RE T S WONG (INVESTMENT & FINANCE) CO LTD

HCCW 163/1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 163 OF 1994

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D E C I S I O N

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1.  This is a summons issued by the liquidators of T S Wong (Investment & Finance) Company Limited (“the Company”) seeking directions under section 200(3) of the Companies Ordinance, Cap. 32 on the disposal of securities held for and on behalf of its clients.  The terms of the order I made are set out in the schedule annexed to this decision.  These are the reasons for decision.

2.  The business of the Company was trading and dealing in shares.  On 6 April 1994, the Securities and Futures Commission presented a petition to wind up the Company on grounds of public interest, the just and equitable ground, and insolvency.  The Company had been dealing in securities without a registration under the then Securities Ordinance.  It had a deficit of current liabilities over current assets of approximately $417 million.  A winding-up order was made on 4 May 1994.  Only about 30% of the overall shares claimed by clients are available to be allocated to them.  The precise reasons for the shortfall are not known.

3.  The share portfolio to be allocated here is relatively small, and is worth approximately $9.34 million as at the end of 2007.  The liquidators have been able to identify the clients who have a claim to the shares.  There are only 32 claimants. Having reviewed the records maintained by the Company for the clients, the liquidators believe that the records are generally accurate for the purposes of ascertaining a client’s claim to shares.

4.  The directions sought in this application relate to the following matters:

(1) the proprietary entitlement of the clients to the securities held by the Company;

(2) the manner of allocating and distributing the securities and assets to clients;

(3) the processing fee; and

(4) unclaimed assets.

The proprietary entitlement to the securities

5.  The Company had dealt with all its clients trading in shares on a margin basis. Clients were required to pledge their shares to the Company to obtain financing from the Company.  They signed a memorandum of deposit, which was a share charge, in favour of the Company over all their securities.  To obtain its own finance from outside lenders, the Company would need to provide lenders with security and to do so it made use of the shares pledged to it by its clients, relying on the authorisation provided by the clients in the memorandum of deposit.

6.  As the shares pledged to the Company by its clients were fungible and interchangeable with other shares of the same type, it was not generally possible to identify specific shares held by the Company as belonging to a specific client, save for one unusual instance mentioned below.  Similarly, when the Company pledged clients’ shares to lenders for its own borrowings, it was not possible to identify that a specific client’s shares had been pledged to a specific lender.  When the lenders later enforced their security by selling the pledged shares, the burden of that enforcement fell arbitrarily on the Company’s clients.

7.  The Company operated its securities business in a way similar to a stockbroker and the share trading operations were conducted separately from other investments it made for its clients.  I hold that the shares purchased by the Company on the instructions of its clients and related assets are trust assets, held by the Company on trust for the clients claiming shares who each have a proprietary interest in those shares (Re CA Pacific Finance Ltd. (in liquidation) (No. 1) [1999] 2 HKC 632). I have made a declaration in terms of paragraph 1 in the schedule.

The manner of allocation and distribution

8.  In view of the relatively modest value of the share portfolio to be allocated to clients, the liquidators are of the view that it would be more practical and cost-effective for the entire portfolio to be converted into cash and then allocated and distributed to clients together with other cash entitlements that are held for the clients by the Company, instead of attempting to allocate the available securities in each stock on a proportional basis to clients who claim that particular stock, which is complex, time-consuming and costly when small quantities of securities are involved.  The only exception is the case of Wong Chiu, who has a clear claim to physical scrip of 4,000 shares in the Sun Hung Kai stock where the share certificates themselves are registered in his name, and where no other claims have been made to those shares.  To allocate the specific shares to this client, no additional work is required to be undertaken.

9.  Similar orders directing the liquidators to liquidate the entire portfolio and then to distribute the proceeds among claimants were made in Re Law Siu Kong Christopher [2006] HKCU 320 and in Re Win Successful Securities Ltd., HCCW No. 112 of 2000, where the value of the shares held for clients was small and it would not be cost-effective or desirable to allocate and distribute securities to clients in the form of securities.

