YU MAN v. THE LIQUIDATIORS OF C.A. PACIFIC SECURITIES LTD

CACV 347/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 347 OF 2002

(ON APPEAL FROM HCCW NO 37 OF 1998)

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J U D G M E N T

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Hon Woo JA:

Introduction

1. This is an appeal by against the decision and order made by Yuen JA (sitting as an additional Judge of the Court of First Instance) on 23 August 2002.

2. By the said order of 23 August 2002,

3. By a notice of appeal dated 3 September 2002, the applicant appeals to this Court and seeks the following orders:

Background

4. Securities, C.A. Pacific Futures ("Futures") and C.A. Pacific Finance Limited ("Finance") were all companies in the C.A. Pacific Group. Sometime in January 1998, Securities and Finance collapsed and went into liquidation. It is an undisputed fact that the applicant was a client of Futures and used his account with Futures to trade in Hang Seng Index futures. He also kept an account with Securities but before January 1998, he had never used that account with Securities.

5. On 16 January 1998, the applicant wanted to buy shares in Sino Land and he made arrangements with a Mr Wan of Futures to make the purchase. Mr Wan arranged with Securities to purchase 130,000 shares in Sino Land for the applicant. On 16 January 1998, the applicant deposited a sum of $350,000 with Futures for the purpose.

6. On 21 January 1998, the Court made a winding up order in respect of Securities and provisional liquidators were appointed. Subsequently, the Liquidators were appointed.

7. It appears that as from February 1998, the applicant has been urging the Liquidators to return the Shares to him but the Liquidators have so far refused to do so. There was a letter dated 18 September 1999 from the Liquidators to the applicant containing an explanation of the situation. It was stated that the records of Securities showed that Securities had purchased the Shares for the applicant, and the transaction was recorded in the applicant's account with Securities. However, the Liquidators did not know the whereabouts of the Shares because the Shares had been mixed up with shares demanded by other claimants.

8. Indeed, the Liquidators sought directions from the Court as to how to deal with the situation relating to the shares they found in Securities because of the objections raised by various claimants. The applicant was a party in the relevant proceedings. The situation and difficulties confronted by the Liquidators can be found succinctly stated in the decision of Yuen J (as she then was) dated 31 October 2001. Briefly, the facts found by the Judge were as follows. Securities was a stockbroker which was associated with Finance, a finance company which provided finance to clients to enable them to trade in securities on margin. When both Securities and Finance collapsed in January 1998, Securities had some 11,000 clients on its books, and some 8,000 of these were also clients of Finance. Most (though not all) of the clients claimed the return of shares that had been acquired by Securities on their instructions. It transpired that there was substantial shortfall in some shares, because Finance had charged large volume of shares to its own lenders which had disposed of the shares. It was impossible to identify exactly which clients' shares had been disposed of in this way, because the shares had been acquired by Securities through CCASS, a computerised book-entry settlement system where unnumbered share certificates are immobilised and deposited with a central shares depository. In December 1998, on the question of whether these shares were the property of the clients as opposed to Securities, the Judge held in a written decision that the property in the shares belonged to the clients. The consequence of that decision was that clients could demand the return of the shares as owners.

9. However, where there was a shortfall in some shares, the next question that confronted the Liquidators was: since the shares were unnumbered, how were the Liquidators to know which clients' shares had been charged by Finance to its lenders and been disposed of, and which clients' shares had remained? In other words, how were the available shares to be distributed amongst the clients demanding them? The Liquidators sought the determination of the Court on this question in November 2000.

10. The Judge found that those clients of Securities who were also clients of Finance, and who had signed a document titled "Memorandum of Deposit" and a "Letter of Authorization" which permitted their funds and properties to be transferred amongst inter-group of the related companies, including Securities and Finance, enabling shares to be withdrawn from anyone of them, were "margin" clients and those who had not signed such documents were referred to as "cash" clients. Moreover, the clients who had signed the Memorandum of Deposit were allocated an account number with a suffix "-01" in the Group' s record system known as Financial Investment System ("FIS"), which the Liquidators had ascertained was kept accurately. The Group's staff would check the FIS on a daily basis, and the shares of "margin" clients only (identified by the code numbers) would be considered for charging to Finance's lenders. Even for shares so identified as belonging to "margin" clients, not all shares would be chosen for charging, as different shares had different security value.

11. It would appear that this daily exercise of identifying only "margin" clients' shares for charging to Finance's lenders was maintained until apparently the last stages of Finance and Securities before their collapse. The Judge then made the decision of 20 December 2000 that Securities as trustee must be deemed to have first exhausted shares attributable to "margin" clients before drawing on shares attributable to "cash" clients. It followed that what remained in each line of stock with Securities as the Liquidators found must be returned first to the "cash" clients who had acquired that stock, with the balance of shares in each line to be allocated to the "margin" clients who had acquired that stock. Where there was a deficiency for either class, the clients in the same class were to share pari passu.

