RE WONG TAK WA PARTAK

HCB4810/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDING NO.4810 OF 2002

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J U D G M E N T

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Petition

1) The petitioner, National Resources Securities Limited, is a securities company. By a petition dated 13 March 2002, it petitioned for a bankruptcy order against Mr Partak Wong Tak Wa ("Mr Wong") for the outstanding balance of HK$896,765.16, being loss incurred by trading of securities through a margin account no.03310 opened in the name of Mr Wong with the petitioner under a Uniform Margin Client's Agreement dated 12 December 1997 ("the Agreement").

Defence

2) Mr Wong is and was at all material times the sole proprietor of Easy Billion Finance Company, a licensed money lender. He admitted that he did sign all the account opening documents, including the Agreement and an authorisation letter at the time of the Agreement, authorising Mr Lam Yuen Fai ("Mr Lam"), to be his trading representative. Mr Lam was at the material times a personal assistant of Mr Simon Chan Ying Ming, the then chairman of Billion International Holdings Co. Ltd. ("Mr Chan" and "Billion International" respectively). Mr Wong apparently is not disputing the outstanding balance of the margin account. However, he denies liability principally on two grounds. First, he is not the "beneficial owner" of the margin account. He only lent his name to a Mr Chan with the full knowledge of the petitioner. All the subsequent trading of the margin account was made by Mr Lam for Mr Chan's behalf and that it was understood by all the parties concerned that Mr Wong would not be responsible for any loss arising from the trading of securities through the margin account. Although the question of beneficial ownership has been raised, counsel for both parties agreed that the real issue is whether Mr Wong was an agent of Mr Chan when the margin account was opened and maintained thereafter. I will call this the Agency Defence. Secondly, it is Mr Wong's case that that the purpose of the arrangement was to enable Mr Chan to trade in the shares of Billion International at the material times so that such shares might be favourably maintained at a high level to suit Mr Chan's purpose. This constituted an offence under the relevant Ordinances. Tainted with illegality, the Agreement is therefore unenforceable. I will call this the Illegality Defence.

3) Mr Wong also complained that when he signed the documents for opening the margin account, the responsible officer of the petitioner, Ms Vicky Wan Kai Kay, did not explain the contents to him. But he admitted that he did understand that the margin account was opened after signing the documents. Mr Chu, counsel for Mr Wong, conceded that Mr Wong is not relying on the doctrine of non est factum. In his submission, Mr Chu briefly referred for the first time in these proceedings to the possible defence of misrepresentation. As will be seen later, I do not find it necessary for present purposes to deal with this point. Accordingly, I do not propose to address the parties' evidence further in connection with the execution of the account opening documents.

Admissibility of evidence on agency

4) Mr Yuen, counsel for the petitioner, took a preliminary objection to the admissibility of the evidence concerning the Agency Defence. He submitted that such evidence, being extrinsic evidence inconsistent with the express provisions of the Agreement, is inadmissible as a matter of law : Pan Asia Textiles Ltd v. Fidus Co. [1987] 2 HKC 233; Magee v. Atkinson & Townsley [1837] 2 M&W 440; Higgins v. John Senior [1841] 8 M&W 834. He pointed to the various terms of the Agreement which clearly established that Mr Wong entered into the Agreement as a principal and not as an agent. Mr Wong signed the Agreement in his own name without any qualification. Under clauses 6 to 8 of the Agreement, he agreed to assume personal liability via-s-via the petitioner. Further, by virtue of paragraph 5 of the accounting opening questionnaire, Mr Wong was made aware of the fact that he could not settle any trading transaction by third party cheque.

5) It is trite that the status and capacity of the asserted or purported parties to a contract is to be determined by reference to the provisions of the contract looked in its entirety. In my view, the Agreement, construed as a whole and considered in the context of other account opening documents, clearly showed that Mr Wong entered into it as a principal. If the Agency Defence is the only ground upon which Mr Wong sought to adduce the relevant evidence, such evidence is clearly inadmissible on authorities.

6) But that is not the only basis upon which the evidence may be adduced. For it is Mr Wong's case that agency arrangement is part and parcel of the scheme designed to enable Mr Chan to avoid certain provisions under section 135 of the Securities Ordinance, Cap.333, section 23 of the Securities (Insider Dealing) Ordinance, Cap.395 and section 28 of the Securities (Disclosure of Interests) Ordinance, Cap.396. As such, it is illegal or void against public policy. It is trite that extrinsic evidence will always be admitted to defeat a contract on the ground of illegality : see Chitty on Contracts (28th edn), Vol.1, para.12-110 at p.632. In order to ascertain if the evidence sought to be adduced is sufficient to raise a defence of illegality, it is necessary to examine such evidence and those statutory provisions more closely.

