XCHRX PROVISIONAL TALENT LTD. v. SOUTH CHINA FINANCE CO. LTD.

HCA No. 2183 of 1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2183 OF 1999

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REASONS FOR DECISION

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1. This is an application by the Plaintiff in these proceedings for summary judgment under Order 14. At the conclusion of the hearing on 1 December 1999 I gave judgment for the Plaintiff as sought, with costs, and now give my reasons for so doing.

2. The Plaintiff has since 9 September 1998 had a securities trading account with South China Securities Limited (Securities) with a margin facility granted by the Defendant to trade in the stock market. The facility was secured by a Memorandum of Securities Deposit and a letter of guarantee provided by a Mr Kwok Wai Tak (Mr Kwok). On 11 September the Plaintiff deposited into that account 35 million shares in CIL Holdings Ltd and then bought 15 million more on margin. By 17 September therefore the Plaintiff had 50 million shares in the account which, at a price then of 34.50 cents, were worth $17,250,000.00, while at the same time there was a debit balance in the account with the Defendant of $5,201,340.00. The following day, the price dropped to 9.70 cents, valuing the shares at $4,850,000.00, with the same debit balance owing. On 21 September trading in the shares was suspended.

3. On 12 August 1997, a company called Richland Harvest Corporation (Richland) had also opened a similar account with Securities and with a similar margin facility with the Defendant. This was secured by way of their usual Memorandum of Securities Deposit, and a letter of guarantee provided by one Mr Chung Kam. By 17 September 1998 there were shares in Richland's account to an acceptable value, to the Defendant, of $1,080,040.00, while the margin account was in deficit to the amount of $3,944,497.12. A margin call was made by the Plaintiff but, no further deposit being forthcoming, the shares were sold on the market, leaving a balance owing by Richland of $2,718,996.60.

4. On 21 September letters of demand were sent to the Plaintiff and Richland in respect of the sums owing.

5. Both these companies had been introduced to the Defendant and Securities by Mr Kwok, and it is alleged by the Defendant that it was with Mr Kwok that they mainly dealt in relation to these accounts. Although he accepts that he introduced them, and sometimes gave instructions on behalf of Richland, Mr Kwok denies any direct involvement in the companies or interest in them. He appears from his description of his activities to have been a middleman. I do not have to make any findings as to his precise position for the purpose of this application and I do not intend to do so.

6. It is not in dispute that, also on 21 September, there was a meeting at the premises of the Defendant between Mr Kwok, a Mr Tam, whose affidavit is the only evidence I have from the Defendant, a Mr Ng and a Mr Chiu. What the Defendant says was agreed by Mr Kwok at that meeting is set out in his affidavit filed for the purpose of these proceedings and reads as follows:-

(1) for and on behalf of the Plaintiff, and in consideration of the Defendant refraining from taking further steps to pursue the amounts outstanding under the margin lending accounts of the Plaintiff and Richland Harvest, that the existing shares held under the margin lending account of the Plaintiff should be held as security not only for that account but also as security in respect of the amount outstanding in the margin lending account of Richland Harvest;

He also says that Mr Kwok agreed to personally pay or arrange payment of further cash or collateral into the margin account of Richland.

7. There is no written record of this agreement, and no evidence other than that of Mr Tam that it was made.

8. This agreement is denied by Mr Kwok, who says that the only purpose of the meeting was to discuss the Plaintiff's situation, and all that was agreed was that he would relay a message to Mr Wong of the Plaintiff that a further 20 million CIL shares should be deposited into the Plaintiff's account so that the Defendant would not proceed to liquidate the existing shares or demand payment of the debit balance on its account. This he said he did and the shares were deposited the same day. Trading in the shares resumed shortly thereafter.

9. Over the next few days the Defendant sold some of the Plaintiff's shares, as they claim they were entitled to do under the account opening agreements, leaving a balance of 44,430,000 shares in the Plaintiff's account and a small cash balance in the Plaintiff's favour.

