ATTORNEY GENERAL v. TSANG WAH-MING AND OTHERS

IN THE SUPREME COURT OF HONG KONG

(Appellate Jurisdiction)

MAGISTRACY CRIMINAL APPEAL No. 689 OF 1989

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BETWEEN

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J U D G M E N T

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1. This is an Appeal by way of Case Stated against the acquittal by the learned magistrate of the four Respondents on charges of contravening s. 26(1) of the Commodities Tracing Ordinance, Cap. 250 ("the Ordinance").

2. S. 26, insofar as it is material, provides:-

"(1) Subject to subsections (2), (3) and (4), no person, whether as principal or agent, shall -

(a)     carry on a business of trading in commodity futures contracts, or

(b)     hole himself out as carrying on such a business, unless such person is registered as a dealer under [the Ordinance].

 

(2)     ..................    

(3)     ..................    

(4) Subsection (1) shall not apply to -

(a)     a person who trades otherwise than as agent in commodity futures contracts only through a dealer registered under [the Ordinance] ....."

S. 2 provides -

"'trading in commodity futures contracts', in relation to any person (whether acting as principal or agent), means making or offering to make an agreement with any other person in Hong Kong, or inducing or attempting to induce any other person in Hong Kong to enter into or offer to enter into a futures contract.

'futures contract' means either -

(a) a contract executed on a commodity exchange the effect of which is -

(i)     ............... or

(ii)     that the parties will make an adjustment between them at an agreed future time according, to whether an agreed commodity .... stands higher or loner at that the than a level agreed at the time of making of the contract, the difference being determines in accordance with the rules of the commodity in which the contract is made....."

Under the same section "commodity" is defined in such a way as to include Hang Seng Index futures contracts.

3. The definitions have been shown to cause problems in interpreting the Ordinance. In Goldstock International Holding Limited v. Io Sio Hong (HCA 8558/87, unreported) Deputy Judge Findlay, Q.C., said that the definition of "futures contract was somewhat circular" and that he found it "difficult to make sense" of the first part of the definition of "trading in commodity futures contracts".

4. The circularity in the definition of "futures contracts" poses no problems in this case because both sides agree that the arrangement under which ...(illegible) House interposes itself as principal between buyer and seller so as to become the seller in relation to every buyer and the buyer in ralation to every seller or a Hang Seng Index futures contract constitutes the execution of a contract on a commodity exchange, the effect of which falls within subparagraph (ii) of paragraph (a) of the definition.

5. With regard to the derinition of "trading in commodity futures contracts", I think that the only way in which it can be made intelligible in the context of the obvious aims of the Ordinance is by either deleting the comma after the first "Hong Kong", or adding a coma after the second "Hong Kong". The first part of the definition would then relate to agreements to enter into or offer to enter into a futures contract". Since the only people who can be parties to a futures contract within the meaning of the Ordinance are those who are qualiried to execute such contracts on a commodity exchange, the agreements referred to must be those under which a customer gives such a qualified person instructions to buy or sell, that is, an agreement between customer and exchange, member under which the exchange member agrees to enter into a futures contract on a commodity exchange.

6. I therefore accept Mr. Bailey's submission that a person who gives a buy or sell order to an exchange member is trading in commodity futures contracts. It accordingly follows that if he is carrying on a business of supplying exchange members with such orders then, unless he comes within one or other of subsections (2), (3) or (4) of s. 26, he commits an offence if he is not registered as a dealer under the Ordinance.

7. The Respondents, both in the Court below and on this Appeal, relied on a construction of s. 26 advanced in Shishir Tranchard Kothari v. Lee Shun-yee and anor. (HCA 4857/80, unreported). In that case, at p. 16 of his judgment, Jackson-Lipkin, J., said:-

"In my judgment [s. 26] cannot apply, and was never intended to apply, to one who, while registered as a commodities dealer's representative, places orders in his own name and at his own risk with the broker on behalf of clients. Such a person is not carrying on a business of trading. He is not even acting as a dealer. He is the client: he places his order with the dealer or broker, Who carries the immediate risk, the dealer or broker looks to him as principal for payment, because it is the broker or dealer who is carrying on the business of trading - he is the speculator and the ultimate risk is his, for, even if the person for whom he bas placed the orders refuses to pay the will have to pay the broker or dealer through whom the trading was put."

8. In that case, the learned judge was dealing with an allegation of breach of statutory duty and his remarks were made whilst dealing with a contention that the section, if breached, gave rise to a civil remedy. As Mr. Bailey pointed out, the learned judge considered the question of trading in futures contracts without reference to the definition quoted earlier. The decision is authority for the proposition that a breach of s. 26 does not support a claim for damages for breach of statutory duty but it cannot be an authority for a question not considered, namely, the kind of agreements encompassed by the first part of the definition of "trading in commodity futures contracts".