The arrangement

7) The alleged purpose of opening the margin account in Mr Wongfound in Mr Chan's 's name can be affirmation dated Brave Holdings Ltd 13 August 2002. He first described how he acquired Sharp ("was later changed to Shape Brave"), a public listed company in Hong Kong (the name of which Billion Internationalmillion incurred by ) in 1996 and 1997, how he repaid a loan of HK$10 Sharp Brave to the petitionerpromised him that if in , and how Mr Yeung of the petitioner future he needed any financial assistanceits best to assist him. He , the petitioner would try then went on to say that thereafter he and Mr Yeung had become very close friends, Mr Yeung introduced many business friends to himstock market dropped . In December 1997, the significantlyneeded capital and . Under a heavy financial burden, Billion International therefore reached an underwriting agreement with ASG Brokerage Ltd as the underwriter for the issue of way of private $100 million new shares to potential third party investors by placement at the price of HKcapital. Mr $0.40 per share in order to raise HK$40 million as Chan said :

"10...In order that the said issue of new shares would be successful, I needed to buy numerous board lots of shares of Billion International from the market so that its share price might be favourably maintained at a high level and as result my financial situation became very tight.

11..I then sought assistance from the Petitioner and Mr. Yeung and they made the following arrangement with me, which said arrangements were agreed between myself of the one part and Mr. Yeung for and on behalf of the Petitioner of the other part:-

(i) The Petitioner would provide me with a margin account ('the Margin Account') for me to buy and sell the shares of Billion International as well as other shares from the market upon security of the Margin deposit and shares held in the Margin Account.

(ii) In order not to violate the regulations and provisions under the Securities Ordinance, Cap.333 as well as the rules and regulations under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited ('the Listing Rules') and other rules, regulations and provisions governing the law of securities in Hong Kong, I had to look for an individual third party to open and hold the said Margin Account though in fact I was the beneficial owner of the Margin Account. Mr. Yeung told me that he would cause the Petitioner to make such arrangements and the Margin Account would be approved by the Petitioner due to the fact that I was the Chairman of Billion International.

(iii) My personal assistant, Mr. Lam Yuen Fai (林沅輝) ('Mr. Lam'), was to be my authorized representative in dealing with the transactions under the Margin Account pursuant to a Power of Attorney/Letter of Authorisation.

(iv) Ms. Wan Wai Kay Vicky ('Ms. Wan'), an Executive Officer of the Petitioner, would attend to the opening of the Margin Account.

(v) The individual third party chosen by me who would open and thereafter hold the Margin Account on my behalf was a mere name holder or account holder of the same and he would not be responsible for any indebtedness thereunder, although the Margin Account was registered in his name. I, as the real beneficial owner, would be the sole person responsible for the dealings and transactions, the gains and losses as well as all the indebtedness under the Margin Account.

(vi) Upon the careful planning and arrangement of Mr. Yeung and me, I made arrangement for my friend Mr. Wong Tak Wa Partak, i.e., the abovenamed Debtor, to open the Margin Account on 12th December 1997. Then I instructed my said personal assistant, Mr. Lam to take the Debtor to the office of the Petitioner to open the Margin Account in the name of the Debtor. Later on the same day, Mr. Lam told me that Ms. Wan had handed to the Debtor some documents in blank form (including the documents for the opening of the Margin Account and a Power of Attorney/Letter of Authorisation) and requested the Debtor to sign, which the Debtor did, for the operation of the Margin Account.

(vi) After the opening of the Margin Account, all the sales and purchases of stocks as well as the deposits of money into the same were done by the Mr. Lam on my instructions and the Debtor has not had any knowledge about the operation of and in the Margin Account. The Debtor had simply lent his name to the opening of the Margin Account.

12. In January 1998, (as will be explained hereinbelow), the share price of Billion International fell significantly and the value of the shares pledged to the Petitioner was not sufficient to satisfy all debts outstanding and owed to the Petitioner under the Margin Account."

8) Mr Chan also deposed how the initial deposit of opening the margin account of HK$3 million was in fact his money. The cheque of HK$2,600,000 dated 17 December 1997 issued by Mr Wong was in fact a repayment by Mr Wong to Mr Chan for an earlier loan. Both of them engaged in money lender's business and lent money to each other when necessary. It was upon Mr Chan's request that Mr Wong issue a bearer cheque for that sum and Mr Chan caused it to be deposited in the margin account after inserting the petitioner's name in it. The balance of HK$400,000 was earlier deposited on 12 December 1997 by Mr Chan's staff upon his instruction.

9) I now come to consider the statutory provisions that Mr Chu sought to rely on.

