C.A. PACIFIC FINANCE LTD (IN LIQUIDATION) v. CHAN PUI FAN

HCA 837/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 837 OF 1998

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J U D G M E N T

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1.  This is an appeal by rehearing from a Master’s order giving final judgment summarily to the plaintiff for the amount claimed being a debt due with interest accrued and accruing.  As a preliminary matter, I gave the defendant leave to file additional evidence with consequential leave to the plaintiff to respond for reasons which will emerge.

Introduction

2.  CA Pacific Securities Limited (CAP Securities) was a stockbroker and registered investment dealer.  CA Pacific Finance Limited (CAP Finance) was a connected company which operated in tandem with CAP Securities, to provide credit facilities to customers on appropriate terms.  In June 1998 CAP Securities and CAP Finance were wound up, and partners of the accountancy firm PricewaterhouseCoopers (PWC) were appointed liquidators. The liquidations proved to be long and complex for there were, at the outset, thousands of investors whose positions had to be ascertained, with hundreds of different types of stocks and other investments valued at over $1 billion held.  On several occasions a High Court judge was called upon to give directions. During the course of the administration former customers were kept in touch; in some instances they were invited to object to a course of action proposed.  Finally, in March 2003, nearly 5 years after the winding-up orders, the liquidators were in a position to establish what customers were entitled to and what shares or other investments were to be settled against what might be due.  In June 2003 the customers were written to.  Those with outstanding debts were given 120 days to pay them off or risk having the shares sold to reduce the deficit.  Those who failed to respond or otherwise did not settle their indebtedness had their shares sold.  Those still with an outstanding debt were in April 2004 told to pay or face legal action.

3.  The defendant fell into this category.

The Case against the Defendant

4.  This emerges from documents, records and statements retrieved by the liquidators following the winding up of the two CAP companies.

5.  The defendant was found to have signed the usual documents required to open a trading account and a securities finance account with CAP Securities and CAP Finance.  On this point, I turn now to evidence in the application for summary judgment before the Master.  For the plaintiff in liquidation, this was given by a Mr John Roden, a senior member of PWC having conduct of the case.  He adduced that the account was opened ‘on or about 28 November 1997’.  I highlight this phraseology which is of course an approximation, as one would have thought the records and documents retrieved would point to a date certain. It is in the circumstances of this case the more interesting because it is apparent from the statements produced that in the defendant’s account that came to be opened for the purpose there was significant trading undertaken on 27 November, such that shares in two listed companies were purchased at a total cost of $5,886,444.01 with, by day’s end, no deposit from which to meet the cost or credit facility in place.  As is usual, settlement did not fall due until 2 days after the trade, thus not until 1 December.  Nevertheless, an apparent irregularity in premature use of the defendant’s account for trading is something that bears consideration.

6.  The statements produced show that the indebtedness increased, with significant further trading, to a maximum of $9.5 million during the course of 28 November.  On 1 December 1997, the account was credited with $5 million, but by then that was not sufficient to put the account in credit.  The debit balance fluctuated according to trades undertaken.  In fact only the shares in two listed companies were traded, called in the statements by shorthand Billion Int’l and Magician Ind.  The latter’s full name is Magician Industries (Holdings) Limited.  The significance of that features later.

7.  It is apparent that by 15 January 1998 not only was the defendant’s account in debit, but she was in default.  By letter of that date solicitors representing CAP Finance demanded of her $3,166,117.51 plus interest accrued and accruing with legal action threatened if the default continued.  In fact, two days later, these proceedings issued, although by the letter a week’s grace had been given; but nothing turns on that.  At this time bought and held in the defendant’s name as security against the deficit cash balance were 18,415,000.00 shares in Billion Int’l.  The writ was filed and served.  But then it was, on 20 January 1998, that a petition to wind up CAP Finance was filed.  The order winding up the company was made in June 1998.

8.  For some years during the course of administration there was no activity.

9.  The matter did not re-emerge until the liquidators wrote to the defendant along with the other former customers.  She did not respond and in particular did not repay or reduce the amount due, and the shares in Billion Int’l (by now called Northern Int’l Holdings Ltd) were sold to reduce the deficit.  As of 30 April 2004 the principal said to be due was $3,021,669.43.  Accumulated interest had grown to $2,030, 800.57.  The liquidators made demand for this and the defendant taking no steps then they issued a writ.  It was only after the defendant filed a defence claiming that their claim was time-barred and an abuse because of the earlier writ filed that the liquidators came to realise that there were proceedings already on foot.  The second action was discontinued and the liquidators took over the conduct of the dormant proceedings, that is this action, and applied for summary judgment.  The defendant applied to strike out the action on the primary ground that there had been an inordinate and inexcusable delay as to give rise to prejudice.  The matters were heard together.

The Evidence before the Master

10.  Mr Roden made an affidavit exhibiting the documents executed by the defendant by which means an account in her name was opened and through which means she traded, resulting in the building up of a debit balance which she was not to make good.

11.  The defendant did not respond save that she filed an affidavit in support of her application to strike out. It was brief and I can afford to repeat its contents verbatim without overloading this judgment:

“	…
	2.	According to my recollection in about end of 1997, one Mr. Hung approached me and proposed to me to open a share trading account.  To my understanding after the account was opened, any transaction should only be carried out according to my confirmed instruction.  I had never given any instruction to trade to Mr. Hung.
	3.	I only came to realize that there was an outstanding balance due to CA Pacific Finance Limited just when I received a demand letter from Sin Wong & Mui, Solicitors dated 15th January 1998 enclosing a statement.  There is now produced and shown to me marked “CPF-1”, copy of the demand letter and a statement.
	4.	After I received the letter of demand, I tried to find Mr. Hung but failed to locate him.
	4.	In January 1998, C.A. Pacific Finance Limited’s business was stopped because of the legal proceedings for its winding up and I could not approach any person of C.A. Pacific Finance Limited to make complaint.
	5.	The Honourable Court will note that there was inactivity in respect of this case on the part of the Plaintiff for over 6 years.
	6.	After these years, I cannot locate the Mr. Hung any further and in such circumstances, I am much prejudiced by the delay in this action.
		…”

12.  Although not clear from this document, the Mr Hung she refers to as having proposed to her the opening of a trading account is said in later evidence to be one Lawrence Hung Sing Kwong, an executive employed by CAP Finance, and/or CAP Securities.

The Master’s Orders

13.  The Master dealt with the matters on 14 April 2004 by dismissing the defendant’s application to strike out and giving judgment to the plaintiff for the full amount claimed.  It is the order for summary judgment that the defendant now appeals, being the matter before me by rehearing.

Additional Evidence

14.  First for me to consider was the defendant’s application to adduce further evidence, which as she stated was for the first time to attack the merits of the plaintiff’s claim.  She said this was hitherto not pursued following counsel’s advice that the Master would throw out the claim because of procedural defects, which in the event he declined to do. Counsel now representing the defendant, Mr Chong, conceded that the Master’s approach could not be faulted, but submitted that justice required me to allow in the defendant’s account as now put forward, albeit lately filed.

15.  In essence, that account now follows.

16.  The defendant was born and raised in Hong Kong, and qualified with an honours diploma in Accountancy in 1989.  She joined a company called Magical Industrial Co. Limited in 1994, when she was 29 years old.  She was appointed its Accounting Manager.  The starting salary was $25,000.00.  In 1995, she bought a flat for accommodation for herself and her mother.  Most of her savings were absorbed in the downpayment, and thereafter most of her income was utilized to meet the mortgage and other household expenses.  She was not, as she painted, financially free to speculate in stocks and shares.  The employer was and remains a wholly-owned subsidiary of the limited company called Magician Industries (Holdings) Limited.  This is the company whose shares were traded in the defendant’s name in the CAP Securities account back in 1997-8.  At that time, the Chairman of Magician Industries Holdings was one Kong Yick Ming.  The Executive Vice-President (Finance) was Charles Liu.  In late 1997, Liu put to the defendant a proposition.  Of this, the defendant stated:

“	20.	On a day in late 1997, I was approached by the said Liu and was asked if I would be willing to do a favour for the said Kong.  I was then asked if I would be willing to act, on paper, as the account holder of a trading account so that, through my “paper name” the said Kong could speculate in stocks and shares.  I believed that the said Kong was interested in speculate in shares but, given his position, it would not be convenient for him to trade under his own name.  Later, on one occasion, I met the said Kong and he asked me if I would be willing to do a favour for him to act, on paper, as the account holder of a trading account so that, through my “paper name”, he could speculate in stocks and shares.
	21.	By reason of my conversation with the said Kong, I believe that the said Kong had an arrangement with the Plaintiff, so that, through my “paper account”, the Plaintiff would accept instruction from the said Kong for the purpose of his trading in stocks and shares.

17.  She was told that a colleague called Sin Mei Chun had been similarly approached and had agreed to do what was asked.  I pause here to note the obvious; the ‘inconvenience’ referred to reflects the irregularity of a Chairman of a listed company investing in the company in the manner that was intended.  She reluctantly agreed to participate as requested, fearing that to decline might mean that she would lose her job and the income she was dependent on.

18.  It was in these circumstances that she came to sign the forms I have earlier referred to.  Liu gave her them to sign and told her to send them to someone called Lawrence Hung, an officer of the plaintiff.  This all took place on 28 November as she remembers because she dated the documents and retained copies.  She came to know that Miss Sin signed similar documents.

19.  One can note from this evidence that the defendant has materially changed her original version of how she came to be a party to a new trading account with the plaintiff; see paragraph 11 above.

20.  Having signed the documents which, as she now knows, were used to open the trading account with CAP Securities, she did not thereafter undertake any trading or authorise or instruct any trading on her behalf.  She played no part in the trading of shares in ‘Billion Int’l ’ or ‘Magician Ind.’.  However, that is no more than consistent with the proposal with which she says she had agreed, namely, that Kong would be giving the trading instructions.  She did, however, deposit the $5 million which showed up in the trading account on 1 December.  On 28 November, Kong gave her a cheque for $10 million drawn in her favour on the account of one Ng Woon Yum, whose name she recognized was that of a colleague at work.  She was told to deposit it in her bank account and then draw two cheques of $5 million each payable to CAP Finance to be deposited into the trading accounts in the names of herself and Miss Sin.  She did as she was asked.  Thereafter, she took no steps.  For the short time that her account was operated on, she received statements which revealed that there was trading but this was not undertaken or authorised by her.  She came to know that Miss Sin’s account was similarly operated.

21.  Following receipt of the letter of demand of 15 January and the writ that followed shortly afterwards, she received, unsolicited, a guarantee apparently signed by Kong.  She kept it and produced it.  In it Kong purported to guarantee personally the defendant’s indebtedness to CAP Finance.

22.  Not long after receipt of the mid-January letter of demand, Hung of CAP Finance came to meet Kong.  Miss Sin and the defendant were invited to attend.  I repeat verbatim the defendant’s account of what happened next:

“	51.	On that occasion, the said Hung demanded the said Kong to settled his ‘trading’ through the trading accounts registered in my name and that of the said Sin otherwise the Plaintiff would have no choice but to proceed with its legal proceedings against me and the said Sin.  On that occasion, the said Hung never made any demand against me or against the said Sin for us to pay the trading debts of the trading accounts registered in my name and that of the said Sin.  The said Hung just told me and the said Sin need not to be so worry and frightened.
	52.	On that occasion, the said Kong told the said Hung that he needed sometime to settle his trading debts as he could not afford the very substantial sum indebted to the Plaintiff.
	53.	The said Hung then told the said Kong that it would be better for the latter to settle his trading debts otherwise I and the said Sin Would be in trouble.  Thereafter, the said Hung left.
	54.	I, the said Sin and the said Kong remained in the office and, after the departure of the said Hung, the said Kong told me and the said Sin that we should not be worry about the matter as he would shoulder all responsibility of his trading.
	55.	I believed in the said Kong and, hence, both I and the said Sin left the matter in the hands of the said Kong.
	56.	On 24th  November 1998, the said Kong wrote a note to me acknowledging his liability for the trading in the trading account registered in the name of myself.  It is produced and shown to me exhibit marked “CPF-28” a true copy of the said note.”

The note she refers to at paragraph 56 I reproduce below:

“	This letter serves to confirm that the securities trading account (No: 105780) opened with C.A. Pacific Securities Limited under the name of Chan Pui Fan (HKIC No: C452683) on November 28, 1997 is for other person’s purpose and she is not the ultimate beneficiary.  The initial fund of HK$5,000,000.00 deposited into Ms Chan’s account was arranged by and from other person nothing to do with and not borrowed by Ms Chan.  The said securities trading account and all the transactions effected under therein were not instructed or operated by Ms Chan and the fund movement in the securities trading account was effected without the prior instruction, knowledge or consent of Ms Chan.  I hereby also agree to take up all the debt or liability arising in or derived from this trading account.
	(Signature)	(Signature)
	Chan Pui Fan	Kong Yick Ming
	Date:   24.11.98	Date:  24th November, 1998 ”

This document was stamped according to a franked imprint on 25 November 1998.

23.  That being the proposed evidence to be adduced, of course for the first time, I heard from Mr Au for the plaintiff who opposed its introduction.  His primary ground in opposition was that this was a defence not hitherto raised by the defendant before, was materially different, and that her explanation that she was advised not to rely on the merits but pursue her defence on procedural grounds was not plausible.  In the event, I allowed in the affidavit upon the basis that if I did not, there was nothing to warrant overturning the Master’s entry of final judgment, which would stand without the defendant having had the opportunity to raise an arguable defence on the merits.

24.  Before I deal with the response to this affidavit filed on behalf of the plaintiff, it is worth noting that there are several matters adduced in this affidavit which do not sit comfortably with that previously put forward by her in evidence, to support her earlier application to strike out the claim.  The first was that in her earlier evidence she stated that it was Hung who had approached her and proposed her that she open a share trading account, and that it was her understanding after the account was opened that any transaction should only be carried out according to her confirmed instruction.  This does not accord with the introduction by Mr Liu as now asserted, nor that the assignment was to be on the basis that Kong did the trading not her. The second was that she stated earlier that she only came to realize that there was an outstanding balance when she received the 15 January letter; this contrary to her more recently sworn evidence that she had received statements.  The third is that having received the letter demand, she said ‘I tried to find Mr Hung but failed to locate him’.  This of course disregards the meeting with Kong and Hung which surely she could not have forgotten about.  The fourth is that in an additional affidavit not before the Master but now before me, she stated that having received a notice from the liquidators that indicated she was to be chased to meet the trading deficit she took steps, sometime in 2003, as I repeat:

“

3.

I refer to paragraph 35 of the Second Affirmation of John Dennis Roden dated the 4th day of February 2005.  I recalled that I did call the liquidator’s office in 2003.  I can recall roughly that I spoke to a female and I asked if the matter could be settled.  The exact conversation I could not recall.  The reason I called the liquidator’s office was that although I did not agree the claim of the liquidator because I had not given instructions to Mr. Hung or any staff of the Plaintiff to trade.  I wanted to know if there was a chance of settlement by a small sum to avoid the dispute to be dragged on legal action as I could not locate Mr. Hung.  At that time I did not have the benefit of any legal advice when I did so.”

What one would have thought would follow naturally would be for her to complain that she was the victim of an arrangement made between Hung for the plaintiff and her boss Kong; yet nothing was said.

25.  The response by affidavit came from Mr Roden.  He said that the records of the liquidators revealed no indication that the defendant’s account was being utilised by Kong or any other.  And he observed that no such matter had been raised by the defendant; in particular, when she sought to negotiate a discounted settlement.

Discussion

26.  Mr Au submitted that whatever arrangement there might have been in which the defendant purported to represent Kong, whilst not accepted by the liquidators, was not a matter which went to the defendant’s liability to the plaintiff under the documents she had committed to.  On the matter of not having instructed the individual trades, this was covered by her evidence at paragraph 21 of her affidavit (reproduced at my paragraph 16).  The guarantee and notice purportedly made by Kong, if genuine, were together conclusive proof that the parties knew of the defendant’s liability to the plaintiff.  The plaintiff had at no stage by conduct or otherwise waived that liability.  If there was the conversation at the meeting she deposed to (see paragraphs 51 to 53 of her affidavit, paragraph 22 herein), it served to confirm her liability.  That said, he invited me to treat with incredulity the recent emergence in the defendant’s account of the involvement of Kong, notwithstanding countless earlier opportunities for her to raise that.

27.  He further submitted that I should treat the differing accounts in the defendant’s affidavits as indicating a desperate attempt to avoid the inevitable.

28.  I asked him to address me on the issue of the timing of the account being opened.  He did not want to concede that the necessary mandates were not signed and delivered before the afternoon of 28 November.  But even on the defendant’s case that she completed these on that day does not, as he submitted, allow her to escape liability for earlier trading.  As explained by Mr Roden, the terms of settlement were as is usual T+2, that is the obligation to pay for the shares bought fell on the second day after the commitment; thus settlement was due at the earliest on 1 December, well after the mandate documents had been signed and delivered.  And there was an attempt to cover the cost albeit with insufficient funds, on 1 December.

29.  He submitted that the defendant had not shown that there were triable issues; thus summary judgment should be confirmed.

My Findings

30.  Mr Au was right to point out the material differences in the defendant’s adduced evidence so as to indicate that at best her recall could not be relied on.  It was also pertinent that the introduction of Kong was very lately produced.  But matters of credibility and reliability are matters for trial after live evidence has been tested in cross-examination and weighed against other evidence.

31.  My primary concern, however, goes to the timing of the defendant’s application for a trading account and credit facilities.

32.  What is or may be true is that she was the public face behind which Kong engaged in irregular trading.  Her assertions are backed by the extent of trading and indebtedness, the receipt from an outside source of $10 million and the production of the guarantee and the stamped notice.

33.  Furthermore, her assertion that she signed the application to trade and other forms on 28 November is also backed.  She kept copies, most of which were dated.  She said she signed them all at the same time and that is most likely; certainly it is not disputed.  Mr Roden stated this was, ‘on or about 28 November’; not an exact assertion, but certainly one which points to that date.  Taking that as prospectively correct, it means that allowing for delivery and processing, the account that the defendant applied to have opened could not have been opened before some time late on 28 November.  But of course there was significant trading on the day before and, at some stage on 28 November, the unsecured commitment had risen to more than $9.5 million (see the bundle of exhibits p. 194).  Mr Au submitted that this was a culmination of debts not due until early December.  But that does not mask the fact that there was trading and commitment upon the days of the trading; and the evidence points to this having been before the application to open the account had been received let alone processed.

34.  What this leads to is that there may have been trading by Kong, possibly orchestrated by Hung, for which the defendant should not be liable given that it would have been undertaken before her applications to trade had been approved and the commitment made.  This, it seems to me, is enough to warrant the matter going to trial.

The Conclusion

35.  The Master’s decision to order final judgment was correct on what was before him, as has been conceded by the defendant.  But on the new evidence, there are, as I have found, triable issues.  In the circumstances, I allow the appeal and give the defendant leave unconditionally to defend.

36.  As conceded by the defendant, the order for costs against her made by the Master shall stand.  As for the costs before me and incidental: these shall be nisi at first instance.  Given the circumstances of the case and subject to argument, I order them to be in the cause.  For the assistance of counsel I refer them to the White Book, paras. 14/7/13 and 14/7/18.