RE THE JOINT AND SEVERAL LIQUIDATORS OF BANKAMERICA NOMINEES (HONG KONG) LTD (IN MEMBERS’ VOLUNTARY LIQUIDATION)

HCMP 2023/2018

[2020] HKCFI 399

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2023 OF 2018

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JUDGMENT

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1.  This is the adjourned hearing of an application made by an ex parte originating summons dated 16 November 2018 (“the originating summons”) by the joint and several liquidators (“Liquidators”) of BankAmerica Nominees (Hong Kong) Limited (in Members’ Voluntary Liquidation) (“BNL”) seeking various orders and directions pursuant to sections 56 and 62 of the Trustee Ordinance (“the Ordinance”) as to how assets held by BNL on trust for clients who cannot be identified from BNL’s books and records are to be dealt with.

2.  The originating summons first came before DHCJ R Ismail on 29 March 2019 at which certain guidance relating to additional matters that should be addressed was given.

Background

3.  BNL was a nominee company incorporated by Bank of America Merrill Lynch (“BAML”) in Hong Kong on 2 September 1960 for the purpose of holding securities on behalf of BAML and its customers. BNL was put into Members’ Voluntary Liquidation on 22 December 2017.

4.  BNL was set up to hold collateral deposited by clients who had taken out loans from BNL’s immediate holding company for its safekeeping. Such collateral was registered in BNL’s name and returned to the borrowers on an ad hoc basis. It was the borrower’s responsibility to make arrangements to change the named beneficiary back to itself.

5.  However, a number of borrowers failed to make such arrangements and BNL continued to receive cash dividends and bonus shares, being the registered owner of the collateral. Whilst BNL and its holding companies kept records inter alia of the date of receipt of cash dividends/bonus shares, details of the companies making such payment etc, such records no longer exist.

6.  There is evidence to the effect that BNL’s records retention policy in effect likely provided for the destruction of books and records after 10 years. Internal documents recording whether or not a borrower’s records had been retained in storage or were destroyed cannot be located and identified. However, neither the Liquidators nor BNL have received any queries relating to the unclaimed assets.

7.  As at 30 September 2019, BNL held total cash in the sum of HKD8,388,868.51 on behalf of the unidentified clients.

8.  As at 14 October 2019, the market traded value of physical scrip so held was HKD6,855,839.77.

This application

9.  The Liquidators believe that the undistributed and/or unallocated shares, dividends, cash balances and accrued interest held or to be received by BNL are trust assets held by them on trust for the benefit of its clients. Accordingly, they seek orders pursuant to sections 56 and 62 of the Trustee Ordinance, Cap 29 (“the Ordinance”) permitting them to deal with such assets.

10.  Prior to the commencement of these proceedings, on 24 October 2018, the Liquidators apprised the Official Trustee of the proposed application. The Official Solicitor has confirmed that the involvement of the Official Trustee is not necessary as the unclaimed assets belong to unidentified clients of BNL. Accordingly, there is no respondent to these proceedings.

Whether the unclaimed assets are trust assets

11.  The Liquidators submitted that given the nature of the business formerly carried on by BNL, the assets it controls belong to its clients. What they now control resulted from its course of business and are not BNL’s own assets but assets that remain undistributed and belong to clients that can no longer be identified.

12.  In Re Peregrine Brokerage Limited & Another [2004] 1 HKLRD 856, Kwan J (as she then was) accepted (see §§9 and 13) that the general rule is as set out in Re CA Pacific Finance Limited & Another [1999] 2 HKLRD 1, namely, that the client and broker relationship was one of principal and agent. Accordingly, cash held by the broker are held on trust for the client who have a proprietary interest in those assets.

13.  On the evidence, it is clear that the assets held by BNL are not BNL’s own assets but assets held on behalf of clients who can no longer be identified. Where a broker purchases an asset for a now unidentifiable client that asset is nevertheless a trust asset despite the client being unidentified: see Re Assets held on trust by Nava SC Securities Limited, unrep., HCMP 1038, 1039 and 1040/2008, 14 October 2008 at §20.

14.  In the present case, there is no reason why the principle underpinning the cases referred to in §§12-13 above should not apply. I have no doubt that the unclaimed assets are trust assets. Those assets were entrusted to BNL for a specific purpose, namely, to be held as collateral. The intention of the former clients could not have been that BNL should retain beneficial ownership upon discharge of the relevant loans.

The order sought

(1) Cash and securities held by BNL and/or the Liquidators

15.  The Liquidators seek an order that would enable them to deal with the unclaimed assets by paying into court (a) cash; and (b) the proceeds of sale of securities in Hong Kong companies or securities in companies established outside Hong Kong.

16.  While under section 62 (1), trustees are permitted to pay cash and securities belonging to a trust into court, the Liquidators wish to pay the proceeds of such securities into court rather than the securities themselves. That would require the prior realization of the securities.

17.  Under section 56 (1) of the Ordinance, the court has a discretion to confer on trustees any necessary power to effect any transaction (such as the sale of the trust assets) that in the opinion of the court is expedient in the management or administration of trust property. As a matter of principle, provided that it is satisfied that it would be expedient to exercise its powers under section 56 (1) in relation to a particular class or classes of securities, the court has power to authorise such  sale.

