C.A. PACIFIC FINANCE LTD (IN LIQUIDATION) v. TSUI YUN BUN BARRY

HCA 632/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 632 OF 2005

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J U D G M E N T

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I.   INTRODUCTION

1.  C A Pacific Finance (CAPF) (acting through its liquidators) claims $661,345.14 said to be due from Mr. Tsui under a margin trading account.  Mr. Tsui opened the account in September 1996.  He used the account to trade in shares and warrants between September 1996 and January 1998.  On 19 January 2008 a petition to wind up CAPF was presented and CAPF ceased business from then.

2.  The sum claimed comprises an alleged principal debt of $332,142.49 and interest of $329,202.65.  The interest has been calculated as simple interest at prime + 3% from 19 January 1998 to 31 January 2008. 

3.  Mr. Tsui denies that any amount remains due to CAPF under the facility. 

4.  Mr. Tsui further observes that the account opening forms for the facility did not comply with requirements of the Money Lenders Ordinance (Cap.163) (MLO) as the statute stood at the relevant time.  He argues that in consequence, whether or not the account was in debit when he ceased to use it, the Court should not allow CAPF to recover any amount.

5.  Finally, Mr. Tsui was a registered dealer’s representative for C A Pacific Securities (CAPS).  The latter was a related company to CAPF, both being within the C A Pacific Group.  As a dealer working for CAPS, Mr. Tsui earned commission from trades which his clients carried out through the Group.  Mr. Tsui claims to set off commission of $1.864 million (covering a period up to September 1997) against whatever amount may be found to be due under the facility.  It is Mr. Tsui’s contention that the commission remains outstanding.  But CAPF says that on the available evidence such commission was either paid by CAPS to Mr. Tsui or to his instruction long ago.  CAPS is now also in liquidation.

II.  DISCUSSION

A.  What was the principal sum due?

6.  There can be no doubt that as at 19 January 1998 Mr. Tsui’s margin account stood in deficit.  Mr. Tsui accepted as much in cross-examination.  But how much did Mr. Tsui actually owe CAPF on that date?

7.  On the face of the last statement prepared for the account in January 1998, Mr. Tsui owed CAPF the sum of $629,225.13.  Against this, the Group held security in the form of shares and warrants belonging to Mr. Tsui (more specifically: 70,000 Grand Ori 2005 warrants; 276,000 CIG-WH Int’l shares; and 2 million ITC Corp 1998 warrants).  The shares and warrants were worth about $321,940 on 19 January 1998.

8.  CAPF accepts that the figure of $629,225.13 is wrong.  That sum was calculated on the basis that CAPF was entitled to charge compound interest on monies due under the account from time to time.  Under the MLO as it then was, CAPF was not entitled to charge compound interest.  Accordingly, re-doing the account using simple interest and the rate of prime + 3% (the rate which CAPF was then charging Mr. Tsui), CAPF says that as at 19 January 1998 Mr. Tsui owed a principal sum of $552,480.50 and interest of $3,810.60.

9.  CAPF also accepts that it must give credit for the shares and warrants held by the Group as security for Mr. Tsui’s margin facility.  But, on that premise, one runs into a problem.

10.  Soon after CAPF and other companies in the Group went into liquidation, the liquidators discovered that the shares and warrants actually acquired by the Group through CCASS did not match the numbers of shares and warrants which according to the Group’s records ought to have been held.  The former was much less than the latter.  CCASS (that is, the Central Clearing and Settlement System) is the computerised book-entry system whereby unnumbered share certificates are lodged with a central depositary.

11.  This situation meant that the shares and warrants actually held by the Group through CCASS had to be allocated among the Group’s numerous clients, including Mr. Tsui.  In the end, on about 30 April 2004 Mr. Tsui was credited with the sale proceeds from an allocation of 1,326 CIG-WH Int’l shares ($160.44); 68,241 Grand Ori 2005 warrants ($682.41); and 0 ITC Corp 1998 warrants ($0).  Net of processing fees, the credit which Mr. Tsui obtained from the allocated shares and warrants was $598.81.

12.  It will be noticed that Mr. Tsui was allocated significantly fewer shares than what the Group ought to have been holding for him.  I will refer to the outstanding balance of shares and warrants which CAPF ought to have been holding for Mr. Tsui as “the unallocated shares”.  For the purposes of these proceedings, CAPF has considered it fair to credit Mr. Tsui with the value of the unallocated shares as at 19 January 1998 ($219,739.20).

