CHEUNG PING KWONG v. CHAN KIN SUN

HCA 2485/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2485 OF 2009

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J U D G M E N T

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INTRODUCTION

1.  The plaintiff commenced this action in December 2009 seeking (among other relief) the repayment of $15 million alternatively, damages. The claim is denied by the defendant.

PLEADED CASE

(a)     the plaintiff

2.  The plaintiff’s pleaded case can be summarized as follows.  At the defendant’s invitation, the plaintiff began trading in listed shares in Hong Kong in January 2008. Financial facilities to do so were offered, and provided, by the defendant; annual interest at 10% was payable for any sum advanced and outstanding.

3.  Shares were traded from January to August 2008. On 5 February 2008, at the defendant’s request, the plaintiff paid $20 million by way of further security.  Out of that sum, the plaintiff later instructed the defendant to transfer $5 million to a Mr Shu (“Shu”).

4.  Because:

(a)  the defendant was a money lender and was not a person specified in Part 1, Schedule 1, Money Lenders Ordinance (Cap 163) or Part 2, Schedule 1, Cap 163;

(b)  there was no note or memorandum in writing of the loan agreement (as required by s 18(2), Cap 163),

the loan agreement is and was unenforceable.

5.  Accordingly, the plaintiff is entitled to recover the said $15 million.  Further, because the defendant wrongfully sold off the plaintiff’s shares in 2009, the plaintiff has suffered loss.

6.  The said loss was pleaded as the difference between the actual sale price and the purchase price if the plaintiff had bought the share at the date of the writ (approximately $53.876 million).  In the closing submissions, the loss is put at:

(1)  $5,851,433.78 (being the difference between (i) the actual sale price and (ii) the purchase price if the plaintiff had bought the shares on the trading day following the defendant’s wrongful sale);

(2)  $9,963,177.14 (being the difference between (i) the actual sale price and (ii) the purchase price if the plaintiff had bought the shares on the second trading day following the defendant’s wrongful sale).

Presumably, the original claim of about $53.8 million is no longer pursued.

(b)     the defendant

7.  The defendant pleads that he and the plaintiff were friends, having been introduced to each other by Shu in mid-2007.  At one stage, they discussed about the defendant injecting capital into a Mainland real property development company (of which the plaintiff was major beneficial owner).  Although $10 million from the defendant was stake-held for such purpose, nothing was agreed at the end.

8.  The defendant has been operating a stockbrokerage in Hong Kong, Yardley Securities Ltd (“Yardley”).  In late-January 2008, the plaintiff expressed interest in stock trading.  After discussion, it was agreed that the plaintiff’s share trades would be placed through the defendant’s personal trading account at Yardley.  For convenience, this will be called “the plaintiff’s share account” below.

9.  A verbal agreement was reached in late-January 2008 to the effect that financial facilities would be provided to the plaintiff at an annual interest rate of 10%.  Share trading commenced in late-January 2008.

10.  In early February 2008, the plaintiff attended Yardley’s office and executed documents usually required for share trading at Yardley.  Further, $20 million was deposited into the plaintiff’s account with Yardley as security on 5 February 2008 (but $5 million was later paid out to Shu as the plaintiff instructed).

11.  The contractual terms of the plaintiff’s share account included:

(a)  the maximum trading margin would not exceed 90% of the shares’ market value at the close of market;

(b)  if the outstanding loan should exceed 90%, the plaintiff should upon demand either sell some or all of his shares or deposit further sums to maintain the loan at or below 90%;

(c)  in such event, the plaintiff should instruct Yardley to transfer $20 million to the defendant as security deposit;

(d)  Yardley’s share trading agreement should form part of the agreement.  In particular, the defendant has the right to liquidate the account without further notice if the plaintiff should fail to maintain the said margin ratio.

12.  From about mid-June 2008, as a result of the global financial crisis, the plaintiff’s shares fell substantially in value.  Consequently, his share trading account’s loan ratio exceeded 90%.

