FAST TRACK HOLDINGS LTD v. BOCI SECURITIES LTD AND OTHERS

HCA 2480/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2480 OF 2016

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D E C I S I O N

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INTRODUCTION

1. I have before me the plaintiff’s summons dated 26 September 2016 (“the Summons”) seeking a continuation of an ex parte injunction originally granted by Deputy High Court Judge Wilson Chan on 26 September 2016 which was subsequently varied by the learned Deputy Judge on 27 January 2016.  As will be seen below, the issue that I have to decide is whether the 1^st defendant should be restrained from debiting the plaintiff’s account for an amount equivalent to the price of certain shares (plus some incidental fees and charges) which the plaintiff says were purchased by some unknown person(s) who fraudulently gained online access to the plaintiff’s securities account with the defendant and placed orders for the purchase of those shares without its authority.

Background facts

2. The plaintiff is a company incorporated in Hong Kong in 2008, and is engaged in (inter alia) the trading of securities, options and futures contracts, and investment holding.

3. The 1^st defendant is a company incorporated in Hong Kong in 1983 and is wholly-owned and managed by BOC International Holdings Limited, itself a wholly-owned subsidiary of the Bank of China.  It is a corporation licensed to carry on, inter alia, Type 1 (Dealing in Securities) regulated activities under the Securities and Futures Ordinance (Cap 571), and also an Exchange Participant of The Stock Exchange of Hong Kong Limited and Hong Kong Futures Exchange Limited.

4. On 14 December 2010, the plaintiff opened a securities account with account number 1000920-2000 (“the Account”) with the 1^st defendant.  With the use of a specified user ID and password, the plaintiff can gain online access to the Account for the purpose of carrying out transactions for the sale and purchase of securities.  According to the plaintiff, there are only three persons in the company who are authorised to access and operate the Account and conduct online securities transactions through the Account.

5. The relationship between the plaintiff and the 1^st defendant is governed by a customer agreement signed by the plaintiff on 14 December 2010, which was later revised on 23 May 2016 (“the Revised Customer Agreement”).

6. On 23 September 2016 (Friday), between 14:40 and 15:22, a person or persons (descried in the writ as the 3^rd defendant) logged onto the Account using the specified user ID and password, and between 15:03 and 15:21 entered into a series of transactions (“the Transactions”) for the purchase of a total of 49,200,000 shares (“the Shares”) in Pa Shun Pharmaceutical International Holdings Limited (Stock Code 574) at the average unit price of HK$0.7636 per share through the Account.  A total of 76 brokers (“the 76 Intermediaries”) acted for the sellers of the Shares (descried in the writ as the 2^nd defendant) in the Transactions.

7. The total amount required for the settlement of the Transactions was approximately HK$37,685,202.06 (including broker’s commission, transaction levy, stamp duty and trading fees) (“the Settlement Sum”).  As at 23 September 2016, prior to the settlement of the Transactions, the cash balance in the Account amounted to the Hong Kong dollar equivalent of about HK$37,853,880.35.

8. On 23 September 2016, at around 16:24, the plaintiff was first alerted by the 1^st defendant of the Transactions.  The plaintiff then carried out some internal investigation, and at around 16:47 on the same day informed the 1^st defendant that the Transactions were unauthorised.  The 1^st defendant also conducted its own internal investigation in respect of its online trading system and infrastructure on the same day, but did not find any unusual activity or evidence of unauthorised access by viruses or otherwise in relation to the Account, nor any sign of any unauthorised access or improper infiltration into the system.

9. It is the plaintiff’s case that the Transactions were unauthorised and were carried out fraudulently by a “hacker” who somehow gained access to the Account through the 1^st defendant’s online banking system.  In particular, the plaintiff refers to the fact that the records of the 1^st defendant’s online trading system show that the person(s) who logged onto the Account between 14:40 and 15:22 on 23 September 2016 did so from a device with an internet protocol address (183.179.239.110) different from the internet protocol address(es) of the device(s) normally used by the plaintiff to access the Account.

10. For the purpose of this decision, I shall proceed on the assumption that the Transactions were carried out by person(s) who was/were not connected with the plaintiff, or without the plaintiff’s authority.  In this regard, it does not matter whether a person who, without the plaintiff’s authority, used the plaintiff’s user ID and password to gain access to the Account through the 1^st defendant’s online trading system can properly be described as a “hacker”.  The question of whether the Transactions are binding as between the plaintiff and the 1^st defendant is a separate matter which I shall consider further below.

11. In the afternoon of 26 September 2016 (Monday), the plaintiff applied for and obtained an ex parte injunction (“the Ex Parte Order”) from Deputy High Court Judge Wilson Chan who made, inter alia, the following orders:-

(1) the completion and settlement of the Transactions in the Account through the 76 Intermediaries be withheld and/or suspended until further order of the court (paragraph 1 of the Ex Parte Order);

(2) the defendants shall take all necessary steps to procure that no money in the Account shall be transferred or disposed of for the purposes of making any settlement of the Transactions, or for paying any commission, transaction levy, stamp duty or trading fee in relation to the Transactions, or for any other fees, expenses or any other purposes in relation to the Transactions (paragraph 2 of the Ex Parte Order); and

(3) the defendants shall take all necessary steps to prevent and avoid the completion of, and settlement of payment for, the Transactions (paragraph 3 of the Ex Parte Order).

12. In addition, the learned Deputy Judge granted an injunction/preservation order in the event that the settlement of or payment for the Transactions had already taken place (paragraph 4 of the Ex Parte Order).

13. On 26 September 2016 at about 4:56 pm, the plaintiff’s solicitors served a copy of the Ex Parte Order on Hong Kong Securities Clearing Company Limited (“the Clearing Company”).  According to the 1^st affirmation of Tai Chi Kin, the Chief Executive of the Clearing Company, dated 27 September 2016:-

(1) The Clearing Company operates CCASS, the Central Clearing and Settlement System for the clearing and settlement of securities traded on The Stock Exchange of Hong Kong Limited (“the Stock Exchange”).

(2) Listed securities transactions in Hong Kong are settled two business days after the trade day (ie T + 2), which means that the Transactions would, in the ordinary course of events, be settled on 27 September 2016.

(3) The mechanism for settlement of trades in listed securities in Hong Kong concluded on the Stock Exchange is that the Clearing Company would be interposed as the central counterparty which contracts separately with each of the selling brokers (or their clearing participants) and the buying brokers (or their clearing participants).  Each trade is broken down and replaced by two market contracts through “novation”:

(a) one between the selling CCASS participant and the Clearing Company as buyer, as principals to such contract; and

(b) another between the buying CCASS participant and the Clearing Company as seller, as principals to such contract.

(4) The Clearing Company is so interposed to ensure market stability by protecting against failed trades through broker failure.

(5) In the present case and in the usual course of events, the Clearing Company would on 27 September 2016, based on the netted positions on its records:-

(a) effect debit or credit entries (as the case may be) to the 76 selling brokers’ CCASS stock accounts and pay for the Shares (as may be netted); and

(b) effect debit or credit entries (as the case may be) to the 1^st defendant’s CCASS stock account and obtain payment for the Shares from the 1^st defendant as buying broker (as may be netted).

(6) It was not possible or practicable for the Clearing Company to take steps to prevent its settlement with the 76 Intermediaries because, by the time that the Clearing Company was served with the Ex Parte Order, settlement with the 76 Intermediaries had already been significantly underway for more than 1 day and because settlement between the Clearing Company and brokers was effected on a net day‑end and continuous basis rather than on a transaction-specific basis.  On the other hand, the Clearing Company had suspended settlement of the Transactions with the 1^st defendant by withholding the processes for delivering the Shares to the 1^st defendant and obtaining in return the money for the purchase of the Shares.

(7) The effect of the Ex Parte Order was that the Clearing Company had assumed the risk of the settlement of the Transactions by paying and settling with the 76 Intermediaries but not itself delivering the Shares and obtaining actual payment form the 1^st defendant on the other side of the Transactions.

14. On 27 September 2016, the Clearing Company made an urgent application, with notice to the plaintiff, to the learned Deputy Judge for a variation of the Ex Parte Order to validate the steps already taken as against the selling brokers and to permit it to obtain payment from the 1^st defendant in return for delivery of the Shares.

15. After hearing solicitors for the Clearing Company and leading counsel for the plaintiff, the learned Deputy Judge made an order (“the Variation Order”):-

(1) permitting:

(a) the Clearing Company, the 2^nd defendant and the 76 Intermediaries to proceed to effect the completion and settlement of the Transactions as between the Clearing Company and each of the 76 Intermediaries; and

(b) the Clearing Company and the 1^st defendant to proceed to effect the completion and settlement of the Transactions as between them; and

(2) deleting the entirety of paragraph 4 (including the heading immediately above it) of the Ex Parte Order.

16. It is also expressly provided, in the Variation Order, that any completion or settlement of the Transactions “shall not, as between the Plaintiff and the 1^st Defendant, be attributed to the Plaintiff, and the 1^st Defendant shall not make use, apply or otherwise make use of or debit the Plaintiff’s funds, money and credit balance in the Account for the purpose of the said completion or settlement”.

17. Pursuant to the Variation Order, the settlement of the Transactions as between the Clearing Company and the 1^st defendant took place on 27 September 2016.

18. In view of the Ex Parte Order (as varied), the 1^st defendant had to use its own house funds to settle the Transactions with the Clearing Company.  In the first affirmation of Chan Kin On, the Chief Operating Officer of the Private Bank Division of the 1^st defendant, it is stated that the 1^st defendant has thereby been deprived of the use of its house funds in the value of the Transactions, and this has had the detrimental effect of decreasing the 1^st defendant’s liquidity ratio and lowering the regulatory cap on how much business could be undertaken.  This, it is said, is prejudicial to the 1^st defendant’s operations.

19. On 28 September 2016, the plaintiff sent an email to the 1^st defendant seeking to transfer stocks or withdraw cash from the Account and another account that it held with the 1^st defendant in the Hong Kong dollar equivalent sum of approximately HK$46,106,142.78 in total.  The 1^st defendant responded on 29 September 2016 stating that it would be withholding a sum equivalent to the value of the Transactions pursuant to Clause 30.01 of Section A of the Revised Customer Agreement, so as to preserve the status quo of the Account.

20. The plaintiff’s inter partes summons for the continuation of the Ex Parte Order came before me on 30 September 2016.  The plaintiff did not seek to continue the Ex Parte Order as against the 2^nd defendant (in view of the variation obtained by the Clearing Company on 27 September 2016), but sought a continuation of the injunction against the 1^st defendant. The 1^st defendant objected to the plaintiff’s application, on the following grounds:-

(1) the 1^st defendant is not liable to the plaintiff for any loss which it may suffer resulting from the allegedly unauthorised Transactions by reason of Clauses 15.2 and 15.3 of the Revised Customer Agreement;

(2) damages would be an adequate remedy for the plaintiff;

(3) the balance of convenience is against the continuation of the injunction; and

(4) material non-disclosure.

1^ST DEFENDANT’S LIABILITY TO PLAINTIFF

21. The 1^st defendant relies on Clauses 15.2 and 15.3 of the Revised Customer Agreement.  Clause 15.2 (Mode of Instructions) provides as follows:

“You or an Authorized Person or any other duly authorized third party or any other person purporting to be you or an Authorized Person shall from time to time give instructions, either electronically, verbally, by telephone or facsimile transmission or in writing, or in such manner or pursuant to the arrangements as may be from time to time mutually agreed between the parties and accepted by us …”

22. Clause 15.3 states as follows:-

“Instructions deemed valid and binding

We [the 1^st defendant] are authorized to act on and treat as valid any instructions given by you or any Authorised Person or any other duly authorized third party or any other person purportingto be you or an Authorized Person in the manner specified in Clause 15.2 above, without any further inquiry on our part as to the authority or identity of the person purporting to give such instructions, or its authenticity … regardless of the prevailing circumstances or the nature of the instructions and notwithstanding any error, misunderstanding, fraud, forgery or lack of clarity in the terms of such instructions. We do not accept any responsibility for unauthorized, misuse and/or fraudulent use of the Account(s) unless the same arose directly from the gross negligence, wilful default or fraud of our directors, employees or officers (“Management”)” [underlining added].

23. On the face of these provisions, it would appear that the 1^st defendant is entitled to treat the orders placed online by the 3^rd defendant for the purchase of the Shares through the Account as authorized and valid instructions given by the plaintiff, notwithstanding the fraudulent nature of the Transactions.  On the other hand, Mr Clifford Smith SC (for the plaintiff) submitted that some limit must be placed on the words in Clause 15.3, in particular those underlined above (ie, “any other person purporting to be you or an Authorized Person”), such that the plaintiff would not be bound by the fraudulent Transactions.  Mr Smith recognized, nevertheless, that this would be a moot point and depend on the proper construction of Clause 15.3.

24. Mr Smith further relied on the observation of Denning LJ (as he then was) in Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712 that “[f]raud unravels everything”.  However, that statement of Denning LJ must, as pointed out by Mr Eugene Fung SC (for the 1^st defendant) be read in its proper context.  What was said by Denning LJ was as follows:

“But the landlords argued before us that the declaration cannot be challenged in the civil courts at all even though it was false and fraudulent; and that the landlords can recover and keep the increased rent even though it was obtained by fraud. If this argument is correct, the landlords would profit greatly from their fraud. The increase in rent would pay the fine many times over. I cannot accede to this argument for a moment. No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever …”

25. In other words, Denning LJ’s observation that “[f]raud unravels everything” was directed at the fraudulent party.  In the present case, it has not been suggested that the 1^st defendant is a party to any fraud. 

26. It seems to me that, in the circumstances of this case, the questions of (i) whether the 1^st defendant is entitled to treat the orders placed online by the 3^rd defendant for the purchase of the Shares through the Account as authorized and valid instructions given by the plaintiff, and (ii) whether the Transactions are binding on the plaintiff (as between the 1^st defendant and the plaintiff), are ultimately matters of contract between them.

27. I accept, nevertheless, that the true meaning and effect of Clause 15.3 of the Revised Customer Agreement is moot.  For the purpose of this decision, I am prepared to hold, in favour of the plaintiff, that there is a “serious issue to be tried” on whether the 1^st defendant can rely upon Clause 15.3 as a full answer to the plaintiff’s claim.

ADEQUACY OF DAMAGES AND BALANCE OF CONVENIENCE

28. I can deal with these matters together.  Unlike the position before the learned Deputy Judge, the Transactions have now been settled and completed (i) as between the 76 Intermediaries as selling brokers and the Clearing Company as buyer, and (ii) as between the Clearing Company as seller and the 1^st defendant as buying broker.

29. As between the 1^st defendant and the plaintiff, the question to be determined at the trial of this action will be whether the 1^st defendant can recoup the Settlement Sum from the plaintiff’s Account.  At this interlocutory stage, the question between the 1^st defendant and the plaintiff is whether the 1^st defendant should be permitted to debit the plaintiff’s Account for the amount of the Settlement Sum pending the trial of this action:-

(1)  If the 1^st defendant’s defence should ultimately succeed at the trial, obviously it ought to be entitled to debit the plaintiff’s Account for the Settlement Sum.

(2)  On the other hand, if the defendant is now permitted to debit the plaintiff’s Account for the amount of the Settlement Sum, the relevant debit entry can easily be reversed should the plaintiff ultimately prevail at the trial.

30. It does not seem to me that the plaintiff would, in any event, be able to withdraw the Settlement Sum from the Account prior to the conclusion of the trial.  The plaintiff has not suggested otherwise.