10.  The liquidators propose that the entire portfolio is to be sold, and the net proceeds of sales for a line of stock are to be allocated on a pro-rata basis to those clients with verified claims to securities in that stock.  The sale proceeds can be allocated with any other cash that is held on trust by the Company for a client, and all distributions to a client of such cash are subject to a processing fee, as discussed below, to cover expenses at a fixed percentage rate and be subject to any debt repayment if applicable.  After completion of the allocation and distribution processes, a client who has suffered a loss in respect of a claim to securities would be treated as having an unsecured claim for that loss in the liquidation.  Their net claim to securities will be valued in accordance with the closing price of the securities as at the date of the winding-up order on 4 May 1994.  I should mention that it is unlikely that a dividend would be payable to unsecured creditors from the general liquidation estate.

11.  The liquidators have sought to ascertain the views of the committee of inspection and the claimants on the proposed method of allocation and distribution.  As at November 2005, of the 32 claimants, 18 had signed a confirmation form indicating that they would agree to the liquidators’ proposal, 8 did not send the confirmation form, and the confirmation form sent by post was returned undelivered for 6 claimants.

12.  Since the filing of the liquidators’ 1^st affidavit in support of the present application in June 2008, the liquidators have written to each of the claimants to notify them of this application.  Oral enquiries were received from some clients and some had inspected the liquidators’ supporting affidavit.  Two written responses were received.  One asked for details of his shares in a particular line of stock, Hopewell Holdings Limited, alleged to have been purchased through the Company.  According to the liquidators’ investigation, the Company did not hold any shares in Hopewell Holdings Limited at the commencement of the liquidation.  The other client asserted that a set off should be carried out at the time of the liquidation so he would have become a creditor of the Company.  I do not agree with this. At the commencement of the liquidation, it was not possible to identify specific shares in a particular line of stock held by the Company as belonging to a specific client for any set off to be carried out. Besides, any distribution to this client, whether in the form of securities or cash, would have to be pari passu in accordance with his verified claim.  As the liquidators have pointed out, their proposal that the distribution of allocated proceeds should be subject to a deduction of any outstanding debt owed by clients is similar in principle to the method approved by the court in CA Pacific Securities Limited, where the distribution of securities allocated to clients was also subject to a deduction of, among other things, the outstanding debt owed by clients.

13.  I agree with the liquidators that the proposed method of allocation and distribution is appropriate.  I have made an order in terms of paragraphs 2.1, 2.2, 2.3, 2.4, 2.5, 2.6 and 2.7 in the schedule.

Processing fee

14.  The liquidators propose that the total trust-related costs, segregated from the overall liquidation costs, are to be recovered from the total value of the portfolio as a percentage of the entitlements allocated to each client.  There is jurisdiction to make an order that the fees incurred in connection with the administration of the trust property are to be paid out of the trust assets (Re Berkeley Applegate (No. 2) [1989] 1 Ch 32 at 48H to 51B; Re CA Pacific Finance Ltd. (in liquidation) (No. 2) [1999] 2 HKC 652 at 657H to 658B).

15.  The total amount of trust-related costs already incurred and to be incurred is estimated at about $3.8 million.  The processing fee percentage is approximately 41%, using the value of the portfolio as at the end of 2007.  The liquidators propose to deduct such percentage of the amount allocated to each client as a provisional processing fee, which is to be placed in a separate interest bearing account.  Upon the completion of taxation of legal costs and assessment of the liquidators’ remuneration and expenses, any excess in the provisional processing fee with interest accrued is to be paid back to the clients.  This is reflected in paragraphs 2.5 and 2.6 of the order in the schedule.

