the issue of mitigation.

13. The first three grounds can be summarised as follows:

(a)   In view of the fact that the contractual documents of the loans did not comply with sections 18(2)(d), (f), (i) and (j) of the Ordinance, the judge was wrong to hold that the contractual documents constituted the note or memorandum required by section 18(1) of the Ordinance, and thus he was wrong in holding that the form of security required by section 18(2)(h) “has in effect been set out in the contractual documents”. 

(b)   The judge was wrong to exercise his discretion to enforce the loans pursuant to section 18(3) of the Ordinance, in that the burden is on the plaintiff to satisfy the judge that it would be inequitable not to enforce the loans and yet the plaintiff did not proffer any explanation for its breaches of the Ordinance.  To support this ground, it is contended that the judge had failed to take into account a number of matters, to be detailed below. 

(c)   The fourth ground of appeal contends that the plaintiff had failed to take reasonable steps to mitigate its loss within a reasonable time after mid-December 1997 or the end of April 1998.  A number of factual matters are also relied on in support of this ground

14. On behalf of the defendant, Mr Coleman stressed that it would not be appropriate to view the two subjects of the Ordinance and mitigation as discrete and separate, for in the present case, they were inextricably intertwined.  He asked us to view them cumulatively, which he submitted the judge had failed to do.  I will proceed to deal with these two subjects separately before turning to deal with their cumulative effect.

Breaches of the Ordinance and the judge’s discretion

15. Section 18 of the Ordinance provides as follows:

“(1)  No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be enforceable unless-

(a)   within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2)  and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and

(b)  there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,

and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.

(2)  The note or memorandum shall contain all the terms of the agreement and in particular shall set out-

(a)  the name and address of the money lender;

(b)  the name and address of the borrower;

(c)  the name and address of the surety, if any;

(d)  the amount of the principal of the loan in words and figures;

(e)  the date of the making of the agreement;

(f)  the date of the making of the loan;

(g)  the terms of repayment of the loan;

(h)  the form of security for the loan, if any;

(i)  the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2; and

(j)  a declaration as to the place of negotiation and completion of the agreement for the loan.

(3)  Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.”

16. As the judge noted in his Reasons (paragraph 59), the plaintiff conceded that there had been breaches of section 18(2)(d) and section 18(2)(i).  

17. The judge also found that there was a breach of section 18(2)(f) because details of the advances, although clearly set out in the faxes sent by Ying to Taiwan and in the plaintiff’s monthly statements, were not contained in the “note or memorandum” required by section 18(1).  He also found that there was a breach of section 18(2)(j) because there was no declaration as to the place of the agreement required by that provision. 

18. The judge, however, held:

“60.  I agree with the plaintiff that the contractual documents can be regarded as the note or memorandum required by s. 18(1).  In relation to s. 18(2)(h), I also agree with the plaintiff that this has in effect been set out in the contractual documents.”

19. Mr Coleman, on behalf of the defendant, challenged this holding.  I think it only necessary to cite what Mr Shieh SC (for the plaintiff) has referred to in response to the argument.  In Celestial (International) Securities & Investment Ltd v William Henry Woo, HCA 9659/2000 (4 Dec 2001, unreported), Deputy Judge Lam (now Lam J) said:

“29.  … Mr Wong argued that the section envisaged that the note or memorandum would be a separate document from the loan agreement since the former would be supplied after the making of the latter.  He did not cite any authority for this proposition.  As a matter of construction of Section 18, I do not see any reason why the loan agreement itself cannot constitute the note or memorandum if it contained all the required particulars.  There is no dispute that the Agreement did contain such particulars.  I hold that as a matter of law, the loan agreement could also be the memorandum.  There was therefore no infringement of Section 18.  I am reinforced in this conclusion by the authorities helpfully referred to me by Mr Grossman, namely Congresbury v. Anglo-Belge Finance [1963] 3 All ER 545 at 551, Reversionary Property & Advance Society v. Huggett [1964] CLY 2403 and Holiday Credit v. Erol [1997] 1 WLR 704 at 709.”

20. In any event, despite the breaches of section 18(2)(d), (f), (i) and (j) found by the judge, he exercised his discretion under section 18(3) in favour of the plaintiff to enforce the plaintiff’s agreement.  

