INCU GLOBAL LTD AND ANOTHER v.D’AGUILAR CAPITAL MANAGEMENT LTD AND ANOTHER

HCA 853/2018

[2022] HKCFI 3214

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 853 OF 2018

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DECISION

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THE APPLICATION

1.  This is the 1^st defendant’s application for summary judgment on its counterclaim against the 1^st plaintiff [1] made by summons filed on 11 January 2022 (“the Summons”). 

BACKGROUND

2.  This action concerns an investment fund (“the Fund”) operated by the 1^st plaintiff (“Incu”), which is a Bermudan exempted segregated account company.

3.  The 2^nd plaintiff is a Bermudan exempted company.  At all material times, the 2^nd plaintiff acted as Incu’s investment manager, and Mr Anthony D’Silva (“Mr D’Silva”) was the director of both plaintiffs.

4.  The 1^st defendant (“D’Aguilar”) is a Hong Kong company.  According to its business registration certificate, it was in the business of research and data analysis.  It was founded by Mr Robin Favre (“Mr Favre”), who at all material times was its sole director and sole shareholder.

5.  D’Aguilar’s case is that it is a research company which writes algorithms to embody trading positions and uses a proprietary trading model to optimise the allocation of algorithms to individual markets.  It is undisputed that it is not licenced by the Security and Futures Commission (“SFC”) to carry out regulated asset management activities, such as trading in securities and future contracts for a client.

6.  The 2^nd defendant (“Skybound”) is a Hong Kong company with a SFC licence to carry out regulated asset management activities.  At all material times, Mr Shou Qi (“Mr Shou”) was Skybound’s Chief Investment Officer.

7.  It is undisputed that in around 2014/2015, Mr Favre met Mr D’Silva to discuss the possibility for Incu to launch a fund to be managed by Mr Favre.  Mr D’Silva then introduced Mr Favre to Skybound so that Mr Favre might manage the Fund as part of Skybound (which held the required SFC licence).  As a result, Skybound employed Mr Favre as a Portfolio Manager. 

8.  By an investment advisory agreement dated 1 October 2015 (“the Agreement”), the plaintiffs appointed D’Aguilar and Skybound jointly as Investment Advisors. 

9.  Recital (B) of the Agreement reads:

The Directors of the Fund has requested the Investment Advisors to provide full discretionary investment management services in relation to such assets of [Incu] in respect of the Fund as the Directors shall from time to time notify to the Investment Advisors (the ‘Assets’) and the Investment Advisors has agreed to provide such services on the terms and conditions set out in this Agreement.

10.  The Agreement, among other things, further provided that:

Clause 3.1

The Directors of the Fund and the Manager hereby delegates to the Investment Advisors the authority, power and right vested in the Directors of the Fund and the Manager by the Company to manage the Assets with a view to achieving the investment objectives of the Company and subject to the policies, guidelines and restrictions relating to the Assets for the time being set out in the Offering Memorandum. Subject to such objectives, policies, guidelines and restrictions, the Investment Advisors, normally acting as agent, will have complete discretion over the Assets (without prior reference to the Directors of the Fund the Manager) to buy, sell, retain, exchange or otherwise deal in investments and other assets.

Clause 3.2

In providing these services, the Investment Advisors shall also:

(a)  carry out reviews of the Company’s portfolio (or such portion thereof as is represented by the Assets) whenever the Investment Advisors shall deem necessary or the Directors of the Fund and the Manager shall reasonably require;

(b)  …

(c)  if appropriate, advise whether and in what manner all rights conferred by the Assets shall be exercised.

Clause 3.3

The Investment Advisors may, where reasonable, employ agents such as brokers to perform any dealing or ancillary services required to enable the Investment Advisors to perform its services in relation to the Assets.  The Investment Advisors will act in good faith and with reasonable skill and care in the selection, use and monitoring of such agents.

Clause 3.5

The Investment Advisors shall account to the Directors of the Fund and the Manager in such manner as may be agreed between the parties for any transaction executed by the Investment Advisors on behalf of the Directors of the Fund and the Manager.

