CHINTUNG COMMODITIES LTD v. CHENG AH-HUNG BERNARD

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JUDGMENT

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Cons, J. A.:

1. The Plaintiff Company, according to the affirmation of Mr. Michael Tong its Managing Director, "is in the business of being brokers and dealers in precious metals and commodity futures". It is a member of what is now known as the Hong Kong Futures Exchange Limited.

2. On the 17th April last year the Defendant commenced ,trading with or through the Plaintiff Company, dealing in various commodities including gold and silver. His business was conducted on margin. There is some dispute as to whether he ran one or two accounts with the Plaintiff Company, but both were under the same reference number and it is conceded now that the number of accounts is not important.

3. The Defendant carried on his trading on margin until the middle of March this year. At that time he was in gold and silver only. On the 18th of the month the market took a swift and violent move against him. He gave instructions to liquidate. There is some dispute as to whether those instructions were given on the 19th or the 20th but it does not matter for the moment. At the time of liquidation the Defendant's position was, and I quote from paragraph 12 of the Statement of Claim -

"Loco London Precious Metals and Hong Kong Gold Tael Market Account short 7,000 oz. Loco London Gold short 150,000. Loco London Silver short 6,000 taels Hong Kong Gold.

 

Commodity Futures Trading Account short 2,000 ozs (20 contracts) New York Conex Gold."

4. When the final figures had been worked out, which took into account the margin paid and various other factors, including conversion of the U. S. dollar amounts into Hong Kong dollars, the Defendant was just over HK$3 million in debt to the Plaintiff Company.

5. The Defendant was not able to raise that money. Discussions were held but led nowhere. In due course the Plaintiff Company issued its writ. We do not know when that was, but the Statement of Claim is dated the 27th April.

6. Before that however, on the 18th April, the Plaintiff Company obtained a Mareva injunction against the Defendant. For that purpose lengthy affidavits had been filed and these were relied upon again in the Order 14 proceedings heard on the 10th June. In the meantime further affidavits had been filed. Those of the Defendant relied mostly upon illegality, suggesting that the Plaintiff had acted in breach of four different ordinances. The submissions upon two were subsequently withdrawn. The remainder however did not prevail. Hunter, J., who was to a large extent already cognizant of the matters involved, having been concerned in the Mareva proceedings, said, -

"I have come to the conclusion that this defendant has in fact made out nothing that I can regard as an arguable defence."

7. The Defendant appeals from that decision. His Notice of Appeal delineates five areas in which the judge might be thought to have gone wrong in some way or other. Mr. Barlow, who appears for the Defendant for the first time in these matters, has put in clearer perspective . the actual issues which he suggests "ought to be tried". They number only three. He seeks further to suggest "that there ought for some other reason to be a trial".

Illegal Exchange

8. This submission relates to the Defendant's position in Loco London Gold and Loco London Silver.

9. Sections 3 and 4 of the Commodity Exchanges (Prohibition) Ordinance Cap. 82 provide as follows:-

The operation of the Loco London markets is explained by Mr. Tong, in his affidavit of the 7th June, in these words -

10. Mr. Barlow relies particularly upon the two passages I have underlined. They indicate, as I understand him to suggest, that secondary markets have been established here in Hong Kong in respect of rights acquired in the London markets or alternatively perhaps in respect of independently created rights based on the prices quoted by the London markets. These would be in contravention of the Ordinance.

11. For myself I am unable to draw either inference from the passages in question or from any other parts of the evidence filed.

Illegal Contract Notes

12. Section 45A(1) of the Commodities Trading Ordinance Cap. 250 provides that a dealer shall make a contract note in respect of every futures contract entered into by him in Hong Kong. This has to be done by the end of the following trading day. If the dealer has acted as agent he must deliver. the note to his customer within the next five days. If he has acted as principal he must retain the note for himself. Subsection 2 provides a long list of details that must be included in the contract note. Failure to comply with the section renders the dealer liable to a fine and imprisonment.

13. The judge accepted that at least four of the required details had not been included by the Plaintiff Company in most, if not all, of the contract notes which it had issued to the Defendant. Therefore, it is said, the performance of the contract between the Plaintiff Company and the Defendant has been tainted with illegality and the monies due thereunder may not be recoverable.

