HKFE CLEARING CORPORATION LTD v. YICKO FUTURES LTD

CACV400/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 400 OF 2005

(ON APPEAL FROM HCCW 1429 OF 2003 )

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JUDGMENT

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Hon. Yuen JA:

1.  This is an appeal from a decision of Barma J given on 23 November 2005 on an application for discovery made by Yicko Futures Ltd. ("the Company") against whom HKFE Clearing Corporation Ltd ("HKCC")  had presented a petition in Companies Winding-Up No.1429 of 2003.  

2.  The facts relevant to HKCC’s petition and the Company’s opposition have been set out in detail in paras. 1- 14 of the judge’s Judgment.  I will only briefly recount those facts which are relevant to this appeal.

Background

3.  HKCC is the clearing house for transactions on the HKFE’s futures exchange.  The Company is a participant in the exchange and in HKCC. 

4.  Under Rule 408 of the HKCC Rules, all open contracts at the close of each trading day are deemed to have been closed out at the Closing Quotation for that trading day.  Any profits or losses so arising are known as "variation adjustments" which are credited or debited (as the case may be) to the participant’s account with HKCC.  Rule 409 of the HKCC Rules provides that participants must pay all variation adjustments by a cash payment immediately on demand.

Petition

5.  HKCC states that the Company is indebted to it in the amount of nearly $4.95m being the sum of the Company’s net debit positions on 30 September 2003 and 2 October 2003. The Company having failed to pay that sum pursuant to a statutory demand, HKCC lodged a petition to wind up the Company.

Opposition to petition

6.  The Company has sought to dispute the debt.  A number of affirmations have been filed on behalf of the Company, and HKCC has also responded to them.  I shall refer only to those matters in the affirmations which are relevant to the present appeal.

7.  The Company has, amongst other things, sought to question the Closing Quotations for September 2003, saying that the Closing Quotations may have been distorted by manipulative bids by other traders.  Under Rule 412 of the HKCC Rules, the Closing Quotations are determined by HKCC using a formula known as Black’s Model.  The parameters used for variables in the formula include data collected by HKCC from traders on each trading day.  

8.  The Company says that the data used for the Model may have been distorted because questionable bids may have been taken into account by HKCC which it should have discarded when determining the Closing Quotations.  The Company relies on an affirmation of Gordon Poon Tung-hoi of United Investments, a client registered trader of the Company who had entered into the open contracts leading to the Company’s debit position.  Mr Poon suspects that there had been attempts to manipulate the market, for instance through aggressive bids being placed on the market just before the close of the trading day.  

Discovery application

9.  The Securities and Futures Commission has since found that there is insufficient evidence to suggest market manipulation, but be that as it may, the Company’s case is that it "does not know whether any of the questionable bids [referred to by Mr Poon] had been factored in the calculation of the Closing Quotations".  In order to "enable the Company in verifying the propriety or otherwise of the quantification of the Closing Quotations", the Company sought discovery of:

(a) hard copies of all live data (i.e. quotes/bids given by registered traders) captured during the relevant period of trading hours on specified dates in respect of certain types of options;

(b) documents containing various parameters provided by registered traders to the HKCC for the purpose of calculating the Closing Quotations on those days;

(c) documents showing the parameters used by the HKCC in calculating the Closing Quotations on those days.

10.  HKCC’s position is that it is not open to the Company to challenge the Closing Quotations, because the Company had executed an undertaking to "accept as final and conclusive" all decisions made by HKCC or any person "in the proper and lawful execution of their powers"  pursuant to the Rules of the HKCC.  HKCC argued that the Company had thereby bound itself to accept the HKCC’s determination of the Closing Quotations, absent fraud (on the part of the HKCC) or manifest error.

11.  The judge allowed the application in respect of paras. (a) - (c). He dismissed an application in respect of para. 1(d) of the summons, with which we are not concerned as there is no cross-appeal.  He did however grant a stay of the order pending appeal.

Appeal

12.  HKCC appealed against the discovery order.  Mr Clifford Smith SC for the HKCC accepts that an order for discovery is made in the exercise of the judge’s discretion but he submits the judge has erred in law.  The judge having held that the determination of the Closing Quotations was final and conclusive in the absence of fraud or manifest error, the Company not having made allegations of fraud or manifest error, there was no issue on which the judge could have ordered discovery. 

13.  The Company has filed a Respondent’s Notice in which it sought to distance itself from Mr Poon’s trading activities.  However, as was accepted by Mr Andrew Bruce SC, leading counsel for the Company, whatever relationship the Company had with Mr Poon is not relevant to the discovery application - which is the only matter before this court.   

Discussion

14.  The judge’s thinking which led to his order was set out at paras. 22-23 of his judgment which I quote.

"22. Mr Bruce did not seriously dispute the propositions which are summarised at para. 18(3) - (5) above [that it was not open to the Company to challenge the Closing Quotations, or the amounts of the variation adjustments determined by HKCC, the only exceptions to this being fraud or manifest error].  However he submitted that the documentation sought was relevant to the question of fraud or manifest error which would justify going behind the determination of HKCC.  It seems to me that this is right.  The information that is contained in the classes of documents sought is, I think, relevant (or at least potentially relevant) to these questions.  It may conceivably disclose a state of affairs which would justify a challenge to the decision or determination of HKCC.  In the absence of any other available material, it seems to me that this material should be made available to the Company to enable it to attempt to defend these proceedings if it can properly do so.

23. In saying this, I have not lost sight of the fact that Mr Bruce has, quite fairly, accepted that he is not at present in a position to alleged either fraud or manifest error.  However, the position here is that the Company is faced with a winding up petition based on a determination by the HKCC, the basis of which is not clearly spelled out, in that it is not possible for the Company to know, without disclosure of the material sought, how the calculations resulting in the determination were made or arrived at.  In these circumstances, it seems to me that the Company should be provided with the information that it seeks so that it can ascertain the basis of the calculations which resulted in the demand for payment of the variation adjustment which was made on it".  (Emphasis added).

15.  With respect to the judge, I take the view that he has fallen into error in allowing what is in effect a "fishing" application.  The situation is not that the Company does not know how its debit position has been calculated.  It has received the relevant calculations.  What it is seeking by way of discovery are materials behind the HKCC’s determination of the Closing Quotations, spurred on by Mr Poon’s suspicions.

16.  But whatever Mr Poon may think about market activities is irrelevant, because the Company has bound itself to accept the Closing Quotations as final and conclusive.  That binding effect cannot be set aside by Mr Poon’s suspicions and his view on whether the HKCC would or would not have been acting prudently in including them in its determination.  Mr Bruce has accepted that the binding effect can only be set aside by fraud - on the part of the HKCC, not anyone else - or manifest error.  Since there is no assertion of either, the validity of the Closing Quotations is not (because it cannot be) in issue. 

17.  What the Company is seeking is discovery of materials to see if it might be able to turn a non-issue into an issue.  That is not permitted under the principles of discovery, and especially not when the purpose is to see if an allegation of fraud can be made.  It is well-established that a party should not be allowed to plead a vague and unparticularised case of fraud in the hope of making it good after discovery (Hong Kong Civil Procedure 2006 §18/8/3).  "If a party fails to particularise his case in his original pleading, he will be ordered to do so before discovery.  This is so even in cases such as this where some of the facts are known only to the other party" (Deak Perrera Far East Ltd v Deak & others [1995] 2 HKC 28, 38B).  It is no different where by reason of the type of proceeding,  issues are joined, not in pleadings, but in affirmations.

18.  Mr Bruce then sought to argue that the undertaking only applied where there has been "proper and lawful" execution of HKCC’s powers.  But with respect, that is still no answer to the point.  It has not been suggested that HKCC’s powers had been executed in bad faith or in an ultra vires way.

19.  Finally, it would appear from para. 23 of the judge’s decision that he may have been swayed by the fact that the Company is facing a winding-up petition.  With respect, I do not think that is relevant.  Whilst a petition to wind up is of course a severe threat to any company, that threat does not entitle it to any exemptions from the general rules governing discovery - it enjoys no special privileges.  In a winding-up petition, it is the Company that bears the burden of proving that the alleged debt is disputed on substantial grounds (Boyle and Marshall, Practice and Procedure of the Companies Court §9.179).

Order

20.  For the reasons discussed, I would allow the appeal, set aside the judge’s order and dismiss the summons.  I order that the Company bear HKCC’s costs of the application and I would also give an order nisi that the Company pay HKCC’s costs of the appeal.

Hon Waung J:

21.  I agree.