RE DEREK LAI KAR YAN AND ANOTHER, JOINT AND SEVERAL LIQUIDATORS OF NEW JAPAN SECURITIES INTERNATIONAL (HK) LTD

HCMP373/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 373 OF 2007

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D E C I S I O N

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1. This is an application by New Japan Securities International (HK) Limited, which I shall call “the company” acting through its liquidators for orders pursuant to sections 56 and 62 of the Trustee Ordinance, Cap. 29.  The company was placed into members’ voluntary liquidation in December 2001 as a result of its parent company’s decision to close the company down on ceasing operations in Hong Kong. 

2. Prior to its liquidation the company carried on business as a securities broker.  In the course of that business it bought and sold shares on behalf of clients and from time to time held such shares in cash representing dividends or sale proceeds on behalf of its clients.

3. Prior to going into liquidation, the company informed its clients on a number of occasions of the fact that it would be ceasing operations.  It did so by a combination of letters and telephone calls to the clients and newspaper advertisements in major English and Chinese language newspapers in Hong Kong.  After the liquidation commenced, the liquidators placed an advertisement in the Government Gazette, calling for proofs of debt or the making of other claims against the company to be lodged with them.

4. Despite this, some 21 of the company’s former clients failed to respond.  So on 13 September 2002, the liquidators wrote to 19 of these former clients notifying them that the company still held shares and/or cash on their behalf.  All but five of the letters were returned undelivered.  The liquidators did not at this stage write to the two remaining former clients as they did not then have addresses for them.  They were, however, able to locate addresses for the remaining two former clients a few months later and similar letters were sent to them on 15 May 2003.

5. In respect of one former client, Mr Lu Kuo-yung, the liquidators discovered from a probate search that solicitors had at one time made an application in respect of his estate.  They therefore wrote to those solicitors in February 2003 to ask them to arrange for a claim to be made in respect of the assets held for Mr Lu.  However, the solicitors replied indicating that they no longer acted for the estate by that time.

6. The liquidation has now been in progress for over five years.  The only remaining matter that needs to be dealt with is the disposition of the shares and cash held for the 21 former clients from whom the company and the liquidators had not heard.  Not surprisingly, the liquidators considered that it was time that the liquidation was brought to an end.  With that in view, they took advice on how to deal with the shares and cash still held by the company.

7. The unclaimed assets consist of shares in three Hong Kong companies, seven Japanese companies that are listed and one unlisted Japanese company.  Many of the shares are worthless, as the companies concerned have run into liquidation.  However, some of the shares are still valuable.  As at 26 February 2007, when the originating summons in these proceedings was issued, the shares still held were worth a total of some HK$1,171,347.35, in Hong Kong dollar terms, and the total cash held amounted to HK$588,218.15.  The amount of shares and cash attributable to each of the former clients is set out in detail in the schedules to the originating summons.  I should note that since that date, the cash balances have in fact increased slightly as a result of further dividend payments that have been received.

8. The liquidators were advised, correctly, in my view, that such securities and cash would not be assets of the company but trust assets held by it on behalf of the former clients.  That is generally the position where a securities company holds shares or acts as a custodian on behalf of its clients; see for example Re C A Pacific Finance Limited (in liquidation) No. 1) [1999] 2 HKC 632, and Re Peregrine Brokerage Limited [2004] 1 HKLRD 856.

9. Nothing in the contractual documents, which define the relationship between the company and its former clients in this case, provides any reason for me to come to a different conclusion.  In the case of one former client, who was a client of a wholly owned subsidiary of the company called New Japan Capital Management (HK) Company Limited, the contract was different whereas the other clients’ contracts were essentially contracts with the company under which it would act as broker and provide custodian services. 

10. In this particular case, there was provision for the subsidiary to provide investment management services with the contract giving the subsidiary full discretion to manage the investments as if it were the absolute beneficial owner of the investments, subject to investment guidelines agreed between the client and the subsidiary.  The documentation also contained a stipulation that the subsidiary was not the trustee and should have no trust obligations in respect of the investments.  The subsidiary was, in the event, also put into liquidation with the cash balances held by it being transferred to the company.

11. Mr Ng, who appears for the liquidators, submits that on the proper interpretation of this arrangement, while the subsidiary did not act as a trustee in managing the investments so as not to be liable for investment decisions it took on the basis that it was a trustee, in the light of the other parts of the agreement, which provided that it would also act as a custodian, the subsidiary did not, in fact, have any beneficial interest in the assets which it acquired on behalf of the client and therefore remained a trustee in respect of them at least when acting as custodian.  I think that this is correct and that it is, therefore, appropriate to include the cash balances held for this client which, in any event, only amount to some HK$600-odd, within the ambit of this application.

12. The liquidators’ proposal is that they should be permitted to realise the securities, where possible, and pay the proceeds into court.  If this is done, the proceeds would be dealt with under Rules of the High Court Order 92 and the High Court Suitors Funds Rules.  Under Rule 23(1) of the Suitors Funds Rules, any sum that is unclaimed after five years may be transferred by the Chief Justice to the General Revenue on the application of any Registrar of the Court.  However, in this case, the liquidators propose that a direction should be given that if the funds remain unclaimed within three months from the date of payment into court, they should be automatically transferred to the General Revenue.  This proposal is based on a course, which was authorised but not approved by Kwan J in Peregrine Brokerage to which I have already referred.

