RE CHARK FUNG SECURITIES CO LTD

HCCW 362/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 362 OF 1998

____________

____________

HCCW 365/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 365 OF 1998

____________

____________

(Heard together)

________________________________

REASONS   FOR   DECISION

________________________________

1.  I have before me two summonses taken out by the liquidators of Chark Fung Securities Company Limited (“CFS”) and Kee Fung Sing International Finance Company Limited (“KFS”) (collectively “the Companies”) on 8 November 2005, for directions under section 200(3) of the Companies Ordinance, Cap. 32.  The liquidators have previously sought directions relating to the allocation and return to clients of the Companies of securities held by CFS for these clients, and orders were made on 13 November 2002 (see the judgment reported in [2002] HKEC 1422) and 15 April 2003.

2.  The directions sought in the present summonses relate to four aspects:

(1)     the valuation of the shares allocated and returned to the clients, for the purpose of arriving at a net claim in adjudicating the clients’ proofs of debt;

(2)     how the proofs of debt arising from margin accounts should be lodged;

(3)     payment into court of unclaimed attributable assets; and

(4)     payment of costs and expenses out of unattributable assets.

3.  None of the clients of the Companies appeared at the hearing.  I should mention that the directions given at the hearing would not have prejudiced the rights of any creditor to apply to court to vary or reverse the decision of the liquidators in respect of a proof of debt lodged by the creditor, under rule 95 of the Companies (Winding-up) Rules.

4.  At the conclusion of the hearing, I have made an order in terms of the draft minutes of order as set out in the Schedule hereto.  These are the reasons for my decision.

The background

5.  For the background of the Companies, their liquidations and the shortfall in the securities held by CFS for the clients of the Companies, I refer to my previous judgment handed down on 20 November 2002, paragraphs 6 to 18.

6.  Consequent to the previous directions, the liquidators proceeded to allocate in March 2003 the remaining securities held by CFS to the clients of the Companies in accordance with their entitlements and substantially completed the process in September 2003.

7.  Out of the 2,478 client accounts, 1,676 accounts were fully compensated by the Unified Exchange Compensation Fund.  Accordingly, these clients retain no interest in the allocation and return of the remaining securities, as the Securities and Futures Commission (“the SFC”) has fully subrogated to their rights and it has elected to receive proceeds of sale of the shares notionally allocated to such clients.

8.  In respect of the 802 remaining account holders who were either partially compensated or did not receive any compensation from the SFC, some had responded to the liquidators and the shares allocated to them were either sold or returned to them in accordance with their instructions, after accounting for the proportional right of subrogation of the SFC.  Some 600 account holders did not respond to the liquidators.  Pursuant to the directions on 13 November 2002, they were deemed to have elected for the sale of the shares allocated to them and these shares were duly sold.  Cheques were then issued to those entitled to receive funds, but to date, 142 account holders have not deposited their cheques, or responded to the liquidators’ letters.  I understand most of these cheques were returned undelivered to the liquidators.  The total amount of unclaimed assets of these 142 account holders is over HK$1 million, being HK$784,846.92 in the case of CFS and HK$286,673.76 in the case of KFS.

Valuation of the shares returned

9.  The liquidators have issued notices to all creditors of the Companies to prove their debts and advertised in the newspapers in the usual way.  82 proofs have been received so far.

10.  The value of the net claim of a client would be calculated in this way.  From the gross claim of the client, it is deducted the value of the shares returned to the client (either in cash or in scrip), and to this it would be added the following:

(1)  the proportional reimbursement of the SFC paid by the client;

(2)  the provisional processing fee paid by the client; and

(3)  the brokerage and administrative fees paid by the client.  The clients’ gross claim represents his claim in monetary terms for the shares and cash that the Companies owed him.

11.  To quantify the net claim which can be admitted to proof, it is necessary to fix the value of the gross claim as well as the value of the shares returned.

12.  The liquidators have considered two methods of valuation.  The first method would be to deduct from each client’s gross claim, valued as at the close of business on the last trading day before the presentation of the winding-up petitions and the appointment of provisional liquidators over CFS (“the Value Date”), an amount equivalent to the cash proceeds resulting from the sale of the client’s share allocation, or an amount equivalent to the value of his share allocation, as at a particular date.  Possibilities for that particular date could be the date when the shares were actually returned to the client, or the date when the allocation statement was issued to the client and the SFC, or the Value Date.  The liquidators do not regard this method as satisfactory, as it would result in arbitrary differences and does not take into account the trust nature of the clients’ claims against CFS.

