LAU MING SAI v. HONG KONG FEDERATION OF STOCK EXCHANGES

M.P. No. 2873 of 1983

                       On a claim by a former client of a defaulting stock broker under Part X of the Securities Ordinance (Cap. 333) held:-

M. P. No. 2873 of 1983

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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RULING

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1. I have before me an application by the plaintiff in this action for an adjournment to call certain further evidence which is not immediately available.  In reality the application has revealed a point of some difficulty and importance on the true construction of Part X of the Securities Ordinance Cap. 333 which is the part which establishes the stock exchange compensation fund.  It has been necessary to come to a conclusion under that Ordinance before deciding whether it is a proper case for an adjournment or not.

2. The position arises in this way. Back in the summer of 1977, the plaintiff had a relationship with a firm of stock brokers Yeung Yau & Company. It is not in dispute that in July of 1977 on four separate occasions and on a further occasion in November 1977, he paid to this firm a total sum of $39,431.70. That sum was paid as the purchase price of two parcels of shares, 3,500 shares in Hong Kong Land and 800 shares in Hong Kong Bank. Unfortunately, the company's affairs were plainly in serious trouble and the inevitable inference from what has been put before me is that the principal was dishonest. The plaintiff never received his shares or his money back.  He was given a note, after pressing the firm, to come in on 2nd January 1978 to collect one or other. They delivered neither. On the 3rd January 1978 he wrote complaining to the Stock Exchange. On the 4th January, the broking firm was suspended. As early as 11th January the Stock Exchange was advertising for claims against it.

3. A claim was duly submitted by the plaintiff for the sum I have mentioned, $39,000 odd. Unfortunately at this particular time, the defendants were under the impression, apparently induced by an opinion of counsel, that to maintain a claim against the fund, a claimant had to exhaust his remedies through the courts.  That view seems to have produced a near paralysis in the settlement of claims between 1978 and about 1982.  I say 1982 because I have a recollection that a case was listed before me some time in that year, which was intended to decide this point.  It in fact did nothing of the sort.   The matter was never argued and indeed ever since that date, as far as I am aware, the defendants have accepted that there is in fact no substance in the point.  It certainly has not been pursued before me.

4. It did have very unfortunate consequences in this case.  The plaintiff took the defendants at their word. In 1981 he issued proceedings against the firm.  He issued his writ on 13th May, and on 18th August he had obtained judgment in default, interlocutory judgment for damages to be assessed. The matter came before the Master for assessment nearly 12 months later on 30th July 1982. It is fairly obvious now, reading between the lines, that someone asked themselves upon what basis are damages in this claim in conversion to be assessed?  They did not take the date of the original demand.   They did not take the date of the writ. They did not take the date of the judgment. They took the date of the assessment.  There was put before the Master two reports from a firm of certified accountants, giving a detailed valuation of the loss on the shares as at 28th July 1982.  It starts by taking the middle market price of the shares on that date.  It then goes on to add in all the lost benefits in the intervening years, things like dividends, bonus issues, rights issues and the rest. This emerges from two documents which were put in before me by way of particulars and became P1 and P2. As a result of that, judgment was given in the sum of $141,822.09 against the broker.

5. It was from that moment that the parties started to drift apart. Having taken the defendants at their word, and launched this action, it was very easy for the plaintiff to say; I now want the judgment sum I have obtained in that action and not the sum that I originally claimed. Dead-lock was reached on the issue (in round figures) of $40,000 versus $14,000. Eventually the $40,000 was conceded by the defendants and the action came on for hearing yesterday in support of the claim for the $141,000 odd. The position was rather peculiar, because nobody then knew how this claim for $141,000 was made up.

6. Up till very shortly before the hearing, it appears that the plaintiff was content to rely upon his judgment. Upon that basis he had apparently successfully resisted an application for particulars.  So I found myself in what I regarded as a fairly ridiculous situation, of having to determine between two figures, and not having the slightest idea how one of them was made up.  Perhaps as a result of some pressure from me, P1 and P2 were then produced, I then saw what lay behind this calculation.  I think Mr. Lui, who obviously picked up the papers only the night before and was therefore in some difficulty, had also in my judgment totally correctly decided that he could not simply rely upon the judgment.  He had to call the author of the reports and to prove the facts in the report to get his case off the ground. So the production of the documents was accompanied by this application for an adjournment.