12. By her decision of 31 October 2001, in which proceedings the applicant participated, the Judge held that the applicant should not be classified as a "margin" client, although he had signed a Memorandum of Deposit with Securities. The Judge noted that the applicant's account with Futures and Securities had a "-02" suffix and accepted the applicant's explanation that he did not wish the Shares to be deposited with Securities as he had heard rumours that the Securities and Futures Commission ("SFC") was investigating it, and that thereafter Futures, acting on his instructions, acquired the Shares through Securities before the Shares could be deposited with Sun Hung Kei Securities ("SHK") with which he wished to open a securities account, but the transaction was interrupted by the CCASS close-out procedures. The Judge was satisfied that Securities had been holding the Shares as a bare custodian before their deposit with SHK, and that the applicant should not be classified as a "margin" client.

13. By the summons dated 2 April 2002, the applicant applied to the Judge to reverse her order made on 31 October 2001. He sought the return of the Shares from the Liquidators. He also claimed damages for the Liquidators' negligence, breach of duties, malice, contravention of rights, etc. He also sought costs, interests, and damages for his loss of time and energy, to be borne by the Liquidators.

14. The summons dated 2 April 2002 and the reasons in support dated 6 May 2002 were dealt with by the Judge in her decision dated 23 August 2002. It is against this decision that the applicant now appeals.

15. The applicant has, at sometime unknown, withdrawn the $350,000 that he had deposited into Futures' account, after he had failed to obtain the return of the Shares from the Liquidators.

The findings of facts

16. In her decision of 23 August 2002, the Judge set out the background facts, which were apparently accepted by her. I have attempted to summarise those facts above. For the purpose of this appeal, it is necessary to go into the facts in greater detail as found by the Judge concerning the circumstances under which the applicant acquired the Shares through Securities. Her decision reads:

17. The Judge also dealt with the applicant's legal arguments based on s 200(5), s 255(1) and (2), s 276(1), s 190(1), (3), (5), s 199(1)(d) and (e), s 199(4)(b), and s 268 of the Companies Ordinance, Cap 32.

The relevant circumstances and law

18. As from 21 January 1998, Securities was being wound up, and the Liquidators were appointed to deal with its assets and liabilities. By virtue of s 197 of the Ordinance, the Liquidators had a duty to take into their custody or under their control all the properties and things in action to which Securities was or appeared to be entitled. This has the effect of freezing all the assets of Securities, including the Shares bought by Securities on behalf of the applicant. During the course of the winding up, the Liquidators may apply to the Court for directions: s 200(3) of the Ordinance.

19. What the applicant has been claiming is for the return of the Shares to him, or for damages arrived at in the following manner:

20. The applicant also claims interest at the rate of 20% per annum and damages for his trouble, time, effort, inconvenience and mental anxiety caused by the litigations that he has launched against the Liquidators. Regarding the various provisions of the Companies Ordinance relied on by the applicant, the Judge had the following to say in her decision of 23 August 2002:

21. The Judge also examined the circumstances under which the applicant acquired the shares through Futures. She noted that when on 20 January 1998 the applicant found out that Futures had put through the order to Securities in breach of his instructions that he did not want Mr Wan to acquire the shares through Securities, he did not seek to get his funds back from Futures. Indeed he demanded the Shares which had been acquired by Securities. The Judge held that in doing so, the applicant ratified Futures' breach of authority, even if there was such breach. The Judge also concluded that in all the circumstances of the case, the Liquidators' conduct could not be faulted and dismissed the applicant's summons dated 2 April 2002 as supplemented by his document dated 6 May 2002.

The appeal

22. The applicant has provided to us very detailed written submissions, setting out his case and complaining that the Judge was wrong and that the Liquidators were acting wrongfully in not releasing the Shares to him.

23. His submissions on the main issue whether he should be entitled to the return of the Shares can be summarised as follows. On 16 January 1998, he bought the Shares through Mr Wan of Futures. His intention was to buy the Shares at the prevailing low price that had been caused by an adverse rumour on Sino Land, which he reckoned to be untrue. He was not a client of Securities at all and, although he had an account numbered 3537-02 with Securities, the Account Agreement with Securities that he had signed was ineffective and void in law. He should therefore not be treated as a client of Securities as held by the Judge. Securities would therefore be a custodian of the Shares and as Securities had allocated the Shares to his account (according to the letter of 18 September 1999 from the Liquidators to him) it was a bare custodian of the Shares and should have returned the Shares to him.