13.  The defendant repeatedly demanded the plaintiff to deposit funds or sell off shares; from mid-June to August 2008, the plaintiff instructed the defendant to sell some of his shares.  However, as of 2 August 2008, the value of the shares still held in the plaintiff’s account exceeded the 90% loan ratio nonetheless.  By late October 2008, the margin ratio reached about 360% of those shares’ market value.

14.  The plaintiff, through his Mainland lawyers, proposed in December 2008 terms for repaying the loan (“the plaintiff’s Dec 2008 proposals”).  The plaintiff’s Dec 2008 proposals were however not accepted by the defendant at the end.

15.  In early July 2009, the defendant informed the plaintiff he would liquidate the plaintiff’s share account.  The share sale by the defendant took place from late-July to early-August 2009.

16.  The defendant denies that he was a money lender.  Thus, s 18(2), Cap 163 did not apply to the margin facilities he made available to the plaintiff.

17.  Alternatively, the defendant contends that it would be inequitable to hold that the parties’ agreement was unenforceable (s 18(3), Cap 163).  In this connection, reliance is placed on various matters including the following:

(1)  the plaintiff was of full age and sound mind, and a successful and sophisticated businessman who received many business awards;

(2)  the loans arose out of the plaintiff’s share trading, which he did so in huge volume and on a regular basis;

(3)  daily summaries of the share trading were sent to the plaintiff;

(4)  the transactions were at arm’s-length.

BACKGROUND

18.  The following summary background is largely undisputed.

19.  Both parties have been successful in their own business: (among other things) the plaintiff was in the real property development business and the defendant in stockbrokerage in Hong Kong.

20.  After having been introduced to each other by Shu in June 2007, they became friends.  In fact, in mid-2007 they discussed the possibility of the defendant investing in the plaintiff’s business though that did not materialize at the end (see also para 7 above).

21.  In January 2008, irrespective of who initiated the idea, or the precise arrangement (the latter being one of the disputes in this action), the plaintiff began to trade in listed shares in Hong Kong with the defendant’s help (and through his account with Yardley) (see also para 2 to 3 and 8 above).

22.  A report/statement of the share trades would be fax transmitted to the plaintiff daily, besides a confirming phone call from the defendant to the plaintiff.

23.  In February 2008, the parties also agreed that the plaintiff was to execute documents for opening a share trading account with Yardley.  On 5 February 2008, the plaintiff attended Yardley’s office to execute the documents for opening such an account; $20 million was also deposited by the plaintiff into the Yardley account on 5 February 2008 ($5 million was later transferred out).  The plaintiff also signed documents authorizing Yardley to transfer the deposit to the defendant.  (See also para 3 and 10 above)

24.  Since about June 2008, the global economic (and financial) downturn began to affect Hong Kong.  The value of the plaintiff’s stock portfolio started to drop.  The defendant verbally asked the plaintiff to deposit more fund or sell some of his shares.

25.  The plaintiff began to sell off some of his shares in June 2008.  By August 2008, only two stocks remained in the plaintiff’s share account.  The plaintiff did not give further instructions to the defendant to sell off those two stocks.

26.  The plaintiff’s Dec 2008 proposals were made (and not accepted by the defendant) (see also para 14 above).

27.  The defendant’s sale of the plaintiff’s shares commenced in late-July 2009.

SHARE TRADING

28.  One of the main issues concerns the terms of the share trading, in particular:

(a)  whether the defendant has the right to liquidate the plaintiff’s share account;

(b)  if so, how that right should be exercised.

On the plaintiff’s part, it is contended that the parties never agreed as to when and how the share dealings could be terminated (para 30, plaintiff’s witness statement).

29.  The above issue is factual.  Because there is no conclusive documentary evidence, a proper resolution will have to depend on an assessment of the witnesses’ credibility.  In this connection, the approach I adopted in Star Glory Investment Ltd v Kai Tuo (HK) Technology Co Ltd and Others, HCA 3523/2002 (13 August 2005), para 12, is also adopted here.