13.  Taking the principal sum of $552,480.50 mentioned earlier and giving Mr. Tsui the benefit of $598.81 for the allocated shares and $219,739.20 for the unallocated shares, one arrives at a revised principal amount of $332,142.49.  This (CAPF says) is the outstanding principal due from Mr. Tsui.

14.  I am unable to accept the entirety of CAPF’s calculation of principal.

15.  It does not seem fair to me to credit Mr. Tsui with the value of the unallocated shares as at 19 January 1998, but with only the value of the allocated shares as at 30 April 2004.  I think that the value of both unallocated and allocated shares as at 19 January 1998 should be credited to Mr. Tsui’s account.

16.  Mr. Tsui’s evidence was that, but for CAPF and CAPS ceasing to operate, he would have given instructions to liquidate his shares and warrants so as to reduce his debt.  However, CAPF and CAPS suddenly closed down and eventually went into liquidation.  There was (Mr. Tsui complains) no one within CAPF who was in a position to receive and process any instructions given by Mr. Tsui on or around 19 January 1998.

17.  As I have mentioned, it was found in the course of liquidation that the Group had been badly managed, such that (among other things) securities actually held by the Group were substantially fewer than ought to have been the case on the face of the Group’s records.  It took many years for the liquidators to unravel the messy situation which they uncovered.  By that time, such securities as were allocated to Mr. Tsui had either significantly diminished in value or (in the case of the 1998 warrants) become worthless.

18.  There are numerous cases affirming that a secured creditor (such as a mortgagee) owes no duty to a debtor to realise a security at any given time.  If and when the secured creditor decides to realise a security, he may have a duty to take practical steps to ensure that the asset is disposed of at a reasonable price.  There is no suggestion here that, when the liquidators sold off Mr. Tsui’s allocated shares, they obtained anything other than the market price for the same.

19.  But this is a different situation from the ordinary case of a secured creditor disposing of a debtor’s asset to cover a loan.  Here the Group (including CAPF) was badly mismanaged.  Its accounting records were wrong or misleading.  The Group was simply in no position to realise any assets which it ostensibly held as security.  It was necessary (with the assistance of several Court applications) to take time to work out how to allocate the reduced number of shares and warrants which the Group held among the Group’s many clients.

20.  In those premises, it would be wrong to allow CAPF to take advantage of its own serious wrongdoing and claim from Mr. Tsui on the basis of the significantly reduced value fetched by his allocated shares.  That would in effect place the burden of the Group’s mismanagement on Mr. Tsui.  He would be “insuring” CAPF against the devastating consequences of CAPF’s own wrongdoing.

21.  If the Group had kept proper accounts and been properly run, the allocated shares could surely have been sold earlier, possibly at some time closer to 19 January 2008.  There would most likely have been someone who could take Mr. Tsui’s instruction (if any) and liquidate the shares and warrants accordingly.  In the normal course of events, if everything had been managed correctly, it would not have been necessary to lose years in working out and conducting an allocation exercise.  It is likely then that the shares and warrants (especially the 1998 warrants) could have fetched a higher value.

22.  In my judgment, as a rough-and-ready means of achieving fairness, Mr. Tsui should therefore be credited with the value of the unallocated and allocated shares as at 19 January 1998.  This would yield an outstanding principal amount of  $230,540.50 (that is, $552,480.50 - $321,940) as at 19 January 1998.

B.  What effect does the MLO have?

23.  There remains the question of how much (if any) interest should run on the principal amount just re-calculated.  Before answering this question, I need to consider the effect of the MLO as it was in 1996.

24.  At that time, MLO s.18 required certain details to be stated in an account opening statement for a margin facility.  Those details included: the name and address of the lender; the principal amount being loaned; the date of the facility agreement; the date of the actual loan; the date of repayment; the rate of interest being charged per annum; and a declaration of the place of negotiation and completion of the loan agreement. 

25.  It will be observed that most of the requisite details are not in fact easily provided where a margin account is involved.  Under such facility, credit is given from time to time depending on the market value of shares, warrants or other instruments deposited with the moneylender as security.  The market values of the deposited instruments will fluctuate.  The margin or credit provided will then vary with those fluctuations.  The result is that it may not be possible at a given time to say precisely how much is being loaned.  No doubt it was for this reason that the MLO was amended in 2002 to exempt from its ambit corporations licensed under the Securities and Futures Ordinance (Cap.571) which provide margin financing.