21. It is necessary to set out the factual findings made by the judge in order to examine if the exercise of his discretion in favour of the plaintiff can be flawed.  The judge gave a description of the defendant in paragraph 31 of his Reasons:

“31.  The defendant’s background shows that he must be a man of sophistication.  He holds a doctors degree.  His name card states that he occupied the following posts:-

(1)      secretary general, private education association of Republic of China (中華民國私立教育事業協會秘書長)；

(2)      中國國民黨台北巿黨部委員；

(3)      台北巿私立強恕高級中學校長；

(4)      財團法人中華民國私立學校教職員工退休撫卹基金管理委員會執行長。

The English description for the last post is executive director.  The defendant said in his testimony he later became the chairman thereof.”

22. The judge stated the reasons for his exercise of discretion, in the following passages:

“62.  I turn now to consider if the breaches were deliberate and fragrant [sic].  The defendant contends they were deliberate breaches in that the contractual documents were pro forma documents.  Hence, the breaches must have taken place in relation to most if not all of the customers.  That may be so, however, I do not consider this per se shows that the plaintiff has chosen to contravene s. 18.  Looking at the whole circumstance, I find that the breaches were unintentional.  There was no conceivable practical advantage (commercial or otherwise) for the plaintiff to deliberately contravene Cap. 163.

63.  The defendant also contends that the breaches could have serious financial consequences for him.  This is because the said margin accounts were effectively left in Ying’s hands and potentially the defendant could be exposed to unlimited indebtedness.  Whether the potential unlimited exposure is real or not, I do not consider this to be related to the breaches; they were rather the result of the defendant consciously choosing to operate the said margin accounts in such manner.  Moreover, even though there was no note or memorandum, even up to the time of trial, the defendant has not complained (besides the alleged failure to close the said margin accounts (which I have rejected)) unauthorised loans had been incurred or excessive interest had been charged.

64.  By virtue of the above matters, I conclude that the breaches were technical and they did not cause the defendant any real prejudice.  On the other hand, it would be inequitable not to enforce the loans because this would result in huge financial loss to the plaintiff.  This is accordingly a case where I should exercise my discretion to enforce the loans.”

23. The contentions raised in the Notice of Appeal and repeated by Mr Coleman in his submission to challenge the judge’s exercise of discretion can be summarised as follows.  Based on the premise that the burden rests with the plaintiff to satisfy the judge to exercise his discretion in its favour, it is contended that there was no explanation from the plaintiff for the breaches.  Our attention is drawn to the fact that the contractual documents were pro forma documents furnished to most if not all of the plaintiff’s customers, which give rise to an inference that the plaintiff had repeatedly breached the requirements mandated by the Ordinance.  There was no demonstrable or conceivable difficulty for the plaintiff to comply with the requirements of section 18 of the Ordinance or apply for an exemption under section 33B of the Ordinance.  It is contended that there was no or no sufficient evidence upon which the judge should find the absence of conceivable practical advantage for the plaintiff to deliberately contravene the requirements of section 18 of the Ordinance.  It is also said that the plaintiff and Okachi HK were both lender and broker and had effective control over all the matters below, namely, the type and quantity of shares traded through the defendant’s shares accounts which were held as security for the loans, the margin deposits credited to the margin accounts, the sale proceeds and the sums advanced under the margin accounts.  Thus, it is contended that the plaintiff was able to act in its own interest to the defendant’s detriment by making advances to the defendant at its discretion (without the need to have the defendant’s knowledge or consent) so that more business could be generated for the plaintiff and Okachi HK.  

24. As can be seen from the passages of the judge’s Reasons set out above, all these arguments had been raised before the judge and rejected by him.  While it is true that the burden rests with the plaintiff to convince the court that the discretion under section 18(3) should be exercised in its favour, the court can certainly act on all the evidence before it, whether adduced by the plaintiff or by the defendant. 

