SUN HUNG KAI INVESTMENT SERVICES LTD v. OODLESS INVESTMENT LTD AND ANOTHER

HCA 2006/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2006 OF 2003

JUDGMENT

1. The plaintiff carries on and at all material times carried on business as a securities dealer.

2. The 1^st defendant opened a securities trading margin account no. 07-909483 with the plaintiff on or about 27 February 2003 (“the account”) so as to enable it to trade in securities in Hong Kong on margin.  The account was opened pursuant to a Margin Loan Facility Letter, Exh. P1 (“the facility letter”) dated 27 February 2003 whereby the sum of HK$2 m. was made available to the 1^st defendant on the terms set out in the facility letter.  The security percentage limit was to be 50%. 

3. The plaintiff’s claim against the 1^st defendant is for the sum of HK$1,335,559.24 being the amount owed by the 1^st defendant to the plaintiff as at 31 May 2003 on trades carried out under the account.  The plaintiff’s claim against the 2^nd defendant is pursuant to a Deed of Guarantee and Indemnity dated 27 February 2003, Exh. P5 (“the guarantee”) executed by the 2^nd defendant whereby he irrevocably and unconditionally guaranteed punctual payment to the plaintiff of all moneys owing by the 1^st defendant to the plaintiff together with interest. 

4. There is no dispute that the account was opened on or about 27 February 2003 in favour of the 1^st defendant.  The main dispute between the parties is whether or not the trades carried out under the account were authorized trades. 

5. The defendants’ case is that only two persons namely, Tai Chin Wah and the 2^nd defendant were the only authorized persons who were authorized to give instructions to the plaintiff on behalf of the 1^st defendant for the purpose of operating and/or trading securities under the account.  There is no dispute that the two persons authorized to give instructions to trade under the account were the said two persons. 

6. The defendants’ case is that the 1^st defendant and/or its authorized persons never made any requests for the sale or purchase of any stocks or shares under the account.  Their case is that any trades made under the account were unauthorized trades for which the 1^st defendant should not be liable.   Hence, the 2^nd defendant alleges that it should also not be liable under the guarantee. 

7. There is also a counterclaim by the 1^st defendant.  The 1^st defendant has deposited on or about 28 February 2003 10,060,000 shares of Gold-Face Holdings Limited (“Gold-Face”) under the account.  As it alleges that there were unauthorized trades under the account, the 1^st defendant counterclaims for the return of the said 10,060,000 shares of Gold-Face. 

8. I heard evidence from Tang Siu Lap, the account executive of the plaintiff in charge of the account and from Leung King Yuen, a director of the plaintiff.  The 1^st defendant and the 2^nd defendant did not appear at the trial and no evidence was adduced by or on behalf of them.  I have no hesitation in accepting the evidence of Tang and Leung.  I find both of them to be honest, credible and reliable witnesses who have told me the truth.

9. Tang Siu Lap gave evidence that he was introduced to the 2^nd defendant by one of his clients.  In or about February 2003 the 2^nd defendant told him that he intended to use a company to open a margin securities trading account with the plaintiff and was prepared to deposit some stocks into the account as security.  He was told by Tang that if the account holder was a company, a guarantor would be required.  The 2^nd defendant said that he would act as a guarantor. 

10. Tang also gave evidence that on or about 27 February 2003 he provided the 2^nd defendant with a set of the necessary documentation for the opening of the account at the 2^nd defendant’s office at Flat 606, 6/F., Silvercord Tower 1, 30 Canton Road, Tsim Sha Tsui, Kowloon.  Tang explained the nature and contents of the documents to the 2^nd defendant.  The documents provided to the 2^nd defendant were the Margin Loan Facility Letter, Exh. P1, a copy of the Securities Trading Account Application, Exh. P2, a Letter of Authorization under Section 81A(6) of the Securities Ordinance, Exh. P3, a true copy of the Client Agreement together with the First Schedule, Exh P4.  These were all signed by the 2^nd defendant on behalf of the 1^st defendant save that the Client Agreement and First Schedule were not signed although the contents were explained to the 2^nd defendant. 

