RE PEREGRINE BROKERAGE LTD

HCMP 2736/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2736 OF 2003

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PEREGRINE FUTURES HONG KONG LIMITED

(In Members' Voluntary Liquidation) acting
through its joint and several liquidators
David Richard Hague and Donald
Edward Osborn Applicants

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(Heard Together)

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REASONS FOR JUDGMENT

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1. There are two amended petitions presented by the liquidators of Peregrine Futures Hong Kong Limited (in Members' Voluntary Liquidation)("PFL") and Peregrine Brokerage Limited (in Members' Voluntary Liquidation)("PBL") seeking broadly the same relief in each matter under the Trustee Ordinance, Cap. 29 to deal with unclaimed cash and securities held by them held by them for their clients so that the liquidations may be completed and the companies dissolved. Both are solvent liquidations and unlike the situations considered by the court in previous cases (Re CA Pacific Finance Ltd (in Liquidation) & Anr (No. 1) [1999] 2 HKC 632; Re Forluxe Securities Ltd (in Liquidation) & Anr, HCCW Nos. 310 and 311 of 1998, Yuen J, 20 December 2000; Re Chark Fung Securities Co. Ltd & Anr [2002] HKEC 1422), there is no shortfall of securities of any client requiring consideration of priorities between cash and margin clients and methods of allocation and distribution as between clients. Rather, the liquidators are concerned to find a flexible and pragmatic solution to dispose of unclaimed trust property of third parties that cannot be distributed to creditors or shareholders in an insolvent or solvent liquidation. In previous decisions, it does not appear that the legal basis for the solution adopted has been adequately considered.

The background

2. I will first set out the relevant background matters.

3. PFL was a futures trader and PBL was in the business of brokerage and custodial services. Both were placed in members' voluntary liquidation by members' special resolution following upon the collapse of the Peregrine group. For PFL, the date of liquidation was 30 July 1998, whereas for PBL it was 27 May 1998. No committee of inspection was appointed in either case. The shareholders in each company are also companies in the Peregrine group. The majority shareholders in each case are also in liquidation with partners of PricewaterhouseCoopers appointed liquidators. The majority shareholder of PFL is Peregrine Investment Holdings Limited ("PIVH"), the majority shareholder of PBL is Peregrine Securities Limited. PIVH was in compulsory liquidation on 18 March 1998 and its listing on the Stock Exchange of Hong Kong Limited was formally cancelled on 13 July 1999.

4. Both liquidations have progressed to the point that the unclaimed properties are the only substantive outstanding matter. In the case of PFL, creditors have been paid in full and substantial distributions have been made to the shareholders. In the case of PBL, the liquidators have sufficient funds to pay creditors in full and only one claim has been stood over pending receipt of further supporting information, all other creditors have been paid in full. The liquidators of PBL intend to distribute surplus in specie to the shareholders shortly.

5. In respect of PFL, there is unclaimed cash in the sum of HK$319,254.12 as at 31 March 2003, being the credit balances of twelve clients. The majority of the cash, in the amount of HK$310,764.00, is the credit balance of J P Morgan Securities Limited ("JP Morgan").

6. As for PBL, the unclaimed property comprises securities and cash, the combined value of which as at 30 September 2003 is about HK$610,000.00, and is made up as follows: (i) 23 clients with 658,016 shares in different companies, the majority of which are scripless and held in the Hong Kong Central Clearing and Settlement System ("CCASS") and other settlement systems; (ii) 41 clients with 115,594,276 shares in PIVH, which have no value and cannot be sold, of which 88,203,076 are scripless and held in CCASS; and (iii) 42 clients with cash balances totalling HK$102,034.00, comprising dividends declared and paid on shares.

7. Since July 1998, the liquidators have made repeated and extensive efforts by letters, telephone calls and advertisements in newspapers to trace clients, verify their claims and return cash and securities to those who have responded and are able to provide sufficient evidence of ownership. Over 300 parties have responded to the liquidators with satisfactory response and the relevant securities were transferred to them. The unclaimed cash and securities referred to above are entered in the companies' books as prima facie belonging to clients who cannot be located or have not been able to provide sufficient information for their claims to be processed. It is believed that a major factor in the liquidators not receiving responses is the low or negative value of some of the securities held.