30.  Only two witnesses testified at trial: the plaintiff and the defendant.

31.  I agree with the defence that the plaintiff has made an important admission in his testimony:

(1)  the stocks in the plaintiff’s share account were pledged to the defendant (confirming the averments at para 4(v), 5 and 7, amended statement of claim);

(2)  the defendant could liquidate the plaintiff’s share account after the defendant had made a margin call which the plaintiff failed to meet.

The amended statement of claim also avers that the Yardley deposit ($15 million) was further security for the margin facilities (para 6 thereof).

32.  The admission that there were securities for the share trading (by way of share pledge and deposit) is important because it implies there ought to be an event (or events) which would “trigger” the defendant’s right to make use of the securities, namely, to:

(a)  sell the pledged shares;

(b)  use the deposit.

33.  Further, leaving aside the above, I also agree that it is inherently implausible that the plaintiff’s share account has no:

(1)  margin level;

(2)  right of liquidation.

This is because share trading, especially trading on margin basis, is well known to be risky (share prices are known to be highly volatile).  On the plaintiff’s own case, the defendant has been a seasoned stock trader (or, at the very least, has vast experience in the trade).

34.  The plaintiff’s Dec 2008 proposals also militate against the plaintiff’s case:

(a)  it is unlikely those proposals would be volunteered had there not been earlier margin calls;

(b)  the drafts in effect sought a “waiver” of the defendant’s right to liquidate (clause 5.3 thereof).  It is noted that the clause only referred to the “unauthorized sale” of shares (but not the “unauthorized purchase” thereof).  Similar to sub-para (a) above, it is unlikely such a clause would be volunteered had there not been a pre-existing right to liquidate.

In relation to the plaintiff’s Dec 2008 proposals, the plaintiff’s explanation to the effect (i) he did so only because it would enable him to buy more shares, and (ii) the defendant has expressed an interest in buying the plaintiff’s Mainland properties, is rejected as untruthful.

35.  Finally, despite his denial of an agreed trading margin level, even the plaintiff has to accept in his testimony he was obliged to maintain the value of the stocks in the plaintiff’s share account at no more than 10% to 20% of their purchase value (see also para 12, plaintiff’s witness statement).

36.  While the plaintiff accepted in his testimony that the defendant could sell off his pledged shares if there was insufficient value (it is unclear what that meant according to his case), he contended that the defendant could only do so after giving him a formal notice (which has to specify the amount payable) with a reasonable time limit for payment.  He further contended that, although the defendant had repeatedly asked him to do so (since about mid-2008) (see also para 24 above), they did not amount to such formal notices (whatever that may mean) but mere friendly requests.

37.  I reject these contentions as lame excuses:

(i)    I note that the thrust of the plaintiff’s pleaded case is that there was no right to liquidate the plaintiff’s share account (for example, para 13, amended reply);

(ii)  I also agree with the defendant that clause 14.1.1 and 14.2 of Yardley’s terms and conditions (which have been incorporated), when read together, do not require such formalities;

(iii)           further, I agree with the observation in Société Générale Bank & Trust Hong Kong Branch v Mike Panjwani HCA 725/2009 (25 November 2010), para 35, to the effect it would be unusual for a margin trading account to imply a term that there should be a reasonable time for complying with a margin call.

38.  Finally, for completeness, I also reject the following parts of the plaintiff’s testimony:

(1)  the Yardley share trading account was opened in his name only because the defendant wanted to have one more Yardley “customer” and that the parties never intended that account to be operational;

(2)  the defendant was willing to take up the risk of share price volatilities because of the amount of commission and interest he could earn (and the tax which could be saved) by operating the plaintiff’s share account (and to do so without any margin requirement or account liquidation right);

The plaintiff’s deposit of $20 million (later reduced to $15 million) with Yardley is also inconsistent with the above.