14. In support of this contention we have been referred to two decisions of the English Court of Appeal⁽¹⁾ where, in circumstances closely analogous to the present, the Court refused to enforce payment for the insufficiently documented transactions. Comments from these cases were approved in Ashmore, Benson Ltd. v. Dawson Ltd. ⁽²⁾ On the other hand we have been asked to look upon yet another decision of that Court⁽³⁾ as indicating that nevertheless the climate of judicial opinion is on the change.

15. Of crucial importance in the present instance is section 26 of the Ordinance, to which I shall have to return in a moment in another context. This section provides for the registration of those who carry on business as dealers, with substantial fines and imprisonment for those who fail to comply. Subsection (6) is here relevant -

16. Several other sections in the Ordinance also provide for fines and imprisonment of varying amounts upon breach of the requirements therein laid down, including section 45A, yet none other provides for rescission or for the recovery of monies already paid.

17. Section 45A is a section which was added some 4 years after the Ordinance was originally introduced. It must therefore have been designed to meet some specific need which the Legislature had observed to be required. Nevertheless it cannot be considered in isolation, and in the light of the express provision in section 26(6) I feel compelled to assume that the Legislature did not intend a similar result to follow from failure to comply with other provisions of the Ordinance.

Illegal Dealer

18. Section 26(2) provides that every director or employee who is accredited to a corporation which carries on business as a dealer shall himself be registered as a dealer. By section 2(2) a person is deemed to be accredited to a corporation if in his capacity as a director or employee, he is duly authorized by the corporation to act for or on its behalf for the purpose of trading in commodity futures contracts.

19. One Mr. Arthur Lai is a director of the Plaintiff Company. He was at one stage a registered dealer. He ceased to be so on the 8th March this year, and yet, according to the affirmation of the Defendant, "he continued working with the Plaintiff between 8th March 1985 and 25th March 1985". In reliance then upon sections 26(2) and (6) the Defendant seeks to escape liability.

20. Mr. Tong has countered with an affidavit that Mr. Lai "although a director of the Plaintiff company is not accredited to the Plaintiff company in the sense that he is not authorized by the company to act for or on behalf of that company for the purpose of trading in commodity futures contracts or as a dealer. He is mainly a non-executive director".

21. The learned judge below appears to have accepted that it was beyond doubt that Mr. Lai was not so "accredited". With every respect I do not think the position is that clear. It seems reasonable to suppose that when Mr. Lai was registered, and, again according to an affirmation of the Defendant, was introduced to the Defendant "as a responsible person of the Plaintiff", Mr. Lai was authorized to trade for the Plaintiff appropriately. If so one might have expected some positive indication that the authority has since been withdrawn, as for example by a copy of the notice that under section 41(3) the Plaintiff Company would have been bound to send to the Commissioner for Commodities Trading. It is not at this or any other stage necessary for the Defendant to substantiate his allegation beyond reasonable doubt. For myself I would therefore have been inclined to think that an issue of fact had been raised which could not be satisfactorily decided upon affidavits alone. Whether it is a material fact depends upon whether the instructions which give rise to the Defendant's present liability were given before or after the 8th March. No doubt the answer can be found in a study of the documents exhibited to the affirmation of Mr. Tong dated the 1st April, but no attempt has been made to do that and in view of my Brothers conclusions on this point, there is no need for me to explore the position.

Some Other Reason

22. In Miles v. Bull ⁽⁴⁾ Megarry J., as he then was, commented on the language of Order 14 in these words -

23. At one stage, due perhaps to my inability readily to comprehend the detailed workings of this particular trade, I was minded to think that this also might be one of those rare occasions in which, although no defence had been made apparent, the circumstances nevertheless were such as to require the Plaintiff to make good his case in court before judgment should be entered in his favour. However as the operations of the trade have become more clear, so have I been more firmly persuaded that that is not so, and that what the Defendant is asking us to authorize is no more than a simple fishing expedition from which he hopes to bring back something on which he can hang an as yet unvisualised issue to be tried.

24. For these reasons I would dismiss the appeal.

Sir Alan Huggins, V.-P.:

25. I have been handicapped in this matter by the absence of any reliable explanation as to the meaning of "Loco London Gold" and, in particular, as to how Loco London Gold differs from "London Gold". It was variously suggested in argument that it referred to gold situated in London, to gold sold on the London market and even to the London exchange itself. This is a phrase which clearly has a special meaning for dealers in gold and there ought to have been some evidence as to that meaning.