10) He first relied on section 135 of the Securities Ordinance, Cap.333. It provides :

"(1) A person shall not intentionally create or cause to be created, or do anything with the intention of creating

(a) a false or misleading appearance of active trading in any securities on the Unified Exchange; or

(b) a false market in respect of any securities on the Unified Exchange)

(2) For the purposes of subsection (1)(b), a false market is created in relation to securities when the market price of those securities is raised or depressed or pegged or stabilized by means of

(a) sales and purchases transacted by persons acting in collaboration with each other for the purpose of securing a market price for those securities that is not justified either by the assets of the corporation which issued the securities or by the profits (including anticipated profits) of the corporation;

(b) any act which has the effect of preventing or inhibiting the free negotiation of market prices for the purchase or sale of the securities; or

(c) the employment of any fictitious transaction or device or any other form of deception or contrivance."

Any person contravening section 135 shall be guilty of an offence and shall be liable on conviction on indictment of a fine of HK$50,000 and to imprisonment for two years : see section 139 of the same Ordinance.

11) While the evidence of Mr Chan, as it now stands, may not be sufficient for the purpose of section 135(1)(b), it is certainly arguable that the purpose of the trading conducted through the margin account was in essence to create a misleading appearance of active trading in Billion International shares in breach of section 135(1)(a). Mr Yuen submitted that sub-paragraph (a) would bite only if the trading was false. With respect, I do not subscribe to such a narrow reading of the provision, which is clearly contrary to its ordinary meaning. Thus, I would hold that for present purposes, it Mr Chan's evidence is to be accepted, a possible defence of illegality can be raised under section 135(1)(a).

12) Mr Chu next relied on section 9(1)(a) of the Securities (Insider Dealing) Ordinance, Cap.395. It reads :

"when a person connected with that corporation who is in possession of information which he knows is relevant information in relation to that corporation deals in any listed securities of that corporation or their derivatives (or in the listed securities of a related corporation or their derivatives) or counsels or procures another person to deal in such listed securities knowing or having reasonable cause to believe that such person would deal in them;"

13) Mr Chu conceded that it is not clear in Mr Chan's evidence that he did use price sensitive information when trading in Billion International shares through the margin account. But he said such an inference can be drawn from the fact that he was then its chairman and must have possessed such information. I am unable to agree that on the evidence before me, such an inference can be drawn. Accordingly, I rule that a defence of illegality on the strength of this particular provision cannot be raised.

14) Finally, Mr Chu referred to section 28 of the Securities (Disclosure of Interests) Ordinance, Cap.396. The relevant part reads :

"(1) A person who

(a) at the commencement of this Ordinance is a director or chief executive of a listed company and is then interested in shares in, or debentures of, the listed company or any associated corporation; or

(b) becomes a director or chief executive of a listed company and at the time when he does so is interested in shares in, or debentures of, the listed company or any associated corporation,is under a duty to notify the company and the Exchange Company in writing

(i) of the subsistence of his interests at that time; and

(ii) of the number of shares of each class in, and the amount of debentures of each class of, the listed company or associated corporation in which each interest of his subsists at that time.

(2) A director or chief executive of a listed company is under a duty to notify the company and the Exchange Company in writing of the occurrence, while he is a director or chief executive, of any of the following events

(a) any event in consequence of whose occurrence he becomes, or ceases to be, interested in shares in, or debentures of, the listed company or any associated corporation;

(b) the entering into by him of a contract to sell any such shares or debentures; ...

and notification to the listed company and to the Exchange Company must state the number or amount, and class, of shares or debentures involved.

...

(8) A person who

(a) fails to perform, within the proper period, a duty to which he is subject under subsection (1) or (2) in accordance with the provisions of this section applicable to that duty; ...

commits an offence and is liable on summary conviction to a fine of $10000 and to imprisonment for 6 months and on conviction upon indictment to a fine of $100000 and to imprisonment for 2 years. ..."

15) I am satisfied that if Mr Chan's evidence is to be accepted, an offence might have been committed under section 28(2). Again, a possible defence of illegality may be raised as a result. Mr Chu also referred to certain provisions in Part I of the same Ordinance requiring a disclosure of change of more than 10% of shares in a listed company. It is not necessary to go into detail of those provisions as there is no evidence before me to suggest that such a change took place in Mr Chan's shareholding as a result of the trading through the margin account.

16) For the above reasons, I rule that the evidence concerning the arrangement in respect of the margin account, including the aspect of agency, that Mr Wong sought to adduce is admissible for the purpose of raising the defence of illegality.

Bona fide dispute on substantial grounds?