25. Despite the contentions now made on behalf of the defendant, Mr Coleman has not been able to point his finger to any prejudice suffered by the defendant caused by the non-compliance with the statutory requirements, nor is Mr Coleman able to point to any evidence that the plaintiff acted in its own interest to the defendant’s detriment by making advances to the defendant at its discretion for generating more business for itself and Okachi HK, despite the contention that the plaintiff was able to do so.  The judge was certainly correct to point out the defendant’s failure in proving that the unlimited potential exposure on the part of the defendant could in any way be related to the breaches of the requirements of the Ordinance.  The exposure rather stemmed from the trading of shares carried out pursuant to the arrangements between the defendant and Okachi HK, through Ying as the account executive.  There is no evidence that the defendant objected to any of the share trading transactions.  Nor is there any evidence that the defendant had complained about the loans being made to him.

26. In Emperor Finance Ltd v La Belle Fashions & Ors [2003] 3 HKLRD 995 at 1033, Ribeiro PJ, with whom all their Lordships in the Court of Final Appeal agreed, stated what the court should consider in exercising its discretion under section 18(3) of the Ordinance:

“119.  In exercising its discretion, the court should examine the breach or breaches in question, their consequences for the parties to the transactions and any other circumstances which may make it inequitable to hold the agreements unenforceable.”

27. In this connection, it is pertinent to have regard to the policy underlying the Ordinance, which had also been alluded to by Ribeiro PJ in Emperor Finance:

“… s. 18 is at the core of the protection given by the legislation and imposes three obligations on moneylenders: (i) to make a memorandum containing the salient terms of the loan; (ii) to obtain the borrower’s signature on the memorandum; and (iii) to give the borrower a copy.  … (i) and (iii), both of which represent basic safeguards …” (paragraph 70 of the judgment).

“… Experience in our courts tends to show that in all sorts of contexts, companies are set up which are wholly-owned and operated by individuals who lack commercial, financial and legal sophistication and are likely to be vulnerable to exploitation by unscrupulous moneylenders.  …  The protections are therefore generally intended to apply to less substantial or commercially experienced companies.” (paragraph 73 of the judgment).

“… The policy of section 18 is to ensure that potentially unsophisticated borrowers are left in no doubt as to how much money exactly they are borrowing by way of principal and what interest they will have to pay on that loan, to which end, such information has to be set out and expressed in the prescribed manner in the memorandum to be signed by the borrower.” (paragraph 102 of the judgment).

28. Mr Shieh has also referred us to Celestial Finance Ltd. v Yu Man Hon & others (2004) 7 HKCFAR 450 at paragraph 21, where Ribeiro PJ said:

“One should not … approach the task of construction with any preconceptions as to the undesirability of ‘leniency’ to money lenders or as to a desirable slant in favour of one or other of the parties.”

29. This, if I may say so with respect, must be the right approach, for on the one hand, the court should not readily countenance breaches of the statutory regulatory requirements, but on the other hand, the court should be aware of unscrupulous borrowers attempting to avoid paying their just debts to moneylenders, referred to by Kempster JA in New Japan Securities International (HK) Limited v Lim Yong Lin [1987] HKLR 447at 448E-H. 

30. In the circumstances, in view of the judge’s finding that the defendant was a man of sophistication and the absence of any evidence that the defendant was in any way prejudiced by the plaintiff’s non-compliance with the requirements of the Ordinance, there is no basis for this Court to interfere with the discretion the judge exercised in favour of the plaintiff.  Even if I were asked to exercise my discretion afresh, in the circumstances of this case, I would do so in favour of the plaintiff. 

Mitigation of loss

31. On this subject, the judge said:

“65.  The defendant relies on the settled principle that a plaintiff is under a duty to take all reasonable steps to mitigate his loss.  It is submitted that in doing so, a plaintiff must act with both his own and the defendant’s interests in mind: British Westinghouse Electronic & Manufacturing Co. Ltd. v. Underground Electric Railways Co. of London Ltd. [1912] AC 673, 689.  A failure to effect an earlier sale of the security when market prices were more favourable constitutes a failure to mitigate: Bristol & West Building Society v. Fancy & Jackson [1997] 4 All ER 582, 623 (the court found there had been unreasonable delay in the mortgagee’s sale of real properties in a falling market).