7. My reaction as soon as I saw the computation of the claim was that underneath the dispute lay a much more fundamental issue.  This was the date at which the assessment had to be conducted.  It was this.  Do you under this Ordinance make an assessment which is contemporaneous i.e. in about January of 1978; or is it permissible to take what is really no more than the chance date of the assessment of damages in the action brought against the brokers which proved to be 28th July 1982.  For that reason I suggested that the first thing I did was to consider this point of date and rule upon the Ordinance.   It seemed to me a lamentable waste of time to adjourn, and call further evidence, if there was a serious risk of that evidence proving to be completely irrelevant or mis-directed.

8. In those circumstances I have to construe the Ordinance.  The compensation fund provisions are contained in Part X.  They open with a definition of "default".  The effect of that is that the broker has to fail to perform "a legal obligation" of one of the three kinds specified in sub-paragraph (a), (b) and (c) of the definition. They are (in what I can best describe as ascending order of naughtiness):-

This case comes under (c) so I need not consider any of the complexities which might arise under a claim under (a) or (b).

9. The sections which follow deal with the setting up, the management, and the financing of the fund.  I can go straight on to section 109 which is the crucial section for this purpose. The vital sub-section is (1) which reads like this:-

"Where in consequence of any act done in the course of or in connection with the stock broking business of the stock broker, or a member firm, or corporate member of the Stock Exchange, a person has a cause of action against that stock broker, member firm or corporate member in relation to any money, security or other property entrusted to or received by the stock broker, member firm, or corporate member or any person employed by that stock broker, member firm, or corporate member, that person shall be entitled subject to this part, to claim compensation from the Compensation Fund in respect of any pecuniary loss suffered by him."

Now one can see that there are three crucial elements to begin with.  First of all there has to be some act done by the broker. Secondly that has to give the person, the claimant, "a cause of action" against the broker, and that phrase "cause of action" is of great importance.  Thirdly the cause of action has to relate to "money, securities or other property entrusted to or received by" the broker.

10. Now given those three circumstances, without more, and at the same time, that person is given the right to claim compensation from the fund for "any pecuniary loss".   Those words simply taken alone, prima facie to me suggest contemporary assessment. One can look at it quite simply in this way.  Assume a cause of action accrues on day 1.  That necessarily means that the claimant can sue on that day.  If damages are an essential ingredient in that cause of action, he must then have suffered damage.   If damage is not an essential ingredient in that cause of action he must then be able to advance some quantifiable claim.  When one looks at the possible heads of action contemplated by the section, one can say that they all suggest some sort of quantification of a claim as at the date on which the cause of action accrues.

11. If that is the basis of the first part of the section, and given those facts a person is eo instanti entitled to claim compensation; it alone suggests that that compensation for "any pecuniary loss" has got to be looked at as at that day.  It postulates or suggests a quantifiable, calculable claim as at that moment.

12. Those first thoughts seem to me to be confirmed if one glances down at the remaining sub-sections in section 109.  Sub-section 3 puts a ceiling on the amount payable "to all persons who suffer loss through any default mentioned in sub-section (1).   It simply carries on the thought of "any pecuniary loss" suffered through that conduct.

13. Sub-section 5 is more specific.  It says "the amount which any claimant is entitled to claim as compensation from the Compensation Fund is the amount of the actual pecuniary loss suffered by him (including the reasonable costs of and incidental to the making and proving of his claim) less the amount or value of money or other benefits received or receivable by him in reduction of the loss from any source other than the Comepnsation Fund".  This points to actual pecuniary loss.  It again suggests present reality, past or contemporaneous suffering and contemporaneous assessment. It is unnecessary for me to determine how far the phrase "actual pecuniary loss" can comprehend future loss, or loss which can be seen to be inevitable at the date of the assessment, but which in fact is going to accrue in the future. What I think is clear from those words is that the loss must be calculable or assessable as at an earlier date.

14. Sub-section 6 deals with interest.  It says this: "In addition to any compensation payable under this part, interest shall be payable out of the compensation fund on the amount of the compensation, less any amount attributable to costs and disbursements, at such rate as may be determined by the Commission from time to time, which shall be calculated from the day on which the default was committed and continue until the day on which the claim is satisfied".  There are number of important points in that.  First of all the rate is to be determined by the Commission. But that does not, in my judgment, mean that the Commission have to exercise any judgment in relation to the particular claim. I think the sole intent of that is that the Commission can, in fixing the rate of interest, reflect monetary conditions which notoriously vary from time to time, bearing in mind that the interest calculation may have to be done, and would have to be done in a case like this, over a very extended period.