11. The 2^nd defendant also executed the Deed of Guarantee, Exh. P5, in front of Mr. Tang.  Exh. P6 is a copy of the board minutes of the 1^st defendant which was provided to the plaintiff authorizing the opening of the account and appointing the 2^nd defendant and Mr. Tai Chin Wah to operate the account. 

12. I am satisfied that the account was opened as mentioned by Tang Siu Lap in evidence and that the account was subject to the documents executed by the 2^nd defendant on behalf of the 1^st defendant.  

13. Tang Siu Lap also gave evidence of the trades in the account in February and March.  He also gave evidence that in mid-April 2003 the 2^nd defendant on behalf of the 1^st defendant made a request of him to increase the extent of the margin facility available to the 1^st defendant.  This was subsequently acceded to by the plaintiff who on 15 April issued a letter to the 1^st defendant revising the terms of the facility letter.  The terms that were revised were that the security percentage limit was no longer 50% but 10% market value on Gold-Face shares. 

14. There was no trading in the account in April 2003.  However, there were some trades in respect of sale transactions in May 2003. 

15. Tang Siu Lap gave evidence, and I accept, that all the transactions under the account carried out by the plaintiff were pursuant to the instructions given to him by the 2^nd defendant over the telephone.  In respect of each trade the contract notes were sent to the 1^st defendant on the following business day after every transaction.  This was sent at the address given to the plaintiff in the account opening form.  I should mention that this is also the address of the 2^nd defendant as given by him in his witness statement. 

16. Tang also gave evidence that monthly statements of account were issued to the 1^st defendant on a monthly basis.  None of the contract notes or monthly statements that were sent to the 1^st defendant were ever returned to the plaintiff.

17. On or about 19 May 2003 the shares of Gold-Face were suspended for trading at the Stock Exchange of Hong Kong Limited.  That led to the plaintiff issuing letters of demand demanding payment of the sums owing by the 1^st defendant to the plaintiff with accrued interest at that time.  This was followed up by letters of demand from solicitors on behalf of the plaintiff.

18. There is evidence given by Tang Siu Lap and confirmed by Leung that there was a meeting towards the end of May 2003 at which the 2^nd defendant attended.  At that meeting there was no dispute by the 2^nd defendant of the amounts owing by the 1^st defendant to the plaintiff.  The 2^nd defendant merely explained his financial position to the plaintiff and requested the plaintiff to give him more time to settle the indebtedness under the account.  However, nothing was agreed between the parties.

19. It is significant that at the meeting towards the end of May 2003 no allegations of unauthorized dealings were ever made by the 2^nd defendant.  These allegations first appeared when the defence and counterclaim was filed on 18 August 2003.  I have no hesitation in rejecting the allegations in the defence of unauthorized dealings. 

20. As regards the counterclaim, no evidence has been adduced in support of the same.  I accept Tang Siu Lap’s evidence that all the transactions under the account were carried out pursuant to instructions given by the 2^nd defendant, as the authorized person of the 1^st defendant, to him over the telephone. 

21. I am satisfied that the plaintiff is entitled to a fixed charge on the shares deposited in the account as a continuing security for the payment of the 1^st defendant’s liabilities to the plaintiff.  This is provided for in clause 2.2 of the First Schedule to the Client Agreement.  Clause 3.8 of the First Schedule also provides for a power of sale on the part of the plaintiff.  I am also satisfied that the plaintiff has a general lien over all the shares in the account pursuant to clause 4.6.1 of the Client Agreement.  I am satisfied that the plaintiff is entitled to judgment in the sum claimed. 

22. I give judgment to the plaintiff against the 1^st and 2^nd defendants in the sum of HK$1,335,559.24.  I also give judgment for interest on the said sum at the contractual rate of 18% per annum from 1 June 2003 until judgment and thereafter at judgment rate until payment.  The counterclaim is dismissed. 

23. I also make an order for costs against the 1^st and 2^nd defendants on a full indemnity basis.  This is provided for in clause 1.1.4 of the First Schedule and clause 2 of the guarantee.