RICHARDSON GREENSHIELDS OF CANADA (PACIFIC) v. TZE YIM(a male) AND OTHERS

HEADNOTE

Commercial Law - Stock exchange transaction - margin trading - whether money lending - fungibility - burden of proof re alleged depletion - effect of customer trading agreement -.whether notice to put up margin was reasonable or effective - whether shares sold at market price - Order 38 rule 2A - proof of evidence standing as examination in chief - warning with regard to documents.

1987 No. A6690

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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Introduction

1. In October 1987 the plaintiff Mr. Tze, who was then aged 65 was full of optimism about the Hong Kong stock market. He was a big player in the market which had enjoyed a long bull run. Mr. Tze was confident that the bull run would continue. As will appear later Mr. Tze's bullishness remained whilst all around were losing theirs. This case demonstrates the dangers of margin trading. All who participate in margin trading should be fully aware of the risks they undertake in the volatile world in which we live.

2. Mr. Tze commenced trading with the plaintiffs in December 1986 he having signed a customer trading agreement in the English language on 16th December 1986. Prior to this Mr. Tze had apparently traded with various other brokers in a substantial manner and thus he was no newcomer to the world of securities.

3. All went well until the October 1987 crash. When the market closed on Friday 16th October the Hang Seng Index stood at 3812 about a 100 points off its all time high a little earlier. At that time, on the plaintiff's evidence, Mr. Tze's portfolio with the plaintiffs was worth $202,258,975. He was allowed a 25% margin and thus he owed them $151,900,957 which was under margin by some $200,000. At this time the plaintiffs were fully secured and the net equity due to Mr. Tze was just over $50,000,000. When the market closed on Monday 19th October (black Monday) the index had fallen 450 points and according to the plaintiff's case Mr. Tze's portfolio had fallen to $184,410,035. He owed them $156,760,450 which meant he was under margin by $18,452,924. However his net equity was still just under $30m. After the market's disastrous crash on 26th October the portfolio had fallen to $123,355,350 and the debt was $153,982,833 thus he was $61m under margin and now owed the plaintiffs over $30m.

4. The plaintiffs then exercised what they contend were their rights under the customer trading agreement and sold all of Mr. Tze's portfolio. Having done so there was a sum due, according to the plaintiffs, of just under $65m in respect of which they issued a writ on 3rd November 1987. With interest the sum said now to be due is some $90m.

5. Mr. Tze takes a number of points in his defence and counterclaim. One of his main grounds of complaint is that the bulk of his portfolio was sold by private sale on 27th October to Mr. Li Ka Shing or to companies with which Mr. Li is connected or associated. Mr. Tze contends that this sale was not at reasonable prices and contends that the plaintiffs were showing favour to Mr. Li at his expense. As an example Mr. Tze complains that his Hang Seng Bank shares were sold to Mr. Li on the 27th October for $20 each whereas Mr. Li was fortunate enough to be able to sell them on the 28th October for $32 each.

Credibility

6. Before setting out the basic facts as I find them to be I have to say that I far prefer the evidence of the plaintiffs' witnesses. The only witnesses of fact called by the defendant was Mr. Tze Yim himself and his son Eric, who is a solicitor of this court. Mr. Tze is understandably distraught at what has happened to his fortune. He genuinely believes that the sale to Mr. Li was not genuine. He has led himself to believe that he could have redeemed his shares from the plaintiffs. He believes that the way in which his account was handled was improper and that there were breaches of the Securities ordinance and the rules of the Hong Kong Stock Exchange. I will have to consider the legal points raised on his behalf in due course. However when it comes down to credibility I did not find Mr. Tze a reliable witness. He is genuinely obsessed by the loss of his fortune and his recollection of the facts is obscured by this obsession. To be fair to Mr. Tze, save as to the alleged transactions on the 19th October 1987, not a great deal turns on the other disputed facts. I have to pay regard to the rights and obligations of the parties created by the Customer Trading Agreement, the effect of the relevant statutory provisions as well as the common law position.

7. Mr. Eric Tze is aged 29 and is, as I have said, a solicitor of this court. Most understandably he has been assisting his father throughout the trauma of the events of October 1987 and the consequent litigation. No possible complaint could be made against him in that respect. He has been in court throughout the trial and throughout all previous interlocutory hearings with which I have been concerned. Until he went into the witness box I was under the impression that he was the instructing solicitor in this case.

8. Mr. Eric Tze, whilst not being personally obsessed with these events, as is his father, nevertheless it is inevitable that some of his father's obsessions should have rubbed off on to him. Again I do not think that a great deal turns on the conflicts of evidence as to what precisely happened between the 19th to 27th October 1991 but I have to say that where Mr. Eric Tse's evidence differs from that of the plaintiff's witnesses I prefer the latter. I must add that I found both father and son difficult witnesses. I take into account that they both gave evidence through an interpreter but it appeared to me that they were arguing the case rather than giving factual evidence. At times they both avoided answering simple questions. Their attitude was in sharp contrast to the major factual witnesses called on behalf of the plaintiffs who gave very careful and, in my judgment reliable, accurate and honest evidence.

9. The major area of dispute on the facts is whether Mr. Tze authorised certain transactions on the 19th October 1987. Mr. Gordon Ng, the plaintiffs' account executive dealing with Mr. Tze's account, told me that he gave Mr. Tze certain advice that morning to the effect that Mr. Tze should sell some Hong Kong Land Shares and purchase some Hong Kong Land Warrants in order to obtain a locked in profit. There were rumours that morning relating to Hong Kong Land and their shares went against the downward trend. Mr. Ng told me that Mr. Tze additionally instructed him to purchase l million Hong Kong Land Shares that day with which request Mr. Ng complied. These shares were purchased at $12.50 each.

10. Mr. Tze denies he authorized purchases or sales of any shares that day.

11. So far as Mr. Ng is concerned, I found his evidence quite compelling. Mr. Tze had been by far his and the firm's biggest client. It seems quite incredible to me that on that day Mr. Ng should have purchased shares to the value of $12.5m without authorization from Mr. Tze. Mr. Tze was as I have already said quite bullish about the stock market, and he was the sort of investor who acted upon rumours. Rumours were certainly circulating that day.

12. I found Mr. Ng a very reliable witness. He spent many years employed by the Hong Kong Government and was Deputy Director of Census and Statistics. He was a J.P. He was seconded to the United Nations for sometime and when he left Government service he embarked upon a career in the securities industry with the plaintiffs. In addition to the evidence of Mr. Ng, I heard evidence from a Mr. Au who was at the material time employed by the plaintiff. He told me that on the evening of the 19th October 1987 he was on a ferry going towards Kowloon when Mr. Tze started talking to him. Mr. Tze recongized him as an employee of the plaintiffs and Mr. Au tells me, and I accept, that he had seen Mr. Tze in the office on many occasions. In fact the evidence was that Mr. Tze spent most of his day at the plaintiffs' offices watching the screen and seeing how his investments fared. Mr. Tze told Mr. Au that he had that day purchased a million Hong Kong Land Shares at $12.50. Mr. Au was slightly suspicious about this on two counts. Firstly he could not recall that the Hong Kong Land Shares had reached that price that day and secondly he has his doubt as to whether Mr. Tze was the sort of investor who would have been in a position to purchase shares to the value of over $12m. Mr. Au tells me that later that evening he went back to the office to check on the price of Hong Kong Land Shares that day and indeed they did reach $12.50. I accept Mr. Au's evidence unhesitatingly. He made a statement about this conversation within a few days of this incident and he later emigrated to Canada. He was willing to fly back to Hong Kong to give the evidence which he gave and I do not think that there is any likelihood whatsoever that he came back in order to tell me anything but the truth.

13. I should have added that Mr. Ng kept a very careful record of all transactions in his personal logbook and these tranactions were in fact so recorded and on the basis of this the plaintiffs brought into being the necessary documentation. I find it too fantastic to accept that any account executive, let alone Mr. Ng, would have made an unauthorized purchase of so many shares on a day when the prospect for the market was so bleak. Mr. Tze was the biggest customer the plaintiffs had in Hong Kong and I cannot believe that Mr. Ng would have done anything to kill the goose which had laid so many golden eggs. I unhesitatingly reject Mr. Tze's denial that the transactions of the 19th October 1991 were unauthorised by him.

