XCHRX CELESTIAL FINANCE LTD. v. HO HONG MAN AND ANOTHER

HCA 18508/1998
& HCA 18509/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 18508 & 18509 OF 1998

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J U D G M E N T

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1. There are two different actions which, by consent of the parties, have been listed for hearing at the same time. In each case, the Plaintiff is Cheerful Finance Company Limited and the 2nd Defendant is David Chong Hon Kit. The 1st Defendant differs, being Ho Hong Man in the first Action and Leung Kuk Fong in the second. The Plaintiff is represented by the same counsel and solicitors in both Actions as are all the Defendants.

2. It has been agreed between the parties that for the purposes of the present proceedings, I may take the material facts and arguments raised in both actions to be identical so that my decision should be the same in both cases. I will begin with High Court Action 18508 of 1998.

3. The Plaintiff is a finance company in the same group of companies as Celestial Securities Limited ("CSL"). On 25 September 1997, the 1st Defendant opened a securities trading account with CSL. On the same day, he entered into an agreement with the Plaintiff whereby the Plaintiff agreed to provide him with advances to finance trading on the CSL account ("the Agreement"). As security for such advances, the Agreement required a sufficient level or margin of securities to be deposited with the Plaintiff, the 1st Defendant granting to the Plaintiff a pledge on all such deposited securities. Accordingly, also on 25 September 1997, the 1st Defendant signed a document headed "Authority to transfer securities" directing CSL to transfer all securities held to his account to the Plaintiff. Power is given to the Plaintiff under the Agreement to liquidate such securities in stated circumstances. On 23 October 1997, the 1st Defendant signed a document giving the 2nd Defendant power to operate his accounts with the Plaintiff and CSL among other companies.

4. The Plaintiff seeks summary judgment against the 1st Defendant as principal debtor in the sum of HK$1,980,080.16. The 2nd Defendant is sued as the 1st Defendant's guarantor pursuant to a written guarantee, also dated 25 September 1997.

5. The Plaintiff's case is that the 1st Defendant incurred a debit balance of HK$2,484,797.00 as at 31 March 1998 and that when, despite repeated demands, he failed to settle the same, his share portfolio was liquidated. This left a deficit and the Plaintiff now sues for the said sum of HK$1,980,080.16 representing the deficit on liquidation plus interest as at 31 August 1998.

6. By way of defence, the 1st Defendant contends that at about 11:00 a.m. on 9 January 1998, he had instructed or agreed to the Plaintiff's immediate liquidation of his entire portfolio to discharge his indebtedness, as a result of being told by the 2nd Defendant that the Plaintiff was demanding such liquidation and that it had issued a document referred to in the evidence as a "force sale notice" of that date.

I shall call that document "the Notice' and the agreed translation of its salient parts is as follows: -

"(Printed Words)

Finance Department to Securities Department

cc. Mrs. Chu, Mr. Lee of Business Marketing Department

The following accounts should be immediately liquidated

(Hand-written characters)

The Finance Department demands the following clients to sell the shares or deposit money before close of market in the morning session. If no is action taken, the Finance Department will itself liquidate the client's position"

7. The 1st Defendant says that he told the 2nd Defendant that no fresh money was going to be paid into the account and that the Plaintiff should immediately go ahead and liquidate the account. This is supported by the 2nd Defendant who says that he in turn informed a Ms. Chan of the Plaintiff's Finance Department that this was the 1st Defendant's position. This is also supported by Wong Chun Man, who was formerly employed by another company in the Cheerful Group and is said to have occupied a position supervising the 2nd Defendant's activities.

8. The 1st Defendant contends that if the immediate liquidation of his portfolio had been duly effected, it would have left his account with a credit balance of $1,105,887.00. He counterclaims for this amount, contending that the Plaintiff had wrongfully failed to carry out the instruction or agreement to liquidate. The 2nd Defendant contends that his liability stands or falls with the 1st Defendant's and fully supports the 1st Defendant's case.

9. Chan Wing On has filed an Affirmation on behalf of the Plaintiff explaining the events of 9 January 1998 by reference to the Plaintiff's records. He states that because drastic market movements had left the account short of security, the Notice was issued on that date which, as appears on the agreed translation, effectively offered the Plaintiff three options.

(1) To top up the account with cash;

(2) To sell shares held to his account to reduce the level of indebtedness to a level acceptable to the Plaintiff; or

(3) If neither (1) nor (2) was done, for the Plaintiff itself to take over the account and liquidate the shares.