Unclaimed assets

16.  It is proposed that any proceeds held on trust which remain unclaimed after 6 months and despite advertisements in newspapers are to be deposited in court.  Where the physical scrip of the securities cannot be sold or are otherwise unclaimed, they are also to be deposited into court and be dealt with under Order 92 of the Rules of the High Court and the High Court Suitors Fund Rules, similar to the order made in Re Chark Fung Securities Co. Ltd. [2005] HKCU 1694, para. 20.

17.  Finally, as for unsaleable securities with minimal value, which include de-listed shares, or shares which have been suspended from trading for a long time, the liquidators seek a direction that they be at liberty to deal with such securities as they see fit including the waiving of any rights or claims of the Company to such securities or deposit them into court to the extent it can be done.

18.  I have made an order in respect of the above matters in paragraphs 2.8, 2.9, 2.10 and 2.11 of the schedule.

Schedule

Terms of the Order

1.    It is declared that individual clients of T S Wong (Investment & Finance) Company Limited (in liquidation) (“Company”) upon whose instructions the Company purchased securities acquired and, insofar as such securities are currently held for the account of the Company at The Central Clearing and Settlement System (“CCASS”) or otherwise including the form of physical scrip in the name of such clients, retain an individual proprietary interest in the securities so purchased on their behalf.

2.    It is ordered that:

2.1    Save and except

(a) those securities in the form of physical scrip certificates (“Physical Scrip”) in respect of which there are no signed blank Instruments of Transfer or the blank Instruments of Transfer have not been duly signed (“Unsaleable Physical Scrip”) (the Physical Scrip other than the Unsaleable Physical Scrip are collectively known as “Saleable Physical Scrip”); and

(b) those securities set out in the attached Schedule of Unsaleable Securities (“Unsaleable Securities”)

the Joint and Several Liquidators be at liberty to sell all securities including Saleable Physical Scrip held by the Company for its clients (“General Portfolio”) as soon as practicable in such mode as the Joint and Several Liquidators see fit and at such prices as determined by them upon taking advice from such stockbrokers or financial advisers as they consider proper and thereafter to apply and distribute the proceeds of sale (“Capital Proceeds”) in the manner set out in the order made herein.

2.2    Where the Joint and Several Liquidators are satisfied that there are sufficient numbers of securities within each particular line of securities now held by the Company to meet all the verified claims of clients to securities within that particular line of securities, the Joint and Several Liquidators be at liberty to distribute, subject to such Deductions set out below, such part of the Capital Proceeds attributable to the sale of such securities to such clients in accordance with their verified claims.

2.3    Where the Joint and Several Liquidators are satisfied that there are insufficient numbers of securities within each particular line of securities now held by the Company to meet all the verified claims of clients to securities within that particular line of securities, the Joint and Several Liquidators be at liberty to distribute, subject to such Deductions set out below, such part of the Capital Proceeds attributable to the sale of such securities to and among such clients pari passu in accordance with their verified claims.

2.4    The Joint and Several Liquidators be at liberty to distribute, subject to such Deductions set out below, the sale proceeds of warrants and dividend income received on account of securities held by the Company to the clients of the Company (“Income Proceeds”) pari passu in accordance with their verified claims for such warrants and dividends.

2.5    The distribution of the Capital Proceeds and Income Proceeds set out in paragraphs 2.2 to 2.4 above by the Joint and Several Liquidators in the case of each such client be subject to the following deductions (“Deductions”):

(a)    any or all unpaid amounts due (if any) by such client to the Company; and

(b)   such of the Joint and Several Liquidators’ costs and expenses as shall have been authorised by the Court as a provisional processing fee, such fee when deducted to be placed by the Joint and Several Liquidators in a separate interest bearing account, for which an account is to be supplied to the Official Receiver and the Committees of Inspection, every three months, provided that upon the completion of taxation of legal costs and an examination and assessment of the Joint and Several Liquidators’ remuneration and expenses, any excess in the provisional processing fee paid with interest accrued is to be paid back to the clients, which remuneration and expenses include but not limited to:

(i)    all direct expenses incurred in connection with the realisation of the General Portfolio and the distribution of the Capital Proceeds and Income Proceeds, including but not limited to brokerage fees;

(ii)   all expenses incurred by the Joint and Several Liquidators in maintaining the General Portfolio since their appointment as provisional liquidators on 1 July 1994;

(iii)   the Joint and Several Liquidators’ fees and expenses which are directly related to the preparation of this application, and their fees and expenses in carrying out this Order; and

(iv)  the taxed legal costs and disbursements of the Joint and Several Liquidators incurred in connection with this application (including advice thereon, preparation therefor and any hearing thereof).

2.6    In relation to Unsaleable Physical Scrip which is in the name of Wong Chiu, the Joint and Several Liquidators be at liberty to deliver such securities to him subject to the following conditions:

(a)    any lien or charge in favour of the Company for any unpaid amounts due by such client to the Company;

(b)   payment of such of the Joint and Several Liquidators’ costs and expenses as shall have been authorised by the Court as a provisional processing fee, such fee when deducted to be placed by the Joint and Several Liquidators in a separate interest bearing account, for which an account is to be supplied to the Official Receiver and the Committees of Inspection, every three months, provided that upon the completion of taxation of legal costs and an examination and assessment of the Joint and Several Liquidators’ remuneration and expenses, any excess in the provisional processing fee paid with interest accrued is to be paid back to the clients, which remuneration and expenses include but not limited to:

(i)    all expenses incurred by the Joint and Several Liquidators in maintaining the General Portfolio since their appointment as provisional liquidators on 1 July 1994;

(ii)   the Joint and Several Liquidators’ fees and expenses which are directly related to the preparation of this application, and their fees and expenses in carrying out this Order; and

(iii)   the taxed legal costs and disbursements of the liquidators incurred in connection with this application (including advice thereon, preparation therefor and any hearing thereof).

2.7    For the purpose of assessing the proof of debt submitted by or on behalf of any client of the Company, the Joint and Several Liquidators do deduct the number of securities in each line of securities the proceeds of which will be paid to the client pursuant to paragraphs 2.2 to 2.4 above, if any, as the case may be, from the verified claim of the client to securities within that line of securities and do value the net claim of the client to securities by reference to the closing price of the securities as at the date of the winding-up order being 4 May 1994.

2.8    The Joint and Several Liquidators be authorised to pay or deposit into Court 6 months after the date of the Order made herein:

(a)    such part of the Unsaleable Physical Scrip which are not claimed by clients;

(b)   such part of the Capital Proceeds and Income Proceeds which are not claimed by clients; and

(c)   such part of the Unsaleable Securities referred to in paragraph 2.11 below.

2.9    Notification of the right of clients whose securities and cash have been paid or deposited into Court pursuant to paragraph 2.8 above (“Unclaimed Assets”) to apply for payment out of their respective securities and cash under Order 92, Rules of the High Court (Cap. 4A) be given by way of advertisement in a Chinese-language and English-language daily newspaper within 21 days of the date of such Unclaimed Assets being paid or deposited into Court.

2.10 In the absence of payment out, the Unclaimed Assets be otherwise dealt with in accordance with Rule 23 of the High Court Suitors Fund Rules (Cap. 4B).

2.11  The Joint and Several Liquidators be at liberty to deal with the Unsaleable Securities as they see fit including waiving any rights or claims of the Company to such securities or pay or deposit the same into Court pursuant to paragraph 2.8 above 6 months after the date of the Order made herein and that they be discharged for any obligations or claims in respect of such securities.

2.12  The Joint and Several Liquidators have liberty to apply.

2.13  The Joint and Several Liquidators’ fees, costs and expenses which are incurred in connection with this application (including advice thereon, preparation therefor and any hearing thereof) and the implementation of this Order to be taxed on a solicitor and own client basis payable out of the Capital Proceeds and Income Proceeds.