31. I consider it to be clear that damages would be an adequate remedy for the plaintiff, there being no suggestion that the 1^st defendant would have any difficulty in paying damages properly due to the plaintiff or permitting the plaintiff to withdraw the Settlement Sum from the Account after the relevant debit entry has been reversed in the event that the plaintiff should ultimately succeed at the trial.

32. On behalf of the plaintiff, it is submitted that its position would somehow be weakened if the 1^st defendant is now permitted to debit the Account for the amount of the Settlement Sum because, it is said, once the Account has been debited, the nature of the plaintiff’s claims, including a proprietary claim, against the 1^st defendant would be fundamentally changed and the plaintiff would suffer serious prejudice if the current injunction is discharged (or not continued).  As I understand it from Mr Smith, the argument is that the plaintiff’s claim, based on fraud, would not be affected by any contractual defence that may be raised by the 1^st defendant provided that the amount of the Settlement Sum remains in the Account.  However (according to Mr Smith), once that amount is debited from the Account, the defendant would (or may) be entitled to rely on the contractual provisions (including Clause 15.3 of the Revised Customer Agreement) and the plaintiff will become embroiled in an argument with the 1^st defendant as regards the meaning and effect of the contractual provisions.

33. I am unable to accept this argument.  In particular, I am unable to see how the validity of the 1^st defendant’s defence based on the contractual provisions in the Revised Customer Agreement can be dependent on whether the Account has or has not been debited for the amount of the Settlement Sum.  Putting the matter slightly differently, I cannot see how the plaintiff’s position would be weakened, or the 1^st defendant’s position strengthened, by the 1^st defendant’s debiting of the Account for the amount of the Settlement Sum carried out with full notice of the plaintiff’s claim.  In my view, it is clear that the plaintiff can derive no real or practical benefit from the continuation of the Ex Parte Order (as varied) against the 1^st defendant.

34. On the other hand, the 1^st defendant’s evidence, as earlier mentioned, is that the 1^st defendant has been compelled to use its house funds to settle the Transactions with the Clearing Company, with the detrimental consequence of decreasing the 1^st defendant’s liquidity ratio and lowering the regulatory cap on how much business could be undertaken.  I accept that the continuation of the injunction would be prejudicial to the 1^st defendant’s operations.

35. Overall, I consider it to be clear that damages would be an adequate remedy for the plaintiff, and that the balance of convenience strongly favours the non-continuation of the Ex Parte Order against the 1^st defendant. Having reached these conclusions, it is not necessary for me to consider the complaint of material non-disclosure.  I may add that although the issue of material non-disclosure was briefly mentioned in the skeleton submissions of Mr Fung, it was not further developed in his oral submissions.

DISPOSITION

36. For the foregoing reasons, I dismiss the Summons.  I also make an order nisi that the plaintiff shall pay the 1^st defendant’s costs of the Summons, including the costs (if any) incurred by the 1^st defendant arising out of the Ex Parte Order and the Variation Order, to be taxed if not agreed, with certificate for 2 counsel.

37. At the conclusion of the hearing, I made an order that the Ex Parte Order as against the 1^st defendant was to continue pending the court’s decision on the Summons.  The Ex Parte Order shall cease to have effect upon the handing down of this decision.

38. After the conclusion of the hearing, the plaintiff’s solicitors wrote a letter to the court dated 4 October 2016.  In that letter, the plaintiff’s solicitors stated, inter alia, that “the Plaintiff is seriously considering applying for leave to appeal in the unfortunate event that the Current Injunction Order is discharged” and asked the court to “give directions to the effect the Current Injunction Order shall remain in force in the interim pending the determination of the Plaintiff’s application for leave to appeal”. This letter was responded to by a letter also dated 4 October 2016 from the defendant’s solicitors.  Since I do not see what prejudice the plaintiff will suffer from the non-continuation of the Ex Parte Order, I am not prepared to give the direction sought by the plaintiff’s solicitors.  The plaintiff is, of course, at liberty to pursue whatever application it considers to be necessary or appropriate in the light of this decision.

39. Lastly, it remains for me to thank counsel for the assistance that they have rendered to the court.