26.  Nonetheless, CAPF accepts that its account opening forms in 1996 did not comply with MLO s.18 and that the MLO then applied to CAPF.

27.  CAPF instead relies on MLO s.18(3) in answer to Mr. Tsui.  That gives the Court a discretion to enforce a moneylending agreement if it is “satisfied that in all the circumstances it would be inequitable that any such agreement ... should be held not to be enforceable”.  The Court may exercise this discretion “subject to such modifications or exceptions, as the Court considers equitable.”

28.  CAPF invites me to exercise my discretion in its favour and enforce the relevant margin facility agreement against Mr. Tsui.  In this connection, CAPF points out that Mr. Tsui was a professional investor.  He knew how a margin account worked.  On Mr. Tsui’s own evidence in cross-examination, he would have entered into the margin arrangement in any event, even if the requisite details had been provided in the account opening form.

29.  In my view, for the reasons just mentioned, it would be inequitable not to enforce the agreement as far as principal amount is concerned.  Plainly, Mr. Tsui realised and understood at the time what a margin facility was and how it operated.  Before opening the account with CAPF, Mr. Tsui had by his own admission traded through shell companies (such as Safe Margin Forex Co. Ltd. and Safe Margin Bullion Ltd.) in foreign exchange and gold using margin financing.  I do not think that non-inclusion of the details specified in MLO s.18 would have made any difference to Mr. Tsui’s decision to open a margin account with CAPF.

30.  But, insofar as interest is concerned, I do not think that it would be right to exercise my discretion to allow the interest (prime + 3%) claimed by CAPF.

31.  The margin facility agreement on its face entitled CAPF to charge “such rate or rates as may be stipulated or laid down by [CAPF] at [CAPF’s] sole discretion form time to time (as well after as before any judgment)”.  It is unclear whether this provision (which only appears in English on the account opening agreement) was drawn to Mr. Tsui’s attention or explained to him in Cantonese.  There is no evidence that it was and most likely it was not.  Mr. Tsui only understands a little English.

32.  Despite the apparently unfettered discretion given to CAPF by the interest provision, I do not think that the agreement entitles CAPF to charge whatever interest it might like.  For example, any interest rate charged must not be extortionate or otherwise contrary to the law.  The interest rate cannot constitute a penalty.  Self-evidently, the interest provision in the margin agreement must be subject to an implied term that CAPF is to exercise the discretion conferred reasonably.

33.  If I am to enforce the agreement as a matter of discretion to the extent of allowing interest to be charged at prime + 3%, I must be satisfied that there is a reasonable basis for so doing.  I say this bearing in mind that the rate contended by CAPF is higher than the prime + 1% which the Court normally awards in commercial cases.

34.  However, I have not been provided with evidence justifying such higher rate.  All that CAPF can point me to is the fact that, according to the statements of account which CAPF was sending to Mr. Tsui between 1996 and 1998, CAPF was charging compound interest at prime + 3% or even prime + 3.5%.  I do not regard such evidence as by itself establishing that prime + 3% is reasonable in all the circumstances.  The bare fact that such was the rate which CAPF was purporting to charge is an insufficient basis on which I can exercise the discretion conferred by MLO s.18 as far as interest is concerned.

35.  I should therefore only allow interest at the usual commercial rate awarded by this Court.  That is prime + 1%.

36.  There is a further consideration.

37.  The interest claimed is for a period of over 10 years, that is, from 19 January 1998 to the present.  The interest may thus easily more than equal the principal at stake.  Mr. Tsui protests that it is inequitable for CAPF to claim interest over all the many years that have passed before its claim has come to trial.

38.  It seems to me that there is some force in Mr. Tsui’s objection.

39.  It is true (as CAPF observes) that Mr. Tsui could at an early stage have paid such lesser amount as he believed that CAPF might be entitled to receive.  Mr. Tsui never did so.

40.  However, a moneylender in CAPF’s position ought at any given moment to know what a client’s net position is.  If its records had been kept properly, CAPF should have been able to give Mr. Tsui a more accurate picture of what was due from him at a much earlier stage.  Mr. Tsui could then decide on the basis of the more precise information, whether or not he should contest the claim. 

