Re Rhb Securities Hong Kong Ltd and Antoher

HCMP 2310/2020

[2021] HKCFI 1392

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2310 OF 2020

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D E C I S I O N

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Introduction

1.The 1^st and 2^nd applicants are Hong Kong companies providing brokerage services for securities and futures.  They are licensed by the Securities and Futures Commission and are bound by its rules.  On 9 December 2019, they notified their customers that they would cease their businesses, which they did on 31 July 2020.  While efforts have been made to return client assets to all the clients, as of today, the applicants still hold client cash and securities which they have not been able to return in the total sum of roughly $22 million. 

2.The applicants have applied to the SFC to have their licences revoked.  It is however a condition of the revocation that the applicants are to ensure that the client assets are properly dealt with.

3.Against the above background, the applicants commenced the present proceedings by an ex parte originating summons on 18 December 2020 (which has since been amended) applying for orders that they be at liberty to pay into court the unreturned client assets pursuant to section 62 of the Trustee Ordinance, Cap 29; and, to deal with, including forfeiting, some of those client assets pursuant to section 56 of the same Ordinance.  These unreturned assets belong to about 700 clients, who are located in Hong Kong, mainland China, Taiwan and Malaysia.  It would appear that the majority of the customers are mainland Chinese.

Issues arising from the first hearing

4.The amended originating summons first came before me on 4 February this year.  At that hearing, I raised a number of queries on the supporting affirmation evidence.  Of particular concern was the fact that there were a group of clients whom the applicants were able to contact and who had indicated their intention to get back their cash or securities but yet the applicants were unable to return the assets to them.

5.In the supporting affirmation, it was stated that these clients had “failed to provide effective means for receiving their assets”.  In the contact log complied by the applicants, a number of clients have the following remark (or remark to similar effect) made against them: “Client intended a stock and cash transfer but has no means”.

6.I directed that further evidence be filed to explain in more detail why this group of clients were unable to withdraw their assets notwithstanding their express wish to do so.

7.I also identified two clients within this group, whom I shall refer to as “KWK” and “TH”, who had sizable amounts of assets held with the applicants.  KWK had assets worth about $6.7 million held with the applicants whereas TH, who had passed away before the first hearing, had assets worth about $18 million.

8.Given the sizable sums at stake and given further that both KWK and TH’s estate were contactable and had indicated that they intended to withdraw the assets, I considered that the applicants should provide further information on these two clients, including the steps which the applicants had taken in order to return the assets.  I also directed that notice of the adjourned hearing be given to these two clients so that they could make representations to the court as they saw fit on whether the client assets should be paid into court.

9.At this juncture, I should add that the further evidence which I requested is clearly material evidence which has a bearing on how the court should exercise its discretion.  The applicants ought to have deposed to these matters as part of their duty to make full and frank disclosure in the present ex parte application.

The further evidence

10.Today’s hearing is the adjourned hearing of the amended originating summons.  Having reviewed the further affirmation filed by the applicants, I consider that the proper thing to do at this stage is to adjourn the amended originating summons sine die as it is not appropriate for the applicants’ unreturned client assets to be paid into court now.

11.My main concern relates to the group of clients who are referred to as “the Affected Clients” in the further affirmation. There were 151 of them as of the date of the last hearing.  They were previously contactable and had either positively communicated their intention to withdraw the assets or did not unequivocally give any consent to the applicants to deal with their assets.

12.The evidence shows that quite a number of the Affected Clients, who appear to be mainland Chinese, had informed the applicants that they were unable to come to Hong Kong to open new bank accounts or securities accounts to receive their assets from the applicants due to travel restrictions imposed by reason of the COVID-19 pandemic.  For these Affected Clients, the assets cannot be transferred to their local bank accounts due to remittance restrictions.

13.Insofar as these clients are concerned, it is a case which stands apart from previous cases in which the court granted an order for payment in upon the cessation of a stockbroker’s business.  In those cases, the court was dealing with the situation where the stockbroking company was unable to contact the clients or for some reason the clients seemed to be uninterested in recovering their own assets.  See, eg, Re Drake & Morgan Limited HCMP 1490/2009, 27 August 2009, paras 7 and 14; Re China Point Stock Brokers Limited (in members’ voluntary liquidation) [2018] HKCFI 1106, para 2.

14.Here, these mainland Chinese Affected Clients were contactable and seemed interested in recovering their assets.  However, they have been prevented by the prevailing travel restrictions to make arrangement to receive the assets from the applicants.  The evidence shows that the individual sums involved are not negligible.  They range from a few thousands to tens of thousands of dollars.  In some instances, the client had in fact provided a bank account in Hong Kong as the receiving account. However, the designated account turned out to be inactive.  The client was not able to come to Hong Kong due to travel restrictions to re-activate the account. 

15.In the circumstances, I think it is fair to expect that upon the easing or lifting of the travel restrictions at some point in the future, some of these customers will come forward to demand the return of their assets. 