The Basic Facts

14. The following are the basic facts as I find them to be.

15. On 16th December 1986 the defendant entered into a written Customer Trading Agreement with the plaintiffs in the English language. All conversations between Mr. Tze and the plaintiff's employees were necessarily conducted in Cantonese. Upon the opening of his account Mr. Tze, as I have said, an experienced investor, requested and was granted, a 30% margin facility, as was the plaintiff's custom in appropriate cases.

16. Within a short time Mr. Tze became regular and much favoured client until by the summer of 1987 his account had become the plaintiff's largest, with a value at the end of July of HK$139m, as opposed to a value of HK$48m at the start of the year.

17. Throughout the period of his trading Mr. Tze relied heavily upon his agreed margin facility and the plaintiffs were content that he should do so in view of the large sums of interest which they earned thereby and because of the margin which had been agreed. The account of Mr. Tze was important to the plaintiffs such that from an early stage they tolerated his account regularly being below margin, invariably allowing it to remain at between 24% - 26%. Eventually, in June 1987, Mr. Tze's margin was reduced by agreement to 25%, notwithstanding that this was against the plaintiff's own policy. Following market rises in August and September 1987 the defendant's position had appreciated to the extent that by the end of September 1987 his margin had been restored to 30%, that is, it was over margin by some 5%.

18. Falls on the London, New York and Tokyo market in mid October 1987 led Mr. Gordon Ng to advise Mr. Tze that with a commensurate fall in the Hong Kong market expected he should secure his position by liquidating a substantial part of his portfolio. Despite this advice given on the 15th, 16th and 18th October 1987 Mr. Tze refused to consider authorizing such a liquidation on the basis that he did not share Mr. Ng's pessimism. At this stage the portfolio had a value of HK$202m whilst it was some HK$200,000 under margin.

19. On the morning of Monday, 19th October 1987, "Black Monday", as I have already fount Mr. Tze authorized the purchase by Mr. Ng of Hong Kong Land Warrants, the sale of Hong Kong Land Shares and the purchase of a million Hong Kong Land Shares in addition.

20. By 11 a.m. on 19th October 1987 the Hong Kong Market was falling, although Hong Kong Land was rising and indeed rose in fact to HK$12.50 from the previous day's close of HK$11.70. Acting on the strength of the rumoured take-over of Hong Kong Land, as I have found, Mr. Tze instructed the purchase of 1 million further Hong Kong Land Shares.

21. As the market continued to fall in the afternoon the Plaintiffs decided that in these circumstances Mr. Tze's portfolio had to be partially liquidated if substantial losses were to be avoided. Under the Customer Trading Agreement the plaintiffs claimed to have reserved the right to liquidate a client's portfolio so as to restore the account to margin. On 19th October 1987 trading on the Hong Kong Market was chaotic and the volume of trading reached a record of HK$4,185m. In the end the plaintiffs managed only to sell 448,200 of the defendant's shares, which was a mere fraction of his entire portfolio.

22. As a result of the 420 point fall in the Hong Kong market on 19th October the market remained closed on the 20th and did not open again until the 26th. Mr. Tze's portfolio had fallen in value by 10% and his margin had increased from being only HK$200,000 below to being HK$18.5m below. At a short meeting between Mr. Tze and Mr. Ka, Mr. O'Rourke, Mr. Leung and Mr. Ng all of the plaintiffs on the 20th October Mr. Tze requested that any further liquidation of his portfolio take place over the next five days rather than immediately. The plaintiffs were not willing to agree to this proposal and instead demanded that Mr. Tze provide the outstanding margin. When pressed as to how the necessary funds would be provided Mr. Tze expressed his intention of mortgaging his properties but beyond this he did not make any more specific proposals. Not satisfied with the outcome of this meeting it was decided by Mr. Ka that instructions from the plaintiff company's head office in Canada should be sought.

23. Further unsuccessful meetings and/or telephone discussions took place between the plaintiff's Hong Kong Office and Mr. Tze on the 21st, 22nd and 23rd October, but on none of these occasions were any more specific proposals put forward by Mr. Tze for the payment of the outstanding margin nor did he appear willing to authorize the sale of his share portfolio. On the afternoon of 23rd October the plaintiff's solicitors felt forced to make a formal written demand for the payment of the outstanding margin deficiency by the opening of the Hong Kong market on Monday, 26th October. No such payment was ever made.

24. On the morning of 26th October Mr. Ka, who had taken over responsibility for Mr. Tse's account, telephoned Mr. william Lewis, the Senior Vice-President of the plaintiff company in Canada in order to fully apprise him of the problems being encountered with this account, the danger it was felt to be in, and the possible means by which a resolution of the problems might be achieved. Following this telephone call further discussions took place between Mr. Lewis and Mr. Winograd the Chief Executive Officer of the Canadian company.

25. In the absence of payment as stipulated, Mr. O'Rourke and Mr. Ka decided that Mr. Tse's portfolio had to be liquidated. However, the decision to liquidate was not acted upon during the morning of the 26th October as it was hoped that the market would soon steady after early falls. During the afternoon efforts were made by Miss Diana Foong, Mr. Ka and Mr. Leung to sell quantities of Hong Kong Land and Cheung Kong Shares. The size of the account, however, meant that their efforts met with very limited success. By the close of trading the Hong Kong Market had fallen by a further 33%.

26. Once the market had closed a further meeting took glace between Mr. Tze and Mr. Ka, Mr. O'Rourke and Mr. Ng. Apart from further professing an intention to mortgage his properties Mr. Tze was unable to offer any concrete proposals for the repayment of his outstanding margin which now stood at HK$61,466,321.50.

27. On the morning of the 27th October it was decided by Mr. Ka and Mr. O'Rourke, after consultation with their Canadian head office, that the only possible way of disposing of Mr. Tze's portfolio under the then existing market conditions would be to a single purchaser of high networth who was both accessible and trustworthy. By this time a speedy cash sale of the portfolio was becoming necessary not only so as to limit the extent of Mr. Tze's losses but also so as to ensure the plaintiff's own survival. Clearly the money owing on this account was substantial but in addition to this the plaintiff had clients who had traded on the Hong Kong Futures Market and had defaulted. In those circumstances under the rules of the Hong Kong Futures Exchange the plaintiffs would have to meet the liability of their clients. So serious was the position that consideration was given to putting the Hong Kong subsidiary, that is the plaintiff, into liquidation. In the end it was decided that this was not a proper course to take but, nevertheless, the financial impact upon the plaintiffs of the events of the 19th October and subsequently were of great concern to them.

28. Prior to the opening of the market on the morning of the 27th October a meeting took place between Mr. Ka and Miss Foong for the plaintiffs and Mr. Li Ka Shing, the Chairman and Managing Director of Cheung Kong (Holdings) and Chairman of Hutchison whampoa Ltd., the third defendant by counterclaim in this action. Mr. Li expressed interest in the blue chip portfolio but was only willing to purchase at a 10% discount on the London closing prices on the basis that London prices had closed down on the Hong Kong closing prices of the 26th October and that further falls were expected as the Hong Kong Market re-opened that morning. A "ball-park" offer of HK$92m was made on the understanding that no improvement on this offer could be expected and it would be subject to precise working out by the appropriate staff.

29. Mr. Ka was disappointed by the offer as he had hoped to base negotiations on the Hong Kong closing prices of 26th October, and not on the lower London prices. Further telephone discussions took place between the Hong Kong and Canadian office after which it was decided to accept Mr. Li's offer on the basis that further falls could be expected as soon as the Hong Kong Market opened.

30. Upon acceptance of the offer Mr. Li sent the plaintiffs a personal cheque in the sum of HK$90,666,270, this being the final price computed by Miss Foong and Mr. Li's staff. This cheque was issued with accompanying instructions to the effect that all stocks purchased were to be placed into a separate account with the plaintiffs in the name of "Penkilan", a company owned or controlled by Mr. Li Ka Shing and being the 4th named defendant by counterclaim in this action.

31. On the evening of the 27th October 1987 Mr. Ling of the plaintiffs wrote to Mr. Tze to inform him of the liquidation of his account and to demand the outstanding balance thereon of HK$64,825,631.54.