Trust property

8. The liquidators believe that the PFL unclaimed cash and the PBL unclaimed property are trust property and seek a declaration to that effect in both petitions. I am satisfied that is correct and have made a declaration that the unclaimed property in each instance is held by the company concerned as trustee for the persons in question and that such unclaimed property does not form part of the assets of the company concerned available for distribution by the liquidators to the creditors and shareholders.

9. The legal position has been considered fully in CA Pacific, supra and this is summarised in Mr Bartlett's submissions as follows. It is clear at common law and as recognized in Hong Kong that generally, if not invariably, a client and broker relationship is one of principal and agent. Thus, any cash or shares held by the broker are held on trust for the client. Further, since it is the client who pays for the securities, there is a natural presumption that the client is the beneficial owner thereof. Neither section 84 of the Securities Ordinance, Cap. 333 nor the fact that the shares are traded through a settlement system alters the position. The nature of the clients' proprietary interests are in the form of separate trusts in favour of each client individually rather than in the nature of tenancy in common in a pool of securities (see 638B to D, 640G to H, 643F to G, 646F to G, 649D to G, 650D to H).

10. In the case of PFL, the company as a broker would enter into futures and options contracts on behalf of clients pursuant to one of two standard forms of agreement. By clause 3(a), it is provided that PFL acts solely as broker to any transactions made with PFL by the client. Clause 5(a) provides that PFL holds client's property as trustee and the property is segregated from PFL's own assets. It would appear from these provisions that the contractual documentation is consistent with the general rule and points to the beneficial interest in the client's cash or securities remaining with the client.

11. The liquidators are unable to establish from the books and records of PFL whether the clients prima facie entitled to unclaimed cash had signed contractual documentation. However, based on their review of the books and records, the liquidators believe that even where no contractual documentation was executed, PFL and such clients had conducted their business relationship as if they had executed the documents in that a course of dealing arose which followed the usual custom and practice in the Hong Kong trading business and according to applicable legislation.

12. In the case of PBL, the company bought shares for its clients pursuant to one of two standard forms of agreement entered into with the clients. PBL also entered into margin agreements with certain clients pursuant to a standard form. Although the contractual documentation does not contain express wording of trust or the like, the documents are otherwise not inconsistent with the general rule and point to the beneficial interest in client's cash or securities remaining with the client. Where no contractual documentation is located for some of the relevant clients, the liquidators rely on the course of dealing principle as in the case of PFL.

13. I accept Mr Bartlett's submission that there is nothing on the present facts regarding each of the companies to displace the general rule set out in CA Pacific that the client and broker relationship was one of principal and agent. The court should not readily infer that the broker is intended to be able to finance its business through applying clients' investment monies as if the broker were beneficially entitled to the same.

Procedure and Options

14. Accepting that unclaimed cash and property are trust property, the liquidators need to find a solution to deal with them.

15. My attention was drawn to Re Forluxe, supra at page 4 and Re Chark Fung, supra at paras. 25 to 27 in which analogous categories of shares were addressed. They were the situations where the number of shares held exceeded the shares claimed by clients and where shares were held but no claim was made by clients. They were dealt with briefly in the judgments. It was directed that the surplus shares and the proceeds of sale of shares where no claim was made were to be incorporated in the free assets of the company and available for distribution. The judgments do not give the underlying reasoning for dealing with the trust property of a third party in this manner. Mr Bartlett sought to provide some explanation to the course adopted in those judgments: it might be a matter of expediency and justice or the court might have applied a broad construction of section 285 of the Companies Ordinance, Cap. 32. For my part, and as Re Chark Fung is my own decision, I can say that I did not consider section 285 in directing that trust property in those situations was to be incorporated in the general assets of the company and that it was done merely out of expediency.