15. Secondly these provisions are mandatory. Interest "shall" be awarded in addition to compensation.  Thirdly and crucially for this purpose it "shall be calculated from the day on which the default was committed". The need to ascertain the date on which the default is committed is underlined by section 117(b) which requires the court to declare "the date of default" on any matter under this fund which comes before it.  This again prima facie suggests that the draftsman of this section had in mind that loss might be suffered as between the date of assessment and the date of payment i.e. that there was going to be some continuing loss element, and that that was to be covered by an award of interest. Putting the matter another way.  Insofar as he was accepting that an element of consequential loss might permissibly be included in an "actual pecuniary loss" assessment, he was saying that that is to be covered, and exclusively covered, by an award of interest.

16. That was my primary conclusion on reading of this section, and I think it is convenient to go back and to test it (as indeed I have been invited to in argument this morning) against those three causes of action specified in sub-section 1.  I remind myself that they all relate to things "entrusted to or received by" the broker.

17. The first head is money.  It assumes that the broker has received money with which he has defaulted.  It is common ground here that such a claim is self-quantifying and that the defendants would simply have to be satisfied as to the actual sum which the broker received and failed to repay.  They will have to assess that as at the date of the default, and add interest to it.  There will be no room for any continuing loss other than interest in any event.  This probably echoes the old common law rule that you could not get anything more than interest for a failure to return or repay money. So ones prima facie conclusion exactly fits this first head.

18. The second head is securities.  Now here again it is common ground that in the ordinary course of assessing damages against, for example, a broker for failing to deliver up shares to his client, one may have to make a two stage assessment.  The first stage is the . compensation for the initial default, which is normally taken to be assessed as at the date of the default. The second stage is compensation for the continuing default, which against normally has to be taken as at the date of the hearing before the court in question.  Now when you are dealing with shares in a public company the court's approach is normally fairly simple and basic.  It is to take the list or market price of the shares on the date of default.  Its reasoning goes like this.  If the claimant is awarded the value of those shares as at that date, then he could have gone into the market on that date, bought that number of shares, and he would have been put in almost an identical position to that in which he would have been had no default been made.  I emphasis that this is quite simple and easy where you got a public listed company.  Other considerations apply when either you have a private company, or the parcel of shares is such to convey or affect control of the company.  I am taking the simple case for the moment because it is identical to the case here.

19. If in such a computation there is a basic award of the value of the shares then really all the court has to do at the second stage, is to add an award of interest to that, upon the basis that the man, in order to go into the market and buy, had to borrow the money.   If he is given the value at the date of default plus the interest he will be substantially (and no court can do better than that) put in the same position as if there had been no breach or no default.  So this contemporary valuation plus interest approach is sufficient in most cases.  This example provides very good reason why the draftsman of this particular Ordinance might have followed that example and provide in his mind for contemporary assessment plus mandatory interest in sub-section 6.

20. The third head of cause of action is other property.  Now here the situation is more variable because you can have all sorts of different species of property.  But again where a market value can be ascertained, the common law's same approach holds good.   Value as at the date of breach or refusal, plus interest covers most cases quite successfully. So that if one looks at the matter against that background it simply confirms what I regard as the prima facie meaning to be given to section 109.

21. The time table in section 112, likewise gives that conclusion indirect support.  That section by sub-section (1) allows the defendants to invite the public to make claims "specifying a date, not being earlier than three months after the publication of the notice on or before which claims for compensation may be made".  It goes on in sub-section (2) to specify two limitation periods; saying the claim should be lodged either (1) within the time specified in the notice if any, or (2) within six months after awareness of default.  It goes on in sub-section (3) to bar claims not made within those time limits. So that you have an overt intention in this Ordinance, that claims should be made, lodged and quantified within a comparatively short time scale. It really is a contradiction to suggest that those claims can, as it were, bring into account events which might happen many years into the future.

22. In those circumstances in my judgment the position under this Ordinance,as far as the timing of claims is concerned, can be summarised in this way.

23. If one applies this approach to the facts before me, it is I think apparent that none of the facts specified in P1 or P2 can have any bearing upon the matter I have to consider, which is the ascertainment of the claim as at the date of default. I need go no further than saying this must have been the first week in January of 1978.  The nearest contemporary event referred to in P1 is a bonus issue of one for ten in relation to the Hongkong & Shanghai Bank on the 14th April 1978.  This coincidentally was actually four days after the closing date for the submission of claims in this case.   It does not seem to me that a bonus issue so far removed as that, can possibly have any bearing upon the market price of these shares in December 1977 and january 1978.   The whole of the material in the documents is in my judgment completely irrelevant as relating to value at a date which is simply immaterial.  Therefore there is no purpose in these documents being proved in evidence; and there is no basis for granting the adjournment which the plaintiff requests.