Clause 6.1

The Investment Advisors shall be entitled to receive such fees payable by the Fund at such intervals, as may be agreed in writing from time to time between the Directors of the Fund and the Manager and the Investment Advisors.  Such Agreements in writing signed by all parties shall be made addendums to the Agreement.  Such fees shall not be abated by any other remuneration receivable by the Investment Advisors in connection with any transactions effected with or for the Directors of the Fund and the Manager under this Agreement.  The Investment Advisors shall account to the Directors of the Fund and the Manager in such manner as may be agreed between the parties for any transaction executed by the Investment Advisors on behalf of the Directors of the Fund and the Manager.

11.  The Fund began its operation in around mid-2016.  It was closed in March 2018.

THE PLAINTIFFS’ CLAIM

12.  According to the plaintiffs’ case, in around 2017, they discovered that the Fund’s assets had been mis-managed, and massive losses of US$6.89 million had been incurred. It was alleged in the Amended Statement of Claim that D’Aguilar and/or Skybound had, in breach of their duties owed to the plaintiffs, failed to properly manage the Fund’s assets by failing to:

(1)  review the Fund’s portfolio;

(2)  monitor and ensure that certain services are available;

(3)  account for trades and keep proper records, and inform Incu of significant events;

(4)  monitor the activities of their agent, Mr Favre, in his trading activities.

13.  In particular, it was alleged that D’Aguilar and/or Skybound had, through Mr Favre, traded Korean index futures and options on behalf of the Fund in the period between 2 May 2017 and 12 May 2017 in ways which were in breach of the expressed/implied terms of the Agreement as well as in breach of their duty of care/fiduciary duty owed to Incu/the 2^nd plaintiff.

14.  It was further alleged that Mr Favre had tried to cover up his mis-management by blaming the Fund’s prime broker.

D’AGUILAR’S DEFENCE AND COUNTERCLAIM

15.  D’Aguilar’s case, insofar as it is relevant for the purpose of the Summons, is that:

(1)  Even though the Agreement named both Skybound and D’Aguilar as “Investment Advisors” of the plaintiffs, in fact and in practice, D’Aguilar acted solely as an Investment Advisor in non-regulated activities as a research company whereas Skybound acted in the capacity of an Investment Advisor in regulated activities in asset management to the plaintiffs;

(2)  D’Aguilar did not trade nor did it conduct any regulated activity.  When Mr Favre traded for the Fund, he did that as a representative of Skybound only.  Hence, all allegations made by the plaintiffs on “trading” did not concern D’Aguilar but Skybound exclusively;

(3)  Pursuant to Clause 6.1 of the Agreement, the plaintiffs were obliged to pay Advisory and Performance Fees (“the Fees”) to D’Aguilar.  The parties agreed that remuneration under the Agreement shall be as stated in the Private Placement Memorandum (“the Memorandum”);

(4)  However, the plaintiffs suspended such payments from August 2017[2] onwards;

(5)  By an email dated 18 April 2018, the administrator of the Fund confirmed for and on behalf of the plaintiffs that the Fees due from the plaintiffs to D’Aguilar for years 2017 and 2018 were in the total sum of US$520,558.04.

16.  D’Aguilar therefore counterclaims herein against the plaintiffs for the Fees in the sum of US$520,558.04, which is the subject matter of the summary judgment application before this Court.

INCU’S DEFENCE TO D’AGUILAR’S COUNTERCLAIM

17.  It has been submitted on behalf of Incu that it has the following defence to D’Aguilar’s counterclaim:

(1)  Incu has a valid set-off defence based on its claim of mis-management against D’Aguilar and Skybound. D’Aguilar’s counterclaim can only succeed if it is successful in pushing away in toto responsibility for the mis-management of the Fund. It is Incu’s case that D’Aguilar is simply unable to do so, especially when, based on the Agreement, it bears joint responsibility with Skybound to properly manage the Fund’s assets (“the Set-Off Defence”);

(2)  D’Aguilar’s entitlement to fees is disputed. The Agreement, even when read with the documents relied upon by D’Aguilar, does not provide that D’Aguilar is solely entitled to the Fees. Instead, the agreement amongst the parties concerning the payment of fees was far from clear, and a pointed dispute had arisen as to whether it is D’Augilar, and/or Skybound, who is entitled to such fees (“the Entitlement to Fees Defence”).

LEGAL PRINCIPLES

18.  In Li Chuen Kwai v. Po Lam Construction Development Limited (HCA 2376/2013, unreported, 24 September 2014), it was held that:

“12. As far as the defendant’s defence is concerned:

(1) The defendant shoulders the burden to satisfy the court that he has a real or bona fide defence (ie that there are triable issues), or that there ought for some reason to be a trial of the plaintiff’s claim.

