FREEMAN SECURITIES LTD v. IP PO KI

HCA 2368/2018

[2020] HKCFI 1048]

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2368 OF 2018

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DECISION

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INTRODUCTION

1.  The Plaintiff, carrying on business to provide brokerage services, applies for a summary judgment against the Defendant, its customer, for the sum of HK$174,806,632.87 together with interest at contractual rate of HSBC prime rate plus 10% per annum compounded monthly from 26 October 2018 to the date of judgment and thereafter at judgment rate.  The Plaintiff’s claim is a claim for repayment of loan advanced to the Defendant on margin facility. 

PLAINTIFF’S CLAIM

2.  On 19 July 2010, the Plaintiff and the Defendant entered into a Customer Agreement for the purpose of opening and maintaining a securities account for the Defendant.  Clause 25 of the Customer Agreement provided that the Defendant shall be liable to pay the Plaintiff any amount due to the Plaintiff and any debit balance or deficiency outstanding in the account to the Plaintiff.  On the same day, the Plaintiff and the Defendant also entered into a Margin Addendum to Customer Agreement (the “Addendum”) for margin facility in favour of the Defendant.  A margin account (the “Margin Account”) was opened thereupon. 

3.  On 20 June 2017, the Defendant gave settlement instructions to the Plaintiff to receive 700,000,000 shares in Freeman FinTech Corp Ltd (“FFCL”) (HK Stock No 279) against payment of HK$250,000,000.  In the same month, the shares were deposited into the Margin Account.  

4.  On 20 November 2017, the Plaintiff sent a notification by SMS to the Defendant that the margin call amount of HK$47,882,258.24 was outstanding in the Margin Account and suggested that further funds be deposited into the Margin Account.  The next day, 21 November 2017, the Plaintiff sent a demand letter by post as well as by email to the Defendant stating that a total amount of HK$266,041,545.47 was outstanding as at close of 20 November 2017.  Of that outstanding amount, HK$50,441,545.47 was the margin call amount.  The Plaintiff demanded the Defendant to deposit funds or provide collateral by 3pm of the same day. 

5.  On 29 November 2017, the Plaintiff notified the Defendant by SMS that margin call amount of HK$46,417,326.61 was outstanding and that further funds should be deposited into the Margin Account.  Having received no response from the Defendant, the Plaintiff, having informed the Defendant of its intention to forcibly liquidate, liquidated 8,000,000 of the shares between 30 November 2017 and 12 December 2017. 

6.  In February 2018, the Defendant deposited HK$70,000,000 into the Margin Account by way of cheque. 

7.  On 16 May 2018, a margin call notification by SMS and by email was sent to the Defendant staging an outstanding balance of HK$207,933,389.77 in the Margin Account, of which there was an outstanding margin call amount of HK$121,710,189.77.  The Plaintiff demanded the Defendant to deposit further funds into the Margin Account by 330pm; otherwise it would liquidate the position in the Margin Account. Having received no response from the Defendant, the Plaintiff liquidated 20,000,000 shares on 16 May 2018.  

8.  On 17 May 2018, the Plaintiff issued a demand letter to the Defendant demanding the latter to settle the outstanding amount of HK$205,350,873.58 and threatening bankruptcy proceeding against the Defendant.  Having received no response from the Defendant, the Plaintiff issued two demand letters respectively on 5 and 10 September 2018 demanding the Defendant to settle the outstanding amount of HK$214,932,580.85.  

9.  Having received no response from the Defendant, the Plaintiff liquidated all the position in the Margin Account.  As at 25 October 2018, a total amount outstanding is HK$174,806,632.87.  This is the principal amount being claimed by the Plaintiff here.  The Plaintiff also claims contractual interest according to the aforesaid documents subsequently adjusted to be HSBC prime rate plus 10% per annum compounded monthly. 

DEFENDANT’S CASE

10.  The Defendant’s defence is that in the first quarter of 2017, Zhang Yong Dong (“Zhang”), a non-executive director and the chairman of the board of directors of FFCL, a subsidiary of the Plaintiff, and one Wang Xiaodong (“Wang”) (an executive director and the CFO of FFCL as well as a director of the Plaintiff from 29 September 2016 to 18 May 2018) agreed orally with the Defendant in respect of the 700,000,000 shares in FFCL in the Margin Account that: -

(1)  If the share price of FFCL appreciates, the Defendant could liquidate his 700,000,000 shares in FFCL; and

(2)  If the share price of FFCL fell, the Plaintiff would not make any margin call of the Defendant and would not dispose of any of the 700,000,000 shares in FFCL, to be held by the Defendant indefinitely until the share price of FFCL would appreciate again. 