17) I next consider on the evidence before me the merits of Mr Wong's case for the purpose of this petition. Counsel agreed and I accept that in bankruptcy petitions such as the one now before me, if there is a bona fide dispute of the alleged debt on substantial grounds, the petition shall either be dismissed or struck out the application of the debtor. This test, I believe, is well established. Accordingly, I do not propose to set out the relevant authorities, most of them had been referred to by Mr Chu, counsel for Mr Wong, in his list of authorities.

18) In his affirmations filed in these proceedings, Mr Yeung denied that he was a close friend of Mr Chan's, and that he knew or consented to the alleged arrangement of opening the margin account in Mr Wong's name. He also pointed out that in Mr Chan's Statement of Affairs filed on 28 June 2002 in connection with the bankruptcy proceedings against Mr Chan himself, Mr Chan did not make any reference to the indebtedness incurred through the margin account at all although he did refer to the payment of HK$3 million.

19) Mr Yuen submitted that Mr Wong's case is unsustainable. He took a number of points. First, he asked rhetorically : if Mr Chan was in effect trying to create a false market for the shares of Billion International, why would he want to tell Mr Yeung of such wrongful intention and conduct? He could have simply sent Mr Wong to open the margin account and then conduct trading in such way as he wanted. There was absolutely no need to inform Mr Yeung. And why would Mr Yeung agree? Secondly, counsel pointed out that according to records, the trading through the margin account was not confined to the shares of Billion International. There were trading of the other two shares as well. Thirdly, Mr Chan in his Statement of Affairs did not make any reference to the loss incurred through the margin account, indicating that he is not admitting liability at all, despite his allegation that it was he who funded the initial opening of the account. Fourthly, when Mr Wong terminated the third party authorisation on 9 February 1988, he described the margin account as his own. There was no indication that the account was opened and maintained on behalf of Mr Chan. Fifthly, Mr Wong said that in mid-February 1998, he telephoned Mr Chan and asked him whether he had resolved the matter with the petitioner. Mr Chan said he had already paid HK$100,000 to the petitioner on 9 February 1998 and that he had already called Mr Yeung informing him that the matter had nothing to do with Mr Wong. Mr Yuen argued that Mr Chan's answer supported the petitioner's case that Mr Yeung was not aware of the arrangement. Otherwise, why would Mr Chan need to inform Mr Yeung in February 1998 that the margin account had nothing to do with Mr Wong. Lastly, Mr Yuen submitted that Mr Wong had been evading service in these proceedings. Had he had a defence, he would not have evaded service at all, counsel contended.

20) In my view, whether the arrangement for opening the margin account as alleged and whether Mr Yeung had knowledge of and consented to it are substantial factual disputes which cannot be resolved on affidavit. A proper finding can only be made after trial. The points raised by Mr Yuen needs to be further explored with the benefit of cross-examination of the witnesses. They cannot be answered one way or the other on affidavit. I do not think that on the evidence before me, the points raised by counsel, taken alone or collectively, would necessarily render Mr Wong's case unsustainable. For example, the trading in respect of the other two shares were significantly less than that for the shares of Billion International. This is not necessarily inconsistent with Mr Chan's case that the main purpose of the margin account was to trade in the share of Billion International actively. Mr Chu submitted that Mr Chan had forgotten to include the loss incurred through the margin account in his Statement of Affairs. That may well be the case. It can only be resolved after cross-examination. Mr Wong did refer in his letter dated 9 February 1998 that margin account as his. On the face of the documents, the account was in his name. If his evidence is to be accepted, he needed not make any reference to the alleged arrangement. For the petitioner was aware of it. Mr Chan's answer to Mr Wong's enquiry in mid-February 1998 might be given to pacify Mr Wong. It is again a matter for cross-examination. Lastly, even assuming that Mr Wong was evading service, it is not a necessary inference that his defence is entirely unmeritorious. It is a matter of credibility to be investigated at trial.

21) Mr Yuen also suggested that as Mr Chan is a bankrupt, admitting further liability does not cause him any further harm. Thus the alleged scheme was just an excuse to enable Mr Wong to escape liability. In essence, Mr Yuen is suggesting that they are fabricating evidence. I do not wish to say no more than that on the evidence before me, this remains a speculation. Whether the speculation will be borne out later is a matter to determined in another set of proceedings.

Conclusion

22) For the above reasons, I am satisfied that Mr Wong has raised a bona fide dispute on substantial grounds on the alleged debt. This is sufficient to dispose of the petition. In the circumstances, it is not necessary for me to address counsel's submissions on other subsidiary points, including the possible defence of misrepresentation. I will dismiss the petition and make an order nisi that costs of the petition be to Mr Wong, to be taxed if not agreed. The order nisi is to be made absolute 14 days after handing down.