66.  The stock market is a highly volatile market.  As the defendant said repeatedly in his testimony, it can rise and fall (and does so rapidly).  With hindsight, it may be obvious that there has generally been a falling market between October 1997 and the time of liquidation of the said margin accounts.  But there was no evidence (not even from the defence) that such market trend must have been obvious (or at least obvious to the plaintiff).  The plaintiff’s witnesses have explained in effect that liquidation of an account was a drastic step and many customers did not want that to happen.

67.  As stated above, I have found that the defendant also did not wish the said margin accounts to be liquidated immediately.  Further, there have been partial payments from the defendant.  In these circumstances, even adopting the test propounded by the defence (that a plaintiff must act with the interests of both parties in mind), there is nothing unreasonable in the plaintiff’s decision to liquidate in December 1998 and not earlier.

68.  By reason of the above conclusion, there is no need to consider whether the contracts have conferred on the plaintiff a right (as opposed to a duty) to liquidate the said margin accounts.  If it had been necessary to do so, I would have found that clauses 5, 7 and 8 thereof have conferred a right to do so.”

32. Mr Coleman contended that the judge correctly identified a well-settled principle that the plaintiff is under a duty to take all reasonable steps to mitigate its loss and damages.  He relies on the authorities referred to in paragraph 65 of the judge’s Reasons.  However he submits that the judge’s consideration of the material available and necessary to be taken into account was cursory in the extreme, without referring to the substantial evidence that had been adduced before him. 

33. Mr Shieh submitted that to proceed on the basis that the judge had found that the plaintiff was under a duty to mitigate its loss and damage is wrong.  I think Mr Shieh is correct because the judge did make a “fall back” finding that clauses 5, 7 and 8 of the plaintiff’s agreement conferred a right to the plaintiff to liquidate the margin accounts. 

34. For present purposes, it is only necessary to recite clause 5 of the plaintiff’s agreement as that alone will cover the situation.  It reads:

“If I/we make default in paying further security or satisfying to you on demand any monies or liabilities hereby secured or fall to comply with or in default of any of the terms herein contained or …. you may without notice sell or dispose of the said securities subject hereto or any part thereof either together or in parcels and either by dealings at any stock exchange or broker’s board or by public or private sale or in such other manner for such consideration (whether payable or deliverable immediately or by instalments) as you may think fit without being in any way responsible for any loss occasioned hereby however arising ….”

35. Mr Shieh submitted that the notion of duty to mitigate one’s loss only arises in a claim for damages but here the plaintiff’s claim is for the repayment of a debt, not damages.  The plaintiff’s liquidation of the margin accounts was the exercise of a contractual right conferred by the plaintiff’s agreement which the plaintiff could exercise in any way most beneficial to it.  This is akin to a case where the contractual right to sell the security has accrued to a mortgagee.  He referred us to Cuckmere Brick Co v Mutual Finance Ltd [1971] 1 Ch 949, at pp 965G-966A, per Salmon LJ; Richardson Greenshields of Canada (Pacific) v Tze Yim, HCA No. A6690/1987 (18 October 1991, unreported) at paragraphs 94, 96, per Kaplan J; China and South Sea Bank Ltd v Tan Soon Gin George [1989] 1 HKC 155, at 159C-H, per Lord Templeman; and Richardson Greenshields of Canada v Chou Tai Chuan, Cecilia, Civil Appeal No. 130/1990 (7 June 1991, unreported), per Bokhary J (as he then was), at para 52.

36. Since the Chou Tai Chuan, Cecilia case also dealt with margin trading in securities and futures, and it is a decision that binds us, it is only necessary to refer to this judgment for present purposes.  Bokhary J, with whom Kempster JA agreed (and on this point Mayo J did not dissent), stated:

“(17) In liquidating the customer’s account were the brokers under any duty to her wider than the one stated in China & South Sea Bank v. Tan [1990] 1 AC 536?