26. The first contention on behalf of the Defendant was that Loco London gold and London Gold were recognised types of gold which could be traded in, amongst other places, Hong Kong. Mr. Barlow submitted that there was a Hong Kong commodity exchange upon which such gold was traded and that that exchange was prohibited by virtue of the provisions of the Commodity Exchanges (Prohibition) Ordinance. He asked us to infer the existence of such an exchange from the various transactions alleged in the affidavits and to hold that any dealings upon that exchange were necessarily illegal. On the evidence before us I do not think any issue was raised as to the existence in Hong Kong of a commodity exchange which offended against the Commodity Exchanges (Prohibition) Ordinance. The only argument which Hunter, J. understood to have been advanced before him was that there was in London a commodity exchange which so offended, and he rightly considered that that argument did not raise an issue which ought to be tried.

27. Secondly it is submitted that the judge erred when he held that the breaches of s. 45A of the Commodities Trading Ordinance which he found to have been committed did not render the associated contracts unenforceable. The finding that the documents relied upon as being contract notes did not satisfy the requirements of the statute has not been challenged. Hunter, J. thought that the breaches of the statute were "trivial to a degree" and that it could not have been the intention of the Legislature that those breaches should produce "such horrendous consequences" as were argued for by the Defendant. Mr. Barlow relied upon Anderson Ltd. v Daniel 1924 1 K. B. 138 and B. & B. Viennese Fashions v Losane 1952 1 A11 E. R. 909 as authority to the contrary. Those were, indeed, strong cases, but I agree with Mr. Payne's answer, that the. present case is closer to Shaw v Groom 1970 2 Q.B. 504 than to them. I am not persuaded that Ashmore, Benson, Pease & Co. Ltd. v A. V. Dawson Ltd. 1973 1 W.L.R. 828, which followed the reasoning of the two earlier cases, shows that Shaw v Groom was wrongly decided. The distinction lies in the answer to the question was the statutory requirement which has not been fulfilled necessary to the performance of the contract or collateral to it? In Anderson Ltd. v Daniel and in B. & B. Viennese Fashions v Losane the documents required by the statute constituted warranties which the vendor had to give. In Ashmore, Benson, Pease & Co. Ltd. v A. V. Dawson Ltd. the use of an unsuitable lorry was clearly an illegal performance of a lawful contract. In Shaw v Groom the rent book was not necessary to the performance of the contract and, like the contract notes in the present case, was merely required as evidence of the contract. It is true that it was intended for the protection of the party who was seeking to avoid liability, but that alone was not enough, since the Legislature may still have intended the enforcement of the prescribed penalty to be the only remedy for any breach. The intention here is further disclosed by the Fact that, as Fuad, J. A. pointed out in argument, whilst s. 26(6) expressly provides for rescission of any contract made where there has been a breach of the requirements of s. 26(2), no comparable provision appears in s. 45A.

28. Thirdly, it is contended that the present contracts are caught by the express provisions of s.26(6). This contention depends upon an assumption that Mr. Arthur Lai, a director of the Plaintiff company who had been acting for and on behalf of the company for the trading in commodity futures, continued to be authorised so to act after he had ceased to be registered as a dealer. It is submitted that the judge made a finding that Mr. Lai was no longer authorised and, although there is no direct reference to this in the Notice of Appeal, that such finding was wrong. Mr. Barlow says that it is therefore open to him to argue that an issue ought to be tried whether Mr. Lai did continue to be authorised, with the inevitable result that there was a breach of s.26(2). The fact remains that the Defendant never made an outright allegation that Mr. Lai continued to be authorised, although equally there was no allegation by the Plaintiff that his authority had been withdrawn. What was alleged by the Defendant was "that the Plaintiff holds only one membership of that of the Hong Kong Commodity Exchange" (sic) and that Mr. Lai was seen working in the Plaintiff's. office after he had ceased to be a registered dealer. On the other hand Mr. Michael Tong (Managing Director of the Plaintiff) made the bald assertion, in an affidavit dated 6th June 1985, that Mr. Lai "although a director of the Plaintiff company is not accredited to the Plaintiff company in the sense that he is not authorised by the Company to act for and on behalf of that company for the purpose of trading in commodity futures contracts or as a dealer. He is mainly a non-executive director".