(2) However, a complete defence need not be shown. The defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial; and leave to defend ought to be given unless there is clearly no defence in law and no possibility of a real defence on the question of fact.

(3) Although the mere assertion in an affidavit does not, ipso facto, provide leave to defend, the court will not embark upon a mini‑trial of the action on paper and leave to defend will be granted unless the defence raised is so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that the defence is a sham.

(4) The test is not whether the defendant’s assertions are to be believed, rather it is whether those assertions are believable, ie capable of being believed. If so, the defendant must have leave to defend.

(5) Whether the defendant’s assertions are believable is a question that should be answered not by taking those assertions in isolation bur rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.”

19.  In Ju Yan Di Embroidery Genesisy v Yau Wai Han [2015] 1 HKLRD 822, 827, Cheung JA held that:

“14. It is well-established that the burden on the defendant in a summary judgment application is to show that he has a credible defence and he must condescend to give particulars of his defence. However, this does not mean that once the plaintiff invokes the application and irrespective of the strength of his case, the defendant bears all the burden of showing that there are triable issues in the case. This is because the starting point in a summary judgment application is that it should only be invoked when there is no defence to the claim. This means that the plaintiff must in the first place demonstrate that the defendant has indeed no defence. This requirement is further recognised in the procedural rules which mandate the plaintiff to state his belief in the verifying affidavit that there is no defence to the claim. This requirement must be kept in proper perspective when assessment is made of the strength of the application, otherwise there is a danger that the attention will be focused solely on what the defendant has said without consideration at the same time of the basic premise of the plaintiff’s claim or its inherent strength and weakness…”

20.  In Time Rich 08 Limited v DBE (HK) Limited & Others [2018] HKCA 404, it was held by the Court of Appeal that:

“…in deciding whether a plaintiff is entitled to summary judgment the relevant test is whether the defendant has raised credible triable issues. If there are, the matter should go to trial. If not, judgment should be entered against the defendants. In considering whether there are triable issues, the Court will not take the defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier. The Court will also consider the inherent probability of the defence but what the Court should not do is to conduct a mini-trial on complicated factual issues : Paul Y Management Ltd v Eternal Unity Development Ltd (CACV 16/2008)” (at paragraph 5.2)

DISCUSSION

The Set-Off Defence

21.  D’Aguilar argued that the Set-Off Defence stands to be dismissed because Mr Favre did not trade for the Fund through D’Aguilar but Skybound, and as a result, even if there were any fault on his part during the relevant trading activities, such fault should only be attributed to Skybound.  Therefore, D’Aguilar, whose role was only confined to research activities (i.e. non-regulated activities), should not be liable to the plaintiffs in relation to the loss suffered which was caused by Mr Favre’s trading activities. 

22.  Heavy reliance had been placed by D’Aguilar on:

(1)  various marketing and other materials in relation to the Fund which described D’Aguilar as “research advisor”, “investment research company” or “quantitative research company”, whose function was to provide the Fund with research only;

(2)  the undisputed background that Mr Favre was introduced to Mr Shou of Skybound so that he could become a licenced representative to trade for the Fund as part of Skybound.  Indeed, Mr Favre had become an employee of Skybound as a result.  It was argued that it would not make any sense for Mr Favre to then trade for the Fund through D’Aguilar which would have exposed both Mr Favre and D’Aguilar to potential regulatory actions and criminal sanctions.

23.  I am of the view that the Set-Off Defence is a bona fide defence.

24.  There are two matters which must be borne in mind:

(1)  Under the Agreement, all relevant obligations were to be discharged by the “Investment Advisors” which was defined to include both D’Aguilar and Skybound.  In other words, they have undertaken to be jointly responsible for ensuring that the Fund’s assets are managed properly, without distinguishing one from another;

(2)  It is clear that Incu’s case against D’Aguilar and Skybound is not limited to Mr Favre’s trading activities but other obligations including, among other things, to carry out reviews over the portfolio, to advise on rights attached to the Fund’s assets and to monitor and ensure that certain services are available.