32. As at 31st July 1991 the amount claimed to be due together with accrued interest totals HK$90,300,946.51.

Points not Argued

33. Mr. Michael Thomas Q.C. for the plaintiffs provided me with a most useful written note of his opening, a practice which I commend to all who to have to open all but the simplest of cases.

34. During the course of his opening and in the written note thereof Mr. Thomas identified a large number of points which Mr. Tze had pleaded and upon which it appeared he was going to rely.

35. As events turn out a large number of these points which were apparent from the pleadings were not relied upon by Mr. Charles Ching, Q.C. in his written closing submissions. Where a point of law is pleaded on behalf of a defendant and where leading counsel decides not to refer to that point at any stage during the course of his closing submissions, it is fair and appropriate for the court to treat those points as having been abandoned or no longer relied upon.

36. Mr. Ching said that he did not abandon any points. But I do not think it is incumbent upon a court to spend time considering points which leading counsel for that party felt unable to incorporate in his written or oral closing submissions. I therefore propose to deal solely with the points upon which Mr. Charles Ching Q.C. relied upon in his closing submissions and to which Mr. Thomas and Mr. Griffiths, for the plaintiff and the defendants to the counterclaim, have responded.

The Customer Trading Agreement

37. This was signed by the defendant and on behalf of the plaintiffs on 16th December 1986 and is, as I have already said, in the English language. It is in the form of a statement addressed to the plaintiffs from Mr. Tze.

38. Clause 1 makes clear that all transactions made by the plaintiffs for the defendant "shall be subject to the constitution, by-law, rules, rulings, regulations, customs and usages of the exchange or market".

39. Clause 2 provided as follows:

 

"The undersigned hereby undertakes with you that the undersigned will:-

 

(a)	provide you, immediately upon your request, with such security or sums of money for such amount as you may specify from time to time to cover the undersigned's indebtedness or obligations to you as a result of the said transactions or otherwise;
(b)	notify you immediately of any significant changes in the financial status or otherwise of the undersigned."

Clause 3 provided as follows:

"All the undersigned's interest in any funds, securities, commodities, precious metals, foreign exchange, and such other property held by you or carried by you in any account for the undersigned (either individually or jointly with others) or which may be in your possession at any time and for any purpose, including safe-keeping, shall be subject to a general lien in your favour and shall be pledged in your favour and as continuing collateral security for the payment of such indebtedness as may exist to you from time to time."

 

Clause 4 provided as follows:

 

"Without prejudice to any other rights or remedies that you may have against the undersigned, you may, at your absolute discretion, liquidate the undersigned's account(s) with you upon the happening of any one or all of the following events:

 

 

Clause 8 provided as follows:

 

"The undersigned hereby agrees and undertakes to pay you interest on any outstanding sums due and payble by the undersigned to you ("the said sums"). The said sums shall be calculated on a day to day basis at such rates as are from time to time charged by you provided always that interest so charged shall be without prejudice to any other rights contained herein and shall accrue as well after as before any Judgment obtained hereunder."

 

Clause 11 provided as follows:

 

"Unless the undersigned otherwise direct in writing, any subject matter of the said transactions held or carried by you for or on tae undersigned's account(s) may at your discretion be kept at any of the places designated by you. You shall not be bound to redeliver to me the identical subject matter of the said transactions representing those received by you from or for the undersigned but may redeliver other subject matter of the said transactions of like kind and amount. Your obligation shall be to deliver to me or my lawful representative the subject matter of the said transactions of like kind and amount at the office at which the account(s) is carried.""

General Principles

40. Mr. Thomas contended for the following general principles which he asked me to apply throughout my consideration of the various points put forward on behalf of Mr. Tze. Apart, perhaps, for the 'pooling' point these submissions were not dissented from by Mr. Ching.

41. The legal ownership of shares passes by delivery of a signed instrument of transfer coupled with the intention that property should pass. Share certificates are no more than evidence of the fact of registration of share ownership.

42. I take it to be established that shares held by brokers, in other words, blank transfers with certificates in the name of the transferor, can be treated as res fungibiles (see Solloway Mills v. Blumberger [1933] 3 DLR 86 & Solloway v. McLaughlin [1938] A.C. 247).

43. It follows from the above that brokers are at liberty to retain ownership of shares delivered to them (i.e. instruments of transfer with certificates) until they choose to transfer ownership by delivery of the same or equivalent documents to other brokers on sale or to their clients or in accordance with the instructions of their clients.

44. When brokers conduct their business in this way no client will enjoy any right of property in any particular shares held by the broker after a purchase for his account or after a client has delivered transfers and certificates to them to fund further margin trading. Thus if Mr. Tze had instructed the plaintiffs to purchase 1000 shares in Hong Kong Land and they carried out this instruction by purchasing, let us say, certificates numbers 1-1000, he would not be entitled to receive back from them the same certificate numbers if he wished to take possession of the share certificates himself. They would have complied with their obligation if they gave to him a certificate or certificates covering 1000 shares but being different certificate numbers. This is the essence of fungibility.

45. Mr. Thomas points out by way of analogy that if I deposit a $1000 note into my bank I am not entitled to receive back, when I later withdraw $1000, the same $1000 note.

46. In this case the plaintiff purchased shares on behalf of Mr. Tze in accordance with the margin agreement which they had with. On some occasions shares were transferred from other brokers to the plaintiffs which were used by Mr. Tze to finance his margin trading. On some occasions when he was overmargined he received cheques from the plaintiffs.

47. It is important to note that every client enjoys both contractual and fiduciary rights against his broker. When a broker executes a purchase on a client's behalf he is obliged to take delivery of the shares from the vendor (see Lord Atkin in Solloway v. Mills).

48. The broker may not for his own benefit deplete the quantity of shares he holds for his clients or to put it another way he is obliged at all times to hold sufficient shares to match the totality of his client's purchases and deposits. The client has the right to call upon his broker to deliver up particular shares to him against payment of the account; this is a personal chose in action and upon delivery of a deed of transfer the propery will vest in him.

49. It must not be forgotton that the broker has certain rights against his clients and this may permit him to refuse to deliver up shares to his client or to retain possession of the badge of ownership. For instance a broker has a common law lien as an unpaid agent (see Halsbury Vol. 45 para. 143). He may also have his contractual rights to retain possession as against his own client such as by way of lien or pledge. (For instance see C1. 3 of the Customer Trading Agreement). Further at Common Law a broker is ordinarily entitled to pledge his client's shares (see Halsbury Vol. 45 para. 25 and London Joint Stock Bank v Simmons (1892) A.C. 201.

50. A pledgee may also validly enter into a sub pledge, and if he does so the client has no right to demand delivery of the shares without redeeming the pledge (see Donald v Suckling (866 L.R. 1 Q.B. 585).

51. So where a client deposits shares with his broker the latter's obligations will depend upon the terms of the deposit.

52. Mr. Thomas submitted that this posits 3 situations:

The Pooling Point

53. Para. 22 of the Fresh Defence and Counterclaim provides as follows:

"In respect of securities which were deposited by Mr. Tze whether on account of purchases made by Richardson Greenshields on his behalf or transferred from the account of other brokers, Mr. Tze will contend that Richardson Greenshields had no right to dispose of or otherwise deal with the same without proper authority from Mr. Tze, or in any event only upon proof that after such disposal or other dealing it held at all times sufficient other securities of the same description as those comprised in such disposal or other dealing so as to be able on demand to discharge its obligations in respect of securities of such description to Mr. Tze and all other clients."

54. It is to be noted that nowhere in this paragraph is there any positive plea to the effect that the plaintiffs were deficient in any particular counter of shares. I reject Mr. Tze's evidence that Mr. Ng promised that the plaintiffs would not 'pool' his shares. This is not pleaded and was not put to Mr. Ng in cross-examination.

55. Various applications for discovery and interrogatories had been made by Mr. Tze directed towards attempting to establish that at all times the plaintiffs did not have sufficient securities so as to be able to discharge on demand its obligations towards Mr. Tze and all other clients. I made various orders designed to assist Mr. Tze in this regard but I regret that the scope of these orders provided difficulties to those who had to comply with them. Various subpoenas were issued by Mr. Tze to third parties and again this caused hardship by virtue of the large amount of documents involved.

56. On 29th July Mr. Ching asked for an adjournment of between 1 - 2 weeks on the grounds that those working on the material recently disclosed had not finished their labours. This adjournment was objected to especially as it would have meant adjourning the trial until October or November and further on the ground that there was no positive averment in paragraph 22 alleging any discrepancy.

57. In response to this application Mr. Thomas invited me to rule on the question whether the pooling point had any relevance to the issues in the case especially in view of the way it was pleaded and I was asked to decide if necesary upon whom lay the burden of proof of establishing that the pool was deficient. Mr. Ching thought that point would take a day and a half to argue but in the end it was completed in half a day. I gave Mr. Ronny along Q.C. until the next morning (30th July) to prepare this argument.

58. I should have added that pursuant to a Consent Discovery Order made by Sears J., Mr. Tze's advisers spent some 3 months in the plaintiff's offices at some considerable time prior to the commencement of the hearing going through all the plaintiff's documents and they were still not in a position during the course of the trial to seek leave to amend the defence to plead a positive case on stock deficiency.

59. Mr. Wong's submissions on the pooling point starts at p. 167 in Vol. 4 of the transcript. Mr. Thomas put in another helpful written note of his submissions and his oral submissions commenced at p. 186 of the same bundle

60. My ruling on this point starts at p. 225 of the same volume and is in the following terms:

 

"I have been invited by all l parties to give a ruling in relation to what has been termed the "pooling point". I am doing this now because the view I form of this matter is likely to be relevant to questions relating to further cross-examination of Mr. Albert Leung, an on-going discovery exercise being conducted by the defendant, and to an application for an adjournment of this hearing. Although it is fair to point out that the pooling point has been canvassed before me in several interlocutory applications relating to discovery and Interrogatories, this is the first time that the matter has been fully argued following Mr. Thomas' opening of the case and the citation of the relevant authorities, and I am much indebted to both Mr. Wong and Mr. Thomas for their assistance. The relevant plea in the Fresh Defence is paragraph 22 which reads as follows: -

 

"In respect of securities which were deposited by Mr. Tze, whether on account of purchases made by Richardson Greenshields on his behalf or transferred from the account of other brokers, Mr. Tze will contend that Richardson Greenshields had no right to dispose of or otherwise Ideal with the same without proper authority from Mr. Tze or in any event, only upon proof that after such disposal or other dealing it held at all times sufficient other securities of the same description as those comprised in such disposal or other dealing so as to be able on demand to discharge its obligations in respect of securities of such description to Mr. Tze and all other clients."

 

I am not concerned in this ruling with proper authority because I would have to decide later, inter alia, whether Mr. Tze is correct when he contends that the shares could only be sold with his assent and after reasonable notice had been given to him. So I am only concerned in this ruling with the alternative plea in this paragraph that the shares could only be disposed of or dealt with only upon proof that after such disposal or other dealing it, i.e. Richardson Greenshields, held at all times sufficient other securities of the same description as those comprised in such disposal or other dealing so as to be able on demand to discharge his obligations in respect of securities of such description to Mr. Tze and all other clients. It is to be noted that there is no averment in paragraph 22 that Richardson Greenshields have not at the material times kept a sufficient quantity of shares to comply with this pleaded obligation. Paragraph A4 of the prayer against Richardson Greenshields claims an account to be taken of what is due from them to the defendant in respect of securities belonging to the defendant which have been converted or otherwise dealt with or disposed of by Richardson Greenshields without the defendant's authority. Paragraph 22 of the Defence raises the spectre of conversion but does not aver it. Mr. Wong, for the defendant, contents that the onus of establishing that there was at all times a sufficiency in the pool lies on Richardson Greenshields and he relies heavily upon the written admission number 2 which Mr. Thomas made on behalf of Richardson Greenshelds. That admission states as follows:-

 

"At least one Instrument of Transfer and accompanying share certificate in a street name delivered to the plaintiffs by or on behalf of the defendant for the purpose of his margin account was subsequently delivered to a third party as a result of a sale transaction effected by the plaintiffs on behalf of another of its clients unrelated to the defendant's account."

 

I find difficulty in accepting Mr. Wong's contention. As the pleadings stand there is no allegation that after disposal there was an insufficiency in the pool. It is conceded that the principle of fungibility applies at least to the shares purchased by Richardson Greenshelds on behalf of the defendant. It is denied in relation to shares deposited through other brokers, in other words the Schedule A shares. As to the latter point, Mr. Wong takes a construction point on the Customer Trading Agreement in relation to clause 11 and the preamble which leads to the conclusion, so he submits, that the deposited shares are not covered by clause 11. In my judgment Mr. Wong's contention is far too narrow and fails to take into account the full breadth of the preamble and the nature of the transaction contemplated by the Customer Trading Agreement. In my judgment the fungibility principle applies to both categories of securities. On this basis it can be seen that admission number 2 does not alter the normal burden of proof. If the defendant had wished to raise the insufficiency of the pool, then he should have pleaded it specifically. As it stands on the pleadings, and as submitted by Mr. Wong, the burden is being cast upon the defendant. Now, this of course is contrary to the normal rule that he who asserts something has to prove it and I can see nothing in this case or in the relationship between broker and client to justify departing from the normal rule and I am comforted by the fact that this appears to have been the view of the Supreme Court of Canada in Solloway- v - Blumberger, Dominion Law Reports 1933, page 86, at pages 96 and 97 where; in the context of a conversion claim against a broker, the Supreme Court of Canada said: -

 

"Contrary to what was stated in the Court of Appeal, we would not think the onus was upon the Appellants to show that they had properly disposed of the securities. The respondent had undertaken to establish wrongful conversion. He was bound to prove it. It was no part of the appellant's case to help the respondent in the task that he had set out for himself. There are dicta to that effect by Mr. Justice Finch delivering the Judgment of the appellate division of the Supreme Court of New York in Rogers - v - Thomson, and by Lord Buckmaster in Smith - v - Great Western Railway which would indicate a view contrary to that expressed in the British Columbia Court of Appeal."

 

I should add that no allegation of fraud or dishonesty has been pleaded against Richardson Greenshields in connection with this aspect of the case and secondly a number of witnesses called by them have given evidence that the pool was never depleted so as to create an insufficiency and not one of them was challenged on this point and this would seem to suggest the defendants had not, by then, got any evidence to substantiate such cross-examination or pleading to that effect. The defendant will of course contend that he couldn't make this point because examination of the documents disclosed is still going on, but I must note that under an unusually generous Consent Order, a Consent Discovery Order endorsed by Mr. Justice Sears the defendant's advisers did have a period of months going through Richardson Greenshields' records and that took place a considerable time ago. It follows therefore that I answer "No" to Mr. Thomas' second proposition which he set out in his written submissions on this point, and that is,

 

"is a plaintiff stockbroker who has sold shares deposited by or bought for a defendant in the course of business on a margin account, obliged to prove, as a condition of recovering a debt due from the defendant, that at all material times while transacting business for him, he had in his possession or control sufficient shares to meet the position of every client including the defendant.""

61. The effect of this ruling was, as Mr. Ching accepted, to obviate the need for any further cross-examination of Mr. Albert Leung or the calling of any further evidence on behalf of Mr. Tze. I then heard closing submissions from all parties.

Dr. Glennie's Evidence

62. Mr. Ching called, as an expert witness, Dr. John Glennie from the U.S.A. Both Mr. Thomas and Mr. Griffiths indicated that they would in due course be submitting that his evidence was inadmissible as he was not qualified to give expert evidence on the workings and practices of the Hong Kong Stock Exchange and of Hong Kong brokers. They invited me to hear his evidence and to rule on admissibility in this judgment. In his closing submission Mr. Griffiths resiled from his earlier view, no doubt prompted by what he considered to be useful answers from Dr. Glennie in relation to the case against Mr. Li. He submitted that Dr. Glennie's evidence was just admissible. Mr. Thomas submitted throughout that Dr. Glennie's evidence was inadmissible.

63. Dr. Glennie is clearly a knowledgeable person in to the United States securities markets and industry. He writes and teaches on this and allied subjects. He is clearly competent and expert within his own sphere of activity.

64. However, when it comes to the workings of the Hong Kong Stock Exchange I do not believe that Dr. Glennie was any more expert in this subject than any one else in court. In fact the reverse may well be true because he admitted that he did not know that the Hong Kong Stock Exchange screens failed to record the quantity of shares being offered for sale or purchase. Further he did not know that brokers in Hong Kong took commission from both sides. I agree with Mr. Thomas that Dr. Gleenie's evidence was flawed by the advantage of hindsight. Applying the principles conveniently set out at paragraphs 32-37 and 43 of Phipson on Evidence (14th Ed.) I am satisfied that Dr. Glennie is not qualified to give expert evidence about the reasonableness or otherwise of the plaintiff's action at the relevant and material time. If I were wrong in this conclusion I would nevertheless have concluded that Dr. Glennie's evidence did not assist me in deciding whether the plaintiffs were in breach of their duty towards Mr. Tze when they disposed of his portfolio at the prices and in the circumstances that they did.

Witness Statements

65. On the hearing of the summons for directions an order was made pursuant to Order 38 Rule 2A of the Hong Kong Rules of the Supreme Court to the effect that the parties should exchange witness statements. Mr. Thomas invited me to make a further order to the effect that the statement of each witness should stand as that witnesses' evidence in chief.

66. In the light of observations falling from Lord Donaldson M.R. in Mercer v. Chief Constable of Lancashire (1991) 1 WLR 367 1 declined to make a blanket order. I considered each witness and his statement separately and save for Mr. Alan Au I made the individual orders for which Mr. Thomas contended. On each occasion I took into account the objections from Mr. Wong and the observations of the Court of Appeal in Mercer. In Mr. Au's case his statement was very short and it was clear that there was a head on clash of evidence and in those circumstances I decided that the interests of justice would best be served by hearing his evidence in chief viva voce. In my judgment it would have been an inordinate waste of time and money for the rest of the plaintiff's witnesses to have given viva voce evidence in chief. Each of the witnesses for the plaintiff identified their statement, verified it to be true and made such amendments or amplification thereto as they thought fit.

67. I was not invited by Mr. Ching to make such an order in relation to the statements of Mr. Tze and Eric Tze. I think that the court does have jurisdiction to make such an order in the absence of a request from the calling party given the words used in the order but I acceded to the submission that in the circumstances of this case both father and son should have an opportunity of telling me in their own words what they remembered and what grievances they felt.

The Claim

68. Before turning to consider each of the defences and counterclaims raised on behalf of Mr. Tze I have to consider whether the plaintiffs have, subject to these defences, established that the sum claimed in this action is due and owing by Mr. Tze.

69. I am quite satisfied that the monthly statements sent to Mr. Tze each month accurately reflect the transactions carried out by the plaintiffs on his behalf and on his instructions. I have already found that the transactions of the 19th October 1987 did take place as a result of specific instructions given by Mr. Tze to Mr. Ng. It is also pertinent to note that before the events of mid October 1987 Mr. Tze made no complaint whatsoever as to the state of his account.

70. All the documents evidencing Mr. Tze's indebtedness to the plaintiffs have been placed before me and formally proved. Apart from the transaction on 19th October no witness of the plaintiffs has been effectively challenged about the state of the account. Mr. Thomas relies upon Sections 47, 49 and 51(3) of the Evidence ordinance and the provision of Order 38 Rule 21 of the Rules of the Supreme Court. In the light of these provisions and of the evidence given before me I am quite satisfied that as at the date of the writ (3rd November 1987), subject of course to his alleged defences and counterclaims, Mr. Tze was indebted to the plaintiffs on his account in the sum of $64,825,631.54.

Issues argued by Mr. Ching

71. I have already found that these transactions were authorized by Mr. Tze.

72. It is common ground that Clause 4 of the Customer Trading Agreement governs this question. Clauses 4(a) and (b) require a demand, and none was made on the 19th October. Mr. Thomas relies on Clause 4(f). Contrary to submissions made by Mr. Ching, this point is pleaded at paragraph 11 of the amended reply (p.102) and features in particulars at p.124/5 of the Pleadings Bundle. Mr. Ching says that there has been no evidence that such an opinion was formed, but Mr. Albert Leung clearly formed that opinion (see p.111 of the Statements Bundle 14). Clause 4(f) is clearly applicable on the facts of this case as I find them to be. Mr. Tze was substantially under margin and Mr. Leung was quite properly concerned in view of the most unfortunate turn of events.

73. In any event, it is quite clear that Mr. Tze ratified the sales effected on his behalf. Mr. Ng told me, and I accept, that he told Mr Tze on the afternoon of the 19th about these sales save those relating to the Hang Seng Bank. Mr. Ng told me that he phoned Mr. Tze in the evening and told him about the Hang Seng Bank sales. Mr. Tze expressed satisfaction that not more shares had been sold and he made no complaint about the sales at that time.

74. Mr. Thomas also points out that it is hard to see what damage would flow if the sales were unauthorized or unlawful. They would have been sold for less on 26th and 27th October.

3.    Ought the Plaintiffs to have sold out Mr. Tze's portfolio on the 19th?

75. Mr. Ching contends that the plaintiffs should have made a demand on the 19th, and should have then commenced selling the shares. This point is not pleaded and it is only supported by the evidence of Dr. Glennie, which I have ruled as inadmissible.

76. The legal basis for such a submission is not understood. A broker does not owe a duty to act in the client's best interests to avoid him suffering foreseeable losses. He has to carry out his instructions with reasonable skill and care, which is not the same thing. I agree with the observations of Staughton J. (as he then was) in Drexel v. E1 Nasr (1986) 1 Lloyds Rep. 357 at 366 where he said:

 

"I do not doubt that Drexels, at any rate when they were acting as agents, owed some duty of care to their clients, like any other professional people. But in the man-made jungle of the commodity markets, red in tooth and claw, I do not consider that they owed a duty as wide as that proposed by Mr. walker. They were not obliged, for example, to advise the defendants whenever they considered that the defendants were likely to suffer losses, or to close the defendants' positions if they thought it in the defendants' interests to do so. I am not convinced that the duty went further than to use reasonable skill and care in carrying out instructions which were given to them. If, as I have held, they were not bound by contract either to close the defendants' positions or to tell the defendants that they had not done so, I certainly do not consider that any duty of care obliged them to do either of those things."

4.    Were the Plaintiffs entitles to liquidate the account on the 26th and 27th October 1987?

77. On the 23rd October 1987 (Core bundle 84-5) the plaintiffs' then solicitors wrote to Mr. Tze in the following terms:

                "Dear Mr. Tze Yim,

 

Re: Account No.67131-83

 

We act for Richardson Greenshields of Canada (Pacific) Limited and are given to understand that as a result of the adjustment of share prices in the stock market of Hong Kong on 19th October 1987, your captioned account is now under margin.

 

We are instructed that subject to the prevailing market condition upon the re-opening of the Stock Exchange on 26th October 1987, our clients are prepared to accept and maintain your margin level at 25% of the market values of your shareholdings with our clients.

 

In the circumstances, we are instructed to request your goodself to put our clients in funds in the sum of HK$18,452,924.00 being the required sum to bring your account back to the aforesaid 25% margin.

 

Our clients would, therefore, appreciate it if you would send the said sum of HK$18,452,924.00 to our clients on or before 9:30 a.m., 26th October 1987.

 

Failure to do so will leave our clients with no alternative but to take such necessary action against you including the reluctant alternative of liquidating your account without further notice.

 

As regards your proposed alternative to transfer the securities in your account with our clients to another financial institution, our clients have no objection to your so doing provided that immediately prior to the said transfer:-

 

1.	You pay to our clients all debit balance (s) due and payable by you to our clients; or
2.	You provide a bank guarantee in favour of, and in terms acceptable to, our clients to ensure payment for such debit balance (s)."

Was the demand excessive?

78. Mr. Thomas contends that the demand contained in this letter fully satisfies the terms of Clause 4 (b) of the Customer Trading Agreement.

79. Mr. Ching submits that the demand was for an excessive sum because it included the transactions on the 19th October which Mr. Tze denied. As I have found against Mr. Tze on this point, it follows that the demand was not for an excessive amount.

80. In any event I agree with Mr. Thomas's further submission that Clause 4 (b) is not posited on a demand for a specific debt due. What triggers the right to sell is the failure to put up a sum "as you may specify... to cover the undersigned's indebtedness or obligations to you as a result of the said transactions" (see Clause 2).