29. There has been much argument by Mr. Barlow as to the meaning of the word "accredited" in s. 26(2). With respect I have been unable to understand that argument. Section 2(2) provides that a director of a corporation

30. No other definition of "accredited" appears in the statute, but it is submitted that that definition is not exhaustive. Who else, then, can be "accredited" The only answers suggested are "A director having credentials"and "A director recognised by the Securities Commission as a director involved in the business". The former answer is so ambiguous as to be valueless and the latter begs the questions What is "the business"? and How does "recognition" differ from "registration"? I am satisfied that the definition in s. 2(2) is exhaustive.

31. In truth the Defendant never got to grips with what could have been real issues, namely whether Mr. Lai was accredited at a date after 8th March 1985 and whether any of the material transactions took place after that date. Mr. Barlow submits that those issues were sufficiently raised. I do not think they were. In any event, as to the first Mr. Barlow in effect asks us to presume a continuance of Mr. Lai's authority in the absence of evidence of discontinuance. Mr. Payne argues that in the light of the evidence that Mr. Lai's authority had been discontinued by 6th June 1985 and that his name had been removed from the Register of Dealers on 8th March 1985, no such presumption is justified and that it was for the Defendant on an Order 14 summons to adduce evidence which, if not contradicted, would establish illegality. He goes further and says that the Plaintiff's evidence is so clear that the issue would not be triable even if it had been raised.

32. On an Order 14 summons a defendant who raises a legal objection to the claim must clearly state not only the point of law but also the facts on which the point of law arises. Here the Defendant has stated the point of law (that the contracts were illegal) but he was not in a position to swear to the fact on which that point would arise, namely that the Plaintiff carried on a business as a dealer when Mr. Lai was accredited although unregistered. He had no personal knowledge of the authority given to Mr. Lai by the Plaintiff but only of facts from which he inferred that Mr. Lai was still accredited. Those facts did not begin to justify such an inference: in the words of Sir Robert Megarry, V.-C., his case was "all surmise and Micawberism": The Lady Anne Tennant v Associated Newspapers Group Ltd. 1979 F. S. R. 298, 303 That, I believe, is all that Hunter, J. was holding, although the words he used may suggest that he was making a finding of fact on the affidavit evidence. Even if it could fairly be said that the first possible issue had been raised at all, I agree with him that it was not one which, on the evidence adduced, ought to be tried.

33. That would still have left the issue whether any of the material transactions took place after 8th March 1985. As to that no attempt has been made to identify the transactions which it is said are illegal or how the business between the parties stood immediately before any illegality began. However, we need not concern ourselves further with this aspect of the case in view of what I have said about the first possible issue.

34. Finally, Mr. Barlow has sought to make the point that, even if he had failed to show that a clear triable issue had been raised, this was a case where there "ought for some other reason to be a trial". He relied upon Miles v Bull 1969 1 Q. B. 258 and urged that the facts were complicated and gave reason to suspect the Plaintiff of improper dealing. I cannot help thinking that such complication as may appear arises principally from the Defendant's failure to place before the judge and before this court the evidence necessary to show a triable issue. I am not persuaded that it was ever suggested to the judge that this was a Miles v Bull type of case, and the Notice of Appeal did not indicate that any such argument would be advanced. In the result I am driven to conclude that the Defendant is endeavouring to embark upon a fishing expedition in the hope of finding some ground for delaying a judgment against him. This was obviously the view of Hunter, J. and I see no reason to disagree. If, as seems to be the case, the Plaintiff was in breach of s. 45A, the prescribed penalties could have been exacted.

35. I add only that the suggestion that the Plaintiff was in some way to blame for the Defendant's losses was wholly unfounded. The terms of the agreement entered into between the parties expressly provided that the Plaintiff should be under no liability whatsoever in respect of any advice in fact given by it and that the Defendant was to be deemed to have dealt in reliance upon his own judgment: c1.7(a). Even in the absence of such express provision no facts have been alleged which could possibly constitute negligence or misrepresentation. It is inconceivable that any dealer in commodities would, in effect, underwrite his customer's losses - and that is what the Defendant ultimately contends for in the present case.

36. I would dismiss the appeal.

Fuad, J. A.:

37. I, too, would dismiss this appeal.

38. I agree with my Lords the Vice-President and Cons, J. A. that Hunter, J. was right in holding that the Defendant had not shown cause that there was an issue or question which ought to be tried arising out of the alleged contraventions of either -

and there is nothing I could usefully add on these issues.

