CHINA INTERNATIONAL CAPITAL CORPORATION HONG KONG SECURITIES LTD v. ZHANG JIE

HCA 2249/2016
[2018] HKCFI 94

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2249 OF 2016

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R E A S O N S   F O R   D E C I S I O N

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1.  This was the defendant’s appeal from the Decision dated 29 September 2017 of Master S Lo that summary judgment be entered against the defendant for the amount claimed in the statement of claim (namely, HK$22,533,762.14 with interest and costs) and that the defendant’s counterclaim be struck out on the ground that it discloses no reasonable cause of action. At the conclusion of the hearing, the appeal was dismissed with costs, with certificate for two counsel. My reasons appear below.

Background facts

2.  Zhang Jie (“the defendant”) maintained a margin account with China International Capital Corporation Hong Kong Securities Limited (“the plaintiff”) governed by the terms of a written margin account agreement entered into between the plaintiff and the defendant on 20 February 2013.

3.  The defendant obtained margin loans extended to him by the plaintiff pursuant to the margin account agreement.  On 27 June 2016, the plaintiff issued a margin call notice pursuant to clause 5 of the margin account agreement, making a margin call for the sum of $52,421,401.40 by 3:45 pm on 28 June 2016.

4.  The margin call deadline was extended several times at the defendant’s request.  The defendant did not wish his portfolio to be liquidated and had requested additional time for arrangements to transfer his account holding to other securities companies and repay the outstandingloan to the plaintiff while the share price of the collateral was stable.  Whilea number of requests to transfer were made, they could not be implemented.  The defendant’s efforts continued until the morning of 28 July 2016.

5.  On 28 July 2016 a short seller having a short position in the stock of Tech Pro issued a report accusing Tech Pro of “obvious fraud”.  At 1:20 pm on the same day Tech Pro made an announcement containing a bare denial with no detailed rebuttal. The market reacted negatively to the announcement leading to a significant increase in the volume of trade and a consequent drop in the trading price.

6.  After the defendant’s loan to value ratio increased to more than 40% at about 3 pm on 28 July 2017, the plaintiff started to liquidate all securities still held in the defendant’s margin trading account.  The netproceeds were applied to repay the loan in part only, leaving a shortfall. 

7.  On 29 July 2016, the plaintiff issued a default notice requiring repayment of the outstanding balance (being the sum of $22,533,762.14) which, under the terms of the margin account agreement, became immediately repayable.

8.  On 30 August 2016, the plaintiff commenced proceedings to recover the outstanding amount and to that end obtained an ex parte Mareva injunction against the defendant which, subsequently, was varied and continued under various orders.

9.  On 27 January 2017 the plaintiff took out an Order 14 summons for summary judgment and the striking out of the defence and counterclaim.  The application was heard by the Master on 29 September 2017 whose order is the subject of the present appeal.

This appeal

10.  The defendant’s case is that he has a bona fide defence giving rise to triable issues such that he should be allowed to defend the action.

11.  §12 of the defence pleads as follows:

“ The Plaintiff is at all material times under a general duty and fiduciary duty towards the Defendant to act fairly and honestly in all circumstances. (‘the Duty’) In order to give business efficacy and also to fulfill the Duty owed by the Plaintiff to the Defendant, the Duty is also implied in the Margin Account Agreement (‘the Contractual Duty’).”

12.  Factually, the defendant pleaded that one of the collateral securities in the defendant’s margin account comprising a holding of 38,503,200 shares in Tech Pro was sold between 3:28 pm and 3:56 pm on 28 July 2016 averaging HK$0.3942 per share (“the 2^nd sale”) when earlier, at around 3 pm on the same day, the plaintiff had sold 25 million shares of Tech Pro belonging to another client of the plaintiff at HK$1.59 per share (“the 1^st sale”).

13.  The complaint is that the share price had dropped significantly“after/as a result” of the earlier sale and had both parcels of Tech Pro Sharesbeen sold at the same time, the defendant’s margin account would not haveresulted in a negative balance.  The contention is that both parcels of Tech Pro shares should have been sold at the same time and the failure to do so was in breach of the defendant’s duty which counsel for the defendant characterised as a duty “to act fairly and honestly”.

