RE C.A. PACIFIC SECURITIES LTD. (in liquidation)

HCCW 37/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 37 OF 1998

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DECISION

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1. Before I deal with the summonses before me, I shall first set out the facts as gleaned from the affirmations before the Court (as expanded upon orally at the hearing) and the documents in the bundles.

Background Facts

2. In January 1998, Mr Yu Man was a client of CA Pacific Futures Limited ("Futures") and of C.A. Pacific Securities Limited ("Securities").

3. Mr Yu traded in Hang Seng Index futures through Futures, and on his own admission, was an experienced and astute trader. Although he had signed a Client Agreement and had also opened an account (No.3537-02) with Securities, he did not buy or sell shares.

4. As a general rule, however, he was aware of the difference between Hang Seng Index futures and shares, and he knew that Futures and Securities were two different companies in the C.A. Pacific group of companies. From these facts and from certain information given to him on 16 January 1998 (which will be referred to in paragraphs 7-8 and 36-7 below), it can be inferred that he knew that trading in futures and acquiring shares on the stock market would have to be done through different brokers.

5. In mid-January 1998, the stock market in Hong Kong was in an extremely volatile state. On 16 January 1998 (Friday), Mr Yu was anxious to acquire shares in Sino Land (0083) as the price of that share had dropped considerably.

6. Mr Yu contacted a Mr Wan, a broker at Futures. He did not contact brokers at Securities because he had dealt with Mr Wan for a period of time trading in futures, and he had never bought or sold shares through Securities before. He also says that he thought Futures was "connected" with Securities, in that they were owned by the same people, and that Mr Wan was responsible for many "departments" in the C.A. Pacific group of companies.

7. When Mr Yu told Mr Wan that he wanted to acquire shares however, Mr Wan told him that Securities was being investigated by the Securities and Futures Commission, and that "it might be wound-up and no buying and selling could then be done".

8. Mr Wan then suggested to Mr Yu that he should open an account with another stockbroker. He proposed Sun Hung Kai Securities ("SHK"), a well-established brokerage.

9. However, as it would take more than a week after the opening of an account before trading could be done, that would have meant that Mr Yu could not immediately use SHK as his stockbroker.

10. Mr Yu was eager to buy the Sino Land shares immediately because of the volatility of the stock market. He says he therefore instructed Mr Wan to proceed to buy the shares for him but the shares were to be "settled" later at a new account at SHK. There was no discussion between himself and Mr Wan as to how the shares were to be acquired or as to the identity of the stockbroker. He left it all to Mr Wan.

11. A few minutes afterwards, Mr Wan told him that the Sino Land shares had been acquired and asked him to deposit the necessary funds. Mr Yu deposited an amount of $350,000 into the bank account of Futures the same day (16 January 1998).

12. Even though Mr Yu says he had instructed Mr Wan that the shares were to be "settled" at a new account at SHK, and even though he says (in paragraph 2 of his affirmation filed 18 July 2002) that he opened an account at SHK "with a view to receiving the shares", Mr Yu did not in fact take any steps to open a new account at SHK that day (Friday, 16 January) or the next two working days (Saturday, 17 January 1998 and Monday, 19 January 1998). Mr Yu was unable to explain why he did not open an account at SHK on those 3 working days, the account at SHK apparently being opened only several months later.

13. On settlement day 20 January 1998, Mr Wan told Mr Yu that the Sino shares were being "detained" at Securities, which had a petition for its winding-up presented against it the previous day.

14. Mr Yu says that that was the first time he realized that the shares had been bought through Securities, with whom he says he never intended to contract because he was aware that the C.A. Pacific group was going to collapse.

15. Mr Yu approached the (then provisional) liquidators and demanded the shares which had been credited to his account with Securities. He was aware that the funds remained with Futures, and his position was that if the liquidators would agree to transfer the shares to him, he would then instruct Futures to transfer the funds in exchange.

16. The liquidators have not done so, because of questions caused by a shortfall in shares acquired by Securities for its clients. Securities had, in the last few days before its collapse, transferred some shares (even shares belonging to cash clients) to lenders of C.A. Pacific Finance. However, which clients' shares were so transferred is unknown as the shares were unnumbered.

17. In a series of decisions since 1998, this court has determined that:-

18. Initially, the liquidators treated Mr Yu as a "margin" client because he had signed a Memorandum of Deposit in favour of CA Pacific Finance. However, his account also had a "-02" suffix which was used to denote "cash" clients.

19. After a hearing for the determination of objections raised by certain clients to their classification by the liquidators as "margin" clients, I gave a decision dated 31 October 2001. At that hearing, the facts pertaining to Mr Yu were not as clearly presented as they have been now, but the conclusion and order made that Mr Yu should not be classified as a "margin" client remain valid.

20. There has as yet been no distribution of the shares because some clients who had been classified as "margin" clients have objected to that classification and their claims are outstanding. There can therefore not be any final distribution until such time as the exact number and holding of "cash" clients for a particular type of share are known.