39. I turn to consider whether the judge was justified in concluding that no triable issue had been raised regarding the position of Mr. LAI Cheuk-kwan, a director of the Plaintiff company, in light of s.26 of the Commodities Trading Ordinance ("the Ordinance").

40. Subsection (2) of s.26 of the Ordinance does not say that every director and employee of a corporation must be registered as a dealer before a corporation can carry on business as a dealer. The only directors or employees who must be registered are those who are "accredited" to the corporation. The word "accredited" is not defined, but subsection (2) of s.2 of the Ordinance tells us who "shall be deemed to be accredited" for the purposes of the Ordinance. An interesting point arises, and it is this: whether subsection (2) of s.2 is intended to be exhaustive, or whether a director other than one who is authorised by a corporation in terms of that subsection can nevertheless be regarded as having been accredited to the corporation in any factual situation, giving the word "accredited" its ordinary meaning, without resort to the subsection. For reasons that will appear I do not think it necessary to reach a final conclusion on that question.

41. The word "deem" (and its derivatives) in legislation does not always have the same meaning. It is most commonly employed to establish a statutory fiction - to deem a thing to be something that it is not. It is also used for the removal of doubts and sometimes to establish a presumption or an indisputable conclusion. It is all a matter of construction.

42. The word "accredited" appears in other places in the Ordinance. For example:-

On the other hand:-

43. If "accredited" has a special meaning in the world of commodities trading, we have not been told of it. The ordinary meaning of the word connotes some form of official recognition, authority or sanction. As employed in the Ordinance, it seems to me that whatever it means in subsection (2) of s.26 (if it is to be read without reference to subsection (2) of s.2) there must be inferred an express mandate by the corporation to the director or employee concerned, for it is plain that the subsection does not allow accreditation to arise from the mere fact that a person is a director or employee. Taking the broadest view, the word can mean no more than that the person in question was authorised by the corporation to engage in activities with which the Ordinance is concerned.

44. Mr. Barlow submits that if there remains any doubt about the true construction of the word "accredited", the Defendant should have leave to defend. Whether this is so, depends, it seems to me, on the evidence that was adduced, or might be adduced, to allow the Defendant to rely on s.26.

45. Now what evidence did the Defendant put before Hunter, J. on this issue? In para. 3(a) of his affirmation of 5 May 1985, the Defendant said: "I am further informed by my Solicitor that Mr. Lai ..... a director. of the Plaintiff company who is accredited to the Plaintiff company ceased to be registered as a dealer ..... as from 8th March 1985". As regards the accreditation, this was a bare assertion. The fact that Mr. Lai ceased to be registered as a dealer on that date surely cannot carry the Defendant's case any further.

46. There is another similar bare assertion in para. 3(d) - that Mr. Lai "..... although accredited as a dealer of the Plaintiff, was not registered .....". The only facts upon which these assertions might be said to have been based are to be found in the same paragraph; referring to Mr. Lai, the Defendant says "[he] was introduced to me as a responsible person of the Plaintiff". And later: "Despite such removal as one of the registered dealers in the Plaintiff company, I saw Mr. Lai continued working with the Plaintiff between 8th March 1935 and 25th March 1985."

47. In my respectful judgment, once one accepts that some form of express authorisation by the company has to be established beyond the mere fact that Mr. Lai was a director, then the facts upon which the Defendant seeks to rely fall far short of pointing to an illegality which would benefit him, and did not entitle him to obtain leave to defend on this issue. Mr. Lai having been seen "working" at the company's offices cannot be enough. Can a secretary, accountant, or office boy be regarded as "accredited" to the company for the purposes of the Ordinance simply because he or she was seen "working" on the premises? Surely, something more is required.

48. On the final point dealt with by my brothers, I reach the conclusion that this was a perfectly straightforward claim. The Defendant, in his attempt to show cause, let loose a veritable sheaf of arrows, all of which, in my view, missed the target. I, too, cannot find circumstances on the material before us to hold "that there ought for some other reason to be a trial" (0. 14, r. 3(1)) so that it was improper for Hunter, J., in the exercise of his discretion, to allow the Plaintiff company to sign summary judgment.

(1) Anderson Ltd. v. Daniel [1924] 1 K. B. 138 and B. and B. Viennese Fashions v. Losane (1952) 1 All E. R. 909

(2) [1973] 1 W.L.R. 828

(3) Shaw v. Groom [1970] 2 Q.B. 504

(4) [1969] 1 Q. B. 258 at 265