14.  Before considering the issues that arise, the key provisions of the margin account agreement need to be borne in mind:

(a) Section 10 concerned the disposal of collateral and conferred on the plaintiff the right to close the margin account and dispose of any or all securities without notice should the client fail to make a payment on demand of any deposits, margins et cetera.  It entitled the plaintiff to dispose of:

“ any of the securities or investments from time to time in [the defendant’s margin account] … at the then current market price ‌… without being in any way liable for any loss occasioned thereby howsoever arising … [The defendant] agrees that in the event of any disposal of any securities, investments, assets,other property under [the margin account agreement], any such sale or disposal will be conducted in the absolute discretion of the [plaintiff].”

(b) Section 7(c) contained the defendant’s confirmation that:

“ [the plaintiff] may exercise its right under Section 10 … to dispose of such securities … within a very short timeframe (including prior to the deadline indicated in the margin call) in order to protect [the plaintiff’s] ability to adequately and promptly satisfy the outstanding margin loans and other obligations owed by [the defendant. The defendant] hereby covenants that he will not challenge the fairness and reasonableness of the timing and other aspects of the margin calls and disposal of collateral.” (emphasis added)

(c) Section 7(d) contained the defendant’s confirmation and covenant that:

“ he will not initiate or participate any legal proceedings against [the plaintiff] under any claim or counterclaim in connection with or arising out of [the margin account agreement].”

15.  Two issues arise:

(a) whether, as a matter of law, the plaintiff owed any duty to the defendant when exercising its contractual discretion; and

(b) if the answer to (a) is in the affirmative, the scope of that duty and whether, on the evidence, the defendant has shown a prima facie case of breach of that duty, rendering it a bona fide defence.

Whether any duty exists

16.  Mr Lam, counsel for the defendant, relied on the following passage in the judgment of Rix LJ in Socimer International Bank Ltd (in liquidation) v Standard Bank London Limited (No 2) [2008] 1 Lloyd’s Rep 558, §66 in support of the existence of a duty.  After reviewing the authorities that addressed a contractual power to make decisions, Rix LJ stated:

“ ... The concern is that the discretion should not be abused. Reasonableness and unreasonableness also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria … a distinction should be made between the duty to take reasonable care and the duty not to be unreasonable in a Wednesbury sense ….”

17.  Rix LJ’s formulation was derived from various authorities which he had earlier reviewed (see §§61 – 64 of Socimer) starting with the dicta of Leggatt LJ in Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The “Product Star”) (No 2) [1993] 1 Lloyd’s Rep 397 (at 404).  It is clear that the scope and content of that duty is confined to situations where the exercise of the discretion amounted to an abuse or was fraudulent or was so perverse that no rational person could have exercised it in the manner in which it was.

18.  In that regard, it should be noted that for the sake of convenience and clarity, Rix LJ had used the expression “rationality” instead of Wednesbury-type reasonableness, and confined “reasonableness” to the situation where the arbiter on entirely objective criteria is the court itself.

19.  The line of cases culminating in the formulation of the duty in Socimer have different factual contexts.  In none of the cases did the question arise whether, as a matter of construction, and/or to what extent the duty could be affected by express provisions in the contract itself.   Nonetheless, it is well established that the circumstances in which a court willinterfere with the exercise by a party to a contract of a contractual discretion given to it by another party “are extremely limited” where the discretion was exercised honestly and in good faith “for the purposes for which it was conferred” see per Brooke LJ in Ludgate Insurance Co Limited v Citibank NA [1998] Lloyd’s IR 221 at §35.

20.  Mr Wong SC, leading counsel for the plaintiff, invited attention specifically to sections 10 and 7(c) and (d) of the margin accountagreement and the express covenants on the part of the defendant contained therein.  It is to be noted that there is also evidence to the effect that the defendant is a seasoned and experienced investor accustomed to borrowinglarge amounts for the operation of margin accounts.  As earlier mentioned, the defendant made various unsuccessful attempts to transfer his portfolio to other securities accounts as he did not wish his portfolio to be liquidated after receiving the default notice.