10. On 30 September the Defendant's solicitors issued a letter of demand to Richland and its guarantor Mr Chung Kam. No mention was made of any agreement with Mr Kwok.

11. On 17 November 1998, the Plaintiff wrote to the Defendant requesting that the shares and the cash balance in its account be transferred to its account with Pacific-Yamaichi Securities (HK) Ltd. This was not done and two further letters to the same effect were sent on 19 and 20 November. On 23 November, the Defendant wrote to the Plaintiff saying that they were unable to accede to their request and giving the following reason:-

We are currently in the process of carrying out a full auditing and investigation of the account and other accounts held or otherwise controlled by your company, or on its behalf by its directors or officers, and of the circumstances surrounding the deposit and transfer of the stock, shares and securities and monies held under those accounts (including the subject stock, shares and securities and monies held under the captioned account) prior to any release or transfer.

12. Again, no mention was made of any agreement with Mr Kwok.

13. On 23 November and 4 December respectively, the Defendant commenced proceedings against Mr Chung Kam and Richland in respect of Richland's debt.

14. There are two principal issues here. The first is whether the evidence of the making of the alleged agreement is credible. The second is, if there is believable evidence of such an agreement, whether Mr Kwok was authorised, or had ostensible authority, to bind the Plaintiff.

15. Mr Mok, on behalf of the Plaintiff, has put forward a number of reasons he says lead to the inevitable conclusion that the evidence of the agreement does not reach the standard required for the Defendant to establish an arguable defence. The first is the circumstances of the making of the agreement itself, which, although it involved substantial sums of money and the share accounts of two companies, was not recorded in writing, even, it appears, by any minute made by the Defendant's officers at the time. Yet they say that they were accepting as binding an agreement made, not by a director or officer of the Plaintiff, but by someone they took to be an agent.

16. The second is the behaviour of the Defendant immediately after the alleged agreement. Although Mr Tam said that the consideration for the agreement was that the Defendant would refrain from taking further steps to pursue the amounts outstanding under either the account of the Plaintiff or Richland, immediately afterwards they liquidated a total of 25,500,000 CIL shares in the Plaintiffs' account and on 30 September sent a letter of demand to Richland, this latter notwithstanding that there was sufficient share value in the Plaintiff's account to cover Richland's deficit as well. Further, instead of liquidating the Plaintiff's shares to cover the deficit in Richland's account, which under the agreement they would have been entitled to do, they commenced proceedings in the High Court against Richland and its guarantor. They did not at any stage take steps to liquidate the Plaintiff's holding nor even threaten to do so. Indeed, the agreement was not mentioned in any correspondence at all, even in the Defendant's reply to the Plaintiff of 23 November when a completely different, and somewhat vague, reason was given for failing to carry out the Plaintiff's instructions.

17. The first time that the agreement was mentioned at all was in the affidavit of Mr Tam in April this year in opposition to the Plaintiff's application for summary judgment. There is no supporting evidence from anyone else who was there, and nothing in writing. It was not acted upon by the Defendant and was not mentioned until some months afterwards.

18. There is no explanation of this from the Defendant. Mr Quinn for the Defendant says that further evidence might be forthcoming from others at the meeting if the matter goes to trial. I am afraid that this is not good enough. The onus is squarely on the Defendant to satisfy the Court that there is an arguable defence, and they have had an ample opportunity of producing what evidence they wish to rely on.

19. I have no hesitation in agreeing with counsel for the Plaintiff when he says that the evidence here is insufficient and, in the circumstances of this case, not credible, and that the Plaintiff should have their judgment as claimed.

20. In view of my finding in respect of the agreement itself, it is unnecessary for me to deal with the second issue, namely whether Mr Kwok was able to bind the Plaintiff as agent or otherwise. However, if that had been the only issue here, I would be inclined to say that the Defendant had established sufficient on that matter to say that they should be given leave to defend.