41.  Here, in contrast, it took some time for CAPF to get its house in order and to identify how much to claim from Mr. Tsui.  I do not think that Mr. Tsui should be penalised in interest for the delay taken by CAPF in working out how much to demand from him.

42.  When CAPF first demanded payment from Mr. Tsui in June 2003, it asked for substantially more than it was entitled to do (over $1 million).  At that time, CAPF based its claim on compound interest and it was far from clear how much (if any) credit CAPF was prepared to give for the allocated and unallocated shares. 

43.  Later, when CAPF took out its Writ on 12 April 2005, it demanded $1,085,027.03 together with interest at prime + 3.5%. 

44.  It was not until CAPF amended its Statement of Claim on 28 February 2008 that CAPF moderated its demand to exclude compound interest and to give credit for the value of the unallocated shares.

45.  I need to balance the fact that Mr. Tsui did not seek to protect his position by tendering some lesser amount against the delay which CAPF took to put its accounts and records on a proper footing.  In those circumstances, I think that, as a matter of discretion, the fairest approach would be only to allow interest at prime + 1% to run from the date of Writ (12 April 2005) until the date of this Judgment.

46.  Accordingly, applying MLO s.18(3), I hold that the principal sum due from Mr. Tsui is $230,540.50 and interest at prime + 1% is to run on that amount from 12 April 2005 until the date of this Judgment.

C.  What effect does the claim for commission have?

47.  The overwhelming evidence before the Court is that the $1.864 million commission for which Mr. Tsui counterclaims has actually been paid to Mr. Tsui or in accordance with his instruction.

48.  In all likelihood $145,944.50 was paid to Mr. Tsui’s account by non-negotiable cheque dated 14 October 1997.  Such amount was debited from CAPS’s HSBC account on the latter date.

49.  By a written instruction dated 24 October 1997, Mr. Tsui ordered that $221,659.67 of his commission be paid to Account 10053 with CAPF.  That was done.  Account 10053 belonged to Fong Wai Yi.  Mr. Tsui claimed at trial to have no recollection who Fong was.  In all likelihood, Fong was one of Mr. Tsui’s clients.

50.  By the same written instruction, Mr. Tsui directed that the then remaining balance of his commission (about $1.496 million) be paid to his CAPF margin account.  That was also done.

51.  The total of the foregoing amounts add up to Mr. Tsui’s $1.864 million of commission.

52.  In the course of cross-examination, Mr. Tsui suddenly denied that he had written the instruction of 24 October 1997.  But the instruction included a signature at the bottom which looks very much like that of Mr. Tsui. 

53.  Asked at trial whether he denied having signed the written instruction (regardless of who wrote the body of the same), Mr. Tsui could only say that he was not certain whether the signature was or was not his own.  Nothing before trial signalled that Mr. Tsui was taking issue with the authenticity of the written instruction.

54.  In my view, in all likelihood, the document was signed by Mr. Tsui.  If he genuinely did not sign the same, I believe that he would have complained about the document long before trial.  Further, he would have categorically denied signing the same, rather than simply saying that he could not be sure.

55.  Equally suddenly and belatedly, Mr. Tsui claimed in cross-examination to be entitled to commission for the month of October 1997.  No evidence was proffered in support.  Indeed, the contention has never been pleaded.  I am therefore unable to give any weight to Mr. Tsui’s claim of outstanding October 1997 commission.

56.  The outcome is that Mr. Tsui’s counterclaim for commission and his corresponding defence of set-off fails.

III. CONCLUSION

57.  There will be judgment for CAPF in the amount of $230,540.50.  Interest is to run on that amount at prime + 1% from 12 April 2005 until the date of this Judgment.  Thereafter, interest is to be at the judgment rate until payment.  Mr. Tsui’s counterclaim is dismissed.

58.  There will be an Order Nisi that Mr. Tsui is to pay 70% of CAPF’s costs, such costs to be taxed if not agreed.  The amount adjudged due being less than $1 million, CAPF accepts that costs should be taxed on the District Court scale. A substantial issue in this case has been the amount due to CAPF. On this, CAPF has received much less than it was seeking. For that reason, as a matter of impression, I do not think that it would be right to award CAPF 100% (as opposed to only 70%) of its costs.