52.  That case was between creditor and surety, the debtor having defaulted.  The Privy Council held that whether, and if so when, to realise the security were questions which the creditor was free to decide, and that his duty to the surety was simply to sell at current market prices if and when he decides to sell.  In my view, the distinction between the position of a creditor entitled to realize security and that of brokers entitled to liquidate an under-margin account is too fine for us to hold that such brokers are not free to decide whether, and if so when, to liquidate, or that their duty to the customer is wider than one to sell at current market prices if and when they decide to sell.  In my judgment, brokers who are entitled to liquidate a customer’s under-margin account are free to decide if and when to sell the securities or futures held on that account, and their duty to the customer in regard to such liquidation is limited to selling at current market prices as and when they sell if they decide to sell.  So I would decide this issue against the customer, who contends that the brokers were under a duty of care to her in regard to when to liquidate.  They were not.”

37. Indeed, the position of the plaintiff in liquidating the margin accounts being likened to the realisation of a security by a mortgagee was addressed in counsel’s closing submission to the judge.  Out of an abundance of caution, Mr Shieh has applied to us for leave to raise the point in a late respondent’s notice in support of the judge’s judgment.  I do not think Mr Coleman can object to this.

38. The British Westinghouse case relied on by Mr Coleman is distinguishable in that clearly it is a case on damages for breach of contract where the House of Lords referred to the duty on the part of the plaintiff to take all reasonable steps to mitigate the loss consequent on the breach, which debars him from claiming any part of the damage which is due to his neglect to take such steps (page 689 of the judgment).

39. Bristol and West Building Society v Fancy & Jackson [1997] 4 All ER 582 was heavily relied on by Mr Coleman to say that the plaintiff in the present case had a duty to mitigate its loss.  Page 623E-J of the report reads:

“Chadwick J examined questions of mitigation and contributory negligence in relation to Steggles Palmer, Collin Bishop and Cooke & Borsay.  In considering the allegations of failure to mitigate, he said:

‘It is, I think, beyond argument that such part of the loss as is attributable to the society’s failure to realise the mortgaged property at a proper price or within a reasonable time cannot be regarded as having been caused by the breach of the retainer or the breach of the warranty of authority.  That part of the loss has been caused by the society’s own conduct in failing to mitigate.’

The pattern of realisation in cases of this nature requires a number of sequential steps which may be summarised as follows.  First, there is the society’s decision to initiate the process of realisation following the borrower’s default.  Second, there is the issue of a summons for possession.  Third, there is the order for possession.  Fourth, there is the taking of possession.  Fifth, there is the contract for sale.  Sixth, there is completion of that contract.  Delay in taking any of those steps will prolong the period between the borrower’s default and the recovery of moneys advanced.  Prolongation of that period will increase that element of the society’s claim which is said to represent ‘lost interest’ on the principal advanced.  It may also have the effect, on a falling market, of reducing the amount for which the mortgaged property is sold; and so reducing the amount to be set against the claim for principal and lost interest.  Accordingly, there are two questions to be considered: (i) whether there has been unreasonable delay by the society in taking any of the steps which had to be taken towards realisation in the particular case and (ii) whether that delay did, in fact, have the effect of reducing the amount for which the mortgaged property was sold.

[after examining the facts in each case his Lordship accepted that the society had failed to mitigate its loss … ]”

40. Mr Shieh pointed out that Bristol and West is a case where the solicitor was being sued by his client (a mortgagee in a transaction) for damages for professional negligence.  The solicitor failed to report facts to the lender which might have an impact on the assessed value of the security, as a result of which the lender over-lent.  The issue was what loss was caused by the erroneous valuation (consequential upon the solicitor’s breach of duty) and the issue of mitigation arose in the context of such a claim.  It was not a claim by the creditor against the debtor for the underlying debt.  As to the factual finding that there had been unreasonable delay in realisation of the security, the relevant part of the report did not set out the facts and one simply does not know the factual basis of the finding of failure to mitigate.  I consider that this case is not helpful to the defendant.

41. Mr Coleman also referred us to Medforth v Blake & Ors [2000] Ch 86 for the proposition that a receiver managing mortgaged property owed duties to the mortgagor and anyone else with an interest in the equity of redemption.  Applied to the present case, Mr Coleman argued, even accepting that the plaintiff was in the position of a mortgagee and had a contractual right to liquidate the margin accounts at any time it chose, it owed a duty to liquidate at a reasonable time. 