16. The course adopted in the two cases referred to above would be the simplest solution for the liquidators. However, they consider that they should bring the matter before the court for consideration as there is an issue whether section 285 and rule 183 of the Companies (Winding-up) Rules are applicable. Section 285(1) provides as follows:

"If it appears either from any statement sent to the Registrar under section 284 or otherwise that a liquidator has in his hands or under his control any money representing unclaimed or undistributed assets of the company which have remained unclaimed or undistributed for 6 months after the date of their receipt, or any money held by the company in trust in respect of dividends or other sums due to any person as a member of the company, the liquidator shall forthwith pay the said money to the companies liquidation account, and shall be entitled to the prescribed certificate of receipt for the money so paid, and that certificate shall be an effectual discharge to him in respect thereof." (emphasis supplied)

17. Mr Bartlett submitted that on a narrow construction, section 285(1) would be restricted (i) only to money, not extending to the securities themselves; and (ii) to unclaimed or undistributed assets of the company, not extending to assets of a third party held by the company as agent or to share dividends held on trust for members. On a broad construction, the words "assets of the company" could be construed to include assets held by the company, whether they are company property or trust property. I have considerable reservations if the broad construction is the right one.

18. I was also referred to section 292 of Cap. 32. This provides that where a company is dissolved otherwise than under section 290A, "all property and rights whatsoever vested in or held on trust for the company" immediately before its dissolution shall, subject to and without prejudice to any order which may at any time be made by the court under sections 290 and 291, be deemed to be bona vacantia and shall accordingly belong to the government. I agree this provision does not apply to the present situation where property is held on trust by the companies.

19. The solution devised by the liquidators is to proceed under the Trustee Ordinance for consequential relief, in the event that declarations are made as to the trust status of the unclaimed property.

20. For completeness, I should mention that at an earlier hearing on 30 July 2003, I have given directions for notification of these proceedings to overseas clients. These directions have been complied with. The liquidators have already published a notice prior to the hearing in July 2003 in local newspapers. No response has been received by the liquidators. I am satisfied that due notice has been given to interested parties.

21. In the special circumstances of JP Morgan, they have been contacted through their in-house counsel and have confirmed that they do not intend to appear, given that the relief sought by the liquidators is to return the relevant unclaimed cash to JP Morgan. I understand that JP Morgan has not been able to provide any further information to the liquidators to substantial their prima facie entitlement to the unclaimed cash in their credit balance due to mergers within their own group at the relevant time.

22. The primary consequential relief sought are orders that the liquidators be entitled to realize the unclaimed securities in respect of PBL (under section 56 of Cap. 29) and then pay the proceeds of sale together with the unclaimed cash in both liquidations into court and to deposit the valueless securities being the PIVH shares and other unclaimed securities which cannot be sold into court (under section 62 of Cap. 29).

23. The liquidators then seek an order to provide for a mechanism for potential claims to be made against the unclaimed cash and property and in the event that no claim is made within three months from the date of payment and deposit into court, the unclaimed cash and property are to be transferred to the general revenue of the government.

24. I am satisfied that the provisions of sections 56 and 62 can be invoked in this situation. More details on the procedure for the lodgment of funds or securities in court are provided in Order 92 of the Rules of the High Court and the High Court Suitors' Funds Rules. Implicit in the liquidators' proposed mechanism is a relatively short period of three months for the funds and securities to remain in court before transfer to the general revenue. In comparison, rule 23(1) of the Suitors' Funds Rules provides that "when any sum of money remains unclaimed in the court for a period of 5 years, the Chief Justice may, on application by the Registrar of the High Court, order such sum to be transferred to the general revenue of Hong Kong." It seems to me that rule 23(1) only provides for one type of situation in which unclaimed moneys in court may be ordered to be transferred to the general revenue. The five-year period in rule 23(1) ought not to be regarded as governing all situations where it is sought to transfer unclaimed funds and securities to the general revenue. In the present circumstances, the liquidations have been going on for five years and the cash and securities have been unclaimed for this period. I agree with the liquidators that in view of the relatively small amount involved in the unclaimed property, this issue should not hold up the completion of the liquidations any longer. I regard it appropriate that the unclaimed property should remain in court for three months for potential claims to be made. I have made an order in each instance in the terms of the draft order submitted.