18.  The requirement stipulated in RHC Order 92, rule 2 (1) (b) (to set out the names and the addresses of the persons interested entitled to the trust assets (cash/securities) to be deposited be set out in the affidavit supporting the payment in pursuant to section 62 of the Ordinance) is not absolute but only “so far as known”. Thus, orders have been made in cases where there are unclaimed trust assets: see Re A One Investments Co Limited, unrep., HCMP 1518/2013, [2013] HKEC 1720.

19.  In the supporting affidavits of G Jacqueline Fangonil Walsh dated 16 November 2018 and 6 November 2019 (respectively “Walsh 1^st” and “Walsh 2^nd”) for this application and reflected in the draft order lodged with the court on 16 January 2020 prior to the hearing (“the draft order”) , the Liquidators sought an order

(i)  authorising them at their discretion to sell at such time such of the securities and shares held by BNL and/or the Liquidators in both Hong Kong and non-Hong Kong companies so that the net proceeds could be paid into court;

(ii)  authorising them to pay into court unclaimed securities and shares in physical scrip in cases where a sale is not practical, possible or cost-effective; and

(iii)  discharging them from any obligations or liabilities in respect of such assets.

20.  A list of all the shares and securities held on 14 October 2019 with their market value (where available) was exhibited to Walsh 2^nd.

21.  In addition to the above, the draft order extends to such securities or sale proceeds as may be received by BNL and/or the Liquidators after the date of the order and prior to the finalization of the liquidation of BNL. This is unobjectionable since it would save time and costs and obviate a similar application to be made in respect of such future trust assets.

22.  At the hearing, the court intimated that while it was minded to grant the requested authorizations, shares and securities the Liquidators consider readily realizable ought to be specifically identified from the list exhibited to Walsh 2^nd. Likewise, shares and securities not readily saleable and to be paid into court should be separately identified.

23.  The court also intimated that no waivers and/or releases from liability were either necessary or appropriate given that the dealings with trust assets (as in the present case) will have been authorized by the court: see HKCP 2020 at 92/2/1.

(2) Fees, costs and expenses incurred by the Liquidators

24.  The draft order included a provision authorizing the Liquidators to charge and deduct from unclaimed cash (including proceeds of sale of securities) held by BNL the fees and expenses incurred in dealing with the trust assets including further anticipated costs in carrying out the terms of the order sought (“the Liquidators’ costs”). As at the date of the hearing, the costs and expenses incurred were in the region of $900,000 including anticipated charges said to be less than $80,000 for future work such as applications for replacement of missing scrip and to give effect to the terms of order sought.

25.  At the hearing, the court made it abundantly clear that the Liquidators’ costs must be taxed.

26.  The Liquidators were directed to submit a revised draft order for approval in light of matters considered at the hearing. The application was then adjourned pending the submission of the revised draft.

The draft order dated 24 January 2020

27.  A draft revised order (“the revised draft”) was submitted on 24 January 2020 with 2 Schedules attached. Schedule 1 is a list of securities in listed companies (in Hong Kong or Singapore) to be sold by the Liquidators. As at 16 January 2020, these had an aggregate value equivalent to HKD7,104,136.54.

28.  Schedule 2 is a list of securities having an aggregate value of HKD6718.13 as at 16 January 2020 which, in the opinion of the Liquidators, are not readily saleable. Those are to be paid into court.

29.  It should be noted that any order under section 56 of the Ordinance must be prefaced by a statement that in the opinion of the court the transaction in question is expedient but that the same cannot be effected by reason of the absence of any power for that purpose in the Liquidators as trustees: HKCP 85/2/4. The revised draft should include such a recital.

30.  In their covering letter of even date, the Liquidators’ solicitors (while noting the court’s observations at the hearing that Liquidators’ costs be taxed), nevertheless renewed their application that the Liquidators be authorized to charge and deduct the Liquidators’ costs from unclaimed cash.  Not only did the Liquidators invite the court to “dispense” with taxation, they also sought summary assessment of the Liquidators’ costs in the sum of HKD100,000.

31.  It was submitted that (i) BNL is solvent, has no creditors and no assets other than the trust assets; (ii) no one would be prejudiced given that no one has contacted the Liquidators regarding this application and the trust assets although notices were published 8 months ago; and (iii) taxation would be an additional cost that will have to be borne by the trust estate.

32.  The court had occasion to consider the application and combined effect of section 196 (2) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 and Rule 176 (1) of the Companies Winding Up Rules, Cap 32H (collectively “the relevant provisions”) in Re the Incorporated Owners of Tai Chi Factory Building (in liquidation), unreported, HCCW 458/2016, 5 March 2020, handed down on the same day as the Judgment in the present case.

33.  In the Tai Chi Factory Building case, this court decided that the relevant provisions establish a statutory regime for the taxation of the fees and expenses of liquidators and in cases where rule 176(1) is applicable, taxation is mandatory and the court has no power to bypass the statutory regime: see §§11, 16-23. The only exception to rule 176 (1) is where rule 176 (2)) applies. That exception is limited to cases where the bill has been approved by a committee of inspection by resolution which is not the present case.

Order

34.  For those reasons, §§ 4-5 of the revised draft are to be replaced by a provision for taxation by the Registrar.