42. As pointed out by Mr Shieh, the plaintiff likened to a mortgagee can do two things, to liquidate at any time it chooses (the first limb) and to carry out the liquidation (second limb).  It owes no duty to choose any particular time under the first, but once he liquidates, he must exercise reasonable care and act in good faith in the liquidation process.  Medforth v Blake dealt with the second limb, as is obvious from the following passages in the judgment of Sir Richard Scott VC (as he then was):

“The proposition that, in managing and carrying on the mortgaged business, the receiver owes the mortgagor no duty other than that of good faith offends, in my opinion, commercial sense.  The receiver is not obliged to carry on the business.  He can decide not to do so.  He can decide to close it down.  In taking these decisions he is entitled, and perhaps bound, to have regard to the interests of the mortgagee in obtaining repayment of the secured debt.  Provided he acts in good faith, he is entitled to sacrifice the interests of the mortgagor in pursuit of that end.  But if he does decide to carry on the business why should he not be expected to do so with reasonable competence?” (p 93C)

“The Cuckmere Brick case test can impose liability on a mortgagee notwithstanding the absence of fraud or mala fides.  It follows from the Downsview Nominees case and Yorkshire Bank Plc. v. Hall that a receiver/manager who sells but fails to take reasonable care to obtain a proper price may incur liability notwithstanding the absence of fraud of (sic) mala fides.  Why should the approach be any different if what is under review is not the conduct of a sale but conduct in carrying on a business?  If a receiver exercises this power, why does not a specific duty, corresponding to the duty to take reasonable steps to obtain a proper price, arise?  If the business is being carried on by a mortgagee, the mortgagee will be liable, as a mortgagee in possession, for loss caused by his failure to do so with due diligence. …

In the Cuckmere Brick case [1971] Ch. 949, 968-969, the Court of Appeal held that a mortgagee when exercising his power of sale owed a duty to the mortgagor ‘to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it.’  This is firmly established now as a duty in equity.” (pp 98H-99D)

43. In the case before us, the defendant’s complaint is not that the plaintiff was not exercising due diligence in liquidating the margin accounts or that it failed to fetch the market price for the shares or that the liquidation process was carried out in bad faith.  The complaint is that the plaintiff decided to sell at an unreasonable time.  It follows that Medforth v Blake does not assist the defendant either. 

44. As I consider that this Court is bound by the decision of Bokhary J in Chou Tai Chuan, Cecilia, the defendant’s argument of the plaintiff’s failure to mitigate damage on the basis of a delayed exercise of the right to sell must fail in limine.

Facts relevant to mitigation

45. In the event that this case goes further, I think I should also express my view whether the judge was correct in holding that there was nothing unreasonable in the plaintiff’s decision to liquidate in December 1998 and not earlier.

46. Before referring to the evidence relied on by the parties, it is relevant to point out that it is well settled that the onus of proof on the issue of mitigation is on the defendant (see McGregor on Damages, 17th Ed para.7-019).  Hindsight is to be avoided in reviewing the relevant circumstances, and the plaintiff is not under any obligation to do anything other than in the ordinary course of business.  In Banco de Portugal v Waterlow and Sons [1932] AC 452 at 506, Lord Macmillan stated:

“… where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighted in nice scales at the instance of the party whose breach of contract has occasioned the difficulty.  It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency.  The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.”