24. He attempts to rely on the provisions of the Contract Law of the PRC in support of his contention that his agreement with Securities by reason of his having opened an account with it was void. But that code of the PRC has no application to Hong Kong. Moreover, having considered all the relevant documents, I think the applicant's claims against the Liquidators and his application to the court in the winding up proceedings as well as the present appeal had all been caused by his misunderstanding of the facts and the relevant law.

25. There is no mistake that Securities was a custodian of the Shares held on behalf of the applicant. Indeed, as early as December 1998, as stated in para 7 of the Judge's decision of 31 October 2001, the Judge held in a written decision that the property in the shares belonged to the clients. She stated clearly "the consequence of that decision was that clients could demand the return of the shares as owners."

26. The applicant obviously considers that since Securities was the custodian of the shares, the Liquidators should have returned the shares to him upon demand. However, his right of having the Shares returned had been affected not only by the winding up but also by the way Securities kept its shares. Moreover, whether the applicant kept an account with Securities is quite irrelevant because the Judge held that he was to be treated as a "cash' client of Securities, entitling him to the distribution of Sino Land shares by the Liquidators, and having priority with other "cash" clients who had such shares held by Securities pari passu, over "margin" clients. Pausing here, it should be mentioned that the applicant is running a conflicting case: he claims that he had no account with Securities because the account opening documents signed by him and the Account Agreement signed by him were void and of no effect, but he relies on the statement of the Liquidators in their letter of 18 September 1999 that the Shares were recorded by Securities to be in his account. If he had no account with Securities as he now alleges, then he could not possibly rely on the Shares being recorded as in his account.

27. The true issue, which has so far been missed by the applicant, is not whether Securities or the Liquidators were the custodian, whether bare or contractual, of the Shares, but whether the Shares could be identified as those acquired by Securities for the applicant. In the said letter of 18 September 1999, the Liquidators had notified the applicant that they did not know the whereabouts of the Shares because the Shares had already been mixed with the shares demanded by other claimants. The difficulties confronted the Liquidators, and militated against the return of the Shares to the applicant, were that there was a substantial shortfall in some shares, and it was impossible to identify exactly which clients' shares had been disposed of by Finance in favour of its own lenders. The shortfall as caused by the said disposal was found by the Judge as a fact, which was the reason for the Liquidators to seek the determination of the Court, and for the Judge's determination in classifying the claimants as "cash" clients and "margin" clients and her ruling as to how the shares found to remain with Securities were to be distributed. This shortfall is evident by the fact, as disclosed in proceedings between parties in September 2003, that only 58,954 shares in Sino Land had been allocated by the Liquidators to the applicant.

28. The applicant's complaints against the Liquidators and his reliance on various provisions of the Companies Ordinance, in my view, had been correctly and satisfactorily dealt with by the Judge in the passages of her decision cited above.

29. The applicant's case is that since Securities, and therefore the Liquidators, are the custodian of the Shares on his behalf, the Liquidators should return the shares to him without further ado when he made demand. This is to brush aside the Liquidators' duty to treat persons with equal right in an equal and fair manner. Just imagine the position of "cash" clients who had paid for their shares which were acquired by Securities for them and deposited in the CCASS, and Securities had parted with some of these shares to Finance's own lenders. Which client is entitled to recover which shares would be an insoluble problem, in the case of the shares which had been mixed and there was a shortfall of such shares, as found by the Judge. The problem cannot be solved by way of evidence because there is hardly any reliable evidence to show which shares belong to which clients. The applicant's position is no different from any of such "cash" clients. The Judge's decision to distribute such shares to the "cash" clients pari passu, in priority to the "margin" clients, is to achieve a just resolution of this conundrum for the Liquidators and a fair and equal treatment amongst the beneficiaries who have competing interests in the shares held by Securities.

30. The applicant complains to us that the Judge was cross-examining him when he addressed her on 5 August 2002, which resulted in her decision of 23 August 2002, and that she set traps in the questions put to him. He asserts that the Judge was acting contrary to the normal procedure that cross-examination is only allowed in a court trial. I have little doubt that the Judge was only seeking clarification from him relating to his allegations of how he acquired the Shares that ended in Securities' account. The questioning by the Judge of him was no different from the questions we put to him during his oral submissions to us.

31. None of the grounds raised by the applicants has been able to satisfy me that the Judge was wrong in her decision.

Conclusion

32. For the above reasons, the appeal must be dismissed. I would make an order nisi that the applicant do pay the Liquidators' costs of this appeal.

Hon Cheung JA:

33. I agree.

Hon Chu J:

34. I agree and have nothing to add.