39.  On the other hand, I accept the defendant to be a truthful and reliable witness.

40.  The criticisms levied against the defendant’s credibility include:

(a)  he could well have made (but did not make) use of Yardley’s recording facilities to record the verbal agreement, especially the terms relating to margin calls and his right of liquidation;

(b)  there was sufficient financial incentive (high interest return, commission earrings and tax savings) for the defendant to take the risk of price volatilities in the plaintiff’s share account (without requiring the plaintiff to deposit sufficient margin, or to confer a right to liquidate);

(c)  the fact that the defendant did not draw on the $15 million deposit with Yardley until much later supports sub-para (b) above;

(d)  the plaintiff’s contemporaneous complaint in July 2009 that the defendant had wrongfully sold his shares is consistent with the plaintiff’s case that there was no agreement conferring such right of liquidation;

(e)  the defendant failed to obtain telephone call records to support his testimony that he had repeatedly made verbal margin calls.

41.  I have considered those criticisms but do not find them to affect my assessment of the defendant’s credibility or reliability.

42.  The plaintiff also argues that no effective margin calls have been made simply because margin calls must specify the amount of margin which was required.  Reliance is placed on the defendant’s inability to recall the specific amount of margin when he was cross-examined (despite the defendant’s assertion that he had in fact named the amount at the time).

43.  I disagree with the argument.  It is trite that cross-examination is not a test of a witness’ memory.  The events in question occurred about 4 years before the time of trial; it is understandable the defendant could not recall the details when he testified.  Further, daily reports/statements concerning the state of the plaintiff’s share account were sent to the plaintiff and he ought therefore to be aware of the same (since August 2008, there were only two stocks in the plaintiff’s share account).  Finally, para 22 and 25 above are repeated here.

44.  In light of the above, I accept the defendant’s case.  To avoid doubt, the findings of fact I make under this heading include:

(1)  the parties agreed that the plaintiff’s share trades would be made through the defendant’s trading account with Yardley;

(2)  they also agreed that the terms of the share trading account agreement of Yardley (evidenced by the documents executed by the plaintiff) were to be incorporated into, and would become part of the terms of, the plaintiff’s share account;

(3)  the $20 million (later $15 million) deposited by the plaintiff with Yardley was intended to be the security deposit for the plaintiff’s share account;

(4)  the other terms of the plaintiff’s share account were as summarized in para 11(a) to (c) above;

(5)  the margin of the plaintiff’s share account exceeded the contractual limit after mid-2008;

(6)  despite margin calls having been made repeatedly by the defendant, the plaintiff failed to meet those calls;

(7)  by early July 2009, the defendant informed the plaintiff he would liquidate the plaintiff’s share account (as the defendant was contractually entitled so to without further notice).

CAP 163

45.  Two provisions of Cap 163 are relied upon by the plaintiff: ss 2 and 18.

46.  The relevant part of the first provision (s 2) concerns the meaning of “money lender”.  It stipulates:

“‘money lender’… means every person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business, but does not include-

(a) a person specified in Part 1 of Schedule 1; or

(b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such loan” (emphasis supplied).

47.  The relevant part of the second provision (s 18) is:

“(1) No … security given to any money lender in respect of any such agreement or loan, shall be enforceable unless-

(a) within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and

(b) there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed …

(3) Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable” (emphasis supplied).

48.  In relation to s 2, it is common ground the defendant does not fall within either of s 2(a) or (b).  The issue here is whether he was a money lender.

49.  In relation to s 18 (if it be applicable to this action), it is common ground there is no note of memorandum in writing which complies with the provision.  The issue here is whether the court’s discretion conferred by s 18(3) ought to be exercised in the defendant’s favour.

(a)     Was the defendant a money lender?

50.  In support of his contention that the defendant was a money lender (that is, he was a person “whose business is that of making loans”), the plaintiff relies on the following authorities:

(a)  Edgelow v MacElwee [1918] 1 KB 205;

(b)  R v Morgan (1913) 11 DLR 794;

(c)  Hungier v Grace (1972) 46 ALJR 492.

51.  The Edgelow case concerned a solicitor who “makes a practice of advancing money to clients and others” (according to the headnote).  In Harvester Stock Investment Co v Kwan Siu-may HCA 11515/1983 (30 April 1986), that solicitor was described as one who:

“[having] been suspended for two years for misconduct, he commenced lending money. In two years he issued 17 writs in respect of bills or cheques he discounted or money he advanced, yet in none of them did he make a claim for professional costs, nor did he ever send the bill of costs to any of the persons named as the Defendants” (p 13 thereof).