21. Meanwhile however, Mr Yu issued two sets of proceedings against the liquidators, one in the High Court and one in the District Court, alleging that the liquidators had acted wrongfully in not returning the Sino Land shares to him and claiming damages as a result of his inability to sell the shares at a profit.

22. Both sets of proceedings have now been struck out, but there is a pending appeal against the District Court decision.

Summonses

23. On 2 April 2002, Mr Yu issued a summons asking for an order that:-

24. Section 200(5) provides that if any person is aggrieved by any act or decision of a liquidator, that person may apply to the Court, and the Court may confirm, reverse, or modify the act or decision complained of, and make such order in the premises as it thinks just. In Eagle Queen Co Ltd v First Bangkok City Finance Ltd [1989] 2 HKLR 71, it was held by the Court of Appeal that the Court would only interfere with a liquidator's decision or acts in two categories of cases: (i) where the liquidator had not exercised his power in good faith or had acted in a way in which no reasonable liquidator could have acted; or (ii) where in the course of his administration, the liquidator made a ruling or decision which directly affected a party's right and the liquidator had not acted even-handedly as an impartial neutral person.

25. Section 255(1) and (2) are the general subsections for the determination of questions or the exercise of powers in the course of a winding-up.

26. Section 276(1) provides that if in the course of winding-up, it appears that a liquidator his misapplied or retained or become liable or accountable for the money or property of the company, or been guilty of any misfeasance or breach of duty in relation to the company which is actionable at the suit of the company, then the Court, at the action of certain persons including a creditor, may examine into the conduct of the liquidator and compel him to repay or restore the money or property, or contribute to the property of the company.

27. It would be readily apparent from reading the above section that s.276(1) CO cannot assist Mr Yu as he is not seeking to act on behalf of Securities in misfeasance proceedings against the liquidators. Mr Yu's case is to recover for his own benefit the entirety of the Sino Land shares and the loss he claims to have suffered as a result of the liquidators not transferring the shares to him.

28. The real issue before the Court is whether the liquidators have acted in a way in which no reasonable liquidator could have acted, by not having as yet transferred any shares to him. That depends on whether Mr Yu was a cash client like all other cash clients who had acquired shares through Securities.

29. In addition to the above summons, Mr Yu has also filed a number of documents in Court, some in the nature of submissions and some in the nature of applications.

30. In these documents, he has also alleged that the liquidators have breached s.190(1), (3) and (5) CO. Those sections do not apply as they govern the duties of directors to provide statements of affairs to liquidators.

31. Mr Yu has also alleged that the liquidators are in breach of s.199(1)(d) and (e) and s.199(4)(b) CO. Section 199(1) deals with the powers of liquidators to pay creditors and to make compromises with them. Section 199(4)(b) deals with the right of provisional liquidators to sell perishable goods but expressly excludes shares. I do not see the relevance of any of these sections to the facts of the present case.

32. Mr Yu has also alleged that the liquidators are in breach of s.268 CO. This section also does not apply as it provides for the liquidators' right to disclaim onerous property belonging to the company.

33. The liquidators have on their part also issued a summons for a declaration that as at the date of liquidation, Mr Yu had a claim against Securities for 130,000 shares in Sino Land which were acquired by Securities on his behalf, and for an order that the shares (to the extent that they are now held by Securities) may only be dealt with by the liquidators in accordance with the Orders of the Court (referred to in paragraph 17 above) which deal with the allocation and distribution of shares to clients of Securities.

34. They have also asked for an order of the type made by the Court of Appeal in Tse Jeekeen v Hong Kong Alliance in Support of Patriotic Democratic Movement of China CACV 246/2000 based on Grepe v Loam (1887) 37 Ch D 168, that Mr Yu shall not bring or file any further claim, application or proceeding in respect of the said shares against Securities, the liquidators or Pricewaterhouse Coopers, in any court without obtaining the leave of the court.

Analysis of acquisition of shares through Securities

35. Returning to the primary issue, it is clear now from the facts referred to in paragraph 10 above, that Mr Yu had made Futures his agent for the purpose of instructing a stockbroker to acquire shares in Sino Land. Mr Yu, being eager to acquire the shares quickly and not wishing to wait before a new stockbroker could be instructed, simply gave a free hand to Mr Wan as to the method by which he would get the shares for him.

36. Although Mr Yu claimed that he did not know if Futures could directly go on the stock market to acquire the shares by itself, or if it would have to go through a stockbroker, it is clear that he must have known that Futures could not acquire the shares by itself. As noted above, Mr Yu was aware of the difference between index futures and shares, and he knew that Futures and Securities were two different companies, albeit within a group of companies. If Mr Yu had thought that Futures could go on the market itself to acquire the shares, then Mr Wan's information (that Securities was being investigated and on winding-up would not be able to buy or sell) would not have made any impact on Mr Yu and there would have been no need for discussion about a new stockbroker.