11.  The Defendant further contends that this oral agreement contained various implied terms, which in essence were that the Plaintiff should not sell the FFCL shares except with the Defendant’s consent. 

12.  The Defendant, in reliance on the oral agreement and the implied terms, argues that the Plaintiff could not make any margin call. 

13.  In respect of the HK$70,000,000 deposited into the Margin Account in February 2018, the Defendant says that it was a loan advanced by the Defendant to the Plaintiff at the request of Zhang and Wang on behalf of the Plaintiff.  There is no documentation of such loan. 

JURISDICTIONAL ISSUE – FRAUD EXCEPTION

14.  Before I proceed to analyse whether the Defendant has failed to raise any bona fide arguable defence or triable issue, the Defendant raises a jurisdictional issue to urge me to dismiss the present application.  In particular, the Defendant relies on the fraud exception in Order 14 rule 1(2), whereby the Plaintiff cannot apply for summary judgment because the Plaintiff, in its Reply, made certain allegation of fraud, namely, (1) that the oral agreement was a plot designed by Zhang and Wang dishonestly to circumvent the disclosure requirement under the Securities and Futures Ordinance (Cap 571) (the “SFO”); and (2) that the oral agreement constitutes offences contrary to sections 274, 275, 278, 295, 296 and/or 299 of the Ordinance (that is, false trading, price rigging and stock market manipulation). 

15.  When reading the Reply closely, what the Plaintiff pleads about the circumvention of disclosure is that Zhang and Wang designed this plot for their own dishonest purpose.  As regards the offences contrary to the various sections of the SFO, there is no allegation that the Defendant had knowledge of the purposes of the oral agreement, namely, to false trade, to rig the price and/or to manipulate the stock market.  The Plaintiff could establish its claim (even the allegation of such offences pleaded in the Reply taken into account) without the need to establish any allegation of fraud against the Defendant.  In Universal Capital Bank v Hongkong Heya Co Ltd [2016] 2 HKLRD 75 at paragraph 18, DHCJ Burrell held, as part of his ratio, that this fraud exception is not applicable to allegations of fraud made against non-party to the proceedings, having been referred to Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94, where the Court of Appeal held, in essence, that when the plaintiff’s claim involves an allegation of fraud, Order 14 application is not applicable.  It is worth noting that the issue before the Court of Appeal was not whether the fraud exception applies to allegation against a party or a non-party to the proceeding, while that before DHCJ Burrell was. 

16.  Mr Toby Brown, counsel for the Defendant, refers me to a very recent decision of DHCJ Hall-Jones in R Stahl Inc v AJ Development Ltd [2020] HKCFI 816 handed down just 11 days ago, on 20 May 2020, where his Lordship, having ruled at paragraphs 35 that the case before him was a case involving an allegation of fraud against the defendant and at paragraph 37 that it was “unnecessary” for him to address [inter alia, Universal Capital], expressed his comments by way of obiter that the Court of Appeal in Pacific Electric did not make any distinction between a party and a non-party to the proceeding and so did not the wording of Order 14 rule 1(2)(b).  His lordship then made his discomfort known in the following terms at paragraph 38: -

“I do not believe that this observation as to the underlying reason for the fraud exception [in Universal Capital] sits comfortably with the wording of the rule itself. Nor do I believe that reading the word ‘fraud’ in the rule as if it were to read “fraud against the defendant” sits comfortably with Pacific Electric.”

17.  I can see the force of the reasoning of these two conflicting lines of authorities.  However, at this level, I am bound by the ratio in Universal Capital, while the obiter in R Stahl Inc remains an obiter.  I therefore hold that Order 14 is applicable to the Plaintiff’s claim because the allegation of fraud is made against non-parties only. 

18.  Mr Brown further submits that the conflicting decisions on this jurisdictional issue alone should be a reason for refusing Order 14 judgment, referring me to the trite authorities that where there are conflicting legal decisions or the legal principles in the subject area are unclear, the Court should not give summary judgment.  However, those authorities are concerning the conflicting decisions or unclear law in the substantive matter of the Order 14, not the preliminary jurisdictional issue of whether Order 14 is applicable like here.  Having come to the conclusion that this Court has the jurisdiction under Order 14 rule 1(2), I see no reason why I should refuse summary judgment simply on this ground.  I shall now consider the merits of the Order 14 application substantively. 

ARGUABLE DEFENCE AND/OR TRIABLE ISSUES

19.  The evidence, notably documentary, namely, the agreements between the Plaintiff and the Defendant mentioned above as well as the correspondence, is sufficient to establish the Plaintiff’s claim.  The question is whether the Defendant raises any arguable defence and/or triable issue.  

