RE GRAND CARTEL SECURITIES CO LTD

HCMP 783/2021

[2022] HKCFI 743

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 783 OF 2021

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DECISION

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Introduction

1.  This is the second adjourned hearing of the applicant’s ex parte amended originating summons taken out on 2 June 2021 pursuant to sections 56 and 62 of the Trustee Ordinance, Cap 29.

2.  The applicant is a securities broker. It commenced its business in 1995 under its former name of Luen On Securities Company Limited. It has been operating under the licence issued by the Securities and Futures Commission since 2003. It is a Type 1 Licence, ie dealing in securities. There was a change of ownership in the applicant in January 2015 when its name was changed to the present one, Grand Cartel Securities Company Limited. Many of its clients are based in mainland China.

3.  On 2 November 2020, the applicant informed its clients that it would cease business on 25 November of that year. It did cease business on that date. Since then, for a period of about 15 months, the applicant has been taking steps to return the client assets.

4.  Notwithstanding such efforts, there remain as of today 113 clients who have not come forward to retrieve their assets. Cash in value of about $300,000, comprising primarily Hong Kong dollars and a small amount in Renminbi, and securities comprising Hong Kong listed shares in the value of about $750,000 (as of 21 January 2022) remain unclaimed.

5.  In order to properly complete the cessation of the business, the applicant takes out the present application for reliefs under sections 56 and 62 of the Trustee Ordinance. It seeks leave to pay the unclaimed assets into court and to the extent that it is not feasible to pay some of these assets, leave be granted for the applicant to dispose of them, including forfeiting them or selling them and paying the proceeds into court.

Legal principles

6.  As regards the application under section 62, I would apply the approach which I set out in Re K&R International Ltd [2021] 2 HKLRD 47, [2021] HKCFI 561, paras 39 to 55.

7.  As regards the application under section 56, I would follow the approach set out in Re Piper Jaffrey Asia Securities Ltd (in liquidation) [2013] 2 HKLRD 835; Re A One Investment Co Ltd HCMP 1518/2013, 23 October 2013; and Re Wing Fat Securities Limited [2021] HKCFI 3851 at para 32.

Discussion

8.  I am satisfied that the applicant holds the unclaimed assets on trust for the clients.

9.  There are two standard versions of account opening documents which the applicant’s clients would sign. Before the change of ownership in 2015, the Luen On version was used. After that, the Grand Cartel version was used.

10.  The Cash Security Agreement in the Luen On version contained these provisions:

“3.1 除貴公司（在有關交易的成交單據或其他合約單據內）註明以當事人名義進行交易外，貴公司將以本人／吾等的代理人身份進行交易。

…

4. 證券的保管

…

4.2 對於由貴公司寄存妥為保管的任何證券（本人/吾等同意支付貴公司不時及完全酌情決定收取的收費和開支），或任何屬於本人/吾等但（經本人/吾等明示或暗示或其他方式同意）由貴公司佔有或控制的證券（合稱「存放證券」），貴公司可以酌情決定：

(a) （如屬可註册的存放證券）以本人/吾等的名義或以貴公司的有關聯繫實體名義註册；

(b) 或，就其他情況而言，存放於

(i) 認可財務機構；

(ii) 核准保管人；或

(iii) 另一獲發牌進行證券交易的中介人，開立的獨立帳戶作穩妥保管，而該帳戶是指定為信託帳戶或客戶帳戶並由貴公司或貴公司的有聯繫實體為持有本人/吾等的證券目的而在香港開立及維持的；

…

5. 代本人/吾等保管的現金

代本人/吾等保管的現金（此等現金不包括貴公司就交易取得，而且須為交收而轉付或轉付予本人/吾等的現金）須依照適用法律不時的規定，存放於適用法律不時要求的一家認可財務機構或證監會為施行根據《證券及期貨條例》第149條訂立的《證券及期貨（客戶款項）規則》第4條而就一般或個別個案批准的任何其他人士貴公司或貴公司的有聯繫實體為客戶款項所開立和維持的一個獨立帳戶而該帳戶須指定為信托帳戶或客戶帳戶內。…” (underline added)