13. After taking out the application the liquidators advertised notice of the hearing of the application and wrote again to the clients at their last known addresses to inform them of the hearing and the orders that were sought.  In all but one of the cases there was no response.  However, on this occasion, in respect of the shares and cash held for Mr Lu, to whom I have already referred, a Mr Lui Kai-lun contacted the liquidators.  He said that he was the nephew of Mr Lu and that he had received notification of the hearing.  He explained that he had, in fact, received some of the earlier letters but thought at that time that there was no point in doing anything as he was under the misapprehension that the shares held by the company for his uncle were worthless. 

14. He informed the liquidators that Mr Lu was survived by a wife and subsequent discussions and correspondence with Mr Lui have resulted in the liquidators being provided with copies of a certificate of marriage in respect of Mr Lu and statements of accounts sent previously by the company to Mr Lu.  Mr Lui has now provided the liquidators with copies of further documents, which appear to indicate that Mr Lu was indeed married and that the beneficiaries of his estate are his wife and three other individuals who appear to be his children.  At present, on the basis of material at present available to them, the liquidators do not yet feel able to release Mr Lu’s entitlement either to Mr Lui or to someone else.

15. However, the liquidators envisage that it may be possible for satisfactory evidence to be provided to them that would enable them to act in accordance with directions given to them for the disposal of any securities and cash balances that they hold on behalf of Mr Lu.  It may be that on the basis of the documentation provided, which appears to consist of official documents from Indonesia indicating the identity of those entitled to Mr Lu’s estate, that the persons entitled to the estate will be able to provide jointly instructions to the liquidators as to how to deal with the balances or other assets held on behalf of Mr Lu. 

16. In the hope that this can be done, the liquidators have asked that the application today, insofar as it relates to the unclaimed securities and unclaimed cash balance held by the company on behalf of Mr Lu, as detailed in schedules 1 and 2 to the originating summons, should be adjourned sine die with liberty to restore as a fall back position in case the liquidators are unable to resolve this particular situation.  That seems to me to be a sensible course and, accordingly, I adjourn that part of the application sine die with liberty to restore.

17. Dealing with the remaining 20 former clients, the course of selling securities held by a company in liquidation as trustee and paying the proceeds into court has taken place in a number of earlier cases.  These include C A Pacific and Peregrine Brokerage to which I have already referred and also in other examples including Re Celestial Finance Limited 657 of 2005, Re Chekiang First Securities Company Limited HCMP923 of 2006 and Re Uni-Alpha Securities Limited HCMP714 of 2006, all of which are decisions of Deputy Judge L Chan.

18. I am satisfied that I should permit the liquidators to sell their securities pursuant to section 59(1) of the Trustee Ordinance as it is expedient to do so.  The expediency arises, of course, as a result of the need to conclude this liquidation, which has already been going on for some considerable time.  I also am satisfied that it is appropriate that the liquidators should be directed to deposit the proceeds of sale together with whatever cash balances that they hold, including any future dividend payments that may be received, into court pursuant to section 62 of the Trustee Ordinance.

19. The only question that has troubled me is whether or not I should make the further directions sought in relation to the automatic transfer of any unclaimed balance in the High Court Suitors Funds under the High Court Suitors Funds Rules for such unclaimed balances to be transferred to the General Revenue in three months after the funds are lodged with the court.

20. Having considered this matter, it seems to me that although this course was taken in Peregrine Brokerage I do not feel that it is necessary for me to make such a direction at this stage.  As I have noted, Rule 23(1) of the High Court Suitors Funds Rules provides for unclaimed funds to be transferred to the General Revenue on the application of a Registrar after a period of five years have elapsed since their lodgement.  There does not appear in the rules to be any express provision for shortening that period.  In Peregrine Brokerage the concern was expressed that the liquidation of the companies concerned might be held up if the period was not shortened. 

21. However, it seems to me that this is not necessarily the position.  The fact of payment into court by a trustee of trust assets or trust funds held by him is that he effectively retires from the trust at that point.  He is released, thereby, from further obligations in relation to the trust funds.  The authorities appear to indicate that although he may have retired from the trust, he does not necessarily vacate his position as a trustee.  However, it seems to me that given that the company will no longer have any obligations quai trustee in relation to the funds and that the only relevance of their continuing in that position may be that they may be called upon to assist by giving information if at some future time it becomes necessary for the entitlement of a particular claimant to a fund to be investigated, that is not, in itself, a reason why the company should not, having disposed of all the assets under its control and there being no other matters that need to be dealt with in the liquidation, why the company should not at that point be dissolved in the ordinary way.

22. After the lodgement of the funds in court, it will be for any claimant to the funds to come forward and make a claim and take whatever steps he made need to, to establish his claim to the funds in question.  I do not see that the company or the liquidators need be concerned with the matter after the funds have been lodged in court.  In the circumstances, therefore, I do not think that it is necessary to give the additional directions sought and I shall not do so in this case.

23. In the circumstances, therefore, I propose, subject to adjourning the matter sine die in relation to the assets held for Mr Lu, to make an order substantially in terms of the originating summons, with the exception of paragraphs 5(3) in our paragraph 6.  I would just add that so far as the advertisement that is to be made by the trustees after lodgement of the funds in court is concerned, it should also indicate that the funds in court will be dealt with in accordance with the High Court Suitors Funds Rules and that any claimant seeking to make any claim in respect of such funds should make his application directly to the court, referring to the funds in question as having been lodged under these proceedings.

(Submissions by counsel for costs)

24. I will give you liberty to apply in case something comes up and you feel the need to revisit the question of the time for which the funds should remain in court or, indeed, any other matters related to this application.