The Harvester Stock Investment case also described the Edgelow case as:

“… an extreme case where a solicitor under the pretext of carrying on his profession was, without doubt, carrying on the business of money-lender instead” (p 12-13 thereof).

It was also inferred by the court in the Edgelow case:

“… that the events of 1910 [that is, being found guilty of misconduct] would not tend to the creation of a satisfactory clientele. … I am satisfied also that his loan transactions were in no way confined to clients” (p 208).

52.  The court in the Edgelow case drew a distinction between:

“… occasional loans to relations, friends or acquaintances, whether interest be charged or not ... [or] a man … [who] may upon one or several isolated occasions lend money to a stranger … ” (which do not amount to money lending) (p 206),

and:

“… a business of money-lending, and the word ‘business’ imports the notion of system, repetition, and continuity … Each case must depend on its own peculiar features. It is ever a question of degree” (emphasis supplied) (p 206).

More will be said about the phrase “system, repetition, and continuity” in para 59 below.

53.  The Edgelow case has been referred to, and discussed, in quite a few local decisions.  They include (chronologically):

(1)  the Harvester Stock Investment case (April 1986);

(2)  New Japan Securities International (HK) Ltd v Lim Yiong Lin HCA 1466/1983 (October 1986);

(3)  Richardson Greenshields of Canada (Pacific) v Tze Yim HCA 6690/1987 (October 1991);

(4)  Supreme Design Fashion Ltd and Another v Michael Hope International Ltd HCA 1198/1996 (July 1999);

(5)  Poon Chan Lin v Law Chee Kong and Others HCA 1883/2002 (December 2007).

54.  Of the above, the Harvester Stock Investment case, the New Japan Securities case and the Richardson Greenshields case all involved margin facilities extended by stockbrokers to their customers for share trading.  In all these cases, the courts found that there was no business of money lending, and hence none of the stockbrokers were money lenders.

55.  In the Harvester Stock Investment case, the court held firstly that margin facilities were not a “loan” covered by Cap 163.  After referring to various withdrawals by the customer from her share trading account, which was described by the stockbroker as “loan”, the court observed:

“It was never suggested by the Defendant (that is, the customer) … that the Plaintiff was entitled to call for the ‘repayment’ of those specific sums, with or without interest—they merely went into the ‘melting pot’ of the Share Dealing Margin Account.” (p 8 thereof);

“… [Cap 163] was intended also to cover [an] ‘ordinary’ loan in the accepted sense of a word” (p 10 thereof),

and opined that those sums were not a “loan” within the meaning of Cap 163.

56.  The Harvester Stock Investment case also dealt with the question of whether margin facilities genuinely connected with a stockbroker’s business can render the stockbroker a “money lender”.  Hence:

“The Plaintiff [that is, the stockbroker] has satisfied me, and … I hold, that it does not have a business of making loans. The ‘system’ which I have described, and which is not in dispute, is part and parcel of, and not a separate business from, its business of stock-broker … the agreements were to enable the Defendant to purchase shares through the Plaintiff qua stock-broker, but on credit. The credit was arranged in the manner described in the world of stock-broking as ‘margin trading’. If I ask myself ‘what was the object of the whole exercise?’ between these parties, the answer must clearly be that it was stock-broking with credit extended to the client. It would stretch imagination to breaking point to say that it was moneylending in the guise of stock-broking” (emphasis supplied) (pp 10-11 thereof).

The court there also referred to Official Assignee of the Property of Koh Hor Khoo and Others, Bankrupts v Ek Liong Hin Ltd [1960] AC 178 where a godown storage operator who made loans to selected customers on the security of goods stored in the godown were held by the Privy Council not to be engaged in money lending (p 13 thereof).

57.  The court in the New Japan Securities case, after referring to the Harvester Stock Investment case, observed:

“I have no hesitation in saying on the evidence that the primary business of the Plaintiff was stock broking and that the loans to the Defendant and to other clients on the margin account were made in the ordinary course of that business. And I am fortified in coming to that conclusion by the Harvester case because that also involved stock broking and the running of a margin account … ” (emphasis supplied) (p 8 thereof).