25.  It is also important to refer to Mr Favre’s own evidence that:

“The reason why [Skybound] received far less remuneration than [D’Aguilar]…is that: (i) the Fund adopted a research-intensive trading strategy; (ii) the research was done by [D’Aguilar]; and (iii) [Skybound] was involved solely because it had an SFC licence, and joining [Skybound] meant I could lawfully trade for the Fund in Hong Kong as a licenced representative…

…

Each investment fund has an investment strategy and risk profile that appeals to particular investors. As correctly pointed out by Mr D’Silva, the Fund was intended to adopt my investment strategy (‘Strategy’)…In short, the Strategy was to focus on the trading of the most liquid Asian Equity Index futures and options market, and to use a set of proprietary statistical model (owned by [D’Aguilar]) (‘Model’) to capture returns from both short term trends and longer term market cycles…

The success of the Strategy is defined by the risk-adjusted returns of the Fund. That depends on the quality of the research (by way of statistical analysis using the Model) into trading ideas and strategies, which would then be modelled into algorithms, tested, and ultimately implemented if they prove fruitful. As explained on page 4 of the [powerpoint presentation], ‘[a]dvanced statistical analysis of historical data is the corner stone of [D’Aguilar] trading strategies’. The operation of the Fund was therefore research-intensive, as excellent research into trading strategies was essential to the success of the Fund. That was why the philosophy of the Fund was ‘research-research-research’…

To illustrate the type of research work completed by [D’Aguilar] for the Fund:

(1) first, on a full-time basis, [D’Aguilar] would research into trading ideas to generate ‘entry and exit points’ by reference to technical indicators, model them into algorithms to be tested against empirical data, and place the algorithms in [D’Aguilar]’s library if the ideas generated positive results;

(2) second, every 6 months, based on a balancing of various metrics (including historical results, the Sharpe & Sortino ratios, and peak to valley drawdown), [D’Aguilar] would choose 4 optimal algorithms for each market; and

(3) third, every month, [D’Aguilar] would use the Model to optimise the allocation of algorithms…

…

On the other hand, Mr D’Silva knew full well that [Skybound] was involved in the Fund purely because I needed an ‘SFC licenced asset manager that has the skills, experience and infrastructure to run a fund’…[Skybound] only entered into the picture so that I could lawfully trade for the Fund as a licenced representative, and [Skybound]’s role was at all times confined to a ‘platform’ (in Mr D’Silva’s words) for licenced trading…”[3] (emphasis added)

26.  Given the importance of D’Aguilar’s research in the management of the Fund, there must be at least a triable issue as to whether D’Aguilar should be responsible for the alleged mis-management of the Funds, especially when it is Mr Favre’s own evidence that Skybound as a matter of fact only provided a “platform” by which he could trade properly in Hong Kong. 

27.  By reason of the above, D’Aguilar’s argument that it defies commercial sense and logic for D’Aguilar to trade via Mr Favre cannot assist D’Aguilar, because it is at least arguable that when deciding who should be responsible for Incu’s loss (if proved), the Court should consider not only the capacity of Mr Favre when he placed the relevant trading orders (i.e. regulated activity), but also his capacity when he decided on how he should trade for the Fund, which was primarily based on the research work done by D’Aguilar.

28.  On this ground alone, D’Aguilar’s application for summary judgment must fail.

29.  I should also make it clear that I do not accept D’Aguilar’s argument that Incu’s case of “joint responsibility” was not pleaded, for Incu has plainly done so.  See, for example, paragraph 34 of the Amended Statement of Claim.  Indeed, Incu has invariably referred to both defendants in all allegations.

The Entitlement to Fees Defence

30.  Mr Tang and Mr Wong have made a number of points here:

31.  Firstly, it was said that D’Aguilar’s pleaded case is incomplete, because while Clause 6.1 of the Agreement[4] required parties to have a written and signed agreement on the Fees, there was no proper subsequent agreement to activate such a contractual obligation.

32.  I agree with Ms Tong SC and Mr Yeung that Clause 6.1 of the Agreement only stipulated that the subsequent agreement reached between the parties must be in writing.

