Re Everhot Securities Ltd

DCMP 2697/2019

[2019] HKDC 1464

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 2697 OF 2019

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DECISION

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1.By an ex parte originating summons, the applicant seeks amongst other things a declaration that a trust subsists between it and some of its clients in respect of certain unclaimed securities, and for an order that it may sell or otherwise dispose of such securities and pay the net proceeds into court thereby discharging and ending its obligations as a trustee.

Background

2.The following background may be gleaned from the supporting affirmations of the applicant’s director.

3.The applicant had, until 31 May 2017, operated a stock trading business.

4.After the applicant had decided to cease its stock trading business, it wrote to all its clients to request them to transfer the shares held in their respective accounts maintained with the applicant to another stockbroker.  Most of the clients gave instructions to transfer their shares away but a few clients had failed to respond.  Despite further efforts (by telephone calls and personal visits), the applicant has failed to make contact with those clients (“Residual Clients”).

5.As the applicant could no longer hold shares for its clients after cessation of its stock trading business, it opened an account with another stockbroker (“Solid King”) in the name of the applicant and transferred all the shares held by the Residual Clients to it.  The applicant made it clear to Solid King that it is merely a trustee holding the shares upon trust for and on behalf of its clients and the shares belonging to each of the Residual Clients are identified within the account so that there is no mixing of assets.

6.The applicant reported the matter to Securities and Futures Commission (“SFC”) in accordance with the Securities and Futures Ordinance, Cap 571 (“SFO”).  The SFC suggested the applicant to try to contact its clients by means of advertisement in local newspapers.  The applicant posted an advertisement in a Chinese newspaper and an English newspaper but there was still no response.  The SFC further suggested making an application to the court under section 62 or sections 67 and 68 of the Trustees Ordinance, Cap 29 (“TO”).

The application

7.Under section 37 of the District Court Ordinance, Cap 336 (“DCO”), the District Court has jurisdiction to hear and determine these proceedings, as the total market value of the Unclaimed Securities (as confirmed by the monthly statements issued by Solid King and summarised in the schedule handed up by Mr Woo at the hearing) does not exceed HK$10,000.

8.Pursuant to my directions, the applicant gave notice of the proceedings (including the orders sought) to the Residual Clients by ordinary post and by advertisement in local newspapers: see Re ABN AMRO Bank NV [2018] HKCFI 1559 at para15; and Re New Japan Securities International (HK) Limited [2007] 3 HKLRD 54 at para 13.

9.On 9 October 2019, the applicant received a telephone call from one of the Residual Clients (Mr Cheng) who is beneficially entitled to the 600 shares in 401 Holdings Ltd.  Mr Cheng said he is not going to claim back the securities and gave instructions to terminate his account. He said he would not attend this hearing.  Apart from him, no other Residual Clients has come forward.

10.It is a general rule that a broker is a trustee over the money and securities it holds on behalf of its clients: see Re Drake & Morgan Ltd, unreported, HCMP 1490/2009, 27 August 2009 at para 12 and the authorities cited therein.  The agreements between the applicant and the Residual Clients, exhibited in the supporting affirmations, are consistent with the general rule.  I accept that the applicant has no beneficial interest in the Unclaimed Securities and has been holding the shares as a trustee for the Residual Clients.

11.The applicant has ceased its stock trading business by the end of May 2017 but, because of the Unclaimed Securities, has yet to obtain a revocation of its license under section 195(1)(d) of the SFO. I agree that it would be just and equitable in the circumstances to authorise payment into court under section 62 of the TO of the Unclaimed Securities so as to bring an end to the trust and to relieve the applicant of its duties as a trustee and the onerous duties under the SFO: see Re Drake & Morgan Ltd, at para 16 and the authorities cited therein.

12.However, it is practically not possible for the Unclaimed Securities to be lodged directly into court as the Registrar is not a participant of the Central Clearing and Settlement System of Hong Kong Exchanges and Clearing Ltd.  A pragmatic solution to the problem is to authorise the applicant to procure the sale or otherwise disposal of the Unclaimed Securities under section 56(1) of the TO and then pay the net proceeds into court: see Re ABN AMRO Bank NV [2018] HKCFI 1559 at paras 17(2) & 23; and Re New Japan Securities International (HK) Ltd, at paras 17-18.

13.401 Holdings Ltd was put into compulsory winding up in 2005.  The liquidators have yet to realise the assets of the company and to decide whether to declare a dividend to its shareholders.  In the meantime, its shares cannot be sold and have little or no market value.  Initially, the applicant proposed to pay $18 into court pending claim by the beneficial owner, calculated in accordance with the closing price of the shares immediately before they were suspended from trading.  Now that the beneficial owner (Mr Cheng) has confirmed that he is abandoning the shares, the better course (which is accepted by Mr Woo) is to grant liberty to the applicant to deal with the shares as they see fit including the forfeiture thereof following Re ABN AMRO Bank NV [2018] HKCFI 1559 and Re Piper Jaffrey Asia Securities Limited, unreported, HCMP 437/2013.

Disposition

14.For the above reasons, I make an order in terms of the originating summons save that para (4) thereof be substituted with an order granting liberty to the applicant to deal with the 600 shares in 401 Holdings Ltd as they see fit including the forfeiture thereof and that they be discharged from any obligations or claims in respect of such shares.

Mr Woo Roderick Bun of F Zimmern & Co, for the applicant