A similar approach was adopted in the Poon Chan Lin case (which involved a real property development project) (see para 83 thereof).

58.  In agreeing with the Harvester Stock Investment case, the court in the Richardson Greenshields case said:

“[The plaintiff stockbroker submits] that the plaintiffs never made any loans to [their customer] …

To support [the proposition], [the plaintiff stockbroker] analysed the facilities granted to and enjoyed by [the customer]. When sufficient margin was available [the customer] enjoyed two types of facilities. Firstly, he received cash payments … Secondly, [the customer] could use his excess margin to purchase further shares … in no case where the above facilities were utilized … was any specific sum paid … that specific sums should be repaid.

I am quite satisfied that the plaintiffs did not make loans to [the customer] nor did they do so under any agreements for the repayment of money within the meaning of [Cap 163].

… It is true that in [the Harvester Stock Investment] case the books of the broker referred to ‘loans’ but the Court will always look at the substance of a transaction and not the label given to it by the parties … ” (emphasis supplied) (pp 35-36 thereof).

59.  Apart from relying on the Edgelow case for the proposition that “system, repetition, and continuity” imports “business”, the plaintiff also relies on the Morgan case.  That case decided that:

“One, who at intervals extending over a year makes various loans of money at usurious rates is a ‘money lender’ … ” (headnote).

The Edgelow case and the Morgan case have been distinguished in the Supreme Design Fashion case, which involved a plaintiff who borrowed money from the defendant pursuant to a loan agreement which was labeled an “agency” agreement.  Having found that such was in substance a loan agreement, the court dealt with the question of whether there was a business of money lending:

“It is argued for the Plaintiffs that because there was a series of letters of credit, there was a series of loans and this is enough to establish system and continuity. … I do not see that this can apply here. There was one contract. It was for a series of advances but the total was fixed and the repayment followed on one fixed event, namely, delivery” (emphasis supplied) (p 11 thereof).

The court concluded that there was no business of money lending.

60.  To avoid doubt, I find that the substance of the parties’ transaction to be share trading, albeit on margin.  Similar to the Supreme Design Fashion case, only one agreement was reached between the plaintiff and the defendant here.

61.  Accordingly, I conclude that the observations made, and the conclusions reached, in the local decisions quoted above are equally applicable to the present case.  Thus:

(a)  the margin facilities made available to the plaintiff are not “loans” within the meaning of Cap 163;

(b)  the defendant has not engaged in the business of making loan and thus was not a money lender.

(b)     S 18(3) discretion

62.  Because of the conclusion reached under the previous sub-heading, it is strictly unnecessary to determine this aspect.  I shall do so very briefly for completeness.

63.  I find as facts the matters set out in para 17 above and I:

(1)  agree with para 44 to 62 of the defendant’s opening submissions;

(2)  disagree with para 45 of the plaintiff’s closing submissions;

(3)  have considered the plaintiff’s supplemental closing submissions.

I am satisfied that there is no inequity in enforcing the securities given by the plaintiff to the defendant; instead there will be inequity in not doing so.

64.  Thus, insofar as it may be necessary to do so, this is an appropriate case for my discretion to be exercised in the defendant’s favour.

CONCLUSION

65.  The plaintiff’s claim is dismissed.

OTHER MATTERS

66.  Because of the conclusion reached concerning the defendant’s liability, there is no need to consider or determine the question of quantum of loss.

67.  The parties’ closing submissions also mentioned various other points.  These have not been expressly set out or dealt with in the above headings and sub-headings.  This is so only because of the need to balance between the length of the judgment and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked). To avoid doubt, those other points have also been considered.

COSTS ORDER

68.  The parties agree that costs should follow the event.  There will accordingly be a costs order that the costs of this action (including any reserved costs) be paid by the plaintiff to the defendant to be taxed if not agreed.

69.  The plaintiff does not oppose certificate for two counsel be given to the defendant.  Having considered the issues involved in this action, I am satisfied that such certificate should be given.