20.  First, I agree with counsel for the Plaintiff, Mr Michael Lok’s submission that the oral agreement per se is unbelievable at all.  The oral agreement would mean that the Plaintiff would not be able meaningfully to exercise any rights of security over the FFCL shares.  This would not only go contrary to the terms of the agreement between the parties, but also go contrary to any commercial sense. By the oral agreement, the Plaintiff would benefit little, if any, but would only increase its risk of loss.  If there were really such an unusual oral agreement, it would be inherently improbable that there is no contemporaneous record at all.  It would also be inherently improbable that the Defendant still did not respond meaningfully to the Plaintiff despite the Plaintiff’s various demands, especially the one issued on 17 May 2018 when the Plaintiff threatened bankruptcy proceedings against the Defendant.  Therefore, I find this allegation of oral agreement unbelievable. 

21.  Second, the implied terms also do not make sense at all.  I only need to refer to Societe Generale Bank & Trust Hong Kong Branch v Mike Panjwani, HCA 725/2009, 25 November 2010 at §35, where To J (as he then was) said: -

“Reasonable notice to comply with margin call is simply impossible in the margin trading context. The market moves without notice, let alone reasonable notice. This term which is sought to be implied runs contrary to the theme of the contract documents. As I have already mentioned before, the Plaintiff is not the borrower’s margin trading consultant. It only provides facility and a trading platform. The terms in the contract documents are to provide for loans to be advanced to the Defendant and to ensure that the loans so advanced are secured and safe. This theme is amply clear from clause 8.8 of the General Terms which provides that when the margin level falls below Close-out Level, the Plaintiff shall in order to protect its position, be entitled to take whatever action including closing-out of all or any of the Defendant’s open positions. For that reason and for that purpose, the Plaintiff has to act quickly to protect its loan. Once the Close-out Level is breached, reasonable notice is out of the window. The Plaintiff’s has to act quickly to cut loss for the Defendant so that its loan is safe. If the Plaintiff may not close-out the Defendant’s open positions and has to wait for reasonable time for the Defendant to put in funds, the remaining margin may be swept away to negative margin level. The Plaintiff would be left with an unsecured loan while waiting for reasonable time to come. Furthermore, there can be no guarantee that the borrower would put in funds to answer the margin call. In that situation, reasonable time would never come. Reasonable notice or reasonable time for the borrower to comply with margin call is so illusory in the margin trading context that the obligation to give reasonable notice or reasonable time to comply with margin call could not have been in the contemplation of the parties once Close-out Level is triggered.” (emphases added)

22.  In the present case, the Defendant’s defence even goes further than a reasonable notice. Essentially, the Defendant is saying that without his consent, the FCCL shares could not be sold.  This is unbelievable. 

23.  Third, in respect of the HK$70,000,000 deposited in the Margin Account, the Defendant’s allegation that this was a loan advanced to the Plaintiff is again unbelievable.  If this were a loan to the Plaintiff, I see no reason why this “loan” would be deposited in this unusual manner, namely, into the Margin Account but not into a bank account maintained in the name of the Plaintiff itself.  It remains for me to add that my finding concerning this HK$70,000,000 deposit only reinforces my finding concerning the oral agreement above. 

24.  Given my conclusion above, it is unnecessary for me to consider the Defendant’s allegation that Zhang and Wang had the authority, actual or apparent, to represent the Plaintiff to enter into the oral agreement with the Defendant and sought the loan from the Defendant.  Suffice to say that there is no evidence raised to explain why Zhang, not being director of the Plaintiff, would have the authority to represent the Plaintiff to enter into a contract with the Defendant.  As regards Wang, while he was a director of the Plaintiff at the material times, and he had been dealing with the Plaintiff in respect of the account, given the unusual terms of the oral agreement and the unusual manner of the advancement of the loan which would prima facie go outside the normal scope of a director, the mere allegation that Wang was a director is insufficient to establish even apparent authority.  

25.  In conclusion, I find that the Defendant has failed to raise any arguable defence and triable issue, and therefore the Plaintiff is entitled to summary judgment. 

26.  As regards the Plaintiff’s claim for pre-judgment interest rate at the contractual rate of HSBC prime rate plus 10% per annum compounded monthly from 26 October 2018 to today, since it is a commercially agreed rate and the Defendant has raised nothing in evidence to oppose this rate, I shall award pre-judgment interest at this rate. 

ORDER

27.  In the premises, I make the following order: - 

(1)  The Defendant shall pay HK$174,806,632.87 to the Plaintiff.

(2)  There shall be pre-judgment interest at the rate of HSBC prime rate plus 10% per annum compounded monthly from 26 October 2018 to today.

(3)  There shall be post-judgment interest on the sums of (1) and (2) above from today until payment of judgment.

(4)  The Defendant shall pay the costs of the Plaintiff’s action (including the present application) with certificate for counsel, to be taxed if not agreed.