At the heart of the dispute is whether the Defendants ever conveyed any instruction or agreement to the Plaintiff that it should adopt option (3). The Defendants argue that such instruction or agreement was indeed conveyed to the Plaintiff and that the 1st Defendant did not realise until about 12 January that the immediate liquidation of the whole portfolio had not been carried out on 9 January.

10. The Plaintiff contends that the evidence, consisting of the contemporaneous transaction notes, shows incontrovertibly that the 1st Defendant's response to the Notice was for him, via the 2nd Defendant, progressively to sell off his portfolio in parts over the period spanning 9 January and 14 January (excluding the weekend of 10 and 11 January). He and the 2nd Defendant decided what to sell and when. Certainly the transaction notes show that each transaction was ordered by the 2nd Defendant for the 1st Defendant's account. Moreover, Mr. Pun appearing for the Defendants, informed me that it was not his case that such transactions were done on the Plaintiff's behalf but that, although there is no evidence yet filed to this effect, his client would say that after discovering on 12 January that the instruction had not been carried out, he effectively resumed control of his account and instructed the 2nd Defendant to sell the shares on his behalf.

11. The result of the sales effected between 9 January and 14 January was to reduce the deficit balance on the 1st Defendant's account to $2,437,337.17. By then, the only shares held to his account and remaining unsold were shares in two companies, namely Leading Spirit and Ls Conrowa respectively. Trading in such shares had been suspended by the Stock Exchange.

12. In the case of Leading Spirit, it is common ground that such suspension took place on 13 January 1998. That parcel of shares was an important component in the 1st Defendant's portfolio. Thus, the daily statement of the account for 9 January indicated that they had a market value of $2,762,200 representing about half the value of the portfolio. This indicative value fell sharply to $1,894,080 on 12 January, the next trading day, and, on 13 January as mentioned above, trading was suspended. When they eventually resumed trading in May, their value dropped even further.

13. It is, therefore, at the core of the alleged defence that if the alleged instruction on 9 January to effect an immediate sale had been carried out, the drop in their value and the suspension of trading would have been avoided and their sale would have realised proceeds sufficient to leave the accounts substantially in credit.

14. However, the Plaintiff counters that since, by 12 January, the 1st Defendant was in control of the account and selling shares, it was up to him on that day to sell all his shares, including the Leading Spirit shares. Accordingly, he is said to have only himself to blame if they were not sold on 12 January and became suspended on 13 January, dropping in value thereafter.

15. When trading in the Leading Spirit and Ls Conrowa shares resumed on 8 May 1998, the Plaintiff took over and sold them, leaving the account with an outstanding debit balance of $1,890,280.78. That sum, with interest calculated as at 31 August 1998 came to the abovementioned figure of $1,980,080.16.

16. Mr. Tam for the Plaintiff alleges that this is a straightforward case in which the Plaintiff does no more than sue for the outstanding balance of a credit account representing the unrecovered deficiency after realising the security held for the loan.

17. Mr. Pun, on the other hand, argued that there were three principal reasons why there should be unconditional leave to defend.

18. First, he says, it is in issue as to whether the 2nd Defendant was an employee of the Plaintiff (as opposed to an employee of some other company in the group). He says that this is important in the context of the 1st Defendant's case that, by giving the instruction for immediate sale to the 2nd Defendant, he thereby gave the instruction to the Plaintiff via its duly authorised agent and employee.

19. In my judgment, no relevant issue arises here. Whatever the 2nd Defendant's capacity in receiving the alleged instruction may have been, the evidence is that the instruction was passed on to Ms. Chan of the Plaintiff's Finance Department who was undoubtedly employed by the Plaintiff and authorised to receive and act upon any such instruction.

20. Secondly, Mr. Pun alleges that he has raised a triable issue as to whether, by virtue of an alleged express oral agreement entered into between the 1st Defendant and the 2nd Defendant, (the latter acting for and on behalf of the Plaintiff) at the time when the account was opened, the Plaintiff was under an obligation immediately to liquidate the 1st Defendant's portfolio as soon as the value of such portfolio fell below certain orally specified margin requirements.

21. In my judgment, this allegation falls foul of clause 40 of the Agreement which, so far as material, is in the following terms namely,

"I ...... declare that this agreement sets forth the entire agreement and understanding between [the Plaintiff] and myself in connection with the above and I shall not rely on any representation or warranty or undertaking alleged to be made by you or your agent or staff save for all the presents as contained herein and that this Agreement is made and completed at Room 2104-2105 World-wide House."