9. I therefore accept Mr. Bailey's submission that the Kothari Case is of no assistance to the Respondents' contention that only exchange members can trade in commodity futures contracts within the meaning of the Ordinance.

10. Assuming for the moment that the Respondents were carrying on a business of trading in commodity futures contracts we come to the heart of Mr. Hoo's submissions on their behalf, namely, that subsection 4 absolved them of the obligation to register as sealers imposed by subsection 1.

11. In the lower Court the Respondents had argued that "agent" in that subsection meant "agent of a dealer" but the learned magistrate rejected that contention. On appeal the Respondents did not pursue that argument but relied on a submission that they came within subsection 4 because they were tracing ''otherwise than as agents".

12. The findings of fact relevant for the purposes of this submission were that the 1st Respondent was the sole proprietor of Renown Securities Company and that his brother, the 3rd respondent, was a director of the 2nd Respondent. To complete the description of the Respondents the 4th was an employee of the 2nd Respondent. The relationship of the Respondents to one another is not important because the Attorney-General is interested only in the answer to the question posed by the Case Stated and does not intend to pursue the matter against any of the Respondents if the question is answered in his favour. What is important is that both the unincorporated and incorporated Renown businesses operated "in harness forming a group" which provided both money-lending and investment services to their customers. During the hearing of the Appeal the group business was referred to as "Renown" and I propose to continue that practice in this judgment.

13. Renown was authorised by law to operate as a stockbroker and moneylender. Neither Renown nor any of the Respondents was registered as a dealer under the Ordinance but Renown had an account and a direct telephone link with a dealer ("Pak Lok") so registered. Stockbrokers, as a regular part of their business of stockbroking, buy and sell Hang Seng Index futures contracts because that "commodity" has certain attractions, one of which is that it can provide a hedge against volatile movements in the prices of the shares used to calculate the Index. Renown's account was used, except on the occasions which gave rise to the charges, for that purpose, as well as for other purposes well recognised as regular within the rules of the stock and commodity exchanges. During the period covered by the charges Renown had 400 customers in its stockbroking business, nine of whom "effected transactions for Hang Seng Index futures contracts through Renown's account with Pak Lok". Five of the nine gave evidence for the Prosecution about their relationship with Renown. These witnesses came to be known both in the Case Staten and during the hearing of the Appeal as "the five users". It is the relationship between the five users and Renown which is of crucial importance in determining whether the Respondents were absolved by subsection 4 from the obligation to register imposed by subsection 1.

14. The facts found by the learned magistrate relevant to this issue were that there was "no customer agreement or any indemnity provisions governing the transactions" between Renown and the five users; that Renown provided Pak Lok with the margin deposit of $15,000 required in respect of each Hang Seng Index futures contract by the rules of the commodity exchange without requiring any of the five users to deposit a corresponding margin with Renown; that Renown "was completely exposed to the risk created by the five users" and that Renown's "only hope to recover losses suffered was to rely on [the five users'] sense of honour"; that neither Renown nor any Respondent "received any financial reward by way of commission from either the five users or Pak Lok, or other payments of any kind for the provision of the facilities to trade in futures contracts", and that each of the five users knew that none of the Respondents was registered as a dealer under the Ordinance, "and knew further that they were in reality dealing on Renown's account with a registered dealer".

15. On those findings there was no agreement made by Renown with Pak Lok on behalf of any of the users to buy or sell a Hang Seng Index futures contract which affected the user's rights against or liabilities towards either Renown or Pak Lok. So, whatever the relationship between Renown and a user it was not that of principal and agent.

16. The phrase "otherwise than as agent" was added to s. 26(4)(a) by an amendment enacted in 1980. Both counsel referred me to the Explanatory Memorandum which accompanied the amending Bill in order to discover the "mischief" which the amendment sought to remedy. From the Memorandum it appears that the mischief was the absence of any requirement for registration as a dealer in respect of those who "solicit business from members of the public but who then trade only through registered dealers".

17. Mr. Bailey submitted that in order to remedy that mischief "otherwise than as agent" had to be read as synonymous with "otherwise than on behalf of another" That interpretation, however, covers activities outside the description of the mischief in the Memorandum. If Renown's conduct is a mischief which needs to be remedied to enable the objects of tile Ordinance to be accomplished, it was not recognised as such in the description in the Memorandum.

18. I therefore accept Mr. Hoo's submission that on the learned magistrate's findings Renown was trading, in respect of the users, otherwise than as agent. The Respondents were accordingly not obliged by s. 26(1) to register as dealers.

19. The question posed by the Case States is -

"Was I correct in holding that the four Respondents, on the facts I found proved, had not carried on a business of trading in commodity futures contracts within the weaning of section 26(1) of the / Ordinance _/?"

Interpreting that question as asking whether, on tile facts found proved, it was right to hold that there was no obligation imposed on any of the Respondents by s. 26(1), the answer is, "Yes".