13.  The second method, which the liquidators favour, is to deal with the returned shares on a proprietary basis.  In this method, the client’s claim in damages against CFS is expressed in terms of the number of shares in each line of stock the client had held, less those returned to him.  To take a simple example, where a client had a claim for 100 shares in a particular stock as at the Value Date, and 10 shares are returned to him by the liquidators in the allocation exercise (either in specie or by the proceeds of sale), the return of the 10 shares would be taken to reduce the client’s proprietary claim from 100 shares to 90 shares.  The client therefore has a claim in damages in respect of 90 shares, and what would need to be quantified is the value of the 90 shares.  There are two possibilities for the date of valuing these shares; this could be the Value Date (being 25 May 1998) or the date of the winding-up orders against the Companies (being 7 July 1998).

14.  It seems to me that the date of the winding up orders is the more appropriate date for the valuation of claims, having considered the following provisions and authorities referred to by Mr. Lam for the liquidators:  Companies (Winding up) Rules, rules 87 to 89; Form 63B in the Appendix to the Companies (Winding-up) Rules; Buckley on the Companies Acts, 14^th ed., page 1694; Re Law Car and General Insurance Corporation [1913] 2 Ch 103 at 135.

15.  I have therefore given a direction that the number of shares in each line of stock returned to the client should be deducted from the client’s original holding of the relevant line of stock, for the purpose of assessing the proof of debt submitted by any client, and that the net claim is to be valued by reference to the closing price of the shares as at the date of the winding up orders.  This is paragraph 1 in the Schedule.

Proof of debt in respect of margin accounts

16.  Each margin account was described in the books of CFS as an account in the name of KFS, albeit for the account of the underlying client.  There may be some uncertainty as to the precise legal relationship between the three parties.

17.  On one analysis, the margin account clients as principals, via KFS as their agents, had engaged CFS as the trading broker to trade in securities.  The shares purchased by CFS on the instructions of these clients belonged beneficially to the clients.  KFS had extended credit to these clients to settle the trades.  By the terms of the contract between KFS and these clients, KFS had a lien over the securities and the right to seek repayment of the clients’ debts out of the securities.

18.  Even if KFS was the agent for the clients in contracting with CFS, it could have rights and liabilities against CFS (Bowstead and Reynolds on Agency, 17^th ed., Article 100).

19.  It is necessary to regulate the proof of debt that may be lodged in respect of margin accounts, to prevent the lodging of proofs of debt by both KFS and the margin account clients, and to avoid the multiplicity of proceedings.  This would have the advantage that KFS could simply deduct from the dividends received any amounts due from the margin account clients and pay them the balance.  The liquidators seek a direction that any proof of debt in respect of margin accounts for claims arising from the shortfall in available securities shall be filed by KFS for and on behalf of itself and its clients in the liquidation of CFS.  I have given a direction as sought, in terms of paragraph 2 of the Schedule.

The unclaimed assets

20.  As stated earlier, there are unclaimed assets as 142 account holders have not deposited their cheques.  As these assets represent trust monies, the liquidators seek a direction that the monies be paid into court, pursuant to section 62 of the Trustee Ordinance, Cap. 29 and be dealt with under Order 92 of the Rules of the High Court.  They also seek a direction for a mechanism, similar to Re Peregrine Brokerage Ltd. & Anr. [2004] 1 HKLRD 856 at 863 to 864, paras. 22 to 24, to provide for potential claims to be made against the unclaimed assets within three months, and any sum which remains unclaimed at the end of which is to be transferred to the general revenue of Hong Kong.  I have made a direction in terms of paragraph 3 of the Schedule.

21.  I understand from the liquidators that notwithstanding it was mentioned in the judgment in these proceedings in November 2002 that the surplus shares and the proceeds of sale of shares where no claim was made (referred to as category D and E shares in paragraphs 25 and 27 of the judgment) would form part of the free assets of the Companies, they had in fact been held separately as trust property.  The liquidators do not think it necessary to make any separate provision for these unclaimed assets, as these shares have been sold and the proceeds are believed to be included in the proceeds of sale of two unallocated sources dealt with under paragraph 4 of the Schedule.