21.  For present purposes, the issue is not the existence or otherwise of the duty.  I am prepared to proceed on the basis that the duty as formulated in Socimer applies in the present case.  

22.  In those circumstances, the only issue is whether there is any evidence that could support a prima facie case that the plaintiff’s exercise of its discretion amounted to an abuse, or was fraudulent or is otherwise so perverse that no rational person could have subscribed to it.  It is worth emphasising that no question of any contractual or tortious duty of care arises.

Whether a prima facie case is made out

23.  Stripped to its core, the defendant’s case is nothing more than that it was “unfair” that the plaintiff chose to liquidate the parcel of shares comprised in the 1^st sale before embarking on the 2^nd sale.  As I understood the defendant’s case, the duty involves equal treatment such that when the lender decides to liquidate a collateral provided by a client in Company X, all Company X shares held as collateral in the accounts of other clients, must be sold at the same time although it was not entirely clear whether the duty extended to all clients’ accounts that had provided collateral in Company X or only those accounts that were in default.

24.  The defendant relied on an affirmation of a Mr Wong Kwok On opining on a “trade practice” alleged to exist.  Mr Wong’s affirmation is remarkable for its brevity and notable for its lack of substance.  The evidence proffered was tenuous and conclusory in nature: it shed no light on the substance of the alleged trade practice.

25.  Mr Lam was unable to clarify or provide the court with an adequate and comprehensible explanation as to its practical application.  For example, did it require all accounts to be reviewed at precisely the same time a lender may have hundreds of accounts, when it is common knowledge that the market fluctuates from moment to moment and the portfolios and circumstances of the accounts of each client are different?  Is it feasible and how would that work in practice?  How would one accomplish sales ‘at the same time’ particularly if they concerned significant holdings of shares in a particular company?  How would that tie in with the queueing system for offers and bids?  Those queries remained unanswered.

26.  Leaving aside the issue of the existence or otherwise of the trade practice as alleged, the important question is whether any evidence of abuse or irrationality is discernible from the evidence before the court.

27.  The defendant relied on the matters summarised in §§5 – 6 above and sought to read into the plaintiff’s evidence (in the 3^rd affirmation of Zhou Jiaxing, §26) that it “may in its absolute discretion take into account any factors which the plaintiff considers appropriate in deciding the priority and timing of liquidation”, some nefarious or ulterior purpose.  The defendant also complained that the plaintiff refused its requests for sales records of the 1^st sale.

28.  As regards the plaintiff’s refusal to provide details of the 1^st sale, unless it can be shown that the plaintiff was under any duty or obligation to provide that information, it cannot advance the defendant’s case one iota.  The defendant was unable to point to any such duty.

29.  In so far as it concerns the discretion in deciding the priority and timing of liquidation, such a discretion is part and parcel of the operation of margin loans and is entirely consistent with the provisions of the margin account agreement.  The plaintiff has explained that “[t]he timing of disposal of collateral is determined by matters such as a client’s loan to value ratio, the timing of any margin call, the amount of any outstanding loan and the value of collateral”: see the 4^th affirmation of Zhou Jiaxing, §10.

30.  The defendant may consider it “unfair” that the 2^nd sale took place approximately when the share price had fallen dramatically in the interim.  But unless there is evidence to show the sale was dishonest or in abuse or not made in good faith, fairness and reasonableness do not come into the picture.  There is no suggestion that each of those sales were not made at market price.  None of those considerations described by the plaintiff could be said to be inappropriate, improper or irrelevant when making decisions to liquidate in the context of margin accounts.  No prima facie case of abuse or irrationality concerning the exercise of the plaintiff’s discretion can remotely be discerned from the evidence before the court.

31.  In my view, the submission that the plaintiff was in breach of the duty is nothing more than “moonshine” and the appeal merited immediate dismissal.  An order was also made that the Mareva injunction be continued until further order.