81. The demand contained in the letter of 23rd October, not being for an excessive amount, was a good demand within the terms of Clause 4 of the Customer Trading Agreement. In the light of this finding, I do not need to consider the effect of Pigot v. Cubley 15 C.B. (N.S.) 701 (E.R. 143 at 960)

Did the demand give insufficient notice?

82. Mr. Ching then submits that the demand was not valid because it gave insufficient notice. The letter was received during the early evening of Friday 23rd October, and Mr. Tze was given until 9:30 a.m. on Monday 26th October to put up the requested amount. Mr. Ching complains that this only gave Mr. Tze Saturday morning to make the necessary arrangements. He points out that the Stock Market was closed from 19th October until 26th October, and that financial institutions in Hong Kong were in turmoil. Mr. Ching relies upon Bank of Baroda v. Panessar (1987) 1 Ch.335 in support of the proposition that a reasonable time must be allowed in such circumstances. However, this case does not support such a wide proposition. The relevant part of the headnote reads as follows:

 

"... that a debtor who was required to pay money on demand was allowed only such time as was necessary to implement the mechanics of payment needed to discharge the debt before being in default; that in view of the modern methods of communication and transfer of money available the time needed was exceptionally short."

83. It is to be observed that in that case one hour was allowed and held to be reasonable.

This rule is not new. In Brighty v. Norton (1862) 3 B & S 305 at 312 Blackburn J. said:

 

"I agree that a debtor who is required to pay money on demand or at a stated time must have it ready and is not entitled to further time in order to look for it."

84. This very strict rule has been marginally refined over the years such that in the Bank of Baroda case Walton J. was able to concur with what he had said in an earlier case, namely Hawtin & Partners Ltd. v. Pugh unreported 20th June 1975 where he said:

 

"Nevertheless, it is physically impossible in most cases for a person to keep the money required to discharge the debt about his person. He may in a simple case keep it in a box under his bed; it may be at the bank or with a bailee. The debtor is, therefore, not in default in making the payment demanded unless and until he has had a reasonable opportunity of implementing whatever reasonable mechanics of payment he may need to employ to discharge the debt. Of course, this is limited to the time necessary for the mechanics of payment. It does not extend to any time to raise the money if it is not there to be paid."

85. In Bank of Baroda Walton J. went on to make the obvious comment that in 99 cases out of 100 this is all completely academic because the debtor has not got the money available and the demand is only a step towards some other end such, as in this case, bringing an action for recovery of the sum due.

86. Mr. Ka told me, and I accept, that ordinarily margin is required to be put up the next trading day, and I see nothing unfair or oppressive in that. Any person trading on margin must expect the market to go against him in such a way as to obligate him to put up further funds to cover the deficiency. I reject Mr. Tze's evidence that he was promised 7 days in which to put up the funds. This was an incredible piece of evidence given the amount of his indebtedness and the circumstances then existing.

87. Mr. Tze had from Friday evening until Monday morning to meet the demand. So far as time was concerned, I consider that this provided sufficient time to meet the mechanics of payment test. Regrettably, the simple truth is that there never was any real prospect of Mr. Tze being able to put up the required amount or redeem his portfolio. He owed money to other brokers some of whom also sued him. He told me that his only property assets totaled $2 million and although he mentioned assurances by bankers nothing materialized and I heard no evidence from them. He was certainly not entitled to time to raise the money it not being readily available to be paid.

Was the demand inoperative pending the provision of accounts by the plaintiffs?

88. Mr. Tze contended that prior to the 23rd October demand he had made an oral demand for an up-to-date account of his positions. His claim is supported by his son Eric. The plaintiffs' witnesses deny that there was such a demand and I prefer their evidence. Had such a demand been made, it would not have been difficult for the plaintiffs to comply with it.

89. On 27th October the plaintiffs received at 3:15 p.m. a letter from Mr. Tze drafted by Eric on the 26th October in the following terms:

                "Dear Sirs,

 

Re: Account No.67131-83

 

With reference to my captioned account with you, I shall be grateful if you will kindly let me have a detailed Statement of Account from the first date of opening of the said account up to the present showing, inter alias, the quantity of shares bought/sold/deposited /withdrawn, bonus shares/rights shares issued, dividends paid and monthly interest charged etc as soon as possible for my approval of the correctness thereof, after which I shall settle the shares deposited in my captioned account with you."

90. It is of significance that this letter drafted by Eric Tze, a solicitor of the Supreme Court of Hong Kong, made no mention of any earlier requests. This letter was designed to gain time and I do not believe that there was any prospect of Mr. Tze being able to settle the "correct amount owing to you".

91. Mr. Tze gave his reason for wanting an account that he was shocked and disturbed by the unauthorized transactions of the 19th October, and this led him to cast doubts about the whole account. I have already found that those transactions were authorized by him, and thus the letter of 26th October was merely Eric Tze's attempt to stall for further time on behalf of his father.

92. In any event, I find that the whole question of the request for an account is a red herring. Mr. Thomas accepted that a principal had a right to inspect his agent's records relevant to transactions effected on his behalf. He submitted that it did not affect the contractual position created in this case by the Customer Trading Agreement. The plaintiffs have their rights under the Customer Trading Agreement which they were entitled to invoke. The combined effect of Clauses 2 and 4 bear on the broker's specification of an amount required to cover an indebtedness, which is a very different thing to an agreed account.

93. I agree with Mr. Thomas when he submits that "there is no principle of law entitling the client to block the exercise of the broker's contractual rights because there is subsisting a request for an account." Were it otherwise the broker's position in a margin situation in a failing. market would be intolerable.

94. Both parties accept that the appropriate principles are to be gleaned from Cuckmere Brick v. Mutual Finance Ltd. (1971) 1 Ch. 949. That case concerned the exercise of a power of sale of charged land, but the principles are of general application and apposite to the facts of the present case. At p.965G in an oft-cited passage Salmon L.J. (as he then was) said:

 

"I will now turn to the law. It is well settled that a mortgagee is not a trustee of the power of sale for the mortgagor. Once the power has accrued, the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained. he has the right to realise his security by turning it into money when he likes. Nor, in my view, is there anything to prevent a mortgagee from accepting the best bid he can get at an auction, even though the auction is badly attended and the bidding exceptionally low. Providing none of those adverse factors is due to any fault of the mortgagee, he can do as he likes. If the mortgagee's interests, as he sees them, conflict with those of the mortgagor, the mortgagee can give preference to his own interests, which of course he could not do were he a trustee of the power of sale for the mortgagor."

95. This passage is important because it makes clear that the plaintiffs in this case were entitled to have regard to their own interests, and give preference to them. The plaintiffs were in desperate need to realise the securities as quickly as possible. It is unrealistic and uncommercial to suppose that they had any duty to wait until the market recovered in order to assist Mr. Tze. The evidence shows that they would have had to wait for a long time and the interest implications in such a wait would have been horrendous.

96. In my judgment the plaintiffs were entitled to sell these shares when they deemed appropriate and having regard to their own interests. They were entitled to sell them off or on the market and they were entitled to sell them to one purchaser or to several. What they were not entitled to do was to sell them for less than the market price.

97. I do not consider that the plaintiffs were in breach of their duty to Mr. Tze by not attempting to sell on the morning of the 26th October. It was genuinely hoped that the market would steady after the morning falls and this was a perfectly proper view to take. I accept the plaintiffs evidence that they attempted to liquidate during the course of the afternoon of the 26th, but with limited success. Mr. Tze's portfolio was extremely large and it was impossible to find buyers for such large quantities of shares. Trading was, in any event, hectic. The telephone line was humming. Matters were not made easier by the screens in the Stock Exchange not showing the quantities for sale or purchase. Some Hong Kong Land and Cheung Kong Holdings shares were sold in the afternoon and I do not see how the plaintiffs can be criticised for not selling more. They certainly tried. It was, afterall, in their interests and in the interests of Mr. Tze that they should succeed.

98. In so far as shares were sold on 26th they were sold on the Hong Kong Stock Exchange at market prices, and no complaint Can be made on this.

99. I do not consider that the plaintiffs can be criticised for having regard to their own interests in deciding to sell the balance before the market opened on the 27th October. They were in financial difficulties and Mr. Tze owed them approximately $30 million, which was by then wholly unsecured.

100. Nor do I consider that they can be criticised for selling the whole portfolio to Mr. Li. Mr. Li was, afterall, known to the plaintiffs. That meant that they could actually get through to him. They were also in the same building. Mr. Li described graphically how busy his phone lines were at this time. He was known to be able to finance his purchase without difficulty, and he had made plain his intention to support the market. In fact, he told me, and I accept, that he put approximately $3.8 billion into the market to support it in this difficult time. He was clearly likely to be, and was, interested in a portfolio which contained large quantities of Cheung Kong and Hutchison Whampoa shares.

101. The sale to Mr. Li was a completely arm's length commercial transaction. That it turned out to be a good purchase for Mr. Li is neither here nor there. He was not a related party to the plaintiffs and there is not a shred of evidence to support the allegation that these shares were sold to Mr. Li as some kind of favour.

Was market price achieved?

102. So I come to the crucial question, namely, was the price obtained from Mr. Li the market price? It was perfectly reasonable for the plaintiffs to attempt to get from Mr. Li a price based on the Hong Kong closing prices on the 26th. It is also reasonable and common practice to expect to offer a discount on such prices in view of the very large number of shares involved. The shares offered to Mr. Li were as follows:

103. Any purchaser of such a large quantity would, in my judgment, and on the evidence which I accept, expect to be entitled to a discount. A 10% discount was, in my judgment, Perfectly proper.

104. Unfortunately for the plaintiffs and Mr. Tze, Hong Kong stocks had continued to fall overnight in London, and both sides to the negotiations were aware of this fact. Mr. Li offered a price equal to a 10% discount on the London closing prices on the 26th October. He would have been foolish not to attempt to do because there was no certainty that prices would not slip further when the Hong Kong Market opened on the 27th. This deal had to be concluded before market opening on the 27th, and Mr. Li was entitled to attempt to cater for this possibility.

105. Some evidence was given by Mr. Gates as to the unreliability of the London prices as a guide to next day's trading in Hong Kong. He may well be correct in what he says from a technical point of view, but in the man-made jungle of the securities markets "red in tooth and claw" such niceties are frequently ignored. The simple fact of the matter is that Mr. Li had all the trump cards. He knew it and so did the plaintiffs. He played his trump cards. The plaintiffs had a star choice. Either to accept Mr. Li's formula which would result in an immediate payment to them of some $90 million or take their chance in the market on the 27th with the possibility of still lower prices and an inability to dispose of all of the shares.

106. On the evidence given by the plaintiffs' witnesses this matter was given very careful thought both in Hong Kong and Canada. Given the plaintiffs' position and the uncertainties and volatility of the market I do not see how the plaintiffs can possibly be criticised for going for a "bird in the hand".

107. In my judgment, Mr. Tze gets nowhere near to an allegation that the plaintiffs did other than obtain the best price possible in the extraordinary circumstances which then existed.

108. In his written closing submissions on behalf of Mr. Li and his companies, Mr. Griffiths Q.C. sets out his submissions on price with which I agree and do not feel necessary to repeat. In so far as he relies on certain observations of Dr. Glennie to support Mr. Li's provision in this matter I, of course, ignore Dr. Glennie's evidence, which I have ruled inadmissible. It is a conclusion at which I arrived independently of any expert evidence.

109. This plea was originally made and then omitted. At the beginning of the trial Mr. Ronny Wong Q.C. applied to amend by adding it basic. I acceded to this application as I have always been anxious to give Mr. Tze as much latitude as is reasonable in putting forward his various defences to this claim for such a large sum of money. As the point involved is one of pure law, no real hardship was suffered by the plaintiffs.

110. S.2 of the Money Lender's Ordinance Cap. 163 refers to "money lenders" thus;

 

"'Money lender' means every person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business, but does not include -

 

111. The plaintiffs are not exempted persons under Part 1 of Schedule 1. The only possible relevant exempted loan referred to in Part 2 of Schedule is:

 

"5.    a loan made by a company or a firm or individual whose ordinary business does not primarily or mainly involve the lending of money, in the ordinary course of business."

112. S.18 of the Ordinance provides that no agreement for the repayment of money lent by a money lender, any interest thereon nor any security shall be enforceable unless certain documents are drawn up. It is common ground that no such documents were drawn up. Mr. Ching also referred to s.19, which imposes a duty on a money lender to give information to a borrower. (see also s.7(1)(a) and 23)

113. Mr. Thomas takes a root and branch approach by submitting that the plaintiffs never made any loans to Mr. Tze and that there is no evidence of any agreement for the repayment of money lent or for the payment of interest on money so lent within the meaning of s.18 of the Ordinance. If wrong about this then he submits that such loans (which he denies) were exempt loans within paragraph 5 of Part 2 of Schedule 1 of the Ordinance.

114. To support his proposition, Mr. Thomas analysed the facilities granted to and enjoyed by Mr. Tze. When sufficient margin was available Mr. Tze enjoyed two types of facilities. Firstly, he received cash payments, either direct to himself or to other brokers to obtain shares from them for margin purposes. Secondly, Mr. Tze could use his excess margin to purchase further shares. Mr. Thomas submits that in no case where the above facilities were utilized by Mr. Tze was any specific sum paid pursuant to any agreement between the parties that specific sums should be repaid.

115. Mr. Ching invited me to look at the reality of the situation. He submitted that what happened here was that the plaintiffs lent Mr. Tze money in order for him to purchase shares. They charged him interest on outstanding sums. The shares purchased under this arrangement were held by the plaintiffs as security for the moneys outstanding. Mr. Ching reminded me that Mr. Ng gave evidence to the effect that all his clients traded on margin. Diana Foong told me that half her clients traded on margin. Mr. Ching asked rhetorically why should the plaintiffs go to the trouble of obtaining a money lender's licence if they were not lending a money.

116. If Mr. Ching were correct, the consequences would be far reaching and surprising. For instance, many department stores give their clients charge accounts, which allow them to pay part only of what is due and charge interest on the outstanding balance. Are they making loans within the Ordinance? A wine merchant gives his client credit. Is he making a loan until the client repays in full? It seems to me that there is all the difference in the world between lending money to someone simpliciter and giving them credit against goods bought and sold.

117. I am quite satisfied that the plaintiffs did not make loans to Mr. Tze nor did they do so under any agreements for the repayment of money within the meaning of the Ordinance.

118. In any event, this point is not devoid of Hong Kong authority. In Harvester Stock Investment Co. v. Kwan Siu-may (1983 No.11515, 30th April 1986 unreported) Jackson Lipkin J. had to consider exactly the same point. Despite Mr. Ching's protestation to the contrary I can see no real distinction between the facts of that case and the present one. It is true that in that case the books of the broker referred to "loans" but the Court will always look at the substance of a transaction and not the label given to it by the parties especially as in that case English was not the primary language of any of the relevant parties.

119. I accept, of course, that I am not bound by the decision of Jackson Lipkin J. It seems to me that Jackson Lipkin J., however, was quite correct in his very careful judgment, and his conclusions coincide with the independent view that I have formed of the matter.

120. In his judgment, he made clear that it was never suggested that the brokers were entitled to call for the repayment of the sums due - "they merely went into the 'melting pot' of the share dealing margin account".

121. Jackson Lipkin J. found that "the plaintiff has satisfied me and as a matter of law also I hold that it does not have a business of making loans. The system which I have described and which is not in dispute is part and parcel of and not a separate business from its business of stock broking". He then went to ask himself the question, "what was the object of the whole exercise" between the parties and he answered it by finding that it must clearly be that it was stock broking with credit extended to the client. He then added this:

 

"It would stretch imagination to breaking point to say that it was money lending in the guise of stock broking."

122. He also referred to and relied upon a passage in the judgment of Nagle J. in Talcott Taunton.v. G. Seifert (1964) NSWR 1205 at 1207 where the learned judge said:

 

"... one must look at the real nature of the arrangement and not at the motive or object which the parties hope to achieve by their arrangement... The real test is to be found in what, in fact; they have done and the legal effect of the documents they have entered into."