Costs and expenses

22.  In the order on 15 April 2003, I had directed that the liquidators’ fees, costs and expenses incurred in relation to the determination of the clients’ entitlement to securities, the allocation and distribution of shares or proceeds of sale to clients, and the liquidators’ application for directions be assessed by a Master and be paid out of the provisional processing fees collected from the clients.

23.  The liquidators have incurred costs taxed in the sum of HK$5,573,304.00 (including taxing fees) and further legal costs of HK$54,850.00 which have not been taxed.  The total provisional processing fees collected amounted to HK$5,285,669.00.  There is a shortfall of HK$287,635.00 in the funds available to meet the taxed costs, apart from the untaxed costs of HK$54,850.00.

24.  These are trust expenses which fall into the scope of a Berkeley Applegate order ([1989] Ch. 32).  The liquidators seek a direction that the shortfall be met from two sources of proceeds of sale of securities which cannot be allocated, being:

(1)  the proceeds of sale of securities in the sum of HK$414,432.00, which originated from the closing out of CFS’s open positions by the Hong Kong Securities Clearing Company Limited when CFS ceased trading on 25 May 1998, and the liquidators have insufficient information to identify whose shares were used in the closing out process and thereby identify to whom these funds should be paid; and

(2)  the proceeds of sale of securities held in eight irregular accounts in the sum of HK$92,488.00, in respect of which no genuine client is believed to exist to claim a proprietary interest.

25.  I have made a direction as sought, in the terms of paragraph 4 in the Schedule.  I also provided that the costs of the present applications are to be paid out of the estate of the Companies.

The Schedule

1.  For the purposes of assessing the proof of debt submitted by or on behalf of any client of CFS or KFS, the Liquidators do deduct the number of shares in each line of stock returned in specie to the client pursuant to paragraphs 8, 12 and 14 of the Order of the Honourable Madam Justice Kwan herein dated 13 November 2002, if any, or the number of shares in each line of stock the proceeds of which were paid to the client pursuant to paragraphs 13 and 14 of the said Order, if any, as the case may be, from the verified claim of the client to securities within that line of stock and do value the net claim of the client to securities by reference to the closing price of the securities as at the date of the winding up orders, being 7 July 1998.

2.  Any proof of debt in respect of the margin accounts in CFS maintained in the name of KFS for the account of KFS' clients shall be submitted by KFS for and on behalf of itself and its clients.  The Liquidators of CFS are entitled to reject any proof of debt not submitted in the manner aforesaid.

3.  Where the Liquidators of CFS still hold proceeds of sale of shares attributable to a client of CFS or KFS whose share allocations were sold consequent upon those clients' deemed election for sale pursuant to paragraph 11 of the Order of the Honourable Madam Justice Kwan herein dated 13 November 2002, the Liquidators be directed to pay such proceeds, the details of which are set out in the table exhibited to the 5th Affirmation of Gabriel Chi Kok Tam at Tab 29 of "GCKT-5", into Court in accordance with section 62 of the Trustee Ordinance (Cap. 29) and the procedures under Order 92 of the Rules of the High Court, with the provision that the notice of lodgement into court be made by advertisement once in an English and a Chinese newspaper circulating in Hong Kong and that any sum which remains unclaimed at the expiration of 3 months from the date of the advertisement be transferred to the general revenue of Hong Kong.

4.  The Liquidators be at liberty to apply the funds retained by them in the sum of HK$506,920.00 together with any interest accrued in discharge of the balance of their proper fees, costs and expenses (including legal costs) incurred and assessed and allowed by a Master pursuant to paragraphs 3 and 5 of the Order of the Honourable Madam Justice Kwan herein dated 15 April 2003 and to apply the balance of such funds in discharge of their additional fees, costs and expenses (including legal costs) to be assessed in accordance with the terms of the said Order and to pay into Court the balance, if any, of any such funds, to be dealt with in accordance with paragraph 3 hereof.

5.  The costs of this application be paid out of the estates of the Companies.