47. The facts relied on by the defendant in his contention that the plaintiff had failed to take reasonable steps to mitigate its loss within a reasonable time after mid-December 1997 or the end of April 1998 are as follows.  Following the stock market crash in October 1997, on 21 October 1997, the value of the shares in M3001 dropped from about $112.8 million as at 13 October 1997 to $53.7 million at close of market on 31 October 1997, a reduction of over 50% in the value.  By 31 October 1997, the margin usage of M3001 had increased to 228%, over 4 times the usual margin or lending ratio of 30-50% accepted by the plaintiff on red chips and other second or third line stocks.  On 31 October 1997, the margin call under M3001 was for $25.2 million, whereas on 7 November 1997 the margin call under M3480 was for $3.2 million.  Since late October and early November 1997, the plaintiff had begun to chase the defendant for additional margin deposit.  As at 16 December 1997, the total outstanding indebtedness under M3001 was $50.9 million, while the market value of the shares in it was $46.2 million.  The accept value of the shares was only $16.9 million, and the margin usage was more than 300% being almost double the margin usage prior to the market crash.  The margin call required was $34.1 million.  Regarding M3480, the total debt was $18.7 million, the market value of the shares $15.6 million, the accept value of the shares $7.1 million, the margin usage was over 260%, and the margin call required was $11.6 million.  There was an agreement made in February 1998, under which the defendant agreed to make monthly margin deposits to cover the interest under the margin accounts, and to make a further payment of $2-3 million as margin deposit.  There were four deposits made, as referred to in paragraph 9 of the judge’s Reasons, the last of which was made on 29 April 1998.  By 3 June 1998, the debit balance of M3001 was $39.3 million, margin usage 311%, margin call $26.7 million, and under M3480 the debit balance $18.9 million, margin usage 326% and margin call $13.1 million.

48. The defendant also relied on the evidence of Mr Naruhito (the plaintiff’s director) that the shares were likely to be capable of being disposed of at a reasonable time after mid-1997 or late April 1998.

49. It is contended that the defendant’s request for indulgence, relied on by the judge, would not relieve the plaintiff from its duty to take reasonable steps to mitigate its loss, which must be assessed objectively in the light of all the surrounding circumstances.

50. Mr Shieh drew our attention to the following matters, to justify the judge’s rejection of the mitigation defence.

51. As the judge said, the stock market is a highly volatile market.  There was no evidence that a falling market trend between October 1997 and December 1998 was obvious at the time or indeed at any time.  The evidence instead showed the contrary.  In August 1998, the Government announced it would intervene in the stock market, which pushed the Heng Sang Index up by 8.25%.  It must have generated some reasonable expectation that the market might consolidate later on in the year.  As it transpired (which is hindsight), the measures did not quite work.  However, one never knows how the market would fluctuate, although one can always be wise after the event.  The defendant’s own attitude towards market movements was that ‘it goes up, it goes down’, and that the market would always go up again after a crash.  Liquidation of an account was a drastic step and many customers did not want that to happen.

52. The defendant did not want his margin accounts to be liquidated and repeatedly asked for indulgence.  At the end of December 1997, the value of the shares in the shares accounts first dropped well below the level of indebtedness.  Ying requested the defendant to pay margin deposit.  A meeting was scheduled on 7 January 1998.  The defendant wrote on 9 January 1998 to Fan to get Fan involved.  The letter was copied to Ying.  As it happened shortly afterwards, Fan became a source to assist the defendant in the payment of deposit.  At the end of January 1998, after repeated demands by Ying, the defendant agreed to deposit about $2-3 million and then monthly $500,000 to pay for the margin interest.  That indulgence was eventually given by the plaintiff.  On 4 February 1998, Fan paid the first sum of $750,000 as margin deposit on behalf of the defendant.  Similarly, on 4 March 1998, Fan paid the second $750,000, and on 26 March 1998 the defendant remitted the third sum of $500,000 (or $499,900) as margin deposit.  By a fax of the same date, Ying acknowledged receipt of the defendant’s $500,000 and advised him that he would sell some shares in his portfolios in order to reduce the interest burden and would liaise with the plaintiff not to liquidate the accounts.  By a fax of 30 March 1998, Ying told the defendant that he would, as instructed by the defendant, negotiate with the company to keep the accounts and to sell some odd-shares.  On or about 14 April 1998, Fan had a telephone conversation with Ying and related to Ying the defendant’s request not to liquidate the accounts.  On 20 April 1998, Ying wrote to the defendant urging him to make payment as soon as possible, otherwise the plaintiff might not accede to his request not to liquidate the accounts.  No deadline was imposed.  On 29 April 1998, Fan paid the fourth sum of $500,000 as margin deposit on behalf of the defendant, making a total of $2.5 million.  On 15 June 1998, Ying further wrote to the defendant to ask him to make payment of interests as soon as possible but no deadline was imposed. 