123. If I were wrong on the loan and agreement point, then I would go on to hold that these loans were exempt under paragraph 5 of Part 2 Schedule 1 of the Ordinance. These loans, if they be such, were made in the ordinary course of the plaintiffs' stock broking business. I am quite satisfied that the ordinary business of the plaintiffs is stock broking and this does not primarily or mainly involve the lending of money. On this basis, it would not matter if all of the plaintiffs' clients traded on margin. It is useful to bear in mind the following observation of McCardie J. in Eddelow v. MacElwee (1918) 1KB 205-207 in relation to the English Act;

 

"Each case must depend on its own peculiar features. It is ever a question of degree ..... The Act of 1900 was a severe but beneficial measure. Its object must always be remembered. On the one hand a legitimate business must not be checked if the lending of money is reasonably and bona fide incidental to its successful prosecution. On the other hand the law must not permit an apparently legitimate business to be made the mere cloak and pretext for the unlawful trade of an unregistered money-lender. Evasion of the Moneylender's Act should be repressed, and judges, I think, should be astute to recognize the possibilities of ingenious subterfuge and subtle device."

124. I, therefore, reject Mr. Ching's submissions that Harvester was wrongly decided or relevantly distinguishable on the facts. The 'moneylender point' fails and the instinct of he who deleted this plea from Mr. Tze's original defence was quite correct.

Secret Commission

125. Paragraph 24 of the Defence alleges that the plaintiffs were not entitled to charge Mr. Tze brokerage or commission in respect of the disposal of his shares to Mr. Li. I can see nothing in this point arid it was not elaborated upon by Mr. Ching.

126. Paragraph 23A of the Defence which was added late in the day alleges that the plaintiffs made a secret profit or commission because they received commission of $227,003 .20 from Mr. Li, Penkilan and Wabura in respect of this sale. I can see no reason in law why they should not so charge Mr. Li and his companies and although the point was just mentioned by Mr. Ching at the very end of his submissions he made no effective submission in support of these pleas.

Other Points

127. In his very useful written opening submission, Mr. Thomas identified a number of alleged defences which he was able to glean from the pleadings. When Mr. Ching closed his case, he did not rely upon many of these points. I pointed this out to him at p.293 of vo1.4 of the transcript and asked him specifically whether these points were no longer relied upon. He replied "Your lordship can take it that I have nothing to say upon them". I take that to mean that these points are no longer relied upon. It frequently occurs that a pleading contains points which counsel does not feel able to put forward in his closing submission. This may be because he never thought it a good point, or because it became a bad point as the case progressed, or because he became convinced by his opponent's arguments to the contrary. Our system of litigation depends on a good measure of trust between Bench and Bar and if someone of Mr. Ching's distinction does not feel able to rely upon a point, which has been pleaded, perhaps in a fit of enthusiasm, then the Court is not, in my judgment, obliged to rule upon it nevertheless. I, therefore, propose to treat these unargued points as effectively abandoned.

Conclusion on the Plaintiffs' claim

128. The plaintiffs have satisfied me that as at the date of writ the sum of $64,825,631.54 was lawfully due and owing. All of the defences relied upon by Mr. Tze and argued by Mr. Ching in his closing submission fail.

Mr. Tze's counterclaim

129. This clearly falls away by reason of the fact that the plaintiffs' acted within their rights in disposing of Mr. Tze's portfolio in the circumstances outlined above and were not in breach of any duty owed to him.

The case against Mr. Li, Penkilan & Wabura

130. The counterclaim against these defendants never gets off the ground in view of the fact that the plaintiffs were entitled to sell Mr. Tze's shares and they sold them to Mr. Li or his companies at what I found to be the market price.

131. I would, however, like to make the following observations. I can well understand why Mr. Tze and his legal advisers thought it necessary to investigate whether there was a case against Mr. Li or his companies. The 10% discount on London closing prices needed to be investigated. It was not unreasonable for Mr. Tze to investigate whether there was in fact any relationship between Mr. Li or his companies and the plaintiffs or their parent company. I have no doubt that Mr. Tze's suspicions were heightened by the large and speedy profit made by Mr. Li on the resale next day of the Hang Seng Bank shares.

132. However, by the time discovery had been substantially completed and voluminous interrogatories sought and answered it should have been plain that this was a perfectly proper arm's length commercial transaction, and that many of the allegations made against Mr. Li and his companies just could not be substantiated.

133. Mr. Ching put the case against Mr. Li on the basis that he was put on notice as to whether the sale or the sale at that price was proper, because he knew it was a liquidation sale. He alleged, as was the case, that Mr. Li made no enquiries and that he thus made himself a party to a breach of contract committed by the plaintiffs.

134. When asked what Mr. Li should have asked the plaintiffs, Mr. Ching was uncharacteristically reticent and said that he could not take the matter further and left the matter in my lap (p.274 Vo1.4 of the transcript). It is in my judgment absurd to expect Mr. Li to make any enquiries such as whether the plaintiffs' right to sell had crystallized under the Customer Trading Agreement or some such question. The plaintiffs were, to Mr. Li's knowledge, reputable brokers. Financial markets were in turmoil. It was obvious that margin traders would be in difficulty. It could mot have surprised Mr. Li that the plaintiffs had portfolios that they were desperate to realise. As is usual in situations such as this those with ready cash are in a position to take advantage of the situation by buying low and later selling high. Many fortunes have been made that way. Provided the price agreed to be paid by Mr. Li was the market price, as I have held it to be, I do not see how any criticism can be attributed to Mr. Li or his companies.

135. Mr. Griffiths' submissions on behalf of Mr. Li traversed much wider ground than the narrow basis of the case put against him. His written closing submissions deal at some length with the interesting question of estoppel into which I do not feel it necessary to delve in view of my findings and conclusions of law. He has, however, kept his powder dry for another day.

Documents

136. I cannot leave this case without commenting about the documentation. I was supplied with 54 fully stuffed ring binders of documents. The actual number of documents to which reference was made during the course of the trial was very small indeed. The cost of photocopying must have been horrendous. The sheer logistics of dealing with so many documents was difficult. If the matter should go on appeal the problem becomes nearly three times as bad.

137. I wish to make 2 observations without attempting to apportion any blame in this case. Firstly, solicitors and counsel must pay more attention to the difficult problem of what documents ought to go in the bundles. The present tendency, exacerbated no doubt by the photocopier, is to copy all and worry about it later. This should not happen. Both sides' solicitors should meet in an endeavour to agree on the documents. They are both officers of the Court and they have a duty to ensure that the material placed before the Court is relevant to the issues, and that the Court is not unnecessarily swamped with documents. If documents not placed before the Court become relevant during the course of the trial, then they can be put in at a later stage when their relevance has been established. I suspect in this case that both sides prepared their own bundles without much reference to each other. It must be remembered that in an appropriate case, the Court may decide to refuse the costs of photocopying irrelevant documents. It is a duty of the solicitors on both sides to have careful regard to this issue. Regrettably, the duty is honoured more in its breach than in its observance.

138. Secondly, in complex cases with heavy documentation thought should be given to the use of modern methods of information technology. The great paper chase will gradually come to an end with enormous savings in costs and Court time. (The Society for Computers & the Law has just formed a Hong Kong Branch, and further information and material on this subject is obtainable from them). If a judge is computer literate, as some now are, it is helpful if skeletons, chronologies etc. are given to the Court in machine readable form.

Conclusion

139. It follows, therefore, that on the claim the plaintiffs are entitled to judgment for the amount due on the account, namely $64,825,631.54 together with interest thereon up to the date of judgment. As at 31st July 1991 that totals $90,300,948.51. I hope that the parties will be able to agree the appropriate figure to bring the question of interest up to the date of delivery of this judgment. If not, I will hear them on this issue.

140. It follows that Mr. Tze's counterclaim against all parties fails and is dismissed.

141. As to costs, I make a costs order nisi in favour of the plaintiffs in respect of the action.

142. On the counterclaim, I will make a costs order nisi in favour of the defendants to the counterlaim.

143. If necessary I will hear the parties' in relation to any costs which have been reserved but I earnestly hope that this can be agreed to save further costs and Court time.

144. I cannot conclude this judgment without repeating what I said at the conclusion of this hearing. I am greatly indebted to all counsel for their assistance. The quality of their written submissions was high, and particularly helpful to me as I had to return to this matter after the summer break. I was particularly grateful to them all for the polite and helpful way in which they conducted this case despite the bitter and emotional background to it.