33.  Furthermore, it has never been Incu’s pleaded case that the Fees are not payable for want of formality.  In fact, in the plaintiffs’ Reply and Defence to Skybound’s Counterclaim, it was pleaded in paragraph 13(b) that:

“The understanding between the Plaintiffs, D’Aguilar and Skybound from the launch of the Fund was that any advisory and performance fees under the [Agreement] were to be paid to [D’Aguilar]. The formula for calculating the amount of advisory and performance fees payable by the investors of the Fund was set out in the Sub-Fund Supplement;”

34.  It has recently been held by the Court of Appeal in Kaefer A.G. v Winfield Marine Services Co. Ltd [2022] HKCA 807[5] (which is binding on this Court) that:

“30. We agree with the Judge that the bona fide purchaser defence is a separate and distinct defence from the defence of change of position. It was clearly not intended to be part of the defendant’s case when it took out the summons for security for costs. In fact, the defendant does not dispute that the bona fide purchaser defence is a new defence and that its counsel had confirmed to the Master that it only relied on the change of position defence. The defendant’s argument is that despite the defence was not pleaded, it is entitled to raise it based on the uncontradicted evidence and the pleaded facts. We do not agree.

31. Fundamentally, the two defences are not interchangeable…

32. The case of Lo Yuk Sui v Fubon Bank [2020] HKCFA 6 does not assist the defendant. Read in its proper context, the Court of Final Appeal is not suggesting that a party is at liberty to run any defence based on the pleaded facts; otherwise, the other side and the court would be taken by surprise, which would go against the purpose of the rules of pleadings as stated by the Court of Final Appeal[6].” (per Chu JA) (emphasis added)

35.  Hence, Incu cannot rely on an unpleaded case in opposition to D’Aguilar’s application for summary judgment.

36.  This argument is therefore rejected.

37.  Secondly, it was argued that, given Skybound’s case that Incu was obliged to pay the Fees not pursuant to Clause 6.1 of the Agreement but by virtue of an implied term of paying reasonable fees and that it is entitled to 50% of the amount presently claimed by D’Aguilar, the Court should not make any findings in relation to the Summons so as to avoid any risk of:

(1)  inconsistent findings;

(2)  wastage of resources;

(3)  prejudice to Skybound; and

(4)  double jeopardy on the part of Incu.

38.  I do not accept these arguments:

(1)  I agree with Ms Tong and Mr Yeung that, if summary judgment is entered against Incu in favour of D’Aguilar and if Incu pays D’Aguilar accordingly, Incu’s liability to pay the Fees under the Agreement would be discharged, and on Skybound’s own pleaded case, Skybound should look to D’Aguilar for payment.  Hence, the alleged risk of “inconsistent findings” simply would not arise;

(2)  For the above reason, there is no risk of double jeopardy at all;

(3)  I cannot see how it can be said that there would be wastage of resources in the event summary judgment is granted;

(4)  Given the unequivocal indication of Skybound (which is legally represented) that it does not oppose the Summons, I do not think it is open to Incu to rely on its argument on the risk of prejudice to Skybound.

39.  Incu also relied on Order 15 rule 4 of the Rules of the High Court (“RHC”) and argued that since Skybound is jointly entitled to the relief claimed in the summary judgment application, it should be joined herein so that all relevant parties are before the Court.  It was said that since this requirement is not satisfied, the Order 14 application must fail.

40.  This argument is a non-starter because Order 15 rule 4 of the RHC applies to an action rather than an application.

DISPOSAL OF THE SUMMONS

41.  I have concluded above that Incu has raised triable issue in relation to the Set-Off Defence.

42.  The Summons was filed on 11 January 2022, by then Incu had already filed its Re-Amended Reply and Defence to the 1^st defendant’s Counterclaim[7].

43.  I therefore dismiss the Summons.

COSTS

44.  I make a costs order nisi that the 1^st defendant shall bear the 1^st plaintiff’s costs of the Summons.

45.  The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on the papers) within 14 days hereof.

46.  The 1^st plaintiff’s costs of the Summons shall be summarily assessed in lieu of taxation.  Unless any application for variation of the aforesaid costs order nisi is made within time, the 1^st plaintiff shall lodge and serve its statement of costs within 7 days after the expiry of the said 14-day period.  The 1^st defendant shall lodge and serve its statement of objection within 7 days thereafter. Summary assessment of the 1^st plaintiff’s costs of the Summons will be conducted on paper (no matter whether any statement of objection is lodged by the plaintiff within time) thereafter.  The costs assessed shall be payable by the 1^st defendant within 14 days after assessment.