11.  The Cash Security Agreement in the Grand Cartel version contained the following provisions:

“5.1 代理人：宏大證券將作為客戶的代理人執行交易，除非宏大證券 （在相關交易的合約說明或以其他方式）表明宏大證券 是以主事人的身份行事；

…

7.3 資金餘額：除因交易收到的資金以及用以因支付未清算交易或用以履行客戶欠款、債務或其他責任的資金外，客戶在其 帳戶的任何其他資金均應按法律要求存入在持牌銀行開設的客戶信託帳戶。該帳戶餘額的利息將由宏大證券不時自行決 定的利率計算；

7.4 證券的保管：宏大證券可以自主決定將其持有的客戶證券（如屬可登記證券）以客戶或其託管人的名義登記；或存放于 宏大證券銀行或經證監會認可的其他具有安全託管文件設施機構的指定帳戶中，費用由客戶支付。雙方同意，如果證券 不是以客戶的名義登記，則當宏大證券收到此類證券的任何股息或其他收益應存入客戶帳戶或支付或轉交于客戶。如果 客戶的證券是宏大證券持有的多個客戶相同證券的一部分，則客戶享有與其證券相同比例的證券收益。” (underline added)

12.  The language used in the standard forms makes it plain that the applicant holds the clients’ assets on trust for them, whether in the Luen On version or the Grand Cartel version. Furthermore, as a general rule, in a broker and client relationship, the broker holds the client’s assets on trust for the client: Re Drake & Morgan Ltd HCMP 1490/2009, 27 August 2009, para 12; Re Peregrine Brokerage Ltd [2004] 1 HKLRD 856, paras 9 to 13.

13.  Here, there is nothing in the evidence to displace the above general rule.

14.  I am also satisfied that this is a proper case to grant the relief sought under sections 56 and 62.

15.  The evidence shows that the applicant has made continuous efforts over the 15 months from November 2020 to February 2022 to notify the clients of its cessation of business and to return the client assets. These efforts included at least 18 cycles of telephone calls, at least 20 rounds of emails and a total of four newspaper advertisements and notices on its website.

16.  As a result of such efforts, the applicant has successfully returned assets to some of the clients.

17.  Between November 2020 and February 2021, around 320 clients had come forward and given instructions to deal with their cash and securities.

18.  Nonetheless, there remain 113 clients whose assets remain unclaimed.

19.  Out of the 113 clients, 95 could not be reached. The applicant has so far not been able to speak to or get in touch with them at all.

20.  The rest of the clients could be reached at some point but did not give express or valid instruction to the applicant to deal with the assets. A few of them indicated that they did not intend to withdraw the assets but did not take further steps to close their accounts. Some others indicated that they would like to withdraw their assets but could not be contacted when the applicant made further attempts to implement their instructions. Some other clients simply acknowledged the applicant’s notices but gave no indication as to the disposal. Finally, some clients claimed that they did not have any Hong Kong accounts to receive the assets.

21.  Here, the continuous efforts made by the applicant must be highlighted.

22.  The affidavit evidence filed by the applicant contains a detailed description of the efforts made by its staff when approaching or attempting to approach the clients by phone:

“(1) Indeed, after a majority of clients had contacted the clients and gave instructions to deal with their cash and securities, since December 2020, the Applicant has called he remaining clients on a weekly or bi-weekly basis.

(2) In each round of the telephone calls, … the Applicant would call the clients’ last known phone number 3-4 times if the client did not pick up the phone call.

(3) If it was picked up by the clients, the Applicant would explain in detail the Applicant’s decision to terminate the securities trading business, including the Applicant had applied to the Court for depositing its clients’ unclaimed assets into the Court and an assets monthly custody fees had been charged.

(4) Therefore, for those clients who could be reached by phone calls at least once, they were fully informed that they should retrieve their assets as soon as possible, or otherwise they would be deposited into Court.”

23.  It is therefore clear that the applicant had been taking all reasonable steps to explain to the clients the importance of retrieving their assets and the consequence if they failed to do so.

24.  Furthermore, the evidence before me is that, save for two exceptions, the applicant’s written communications with the clients are generally by emails, including the sending of trade confirmations and monthly statements. Given that established practice, I am satisfied that the multiple notifications sent to the clients regarding the cessation by emails, accompanied by phone calls, notices on its website and newspaper advertisements, over the past 15 months or so should be effective in notifying the clients and amount to reasonable efforts on the part of the applicant.