37. It is clear therefore that Mr Yu knew that Futures would have to instruct a stockbroker to acquire the Sino Land shares. The question then is whether he agreed to acquire them through Securities.

38. Mr Yu says that he did not want to acquire them through Securities and that any reasonable person would not do so after knowing that it was being investigated by the SFC and was liable to be wound up. However the question is whether at that time Mr Wan knew of Mr Yu's intentions.

39. Mr Yu did not allege in his affirmation that he explicitly instructed Mr Wan not to acquire shares through Securities even after the alternative option of trading through a new stockbroker was discussed and rejected for delay.

40. If no such instructions had been explicitly given by Mr Yu to Mr Wan, then Mr Wan might have thought that Mr Yu was after all prepared to take the risk of acquiring the shares through Securities, after he (Mr Yu) realized that opening a new account with SHK would lead to delay. Since Mr Yu had an account with Securities, Mr Wan therefore put through a "buy" order to Securities, and the shares were duly credited to Mr Yu's account with Securities. (There was no evidence that Futures had any account with any other stockbrokers through which Futures itself could acquire the shares, to hold them on Mr Yu's behalf. Indeed, according to the liquidators, Futures did not even have an account with Securities, even though they were within the same group).

41. If, on the other hand, instructions not to acquire the shares through Securities had been explicitly given by Mr Yu to Mr Wan, or it was otherwise sufficiently clear to Mr Wan that Mr Yu did not want to acquire the shares through Securities, then Futures would have been in breach of the authority that Mr Yu had given them when it put through the order to Securities.

42. However when on 20 January 1998, Mr Yu found out that Futures had put through the order to Securities in breach of his instructions, he did not seek to get his funds back from Futures. Instead he demanded the shares which had been acquired by Securities. In doing so, he ratified Futures' breach of authority.

43. So analysed, Mr Yu did become (through his agent Futures) a client of Securities in respect of the acquisition of the Sino Land shares. Although he intended to place the shares into a new account that he would open with SHK, the fact was that from 16 January 1998 (when the shares were acquired) until 19 January 1998 (when the petition was presented against Securities), no account had been opened with SHK and no shares had been "earmarked" or set aside by Securities for that purpose. If the facts had been that certain shares had been "earmarked" by Securities for transfer to SHK, then Securities would have been holding them as bare custodian for Mr Yu pending transfer to SHK. However that was not the case. Securities had acquired the shares as his stockbroker and thus Mr Yu's position is no different from that of other cash clients of Securities.

Conclusion

44. In the circumstances, the liquidators' conduct cannot be faulted and Mr Yu's summons dated 2 April 2002 as supplemented by the document dated 6 May 2002 must be dismissed. As for the liquidators' summons dated 2 May 2002, I would make the declaration sought in paragraph (1) and make an order in terms of paragraph (2).

No Tse Jeekeen order

45. As for the liquidators' application for a Tse Jeekeen order, I am not persuaded that the circumstances are such that an order in such strict terms should be granted.

46. The situation is quite different from that in Tse Jeekeen where the plaintiff had no interest whatsoever in the cause of action, and the court inferred that he must have been acting either maliciously or under some mental dysfunction. In Chan Wai wah, Lily Ann v Chan Sai lun, Henry HCMP 2921/01, the plaintiff was seeking to re-litigate matters which had been the subject of a number of previous judgments of courts at all levels.

47. In Grepe v Loam, a number of orders had already been made against the plaintiffs from whom it was not possible to obtain costs to redress their abuse of the court's process. In Ebert v Birch [1999] All ER (D) 354, the plaintiff was bankrupt and was seeking to re-litigate a matter that had already been decided against him.

48. Mr Yu does not have the benefit of legal advice. Until this hearing, there had not been a full exploration of the relevant facts and a thorough analysis at law of Mr Yu's position. The two actions commenced in the High Court and the District Court have been struck out at an early stage and it would appear that no detailed reasons for the strike-out orders have been given so far. In the circumstances, I am not persuaded that a case has been made out for a Tse Jeekeen rder and I would dismiss paragraph (3) of the liquidators' summonso.

Costs order nisi

49. Finally as for costs, the general principle is that costs should follow the event and I see no special circumstances why that should not be followed. Accordingly, since Mr Yu has failed in his summons, I would make an order nisi that he bears the costs of and occasioned by that summons, such costs to be taxed if not agreed. The effect of an order nisi is that unless an application has been made to vary it, it shall become absolute 14 days after this decision is handed down.

50. As for the liquidators' summons, the arguments on paragraphs (1) and (2) of that summons overlapped with the arguments on Mr Yu's summons, so that there would be relatively little in the way of extra costs. The liquidators failed on paragraph (3) of the summons but little time was used on this part of the summons. In view of that, and in view of the fact that Mr Yu did not incur any legal costs, I would make an order nisi that there be no order as to costs of the liquidators' summons.

Remarks: