PHILIP SECURITIES (HK) LTD v. CHOI BUN HUNG

DCCJ1908/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1908 OF 2002

____________

____________

_______________

J U D G M E N T

_______________

Introduction

1. The Plaintiff ("P") is and was at all material times a stockbroker and an Exchange Participant of The Stock Exchange of Hong Kong Limited ("SEHKL"). It is common ground that by an agreement in writing dated 18th July 1997 ("Agreement") made between P and the Defendant ("D"), D became P's dealer's representative ("DR") under inter alia the following express terms :

(a) "[DR] shall not during his/her appointment as [P's DR] herein engage either directly or indirectly in any activity, undertaking or joint venture which is actually or potentially in competition with any business or interest of [P]."(Clause 3.2)

(b) "[DR's obligations under clause 3.2 above shall continue for a further period of six months after termination of his/her appointment herein if: 3.3:1 [DR] should leave [P] without having given [P] the required written notice pursuant to Clause 5.2 below; ..." (Clause 3.3:1)

(c) "[D] may resign from [P's] service (irrespective of the title of appointment) by giving one month's notice in writing to [P]." (Clause 5.2)

(d) "[D] shall indemnify [P] and keep it indemnified against all damages, liabilities, actions, proceedings, judgments, costs (including legal costs on a solicitor-and-own client basis), claims, demands, and any other losses of whatever nature that may be suffered or incurred by [P] in connection with or arising from securities transactions dealt by or through [D] in the name of [P] (whether or not the same have been caused by or may relate to any fraud, deceit, negligence, misconduct, breach of conduct or default on the part of [D] or his/her agent or client)." (Clause 8)

(e) "Without prejudice to clause 8 [D] will be fully and personally responsible for the collection of all amount due from his/her clients and in any case be wholly and fully responsible for all amounts due to any or all of them from such clients introduced by [D] or his/her agents in relation to business transacted with any or all of them." (Clause 9.1)

(f) "[D's] liability under this guarantee shall be that of a principal debtor and [P] and/or its affiliated and/or its clients may at its/their option hold [D] primarily responsible for liabilities incurred by clients introduced by [D] or his/her agents in relation to business transacted with any or all of them." (Clause 9.3)

(g) "No term shall survive expiry or termination of this agreement unless expressly provided." (Clause 16)

(h) "The parties thereby agree that [D] is appointed under this agreement as an independent contractor and not as an employee of [P]." (Clause 18)

2. The following facts are not disputed :

(a) In or about February 1998, D introduced to P a client, namely, Mr Lai Chak Fun ("Lai"), who since 6th February 1998 maintained a margin securities trading account ("Account") with P, for the purpose of trading in securities pursuant to a Margin Client's Agreement of the same date signed by P and Lai ("Margin Agreement").

(b) D tendered his letter of resignation to P on 15th February 2001 ("Resignation Letter").

(c) P issued a circular letter dated 23rd February 2001 ("Notice") to all clients introduced by D to notify them that their authorisation letters signed in D's favour were forthwith of no effect and that as from 1st March 2001 their accounts would be handled by Mr Chong Laam ("Chong"), and to seek fresh authorisations by the relevant clients in favour of Chong.

(d) On 27th February 2001, whilst D was still working as P's DR, Lai instructed P through D to purchase 400,000 warrants for HK$334,901.80 ("Warrants") on 27th February 2001 ("Trade").

(e) P executed Trade but the due date of payment as agreed between P and Lai was the second trading day following the transaction ("T+2"), ie on 1st March 2001.

(f) Lai failed to pay P sufficient funds to settle Trade on 1st March 2001.

(g) P liquidated Lai's position and sold Warrants in accordance with Margin Agreement.

(h) The proceeds of sale of Warrants were insufficient and resulted in a debit balance in Account.

3. P claimed against D pursuant to Clauses 8 and 9 of Agreement for the sum of HK$144,826.46 being the amount for which Lai was allegedly indebted to P under Account as at 19th February 2002. However, after the trial hearing, it transpired that on 3rd June 2002 P received a further sum of HK$4,838.43 under Lai's Account. Both parties accepted that such sum should be deducted from P's claim.

4. In the course of final submissions, Mr Choy, counsel for P, and Mr Ng, solicitor for D, set out the issues and made helpful concessions. There are essentially 2 key issues, namely, (a) whether D's service relationship with P ceased on 28th February or 14th March 2001 ("Resignation Issue") and (b) whether Clauses 8 and 9 of Agreement constituted an indemnity so that D's liability to P thereunder was primary rather than secondary or whether they constituted a guarantee under which D assumed only secondary liability ("Interpretation Issue").

5. If the effective date of D's resignation is 14th March 2001 and Clause 8 and/or 9 of Agreement amount to a guarantee, Mr Choy accepted that P would fail in its claim against D because without D's knowledge and consent, P and Lai came to an agreement after 1st March 2001 whereby P gave time to Lai to repay his indebtedness by various post-dated cheques and P further consented to Lai's individual voluntary arrangement ("IVA") ("Discharge Issue"). Mr Ng, solicitor for D, attempted to argue if Clause 8 and/or 9 amount to a guarantee, then P absolutely waived and discharged its claim for interest against Lai (and hence D) by the position P adopted in respect of Lai's IVA ("Waiver of Interest Issue"). On the other hand, if the effective date of D's resignation is 14th March 2001 and Clause 8 and/or 9 is found to be an indemnity, Mr Ng conceded that by 27th February 2001 P would have incurred liability in respect of Trade and hence D would be liable for P's claim subject to a dispute as to whether interest calculated at the rate obtained between P and Lai should be awarded against D after 14th March 2001 in light of Clause 16 of Agreement and if so, whether compound interest should be awarded. Mr Ng conceded that Waiver of Interest Issue was not relevant if Clause 8 and/or 9 of Agreement is found to be an indemnity. In short, given Mr Choy's and Mr Ng's aforesaid concessions, I do not consider it necessary to deal with Waiver of Interest Issue.

6. Mr Choy accepted that if the effective date of D's resignation is 28th February 2001, Clause 9 of Agreement (irrespective of Interpretation Issue) is irrelevant as no amount was due on that date and Clause 9 of Agreement did not survive the aforesaid effective date by reason of Clause 16. Mr Choy further accepted that if the effective date is 28th February 2001 and Clause 8 of Agreement is found to be a guarantee, by reason of Discharge Issue, P will fail in its claim against D. If the effective date is 28th February 2001 and Clause 8 of Agreement is found to be an indemnity, Mr Ng conceded that D would be liable for the outstanding principal sum of HK$140,000.00 less payments received by P. However, D disputed liability for interest on the principal sum because interest was not yet payable or incurred by P under Clause 8 of Agreement on 28th February 2001 and Clause 8 did not survive the aforesaid effective date by reason of Clause 16. Mr Choy, on the other hand, argued that the wording of Clause 8 covered existing and future liability for interest.

7. Mr Choy and Mr Ng both agreed that the documents in Part C of the trial bundle ("TB") are agreed as to admissibility and authenticity. Further documents being pages TB/252-256 were added to TB by agreement between the parties at the beginning of the trial. Although the General Rules of CCASS (Central Clearing Automated Settlement System) and Rules of the Exchange by SEHKL are amended from time to time, both parties agreed that the relevant rules set out in TB/252-256 were applicable to the circumstances of the present case. In the course of final submissions, Mr Choy and Mr Ng also agreed the annual and daily interest rates calculated at 3.5% pa above prime rate ("Rate") applicable for the period from 5th February 2001 to 31st March 2002.

8. On Mr Ng's pleading point objection, Mr Choy agreed to delete paragraphs 24 and certain parts of paragraph 25 of the witness statement of P's sole witness, Mr Yau Chung Tak ("Yau"). Mr Ng also confirmed that although it has been suggested in D's and Lai's witness statements that there had been delayed liquidation of Warrants by P at a less favourable price, D would not rely on these matters to contend that P failed to properly mitigate loss. However, Mr Ng informed the court that D put P to strict proof of the quantum of its alleged loss. Mr Ng further informed the court that D did not allege that he was P's employee and he accepted that he was at all material times an independent contractor.

9. P called the manager of its credit department ("CD"), Yau, to give evidence. D himself gave evidence and he also called Lai as his witness. Pursuant to the Memorandum of Agreed Directions filed on 28th March 2003, it was agreed that the witness statements do stand as evidence-in-chief unless otherwise directed by the trial judge. Both Mr Choy and Mr Ng agreed to such approach.

P's case

(1) Yau's duties

10. Yau joined P on or about 22nd September 1997 and was promoted to manager in charge of CD on or about 1st April 2001. In his witness statement, he said that one of his main duties was to manage and oversee P's DR. However, in his evidence he said his main duty was to oversee CD's daily operations. Yau explained that P's few middle management staff liaised closely on their supervisory functions. Yau would deal with credit risk matters in relation to DR. However, P's dealing directors supervised the engagement and termination of service of DR, trading matters and DR's relationship with clients.

(2) D's contractual position

11. D joined P in July 1997 (TB/88) and his account executive code was 176. D also signed the Agreement (TB/89-93), a standard form agreement signed by all P's DR, on 18th July 1997. On the same date, SEHKL approved D's application for registration as P's DR (TB/94). Like P's other DR, D introduced clients to P from time to time. Once a client introduced by D opened a securities trading account with P, that client would be recognised as D's client as between P and D. D would be responsible for executing such client's orders for securities trading transactions and he would be remunerated by commission arising from such transactions (TB/120 and 172).

(3) D's resignation

12. Yau denied that Agreement was terminated after 28th February 2001. D's Resignation Letter dated 15th February 2001 (TB/121) stated inter alia that "[D] would like to advise [P] that with effect from 1-3-01, [D] will officially resign [his] position as an Agent Representative at [P]". Even if 15th February 2001 were taken as D's notice to P of his intention to resign from his position as P's DR (which Mr Choy accepted in his final submissions despite the fact that Yau stated in his witness statement that P received Resignation Letter on 20th February 2001), such resignation could only take effect on 15th March 2001 by virtue of Clause 5.2 of Agreement.

13. Yau said normally DR would tender his resignation letter to the dealing director, who would have a word with DR and make a note of the reason for DR's resignation and/or which stockbroker DR would join. If DR still decided to leave P after such discussion, the dealing director would pass the resignation letter to P's personnel and administration department ("PAD"). PAD would stamp the resignation letter with AE De-registration Check ("ADC") stamp (also seen on Resignation Letter) and circulate the letter to P's various departments (ie accounts department ("AD"), CD and PAD) and upon completion of ADC, PAD would write to SEHKL and SFC to de-register or release resigned DR's registration as P's DR.

14. Yau said D did not tender Resignation Letter to him but to P's dealing director, Mr Wong Wai Kit ("Wong"). Yau did not have first hand information on the circumstances in relation to D's resignation, including the effective date of D's resignation, or whether Resignation Letter was dated or tendered to Wong on 15th February 2001. Yau had no recollection when he first saw Resignation Letter. The stamp of "RECEIVED 20 FEB 2001" seen on Resignation Letter was probably placed by PAD.

15. Yau noted from ADC stamp on Resignation Letter that it was first circulated to CD on 7th March 2001 and initialled by CD's staff. There was a notation that HK$140,569.85 was outstanding under Account and that there were post-dated cheques (see below). However, under cross-examination (see paragraph 30 below), Yau accepted that CD should have received Resignation Letter before 7th March 2001.

16. Yau said Wong informally discussed D's resignation with him about 1-2 days after Wong received Resignation Letter. He could not recall the exact date but it was 1-2 days after mid-February 2001. Yau said P's "boss" would first try to persuade any productive DR who resigned to stay on, so it would not be known immediately whether DR would definitely leave. So Yau only knew for sure D would definitely leave when his colleague at CD told him of D's resignation on 7th March 3001 or thereafter. Yau's colleague did not tell him of the contents of Resignation Letter and he could not remember whether he read Resignation Letter. Yau recalled his colleague said D would leave in March 2001 but he did not follow up to ask the date when D would actually leave. But, by reason of Yau's evidence elicited under cross-examination as set out in paragraph 31 below, he accepted he knew before 1st March 2001 that D would definitely leave P.

17. Resignation Letter was next circulated to AD, which noted "clear" (meaning that there were no outstanding sundry expenses such as IDD charges) on ADC stamp on 8th March 2001. Resignation Letter was returned to PAD (who also marked "clear" on ADC stamp) on 9th March 2001. PAD would then prepare documentation to be submitted to SEHKL and the Securities and Futures Commission ("SFC") in compliance with P's obligation to de-register D.

18. DR's departure was normally handled by dealing director and PAD. But Wong did not mention to Yau specifically that D's last day of service was 14th March 2001. In fact, Wong told Yau he had no recollection whether the effective date was 1st or 14th March 2001. Prior to the commencement of these proceedings, Yau checked with PAD who told him D left P's service on 14th March 2001. Yet Yau accepted that his reason for saying that D's last day of service with P was 14th March 2001 was due to his deduction by adding 1 month to the date of Resignation Letter and not on actual information.

19. Yau's own impression in February/March 2001 was that D no longer returned to work for a while before the expiry of the 1-month notice period. Whenever a productive DR resigned, there would be speculation in the office as to when he would leave, so Yau would know. Yau said departing DR seldom stayed for the full month.

20. The purpose of giving 1-month's notice to P was to allow P's various departments to check for any outstanding amounts due by DR (eg IDD charges) and other outstanding matters directed at de-registration and release of DR with SFC and SEHKL. According to Yau's personal knowledge, there was no DR who did not give full month's notice of resignation to P and no case where P notified SFC and SEHKL to de-register DR before expiry of the 1-month notice period.

21. However, Yau said P did not require departing DR to return to work every day of the notice period. Indeed, the departing DR might, as was usual, have already started with preparatory work for the new stockbroker company even before ADC was completed. He could not accept instructions for securities trading transactions but he could send new account opening forms to the clients pending de-registration or release by P. Usually, P had no quarrel with the above arrangement. Further, such practice also applied in respect of new DR joining P from another stockbroker. Yau accepted there was a conflict of interest in DR not returning to work and doing preparatory work for the new stockbroker during the notice period (see Clauses 3.1 and 3.2 of Agreement), but concrete evidence was hard to come by and thus P was unable to pursue against departing DR. However, P would not expressly tell DR what he should not do when he took leave during the notice period.

22. On 23rd March 2001, SFC wrote to P by fax (TB/141) noting that it had been reported by Phillip Commodities (HK) Ltd that D's resignation was effective on 15th March 2001 but D still had DR registration with SFC. SFC asked P to confirm the date of and reason for D's cessation of employment and to provide information as to the money dispute between P and D. Yau said since DR had to give 1 month's notice of resignation to P, PAD calculated D's effective termination date to be 30 days after Resignation Letter. But the 1-month notice requirement was P's internal (ie Clause 5.2 of Agreement) and not SFC's requirement. Yau did not know whether there was any fixed time limit for P to notify SFC and SEHK but these institutions could only know of D's resignation as a result of notification by PAD.

23. P in its reply to SFC dated 27th March 2001 (TB/142) stated that D submitted 1-month resignation notice to P on 15th February 2001 but he had not completed P's resignation procedures before leaving P. P explained that the money dispute was in respect of a sum of HK$141,488.75 as at 27th March 2001 due to failure by D's client to settle such sum and for which D was responsible under Clause 9.1 of Agreement. P also gave notice under section 63/section 54A(1) of the Securities Ordinance, Securities (Dealers, Investment Advisers, Partnerships and Representatives) Rules and Securities (Miscellaneous) Rules on 27th March 2001 in respect of D's cessation to be a representative (TB/143-150) by stating that D resigned with effect from 14th March 2001.

24. By a letter dated 29th March 2001 from SEHKL to D (copied to P) (TB/157), SEHKL informed D that it noted D had ceased to be P's sales representative with effect from 14th March 2001. D never disputed or raised any objection to either SEHKL or P with regard to the said cessation date until after the commencement of the present proceedings.

(4) D's resignation vis-à-vis clients

25. By a letter dated 23rd February 2001 (TB/123-128), Chong unilaterally informed P that he had reached an agreement with D that he would take over from D 105 clients (including D himself) under D's name from 1st March 2001 and he was prepared to assume liabilities of those clients pursuant to the agreement between D and Chong ("Chong's Letter"). Yau said he might have glanced at Chong's Letter but he had no deep impression. Yau said such transfer of clients was a private agreement between D and Chong.

26. Yau explained that normally when DR resigned, another DR had to be appointed in order to ensure continuous service to the clients. Often times, the departing DR would want to take leave and not come to work, so he would find another DR whom he was familiar with to take up and continue to serve his clients. Once departing and continuing DR came to such arrangement, P would require the latter to confirm to P in writing. Whilst P did not have a strong view on the transfer of clients between 2 DR (it being their private arrangement), P's prime concern was that the interests of P's clients would be properly served and protected. Yau said that this method of transferring clients was commonly adopted when P's DR resigned and P would usually accept such arrangement. If P disagreed with the arrangement, it would discuss with the continuing DR and assign another DR to handle the accounts. However, P had not assigned any of D's clients to an agent other than Chong.

27. To ensure that P's clients would be properly protected, P was of the view that D's relevant clients should be informed that D was to leave P's service and that their securities trading accounts handled by D would be handled by Chong. More importantly, due to the change of the handling DR and for security reason, the relevant clients should be asked to sign fresh authorisation letters in Chong's favour and to cancel previous authorisation letters signed by the clients in D's favour. The standard form authorisation letters authorised D to deal with inter alia taking delivery of cheques, credit/debit notes, statements of accounts and provisional letters of allotment, and accepting/rejecting share offers, initial public offers and/or rights issues and other matters in respect of the client's holdings.

28. Therefore, forthwith upon P's receipt of Chong's Letter dated 23rd February 2001, CD issued Notice dated the same day to all D's clients (including D himself) (TB/122). Notice stated that D had left P's service (which Yau accepted was not accurate since as at 23rd February 2001 D had resigned but not yet left his position) and as from 1st March 2001 Chong would be responsible for the client's account. A copy of Chong's name card was enclosed. A fresh authorisation letter in favour of Chong was enclosed for the client's signature and the client was informed that his authorisation letter in D's favour was forthwith of no effect.

29. P did not inform D of the termination of the authorisation letters given by D's clients in D's favour as of 23rd February 2001 other than sending Notice to D (as P's client) at D's home address. Yau confessed that P's procedures at that time were lacking in this respect.

30. Yau said the statement in Notice that Chong would as from 1st March 2001 be responsible for the relevant clients' accounts was probably taken by CD from the dates in Resignation Letter and from Chong's Letter. Yau said his colleague at CD who prepared Notice must have received Resignation Letter for that purpose. Yau believed that the date of 7th March 2001 on ADC stamp was inserted by CD after checking whether there was any outstanding amount due from D, so the date of 7th March 2001 might not be the date when CD received Resignation Letter. He did not ask whether any person at P raised query over the effective date of resignation of 1st March 2001 as stated in Resignation Letter.

31. Yau said that as of 23rd February 2001 P agreed to Chong taking up the handling of D's 105 clients as from 1st March 2001. When Notice dated 23rd February 2001 was signed by Yau's colleague in CD, P knew for sure that D would leave. Yau said that when other DR resigned, similar circular letters as Notice would be issued to the departing DR's clients. P had a template for such circular letters.

32. Yau said in his witness statement that Notice did not alter D's legal position because it was governed by Clause 5.2 of Agreement. Notice did not constitute an admission by P that D could leave P's service on 28th February 2001. P never agreed with D to waive Clause 5.2 of Agreement or that D's obligations and liabilities under the Agreement would cease as from 1st March 2001 by reason of his arrangement with Chong for the transfer of clients between them.

(5) Miscellaneous matters on Resignation Issue

33. In P's notification of remuneration paid to persons other than employees dated 31st May 2001 (TB/172-173), P stated that the period for which service was rendered by D was from 1st April 2000 to 1st March 2001. Yau was not aware of this document and only saw it for the first time whilst he was giving evidence. He did not understand why D's service period was so stated.

34. Chong and Wong were at the time of the trial still with P.

(6) Lai's indebtedness

35. Lai was D's friend. D introduced Lai to open Account with P on or about 6th February 1998. Lai completed and signed a Margin Account Opening Information (TB/107) (D also signed as Lai's DR) and Margin Agreement (TB/108-109) (D also signed as witness) on 6th February 1998. Lai also signed a standard form authorisation letter on the same day in D's favour to authorise D as his attorney to deal with various matters on his behalf (TB/110-111). Thereafter, the transactions under Account were handled by D and Lai was treated as his client.

36. Yau explained that margin securities trading meant that the client need not pay the full price for carrying on securities trading transactions and P would lend money to the client upon payment of interest for settlement purposes. If the client failed to pay the amount due for settlement or pay call on deposit, P had the right under Clauses 6 and 7 of Margin Agreement to liquidate the client's position by selling stock held in the client's account. At first, Lai's Margin Account Opening Form stated that the exposure limit was HK$400,000.00 (TB/107) but was subsequently increased to HK$680,000.00 on application dated 31st March 1998 (TB/113).

37. As regards the procedure for securities trading, on the client's instructions by telephone to purchase stock, DR would pass the instructions to P's central buyer for inputting instructions via SEHKL's terminal. If the intended stock purchase was matched by an intended sale by another stockbroker, the trade was automatically executed. If the trade was executed before close of the same trading day, the central buyer would inform DR who would in turn inform the client. P would print the contract note in the same evening and post the original (with copy to DR) to the client on the following day. The due date for payment for margin account (and as agreed between P and Lai) was T+2 by depositing such sum into P's designated bank account.

38. The amount that a client with a margin account had to pay on T+2 depended on the margin ratio in respect of the stock held by the client. The margin ratios in respect of various types of stock were fixed by P and were printed on leaflets available for perusal by P's clients. The margin ratios were also stated on the contract notes after the clients made their purchases.

39. Rule 555(1) and (2) of SEHKL's Rules of Exchange (TB/256) provided inter alia that as between Exchange Participants (ie buying and selling stockbrokers), delivery and payment of any securities trading transaction must be paid on T+2 (or any earlier time by agreement). Rule 402 of the General Rules of CCASS provided inter alia that an Exchange Participant using the services of CCASS shall be treated as acting as principal and not as agent of its client. Therefore, even if the client failed to make payment on T+2, CCASS would automatically deduct the relevant payment from the buying Exchange Participant's designated bank account.

40. The copy monthly statement of Account dated 28th February 2001 (TB/129-130) showed that Lai purchased Warrants on 27th February 2001 (ie, Trade) causing a debit balance of HK$320,361.61 (exclusive of accrued interest) in Account as at 27th February 2001. The settlement date for Trade by Lai to P and by P as Exchange Participant was 1st March 2001. Interest was payable at daily rate based on Rate in respect of the debit balance in Account (see monthly statements of Account).

41. Although Lai's credit limit was HK$680,000.00, P would only grant loan advance to Lai if he had stock in hand. Further, the extent of the loan depended on the margin ratio. Since Lai only had Warrants in hand and the relevant margin ratio was 30%, their margin value was HK$92,400.00. Therefore, on 27th February 2001 (there being no trading transactions after that date), Lai had to pay HK$229,408.96 to P on 1st March 2001, being HK$320,361.61 less HK$92,400.00 together with interest. He failed to pay and in accordance with P's policy to liquidate clients' margin accounts on T+3 if client was in default, P liquidated Account on 2nd March 2001 and sold Warrants for HK$166,050.45, which was used to meet part of the outstanding sum, leaving a debit balance of HK$155,758.51. Lai deposited HK$15,758.51 into P's bank account (TB/158), thereby reducing the debit balance of Account to HK$140,000.00 (exclusive of interest) as at 5th March 2001. Interest was payable on the sum of HK$140,000.00 at Rate.

42. In March 2001 Lai proposed to P to settle the indebtedness in instalments by 6 post-dated cheques each in the sum of HK$10,000.00 dated 1st April, 1st May, 1st June, 1st July, 1st August and 1st September 2001 respectively (TB/159, 169, 202 and 227-229). However, the 1st and 2nd post-dated cheques were dishonoured when presented for payment on 3rd April and 2nd May 2001 respectively (TB/168 and 174).

43. The Official Receiver ("OR") wrote to P on 27th March 2001 as Lai's intended nominee to seek P's views on Lai's intended IVA (TB/151-156). Subsequently Lai went into IVA with his creditors under HCBI2/2001 (TB/175-201 and 203-226). Yau, knowing that D was unable to pay his debts and had made a proposal for voluntary arrangement ("Proposal" - TB/176-198), instructed his colleague to attend the relevant creditors' meeting (TB/204-205). Yau had not personally read Proposal but it was summarised to him by a colleague. P had no objection to the terms of Proposal, so he gave instructions to his colleague that P would in principle agree to any payment arrangement so long as Lai made arrangements to pay his creditors. He did not know whether his colleague voted for or against Proposal at the creditors' meeting.

44. Yau was not aware of (as it was not summarised for him) paragraph 8 of Proposal which stated that no guarantees had been given for Lai's debts by other persons. Yau agreed that P accepted or not objected to Proposal and in doing so, P did not reserve any rights against any guarantor of Lai's debts. Yau understood paragraph 8 of Proposal to mean that Lai would be solely responsible for his debts.

45. Yau accepted that List E of Proposal stated that the amount due to P was HK$140,000.00, ie the principal sum due to P by Lai as at 5th March 2001 (TB/158). Yau's impression was that Lai himself provided information to OR of the amount due and suggested that Lai might not be aware of the interest sum as such information would only be shown on the monthly statement at the end of the month. However, Yau confirmed that for March 2001 and every month thereafter, P sent monthly statements to Lai and the interim order was only made in June 2001. He eventually agreed under cross-examination that in agreeing to Proposal, P agreed to abandon any claim for interest.

46. In early November 2001, P received a cheque in the sum of HK$9,456.94 from OR being dividend due to P under IVA (TB/230-231).

47. P did not notify D of Lai's IVA as it had never been P's practice to inform DR or departed DR of any client who went into IVA. Yau was not sure whether his colleague informed D of the outstanding indebtedness although he knew P told Chong of the same. Yau personally thought Chong was simply unfortunate but from P's perspective, it could not be said that Chong was not liable and he (as person in charge of CD) would recommend to P to claim against Chong. However, he had not investigated in detail whether it was possible to do so.

48. Although Lai's indebtedness was included in Chong's margin position report (TB/245) and Chong had acknowledged that he would take up and be responsible for D's clients, up to the time of trial P had not yet commenced any legal claim/action against Chong and had not told Chong when to settle Lai's indebtedness. Normally, when DR owed P any sum, P would withhold DR's commission until the whole of the indebtedness was set-off and at the same time take action against the client. Chong complained about the inclusion of Lai's indebtedness in his margin position report.

49. P also took no legal action against Lai because quite soon after Lai's default, he gave post-dated cheques to P and shortly thereafter went into IVA. When Lai's IVA failed, Yau estimated that he would be made bankrupt soon, so P decided not to take action itself.

(7) Interpretation Issue

50. As to the meaning of Clauses 8 and 9 of Agreement, Yau said Clause 8 of Agreement was clearly an indemnity and not a guarantee. D was liable to indemnify P as he admitted Lai purchased Warrants on 27th February 2001 through him. Yau in his witness statement said that under Clause 9 of Agreement, D was fully and personally responsible for the collection of all amounts due from his clients, including the amount due from Lai, and that D was in breach of Clause 9.1 of Agreement in failing to collect the amount due from Lai in relation to Trade.

D's case

51. D worked as P's DR since July 1997 under Agreement, which relationship (and Agreement) was terminated after 28th February 2001. D was aware of Clauses 8 and 9 when he signed Agreement and he gave the guarantee therein in consideration of P granting credit facilities to his clients under margin trading accounts.

52. Lai said he was D's friend. Through D's introduction, Lai opened Account (which was a margin account) with P in February 1998. D handled Lai's securities trading transactions under Account, Margin Agreement and Lai's authorisation letter in D's favour. Lai's credit limit was HK$680,000.00. Lai said he could instruct P's DR to purchase at most HK$680,000.00 worth of stock.

53. Lai said that P carried full business risk for trading under Account as it did not require D to make any deposit and it only set a credit limit. Even so, day trading transactions might exceed the credit limit, ie the relevant stockbroker would allow the client to carry out trading transactions exceeding the credit limit (in order to gain more commission) but the client would make deposits before close of trading day to bring the balance within the credit limit. Lai maintained margin trading accounts with Grand Generale Securities Limited, HT Securities Limited and OSK Asia Securities Limited and had 6-7 years of experience in margin trading. Lai understood that if he did not make payment on the settlement date, interest would be charged on the outstanding sum and such arrangement was applicable to Account and agreed to by him when Margin Agreement was entered into.

54. On 15th February 2001 after trading hours, D personally tendered Resignation Letter to P's dealing director, Wong. Resignation Letter stated that the effective date was 1st March 2001, so his last working day would be 28th February 2001. D knew that the effective date was less than 1 month notwithstanding Clause 5.2 of Agreement. D explained that stockbrokers preferred departing DR to leave as soon as possible because they were concerned that departing DR might affect the morale of remaining DR or might even persuade some of remaining DR to leave as well. So most DR who had left P in the past left in 1-2 days/weeks. It would be rare for departing DR to stay on for a full month.

55. D chose end of February 2001 as his last day because he wanted a good conclusion to his relationship with P (好頭好尾). Further, at that time, P's commission system entitled DR to earn 45% instead of the usual 40% commission if his monthly business exceeded HK$20,000,000.00 and there would be HK$4,000.00-HK$5,000.00 bonus. D therefore chose to leave by the end of the month because he wanted to see if he could break the HK$20,000,000.00 mark in order to earn the extra commission and bonus. Since commission was calculated on a monthly basis, it would be of no benefit to D if he worked for a few more days in March 2001.

56. On receipt of Resignation Letter, Wong invited D to his room for a discussion, which took about an hour. At that time, P's director, Mr Lim Wah Sai ("Lim"), was also present. Wong asked D which stockbroker he would be joining. D said that he was considering ICEA, Hantec and CBL, and Wong made a note of the same on Resignation Letter (C/121). Both Wong and Lim made strong efforts to persuade D to stay on but D was firm in his decision to leave, so at the end they accepted D's resignation. At that time, Resignation Letter was placed on Wong's desk. There was no express discussion between D, Wong and Lim about Clause 5.2 of Agreement or that such clause was of no effect. D then left Wong's room and continued with his work.

57. D accepted the effective date stated in Resignation Letter. Therefore, according to the date specified in Resignation Letter, D did not work for P any more nor did he in any way manage his former clients' (including Lai's) margin accounts with P from 1st March 2001. D denied that P could ask staff not to return to work as it should be a matter of agreement between P and staff.

58. After D resigned, Chong approached him. According to P's company practice, it would arrange for another DR to take over D's clients upon his resignation. Chong hoped that D would recommend him if PAD asked D to nominate DR to take over his clients. D agreed, so he nominated Chong when PAD later asked. Thereafter until he left, P did not inform him of special arrangements in respect of his work and did not further discuss with him about the contents of Resignation Letter as P had accepted the same.

59. According to D's understanding, Chong signed Chong's letter at P's request on 23rd February 2001 to acknowledge he had an agreement with D to take over D's 105 clients as from March 2001 and that he would be responsible for those clients in accordance with the agreement he signed with P. However, D had not seen Chong's Letter.

60. P immediately issued written Notice to all D's clients (including Lai) on 23rd February 2001 to inform them that D had left and that as from 1st March 2001 Chong (whom Lai did not know previously) would handle their accounts. P also informed D's clients that their authorisation letters in D's favour were forthwith (ie 28th February 2001) of no effect. P requested D's clients to sign and return the enclosed authorisation letter in Chong's favour. Therefore, by 1st March 2001, D had no authority to buy/sell stock for his clients (including Lai), and Lai's Account was by then formally handled by Chong. D had not seen Notice prior to leaving P but received the same on 1st or 2nd March 2001 (ie after he left P) in his capacity as P's client having his own trading account. Lai said that upon receipt of Notice by end of February 2001, he knew that D had left P by 1st March 2001.

61. On 27th February 2001, Lai through D purchased Warrants for about HK$320,000.00, leaving a debit balance of HK$320,361.61 in Account on that day. The only stock in hand was Warrants. Although Lai knew that different types of stock had different margin ratios, he did not pay attention to these matters when he bought and sold stock because all stockbrokers allowed him to freely buy and sell stock within his credit limit (Lai's credit limit as granted by P was HK$680,000.00). He accepted that sometimes his stockbrokers would call for margin deposit even though the credit limit had not been reached yet. Since Lai did quick purchase and sale of stock, he would use the sale proceeds to cover the purchase price and he was only interested in the profit margin. There had been previous occasions when Lai was unable to pay about HK$80,000.00-HK$100,000.00, so he made arrangements to pay the same by post-dated cheques.

62. D explained the statement of "CALL FOR DEPOSIT : 229,408.96 ..." on the monthly statement for Lai's Account dated 28th February 2001 meant that Lai should deposit such sum on 1st March 2001 (being T+2 after date of Trade on 27th February 2001) and such sum was derived from the debit balance for February 2001 in the sum of HK$321,808.96 less margin value of Warrants of HK$92,400.00. Lai did not make payment of the sum of HK$229,408.96 on 1st March 2001. Lai also knew P had the right to and would liquidate and sell his stock in hand.

63. But Chong subsequently told D that P's internal situation was confusing and P did not, despite D's departure on 1st March 2001, arrange for Chong to immediately take up the handling of the accounts of D's clients. According to P's instructions, if a client (say, Lai) failed to pay P on the due date, DR should immediately (and without having to seek client's/Lai's consent to do so) liquidate the client's position by selling stock in hand in order to minimise loss. However, due to the lack of smooth arrangement by P, Chong could not immediately take up Lai's Account, so Warrants were not sold immediately. By the time of sale of Warrants, their market value had decreased, therefore Lai owed P about HK$155,000.00. Lai said P should have sold Warrants on 1st March 2001, so P's delay caused Lai to suffer greater loss. Lai subsequently repaid about HK$15,000.00, so HK$140,000.00 was still due by Lai to P. Since D had left P's service, Lai did not inform D of the aforesaid indebtedness.

64. As from March 2001, P treated the aforesaid debt as Chong's indebtedness and included such sum in Chong's margin position report. Chong told D that he had raised numerous objections against such entry with P as he regarded such inclusion unfair. Chong was also of the view that such debt was caused by lack of smooth arrangement by P. Despite the aforesaid, P still included such item in Chong's margin position report and allowed interest to accrue on such sum. However, Chong all along denied liability for such sum.

65. D denied that the effective date of his resignation was 14th March 2001. He said the last day he went to work was on 28th February 2001. On that day, he returned company properties to PAD's staff, including the keys to his drawer and letterbox, his staff card and P's manual on things DR should know (which P would charge a penalty of HK$50.00 if it were lost). On 28th February 2001, D's colleagues had a farewell lunch with him. D also went to say goodbye to Wong who saw him to the lift. D did not return to work at P on 1st March 2001 or thereafter, and P raised no query with him over the same. Had D's service with P been terminated only on 14th March 2001, P would not have allowed Chong to handle D's clients as from 1st March 2001.

66. On 1st March 2001, D went to work at Corporate Brokers Limited ("CBL"). CBL submitted Form 4 notice on 7th March 2001 to SFC to inform them that D became its DR (TB/132-140) and both CBL's manager and D signed on such form. The form was completed by CBL's administration department and it stated that the effective date when D became CBL's sales representative was 1st March 2001 (TB/137). However, upon receipt of such Form 4, SFC would await for P's notice to release D's DR registration before it would approve D's registration as CBL's DR. P had 14 days to give such notice. In mid-March 2001, Ms Chan of SFC's registration department telephoned D to say that P informed them that there were problems with his change of registration. With hindsight, D suspected that when SFC made enquiries with P as to why the notification for D's de-registration had not been submitted within 14 days, P might have mentioned that there was an outstanding amount due from D. At that time, D only became briefly aware that Lai owed P monies and P therefore delayed the de-registration procedure when he telephoned Chong to make enquiries.

67. SEHKL wrote to D by letter dated 29th March 2001 (TB/157) (with copies to SFC and P) noting that D had ceased to be P's DR "with effect from 14 March 2001" and confirming that his name was removed from the relevant register kept by SEHKL immediately. D took no action upon receipt of this letter because at that time he did not think that the effective date of his resignation was important. His main concern was to obtain his new registration as CBL's DR so that he could start accepting clients' instructions for securities trading. Since 28th February 2001 was D's last day and P should notify SFC within 14 days after D left P, the date of 14th March 2001 might well have come about for such reason.

68. When CBL received the relevant approval from SFC, CBL submitted an application signed on behalf of CBL and by D to SEHKL (TB/163-167). D said that other than the particulars for CBL's contact person and other CBL corporate information this application form was completed by him and he stated therein that he was engaged by P until 28th February 2001 and by CBL from 1st March 2001. SEHKL then issued DR licence to D. It was only when D had licence from both SFC and SEHKL that he could execute securities trading at CBL.

69. D said that P posted the notification of remuneration paid to persons other than employees for the year ended 31st March 2001 (TB/172) to him to enable him to submit his tax return. It was stated therein that the period for which D's service was required was from 1st April 2000 to 1st March 2001. Based on the same, D submitted his tax return for 2000/01 (TB/232-235) which stated he worked for P until 28th February 2001 and for CBL from 1st March 2001. The Inland Revenue Department ("IRD") did not raise any query with D in respect of his tax return as submitted. When D received the writ of summons in these proceedings at the end of March 2002, he contacted Lai who informed him that there were outstanding sums under Account.

70. It could be seen from the above that the cause of the present proceedings was SEHKL's requirement that payment be made on T+2. D knew that after the present incident P established a new prohibition against departing DR from acting on client's instructions to purchase securities (although he can sell securities) 2 working days before such DR's last working day to prevent similar situation from occurring again. However, at the time when D resigned, P did not have such prohibition, which prohibition was not binding on D.

71. D explained that if a client placed an order for the purchase of stock, he would write the instructions on a slip and hand the same to P's central buyer for inputting the instructions into SEHKL's terminal. If there were a matching intended sale/purchase by another stockbroker, the deal would be struck automatically via the terminal. Once the deal was struck, the client was obliged to make payment at T+2, failing which P would liquidate his stock in hand. If the value of the stock in hand was insufficient to cover the indebtedness, there would be a debit balance. D was not sure as to payment procedures by P in respect of the deal. However, he accepted that irrespective of whether the client made payment at T+2, P was bound to pay for the bought stock.

72. D knew that if P was unable to recover the outstanding indebtedness from D's client, it would claim against D for the same pursuant to Agreement. In such circumstances, P would withhold commission due to D until the whole of the outstanding indebtedness was set off. Interest would continue to accrue on such outstanding indebtedness under the client's account. D recalled that at the time before he left P, interest accruing on outstanding indebtedness due from clients to P was at Rate. He accepted that interest as shown in Lai's monthly statement dated 28th February 2001 was calculated at Rate, which fluctuated according to changes in the prime rate.

73. Lai explained that he fell into financial difficulties, so he was unable to repay the debt by one-off payment. He therefore negotiated a repayment schedule with P, and eventually in about March 2001 P agreed to allow Lai to repay by instalments by post-dated cheques given to Chong. But Lai's financial circumstances did not improve and he was unable to honour the post-dated cheques. As Lai had too many outstanding debts, Lai sought assistance from OR in mid-2001. OR helped him formulate Proposal for IVA. Subsequently the court granted an interim order in June 2001 in respect of Lai's IVA and Proposal was passed under vote at a creditors' meeting. According to Lai's recollection, only 1 creditor, Aim Strategic Investments (International) Ltd, objected. According to the arrangement for repayment to creditors, Lai made a first partial repayment of HK$9,456.94 to P. Lai made total payments of about HK$500,000.00 to some of his creditors over 8 months. Subsequently Lai lost his job, so he was unable to make any further payment thereafter. However, D said P did not inform him and he had no knowledge of the aforesaid negotiations and agreements reached in respect of the repayment of Lai's indebtedness. D did not know what the claimed sum of HK$144,826.46 comprised.

74. Lai said he had no other choice. There was a further creditors' meeting and eventually he was declared bankrupt on 27th November 2001. Lai said after D left P on 28th February 2001, he no longer handled any transaction in respect of Account. All negotiations between P and Lai, including the proposal under his IVA, did not involve D. Further, Lai did not inform D of the above matters.

Assessment of the evidence : Resignation Issue

75. The question of fact here is whether D's last day of service with P (ie the termination of Agreement) was on 28th February or 14th March 2001. My impression of both Yau and D is that both of them are generally honest witnesses. There are quite a lot of common ground on essential facts on their evidence. Their differences in evidence are largely due to their different roles and Yau's lack of first-hand knowledge of certain events, including the circumstances of D's resignation, which he frankly admitted. Yau was only responsible for credit risk matters, and not DR's "employment" issues. He either drew conclusions from discussions with colleagues at P (the veracity of which was untested in cross-examination although Wong and Chong are still available) and from perusal of the relevant documents. The weight of such evidence is subject to assessment on the balance of probabilities. However, I hasten to add here that where I prefer the evidence of one witness to another it does not in any way reflect on their honesty and is but a result of my assessment of the reliability of that evidence in light of the totality of the factual matrix.

76. There is no dispute that (i) Clause 5.2 of Agreement provides that D may resign from P's service by giving 1 month's notice in writing, and (ii) Resignation Letter was dated 15th February 2001 but stated that D's resignation would be effective on 1st March 2001. Having considered the relevant factual evidence adduced by both parties and counsel's submissions, I am of the view D's resignation became effective on 1st March 2001. My reasons are largely as follows :

(a) I find as a fact that D tendered Resignation Letter to Wong on 15th February 2001 as conceded by Mr Choy in his written final submissions.

(b) D stated in Resignation Letter that his resignation would be effective on 1st March 2001. Yau said that according to his personal knowledge, there was no DR who did not give full month's notice. I am unable to attach weight to such evidence. Yau did not explain why he knew of such matters. He admitted he did not handle the engagement or termination of service of DR and had no direct knowledge of the specific circumstances of D's resignation. As Yau had no personal knowledge on these matters and there is no evidence that he was involved in handling the resignation of other DR, I cannot give weight to his evidence on this aspect.

(c) Although Yau said he did not know the contents of Resignation Letter, he accepted that CD received Resignation Letter before 1st March 2001 (and probably on or before 23rd February 2001 because Yau said CD must have had Resignation Letter when it prepared Notice dated 23rd February 2001). So, CD must have known of D's assertion of the effective date of resignation of 1st March 2001 before that date. I further accept that Wong knew of the same when Resignation Letter was tendered to him on 15th February 2001. After all, he must have read Resignation Letter and he had also written words on the same during discussion with D that day.

(d) D knew that the notice period of his resignation was less than 1 month. He also knew that DR who previously left P did not stay on for a full month. D explained and on balance I accept that it was his intention to see if he could break the HK$20,000,000.00 mark in business turnover by the end of February 2001 so as to earn more commission. It did not serve D financially simply to stay on for a few more days (or even up to 14th March 2001) since commission/bonus was calculated on a monthly basis at the end of the month. I therefore accept that the choice of 1st March 2001 as the effective date was D's conscious choice.

(e) Yau said P did not require departing DR to return to work every day of the notice period, so departing DR generally ceased coming back to work before a month is out. Further, he accepted that departing DR would have started preparatory work for his new "employer" (eg sending new account opening forms to his clients) before the month was out. Although such conduct amounted to conflict of interest (as departing DR had yet to serve out the notice period according to P's case), Yau agreed that P generally raised no quarrel with such conduct and such practice was also applied when new DR joined P from another stockbroker.

Yau's evidence on this aspect is mirrored by D's evidence to the effect that stockbrokers would prefer departing DR to leave as soon as possible to obviate any adverse effect on morale and to minimise the risk of remaining DR being persuaded to leave as well. So, historically, DR who resigned from P left in 1-2 days/weeks.

D said and I accept that his departure from P before expiry of a month after the tender of Resignation Letter was in line with P's past practice of allowing early departure, which I find is not simply a cessation of coming back to work but a clean break or final termination of the working relationship. This is reflected in (i) P's complaisance in departing DR to carry out preparatory work for another stockbroker after he ceased to return to work and before the month is out, and (ii) P's acquiescence of new DR joining D doing the same thing. I find that it was not an acceptance of a situation of potential conflict of interest but a reflection of each party going its own way after a clean break. I accept D's explanation of the reasons given for early mutual termination of service of departing DR, ie to preserve P's remaining staff and their morale.

(f) According to D, Wong and Lim accepted his resignation after lengthy discussion on 15th February 2001. Although there was no express discussion of Clause 5.2 of Agreement, Wong and Lim accepted Resignation Letter and Wong placed it on his desk. Yau in his evidence and Mr Choy in his submissions emphasised the lack of overt discussion of Clause 5.2 of Agreement on 15th February 2001 amongst D, Wong and Li, which (Mr Choy argued) suggested that such clause had not been varied. However, I do not see any express discussion as being essential for P and D to have mutually accepted termination before expiry of a full month. There is no doubt that P and D both knew of Clause 5.2 of Agreement. There is also no doubt (as admitted by Yau) that dealing directors (such as Wong) dealt with DR's resignation matters. On balance, I find that by considering Resignation Letter, attempting to persuade D to stay on and finally accepting D's Resignation Letter as tendered, Wong and Lim by conduct on 15th February 2001 accepted and acquiesced in the effective date as stated in Resignation Letter. Indeed, as seen below, such acquiescence and acceptance had been acted upon by both parties.

(g) I accept D's evidence (on which there was no cross-examination) that on 28th February 2001 he took various steps which reflected his final cessation of service with P. He returned to P the keys to his drawer and letterbox, his staff card and P's manual for DR. He had a farewell lunch with office colleagues and Wong saw him out to the lift when he said final goodbye. I find on balance that such conduct reflected a final termination of P and D's relationship and not suggestive of being on garden leave pending departure.

(h) D ceased to go to work at P's offices on 1st March 2001 or thereafter. Yau recalled and confirmed that he knew (and there was office gossip) in February/March 2001 that D had ceased to work before a month was out. Mr Choy submitted that it did not mean that Agreement was terminated prior to the end of the 1-month notice period. Rather, it was a pragmatic arrangement whereby D could take some leave whilst P made the necessary notification to SFC and SEHKL to de-register him.

As I have found above, D was not on garden leave after 28th February 2001. In fact his appointment with P had been terminated, which was also supported by the following matters.

First, there is no provision in Agreement for putting D on garden leave pending expiry of Resignation Letter. Secondly, there was no evidence that P expressly gave D instructions to cease to return to the office as from 1st to 14th March 2001 or that D had applied to P for garden leave in contra-distinction to a final termination of service. Thirdly, there is no suggestion that in accepting D's resignation upon knowing the effective date as stated in Resignation Letter, P raised any objection.

Fourthly, even if there were evidence that P instructed D to stop returning to work (although I find there is no such evidence), I am, like D, doubtful whether this is permissible in the absence of consensual agreement between the parties (and there is no evidence of such agreement). Had D remained P's DR until 14th March 2001 enjoying rights under Agreement, he would have been entitled to work and earn commission until termination of his appointment. A unilateral prohibition by P against D from so doing based not on the merits of the transaction in question but on enforced garden leave may arguably be a breach of implied if not express provision of Agreement.

(i) P knew all along that D would join another stockbroker. D told Wong he would join 1 of 3 possible stockbrokers. I accept that D in fact started working at CBL on 1st March 2001. Yau anticipated that DR leaving P would generally start doing preparatory work for the new "employer" although DR could not carry out trading activities until he is re-registered. Given that P knew D would join another stockbroker and the general expectation of a departing DR who would join a new stockbroker as aforesaid, I find that P's complaisance of the situation (and there is no evidence of P's objection) can only be sensibly explained by a final termination of P and D's relationship after 28th February 2001 and by P's acceptance of short notice by D.

(j) Yau did not have detailed personal knowledge of D's resignation. On the other hand, Wong handled D's resignation and as dealing director he was also responsible for supervising DR (including D). Wong has not been called to give evidence (although he is still with P) but Yau said Wong did not mention that D's last day of service was 1st March 2001. I do not read this as a denial and indeed, according to Yau, Wong said he had no recollection whether the effective date was 1st or 14th March 2001. In my view, if the parties had insisted and acted on Clause 5.2 of Agreement (as alleged by P) by adding 1 month to the date of Resignation Letter to ascertain the effective date, I do not understand Wong's difficulty in saying what was the effective date if he had simply reviewed the date of Resignation Letter.

(k) As regards Yau's evidence that PAD told him (upon his subsequent enquiry) that 14th March 2001 was the effective date, I do not consider it appropriate to place weight on such hearsay evidence on such fundamental contested issue. Yau accepted that the 1-month notice requirement was an internal requirement under Clause 5.2 of Agreement between P and D which was separate from P's obligation (performed by PAD after ADC) to notify SFC and SEHK to de-register D as P's DR. Yau did not know whether there was any time limit for the latter task. In such circumstances, I find that I cannot place weight on (and I reject) Yau's suggestion in his evidence that the 1-month notice period was for the purpose of ADC or that PAD's assertion of 14th March 2001 as the effective date was reflective of the arrangement accepted and acted upon by D and P (as represented by Wong). Further, Yau said he did not ask (and hence did not know) whether anyone at P raised query over D's assertion of 1st March 2001 as the effective date in Resignation Letter.

(l) D passed his clients to Chong and the effective date of such transfer was 1st March 2001. Mr Choy submitted that such transfer, including the date of the transfer, originated as a private agreement between D and Chong and upon Chong' subsequent unilateral notification to P in writing, P simply informed D's affected clients and acquiesced in the arrangement between D and Chong.

However, the transfer of clients from D to Chong followed a time honoured practice at P when DR left. It was usual for departing and continuing DR to come to an understanding on the handover of client accounts and it was P's requirement to have the continuing DR confirm to P the arrangement (and no doubt his responsibility for such clients under his own agreement with P). Yau confirmed that P normally had no strong views and would accept the transfer arrangement. Indeed, such practice and arrangement was so usual that P had a template for the circular notification letter (eg Notice) to the clients. Had P disagreed with the arrangement, it would have assigned another DR but P never objected to Chong or replaced Chong by another DR for handling D's clients.

D's evidence also showed that the transfer of his clients to Chong originated as a private request from Chong and D's promise to recommend him as his successor. However, after D recommended Chong to PAD, P did not raise any objection. Indeed by acceptance of Chong's Letter without objection or query and by issuance of Notice on the same day, P accepted and acted on the arrangement. By such conduct, P agreed to the transfer of D's clients to Chong with effect from 1st March 2001 and such arrangement was no longer a private agreement between Chong and D. Under the agreed arrangement, D had no right to handle his clients' accounts as from 1st March 2001 and Chong had to handle such accounts as from that date. I find on balance that neither P nor D (or even Chong) would have agreed to the aforesaid arrangement had D's appointment as P's DR not ceased after 28th February 2001.

(m) Form 4 submitted by CBL to SFC on 7th March 2001 stated that the effective date of termination of D's service with P was 1st March 2001. Even though D's registration as CBL's DR was held up because P had not been de-registered/released D, the aforesaid statement in Form 4 showed that shortly after 28th February 2001 and before 14th March 2001, both CBL and D regarded D's last day of service with P was 28th February 2001.

(n) Mr Choy submitted that both SFC and SEHKL wrote to P/D to say that it was their understanding that D ceased to be P's DR on 14th March 2001. I do not find that these are independent statements from such institutions for Yau admitted that they could only know of the effective date as a result of notification by PAD. P in its reply to SFC dated 27th March 2001 (upon query by SFC as to why it was not notified of D's departure) stated that D submitted 1-month resignation notice but failed to complete P's resignation procedures. There was no mention of what resignation procedures were outstanding although there was a subsequent reference in the reply letter to the outstanding indebtedness under Account. On balance and in light of the aforesaid factual matrix indicating that D had well and truly left P by 1st March 2001, I find P's reply to SFC on 27th March 2001 merely an ex post facto attempt to justify the lack of earlier notification to SFC and not reflective of the actual circumstances.

(o) D received a letter from SEHKL dated 29th March 2001 stating that he had ceased to be P's DR on 14th March 2001 but did not raise objections. D accepted that he took no action because he was more concerned with when his registration as CBL's DR could be achieved so that he could proceed with carrying out clients' trading instructions than with the effective date although it was wrongly stated. He did not think it was important and he also suspected that P got it wrong because they added 14 days, ie the time limit for reporting to SFC, to the true effective date of 1st March 2001. On balance I accept D's explanation.

I note also that after that date D still maintained his consistent position thereafter when he stated that he was engaged by P only up to 28th February 2001 and commenced working for CBL on 1st March 2001 in CBL's application to SEHKL in April 2001 after D's de-registration by P.

(p) It was not disputed that P stated on the return for the year ended 31st March 2001 that D's period of service was from 1st April 2000 to 1st March 2001. Mr Choy submitted that as D had transferred the handling of his clients' accounts with P on 1st March 2001 and assuming that D ceased to return to P's office from 1st March 2001 (which I have found to be the case), D would not have generated any commission income for the period between 1st and 14th March 2001, so the statement on P's return only meant that after 1st March 2001 D ceased to render any service for which commission was payable. However, such explanation is not supported by evidence from P because Yau was unable to explain why P's AD made such statement on the return.

On the face of the return, it stated that D's period of service ended on 1st March 2001. In fact, D submitted his tax return based on P's return, and he stated therein that he worked for P until 28th February 2001 and for CBL from 1st March 2001.

(q) Looking at the totality of the evidence and considering counsel's submissions, I find on balance that the parties have mutually treated D's service as finally terminated effective on 1st March 2001, ie his last day of service was on 28th February 2001. I find that Wong accepted D's resignation as per the terms set out in Resignation Letter, including the effective date, and the parties have by their actions and conduct treated and agreed to the above termination date, which amounted to an implicit consensual dispensation of the full 1-month notice requirement. I therefore find that Agreement and P and D's service relationship were terminated after 28th February 2001.

77. I wish to make clear that in coming to the aforesaid conclusion, I have not come to any definitive view or conclusion on Chong's liability to P (if any) in respect of the outstanding sums under Account.

Interpretation Issue

78. Whether Clause 8 of Agreement is a guarantee or an indemnity is a question of construction. Mr Ng and Mr Choy agreed that an indemnity is a contract by one party to keep the other party harmless against loss, but a contract of guarantee is a contract to answer for a debt, default or miscarriage of another who is primarily liable to the promise (see Yeoman Credit Ltd v Latter [1961] 1 WLR 828 and Argo Caribbean Group Ltd v Lewis [1976] 1 LL LR 289). In short, "in a contract of guarantee the surety assumes a secondary liability to answer for the debtor who remains primarily liable, whereas in a contract of indemnity the surety assumes a primary liability, either alone or jointly, with the principle debtor" (see Chitty on Contracts 28th ed (1999) Vol.2, para.44-013 at p.1302).

79. Mr Ng argued that if the obligation to indemnify is couched in terms which made it plain that it is predicated upon there being an underlying liability of the principal debtor, the contract will remain a guarantee (see Andrews and Millet, Law of Guarantees, 3rd ed (2000), para.1.15 at pp.12-13). He cited in support of this contention the case of Stadium Finance Co Ltd v Helm (1965) 109 SJ 471. In that case, the plaintiff hire purchase finance company let a second hand car on hire purchase to a hirer who was a minor and the hirer's mother signed an "indemnity form" as follows :

"(1) I will upon demand pay to you such sum or sums of money as may at any time or from time to time have become payable by the customer but be unpaid by him.

(2) I will indemnify and keep indemnified you, your successors and assigns from all loss and damage suffered and all claims costs and expenses, made against or incurred by you in any way arising out of or consequent upon your having entered into such agreement, whether arising out of a breach by the customer of any of the terms and conditions thereof or otherwise including any such loss or damage etc. aforesaid as may arise from the said agreement being (for whatever reasons) unenforceable against the customer.

(3) No relaxation or indulgence which you may from time to time or at any time extend to the customer shall in any way prejudice or act as a waiver of your strict rights against me hereunder."

Lord Denning MR held that the test was whether, as between two people, one of the two was under a primary liability to perform the obligation, while the other's obligation was secondary only. If so, it was a contract of guarantee and not a contract of indemnity. Lord Denning MR found that Clause (1) was a contract of guarantee as it was something which the customer ought to pay and had not paid. Clause (3) was applicable to a guarantee. Although the plaintiff alleged that Clause (2) was an indemnity, the Court of Appeal held that reading Clause (2) in relation to Clauses (1) and (3), the whole burden of the document was that it was a guarantee and indeed the claim was made under Clause (1) for the amount not paid which the hirer should have paid.

80. In my view, the crucial point in Stadium Finance Co Ltd's case (supra) is the assistance that could be drawn from Clauses (1) and (3) so that reading Clause (2) in that context rendered it a guarantee and not an indemnity provision. Ultimately, as put by Andrews and Millet, The Law of Guarantees (supra), the language of the indemnity clause is all-important.

81. Mr Ng argued that "securities transactions dealt by or through [DR] in the name of [P]" in Clause 8 of Agreement refer to those transactions between P and Lai conducted pursuant to Margin Agreement under which Lai was primarily liable. D was in essence a surety of Lai who was the principal debtor. Although Mr Ng confirmed he was not going to take any pleading point, P in pleading that Lai was indebted to P in the sum of HK$144,826.46 and hence, D was liable to P for such sum (see paragraphs 10 and 11 of the Statement of Claim (TB/3-4)) treated D as surety of P's loss vis-à-vis Lai's breach of Margin Agreement as principal debtor.

82. Mr Ng drew a comparison between Clause 8 of Agreement and Clause 8 of Margin Agreement, the latter of which provides inter alia that "[Lai] undertakes to indemnify [P] and its officers, employees and agents for any loss, cost, claim, liability or expense arising out of or connected with any breach by the Client of its obligations hereunder including, any costs reasonably and necessarily incurred by [P] in collecting any debts due to [P] or in connection with the closure of the margin account(s)". It was argued that Clause 8 of Margin Agreement deals with a two-party relationship between P and Lai without another principal debtor, so it is an indemnity provision. However, Clause 8 of Agreement deals with a three-party relationship with Lai being the principal debtor, hence it is a guarantee notwithstanding it is in form of an indemnity.

83. However, when I pointed out it is not unusual to find indemnity provisions in so-called bank guarantees, which are often given effect as indemnities, Mr Ng in his oral final submissions accepted that not all provisions involving three-party relationships must be regarded as guarantees. Indeed, Andrews and Millet, The Law of Guarantees (supra) referred to my example. Further, Chitty on Contracts (supra) provides inter alia that :

"...... It is therefore possible where the relationship between the surety and the creditor is that of a contract of indemnity, the debtor may still be primarily liable as between himself and the surety. Thus although a contract of indemnity cannot itself be a contract of suretyship, the party liable under such contract may be a surety as against the debtor and it is common and convenient to speak of him as such, even though he has assumed a primary liability towards the creditor. On the other hand, it is of course perfectly possible to have a contract of indemnity in which there is no suretyship at all, because, for example, the party liable under the indemnity has not contracted at the request of another debtor. Thus a dealer who agreed by a "recourse agreement" to indemnify a finance company against any loss under a hire purchase transaction is not a surety either against the creditor or against the debtor ......"

Ultimately, it is a question of construction of the relevant provision in light of the factual matrix.

84. Mr Choy argued that the plain wording of Clause 8 of Agreement made it quite clear that it was an indemnity and not a guarantee clause. He argued that the clause envisaged that D would "indemnify" P and "keep it indemnified" against all damages, liabilities, actions etc that might be suffered or incurred by P in connection with or arising from securities trading transactions undertaken by D through P.

85. Mr Choy submitted that the applicability of Clause 8 of Agreement is not restricted to debts owed by D's clients to P (ie the three-party relationship referred to by Mr Ng) and has a much wider meaning. For example, if D committed an error in executing securities trading transactions on the client's behalf which caused loss to P, Clause 8 plainly provides that D was to indemnify P because the error would have been within the meaning of "securities transactions dealt with or through [DR] in the name of [P]". In such a situation, D's liability would not be mirrored by liability owed by a third party (eg the client) to P. Since Clause 8 of Agreement applies to situations having no reference to the debt of another, it must be seen to have created a relationship of indemnity between P and D. Mr Choy referred to The Anemone [1987] 1 Ll LR 546, 555 in support but I find that the relevant passage cited by Mr Choy was more in relation to the applicability of the provisions of the Statute of Frauds.

86. Mr Choy argued that Clause 8 was in fact simply a recourse agreement. If D conducted securities trading transactions through P which caused economic harm to P, P would be entitled to ask D to make good the loss. As D would not be able to obtain finance from or trading facilities through P to facilitate his client's trading without P agreeing to do so, it made sense to expect P to impose commercial terms to protect its interest. In so reading Clause 8, it made commercial sense to interpret Clause 8 of Agreement as an indemnity clause attracting primary liability (see Goulston Discount Co Ltd v Clark [1967] 2 QB 493, 498).

87. In Goulston Discount Co Ltd's case (supra), a hirer through the defendant dealer entered into a hire purchase agreement with the plaintiff finance company in respect of a car. The plaintiff paid a sum to the defendant who gave credit to the hirer for an old car taken in part exchange. The hirer took the new car. The defendant signed a specific recourse agreement in respect of the new car agreeing inter alia that in consideration of the plaintiff entering into the hire purchase agreement with the hirer, the defendant would indemnify the plaintiff against any loss it might suffer by reason of the fact that the hirer did not pay the amounts which he would have paid had he completed his agreement by exercising the option to purchase. The hirer defaulted in payment after paying a few instalments. The car was retaken and eventually sold by the plaintiff, who claimed against the defendant for the balance of the hire purchase price. Lord Denning held that such a simple recourse agreement was clearly a contract of indemnity and not a guarantee. At p.498, he said "the defendant, the dealer, wanted to sell [the new car]. He sold it to the plaintiffs for ￡400, and was paid for it. The evidence shows that the plaintiffs would not have bought the car from him unless he had agreed that, in case the hirer defaulted, he would indemnify them. That was a very sensible agreement. The defendant ought to honour it" and indemnify the finance company against their loss.

88. Having studied Clause 8 in the context of Agreement and the nature of the roles of P, D and D's client, I find on balance that the plain, logical and purposive interpretation of Clause 8 is that it is an indemnity provision. This interpretation is supported by the plain wording of the clause although I accept this is not conclusive. I bear in mind that P's business is to earn commission and other charges on securities trading transactions carried out through P for clients introduced by D. D and not P would be more knowledgeable of the credit-worthiness of his clients and yet P had to extend loans to at least some of these clients for margin trading. Given the risk of default in payment by the clients (which is not protected other than by setting a credit limit and a right to close margin accounts upon default), it is only logical to have a recourse against D and as such D is not a surety against his clients. D wanted to carry out securities trading transactions for his clients so that he too could earn commission (and indeed Mr Ng conceded that this is part of the relevant consideration) and P by Agreement agreed to facilitate such trading benefit to D. I find that P would not have agreed unless D would indemnify P in case the clients defaulted. Both P and D are well aware of how the mechanism worked, eg P being entitled to withhold D's commission until whole default sum is settled and/or pending claim against the client. I also agree with Mr Choy that the plain wording of Clause 8 of Agreement is wide enough to encompass situations when P incurred loss (eg through D's negligent error in executing security trading transactions) through no default or liability on Lai's part.

89. I have referred the parties to Phillip Securities (HK) Limited v Wong Wai Shing HCA11341/1997, Cheung J (unreported, 29th April 1999) where the plaintiff (same as P in the present case) claimed against the defendant DR by relying on an agreement between P and such DR similar to the Agreement containing Clauses 8 and 9 of Agreement. Although the case turned on other issues, Cheung J (as he then was) accepted without question or discussion that the DR in that case was liable "to indemnify [P] pursuant to Clauses 8 and 9".

90. Since Mr Ng accepted that P incurred liability for the outstanding principal sum of HK$140,000.00 as at 27th February 2001, given that Clause 8 is construed as an indemnity provision, D is liable to P for such sum. Both parties accepted that P received the sums of HK$9,456.94 and HK$4,838.43 from Lai which should be taken into account.

91. It appears that P's claim of HK$144,826.46 comprises of the said sum of HK$140,000.00 together with interest on such sum or its outstanding balance calculated from 1st March 2001 to 19th February 2002 at Rate and compounded on a monthly basis in the sum of HK$14,077.20 ("Interest"), and bank and interest charges for Lai's dishonoured cheques incurred by P in April and May 2001 in the sum of HK$206.20 ("Charges"), less partial payment by Lai in the sum of HK$9,456.94. The amounts for Interest and Charges can be seen from the calculations submitted under cover of the letter from P's solicitors to the court dated 17th March 2004 after the trial hearing but as directed by me.

92. The question is whether D is liable to pay Interest and Charges. As P did not plead any reliance on Rate or the course of dealings between P and Lai whereby interest on the outstanding balance due under Agreement was to be compounded monthly, or on contractual interest between P and Lai for which D was liable to indemnify P, Mr Choy conceded that there is no basis for the court to award interest at Rate on the outstanding balance for the period after 19th February 2002 and he merely urged the court to exercise its discretion under sections 49 and 50 of the District Court Ordinance.

93. As regards the claim for interest for the period from 1st March 2001 (being T+2 settlement date for the purchase price of Warrants under Account and Margin Agreement) to 19th February 2002 calculated on the aforesaid basis, I am of the view that P is not entitled to maintain such claim.

94. Mr Choy accepted that (a) Clause 9 of Agreement had no application on the basis of my finding that the last day of D's service was on 28th February 2001 and therefore no interest was yet due on that date, and (b) by virtue of Clause 16 of Agreement, Clause 8 did not survive the termination of Agreement after 28th February 2001. Mr Ng submitted that no interest liability had been suffered or incurred as at 28th February 2001 as the settlement date for both P and Lai was on 1st March 2001.

95. Mr Choy tried to argue that Clause 8 covered future contingent liability for interest. Clause 8 referred to "liabilities ...... claims, demands, and any other losses ...... that may be suffered or incurred by [P] ......" (my emphasis). Mr Choy argued that the use of the word "may" suggested that future liability is included. In my view, it is neither here nor there because as at the date of execution of the Agreement, all liabilities and losses were matters of the future. However, the use of the words "suffered" and "incurred" indicate that the liabilities and losses which fall within Clause 8 must have actually occurred and were not just contingent. There is no bar to the parties to expressly agree, had they wished to, to cover future contingent liability but they had not done so. To read Clause 8 in the manner suggested by Mr Choy would be to read too wide a meaning into the wording of the clause as framed by the parties. In the circumstances, I am of the view that D was not liable for Interest although the court retains discretion to award interest under sections 49 and 50 of the District Court Ordinance.

96. As regards Charges, since they were incurred in April and May 2001, D is likewise not liable for such sum. In the circumstances, I find that D is liable to pay P the sum of HK$140,000.00 - HK$9,456.94 - HK$4,383.43 = HK$125,704.63.

97. I consider the above sufficient to dispose of the action and there is no need to consider Clause 9 of Agreement. Indeed, Mr Choy conceded that if D's last day of service was 28th February 2001, then irrespective of Interpretation Issue, Clause 9 was irrelevant and it did not survive the termination of Agreement.

Conclusion

98. In the circumstances, I grant judgment to P against D in the sum of HK$125,704.63 together with interest thereon at the rate of 8% pa from the date of the writ of summons to the date of judgment and thereafter at judgment rate until payment. There is no reason why costs should not follow event. I therefore grant a costs order nisi that D should pay P costs of action (together with all costs reserved) to be taxed if not agreed with certificate for counsel. Mr Ng most fairly indicated that he would not oppose certificate for counsel. The Defendant's own costs should be taxed in accordance with Legal Aid Regulations.