25.  I should add that for the two exceptions, the applicant does not have email addresses of the two clients. These two clients have not effected any transactions with the applicant since at least 2016. Multiple telephone calls were made to reach them, but they simply could not be reached.

26.  It is also worth looking at the individual holding size of the clients. Among the 113 clients, nine clients have been identified as “the Specified Clients”. Each of them holds securities of more than $50,000 in value and/or cash of more than $10,000. Together, these Specified Clients hold assets of about $700,000 in value.

27.  The rest of the clients together hold securities and cash in the aggregate sum of about $350,000. For these clients, each of their asset holding with the applicant is fairly insubstantial.

28.  As between the applicant and the clients, I am satisfied that the applicant has taken reasonable steps in an attempt to return the client assets. If the applicant is allowed to pay the remaining unreturned assets into court, I do not think it can be said to be unfair to the clients. They will have to apply to court for payment out (if they wish) and may suffer inconvenience as a result. However, on the materials before me, there does not appear to be any further thing which the applicant can reasonably be expected to do in order to take the matter further. The inconvenience of the clients, if any, is perhaps something that has to be put up with in the circumstances.

29.  As far as the court is concerned, it seems unlikely that those clients with insubstantial assets would come to the court to apply for payment out. They have been given numerous notices but to date have not given any instruction to retrieve the assets.

30.  As regards the Specified Clients, there is perhaps a higher chance that they may apply for a payment out in the future, simply judging by the higher value of their asset holding. However, it is not known why they have so far not responded positively to the applicant’s many notifications made over the past 15 months. If any of them do come forward in the future, it is not expected that this should create an undue burden on the court’s resources.

31.  In sum, in principle, it is a suitable case to grant leave to the applicant to pay the assets into court.

32.  I should also note that none of these clients (many of them based in mainland China) who are or were at one stage contactable had indicated that they wanted to take back their assets but were prevented from coming to Hong Kong to do so due to travelling restrictions imposed by the prevailing COVID-19 pandemic. (If that had been the case, it could be expected that these clients would likely ask for the return of their assets from the applicant or, if paid into court, the court after the easing of the restrictions.)

Order

33.  I make the following orders:

(1)  All cash and securities identified by the applicant as trust assets held on behalf of clients of the applicant as named in the Amended Schedule 1 (as revised) of the amended originating summons (“the Named Clients”) be declared to be assets held on trust (“the Trust Assets”).

(2)  The unclaimed cash as set out in Part A1 and Part A2 of Schedule 2 of the amended originating summons (as revised) be paid into court.

(3)  The unclaimed securities as set out in Part B of Schedule 2 of the amended originating summons (as revised) (whether held in the applicant’s name or in the name of others) be paid into court by:

(a)  obtaining share certificates from CCASS;

(b)  registering the certificates in the name of the Registrar of the High Court of Hong Kong;

(c)  depositing the same with the Registrar of the High Court of Hong Kong, provided that the same is feasible.

(4)  The applicant do have leave to sell or otherwise depose of (including forfeiture thereof) the unclaimed securities as set out in Part C of Schedule 2 of the amended originating summons (as revised) as it sees fit and to pay any proceeds from the sale of such unclaimed securities into court.

(5)  The applicant do pay into court dividends, if any, received by the applicant in respect of the unclaimed securities as set out in Part B and Part C of the amended originating summons (as revised).

(6)  A notification of the order and the rights of the Named Clients to apply for payment out of their respectively unclaimed assets under Order 92 of the Rules of the High Court be effected by advertisements in one Chinese and one English newspaper respectively within 21 days from the date of this order, and by way of letters to the clients and/or their legal or personal representatives at their last known addresses by post.

(7)  A declaration that, upon satisfaction of paragraphs (1) to (6) above, the applicant be discharged from any obligations or claims in respect of the unclaimed assets and Order 92, rule 4 of the Rules of the High Court (notice of lodgement into court) is deemed to have been complied with by the applicant.

(8)  There be no order as to costs.