22. The Defendants have been unable to produce a shred of documentation in any way supporting the existence of the alleged oral agreement. However, Mr. Pun argues that the allegation is supported by Wong Chun Man who is said to be an independent witness. Mr. Wong does indeed appear to suggest that :-

"It was an express term of all the agreements between the Plaintiff and its clients that the Plaintiff should stop all further trading once the margin level or clients' margin accounts fell below the Acceptable Levels of Margin and the Plaintiff should sell the clients' securities to settle the margin account and/or indebtedness to the Plaintiff."

23. However, if the credibility of that statement stood to be tested, I would have had great difficulty accepting it as anything more than "practical moonshine" (in the hallowed language of Order 14 applications). Why, if this was such an express term in all the contracts, has it not simply been made part of the written contract? Why instead did the Plaintiff put Clause 40 in to exclude such a term? I might add that despite his valiant efforts, I am unable to accept Mr. Pun's construction of other Clauses in the Agreement which, if correct, would have rendered Clause 40 nugatory and allowed evidence of extraneous oral agreements in whenever a recalcitrant client was being sued.

24. In any event, it appears to me that whether or not anything was purportedly agreed between the 1st and 2nd Defendants, Clause 40 makes evidence of any such agreement inadmissible to qualify or add to the terms of the Agreement. I therefore conclude that the "express agreement" point does not constitute a triable issue.

25. The third point raised by Mr. Pun is the argument that has already been examined in some detail, namely, that the debit balance was the product for the Plaintiff's own default in failing to effect an immediate liquidation of the 1st Defendant's portfolio, in breach of an express instruction conveyed to the Plaintiff via the 2nd Defendant. Mr. Pun argues with some force that this should not be treated as an insubstantial defence in that: -

(1) It is supported by the Notice which in terms indicated that an immediate sale was intended;

(2) It is at least triable as to whether the 1st Defendant's instruction was that the Plaintiff should itself conduct the immediate liquidation as threatened in the Notice;

(3) Witnesses who could testify to this question, such as Ms. Chan of the Plaintiff, have not sworn affidavits, and should be subjected to cross-examination on the point;

(4) Numerous issues of detail, such as details of the suspension of trading involving Leading Spirit shares, should be investigated at trail; and

(5) The Defendant's version of events is supported by Wong Chung Man who is at least, so far as one can see on the affidavit evidence, an independent witness.

26. The Plaintiff, on the other hand, invites me to treat all these points as devoid of substances or at best, as extremely shadowy.

27. Mr. Tam points to the absence of any protest at the Plaintiff's failure to effect a complete liquidation of the portfolio, even though, on his own case, the 1st Defendant realised by 12 January at the latest that this had not been done. He would by then have realised that the Leading Spirit shares had dropped sharply in value and so may well have been expected to protest loudly. Instead, the evidence suggests that the Defendants decided to take it upon themselves to conduct the liquidation of the account.

28. There is, in my judgment, considerable force in the contention that on 12 January, it was open to the 1st Defendant himself to have sold off the Leading Spirit shares. No explanation has been given as to why he did not. If no explanation is forthcoming, it may well mean that the defence complaining of the Plaintiff's failure to do precisely the same thing, presumably in the afternoon on 9 January, becomes, to say the least, questionable. Mr. Tam contends that the 1st Defendant's conduct is far more consistent with him having decided deliberately not to sell all the shares at once, but to liquidate them gradually in parcels in the hope that the market would turn.

29. In all the circumstances, I have reached the conclusion that the defences raised by the Defendants in relation to the alleged instruction are highly suspicious and shadowy and that they come close to justifying an Order for summary judgment. However, I have decided that the Defendants should not be shut out altogether from defending this action at this stage. It is possible that at trial, some of the features which appear suspicious on the affidavits can be wholly explained away and the Defendant's case vacated. In my judgment, the correct Order is one for conditional leave to defend.

30. I, therefore, make an Order granting the Defendants leave to defend on condition that they or either of them costs to be paid into court the sum of HK$1,890,280.78 within 28 days.

31. In the second case, HCA 18509/1998, the Plaintiff seeks summary judgment against the 1st Defendant as principal debtor in the sum of $379,856.70 which it says was the outstanding balance owed on his account as at 31 August 1998 representing the deficiency of $358,973.70 realised after liquidation of his portfolio in May 1998 plus interest. The 2nd Defendant is again sued as guarantor.

32. As I have mentioned, the parties agree that a like result must be reached in this Action. I therefore Order that the Defendants in the second Action have leave to defend on condition that they or either of them cause to be paid into Court the sum of HK$358,973.70 within 28 days from today's date.

33. If payment in is to be made in accordance with this Order, the costs of this application shall be in the cause. If payment in is not duly made, the Plaintiff is to have Judgment and the costs of the Action.