53. The Government then intervened in the stock market in August 1998, giving some hopes of a market rebound. 

54. The defendant’s margin accounts were liquidated in December 1998.

55. In Mr. Coleman’s skeleton submission, he gave us the indebtedness of the defendant as at 6 July 1998, being about $15 million under M3001 and $7.5 million under M3480.  His explanation for choosing the date of 6 July 1998 (as it was pleaded in the Defence) was that it was about two months after April 1998, when the last margin deposit of $500,000 was paid and that there is no evidence of the defendant making any further request to the plaintiff not to liquidate the margin accounts.  However, Mr Shieh pointed out, I consider correctly, that the defendant did not instruct the plaintiff to liquidate the accounts either.  This entitled the plaintiff to treat the defendant’s request not to liquidate as continuing.  Mr Coleman argued that two months after the margin deposit stopped forthcoming would have been most reasonable for the plaintiff to liquidate the accounts, and any later date was unreasonable.  I am not persuaded, especially because of the Government’s announced intervention in August 1998 which must have given rise to hopes for a rebound.  Any date which is earlier than the Government’s announcement could be said to be an unreasonable time for the plaintiff to liquidate the margin accounts.  If a reference date were to be picked after August 1998, the question then arose as to how long the plaintiff had to wait.  In my view, it would be unreasonable to venture into the realm of conjectures.

56. The important facts to note in this case are that the defendant had been requesting the plaintiff (through Ying) not to liquidate his margin accounts.  The defendant was, as found by the judge, a man of sophistication and obviously appreciated the Hong Kong Stock Market was highly volatile and it could go up and down drastically.  Obviously he was taking a gamble that the market was going to turn in his favour.  It was at his request that his margin accounts were not liquidated.  The requests were supported by the margin deposits made up till the end of April 1998.  It lies ill in his mouth to criticise the plaintiff as acting unreasonably for having acceded to his requests to keep the accounts open.

57. In all the circumstances, I share the judge’s view that it was not unreasonable for the plaintiff to have liquidated the accounts in December 1998 and not earlier.

Cumulative effect

58. Mr Coleman asked us to view the breaches of section 18 of the Ordinance together with the plaintiff’s conduct in liquidating the margin accounts only in December 1998 cumulatively.  He argued that the loans advanced by the plaintiff for dealing in shares and thus the debts owed by the defendant were inextricably linked.  Even if the plaintiff had the right to liquidate at any time, it should have done so at a reasonable time.  Owing to the plaintiff’s breaches of section 18, making the plaintiff’s agreement unenforceable, the court is entitled to curtail or reduce the plaintiff’s contractual right to liquidate at any time, so that the court could instead pinpoint a particular time for the liquidation under all the relevant circumstances.  Mr Coleman contended that that would be an equitable way of allowing the enforcement of the plaintiff’s agreement.  He argued that 6 July 1998 was the reasonable date, and it was unreasonable for the plaintiff to liquidate the margin accounts after that date, and in particular, as late as December 1998.

59. To say this is a submission on the basis of equity would be an over-statement.  I view it as an argument that the court should penalise the plaintiff for breaching section 18(1) and (2) of the Ordinance, equitable or not, or it is a plea for mercy.  The plaintiff’s breaches of the Ordinance did not prejudice the defendant in any way.  He is a sophisticated man who knew what was involved in operating margin accounts to purchase and sell shares.  He appreciated that the stock market was very volatile and he was as capable of making great profits as of suffering huge losses.  He must have been fully aware of the risk involved.  He was fully apprised of the transactions carried out for his shares accounts and the position of his margin accounts, shortly after the transactions had been effected.  The judge described his defence and evidence in support as he “made them up in a pathetic attempt to avoid the plaintiff’s claim”.  For the reasons I have given relating separately to each of the two subjects discussed, I do not consider that even if the two matters are cumulatively considered, equity calls for the court’s interference in the way suggested by Mr Coleman.  I am not at all persuaded that the judge’s decisions are in any way flawed.

Conclusion

60. For the above reasons, I would dismiss the appeal with an order nisi that the defendant pay the plaintiff’s costs.

Hon Yeung JA:

61. For the reasons given by Woo VP, I too would dismiss the appeal with costs.

Hon Yuen JA:

62. I agree.