16.If a payment in order is made now, these clients would have to make an application to the court for payment out instead.  Legal costs may be incurred.  More time is required than if the clients can directly claim from the applicants. 

17.The court would have to deal with these payment out applications.  These assets comprise both cash and securities.  A small portion of these securities are securities issued by overseas companies.  In the case of securities, the transfer back to the clients would take more time to complete than in the case of payment out of cash.  It may not necessarily be a straightforward exercise and may create an administrative burden on the court.

18.In this regard, I refer to what I said in Re K&R International Limited [2021] HKCFI 561 at paras 48 to 54.  When considering whether to allow the payment in of client assets, the court should take into account the implications of such an order both from the perspective of the affected clients and from that of the court.

19.Here, a payment in order granted at this stage is not desirable from the viewpoint of the Affected Clients and the court.

20.Mr Alvin Hor, who appears for the applicants, submits that the applicants have taken all reasonable efforts to locate and contact the clients in an attempt to return the assets.  Mr Hor submits that the applicants have in fact done “far more” than what is considered as “reasonable efforts”.  Hence a payment in order should be made.

21.I accept that in the course of 2020, the applicants had made extensive efforts to contact the clients for the return of the client assets.  These included on multiple occasions (a) sending written notices in Chinese and English by post to the clients’ last known addresses, (b) sending emails to the clients whose email addresses are known, (c) posting announcements in Chinese and English on the applicants’ website, (d) making at least three attempts to call the clients at their last known telephone numbers and (e) publishing notices in Chinese and English in newspapers in Hong Kong, mainland China, Taiwan and Malaysia. 

22.Furthermore, after the first hearing, the applicants have made additional efforts to liaise with the clients, including the Affected Clients. 

23.That said, what count as reasonable efforts is not to be determined solely from the viewpoint of the applicants.

24.It must be recognised as a starting point that where a company elects to cease its business involving client assets, it bears the primary responsibility to return the assets entrusted to it by the clients: Re K&R International Limited at paras 44 to 45.

25.In the present case, the first notification to the clients regarding the cessation of business was sent out by the applicants in December 2019.  In the course of 2020, the applicants tried to return client assets.  In fact, I understand that the business operation only ceased in July 2020.  Unfortunately, meanwhile the COVID-19 pandemic struck.  Business activities were coming to a halt all over the world and were only slowly reviving in the latter part of 2020.  The applicants then made an application for payment in in December 2020. 

26.We are effectively looking at a one-year timeframe within which the applicants attempted (or hoped) to wrap up their businesses completely.  Given the number of customers involved and the value of the assets at stake, even without a pandemic, that timeframe would appear to me to be a little too ambitious.  With the pandemic happening at the same time, the timeframe seems positively aggressive and hence unreasonable.

27.What one would reasonably expect from the applicants is that they should really allow more time for the Affected Clients to make arrangement to receive the assets.  After all, the return of client assets has been necessitated by the applicants’ unilateral decision to terminate the businesses.  Hence, I do not agree with Mr Hor’s submission that the applicants have done “far more” than is reasonable to return the client assets.

28.What has happened since the first hearing in February is in fact telling.  In less than three months’ time, five Affected Clients came forward and effected withdrawal of their assets totalling about $14 million in value.  KWK was one of the five Affected Clients.

29.Further, since that hearing in February, a total of 30 clients successfully withdrew their assets from the applicants.

30.These facts really speak for themselves.  They show that it does take time for the clients to come forward to withdraw their assets and that it would be reasonable for the applicants to wait and allow more time before asking the court to make a payment in order.  If the order had been made at the first hearing, these 30 clients would have had to make a court application for payment out, thus causing inconvenience to the clients and burdening the court with applications that should really have been dealt with by the applicants themselves as part of their responsibility to wrap up their businesses in a proper manner.

31.Separately, the evidence shows that some other Affected Clients have so far failed to withdraw assets for other reasons.  I do not propose to set out all the reasons here.  Some of them have to do with the difficulties encountered by the applicants in verifying the identity of the Affected Clients. 

32.For instance, the representatives of some of them who are corporations were unable to provide signatures which match with the applicants’ records of the clients’ list of authorised signatories.  In the circumstances, it is submitted on the applicants’ behalf that these assets should be paid into court as the applicants had taken reasonable steps to try to return them, but without success.

33.At today’s hearing, I asked Mr Hor if the applicants could not resolve these technical issues, how the court is supposed to resolve them when these clients come to the court for payment out in the future.  Mr Hor submitted that the applicants had done everything to try to resolve the problem.  I do not accept that. 

34.What the applicants are effectively doing by applying for payment in in respect of these cases is to shift the problem to the court.  This is unacceptable.  To properly verify the identity of clients in the course of dealing with and handling their assets is something that the applicants, as professional stockbrokers, are well-positioned to do.  It is for them to solve the problems as they arise.  As I said in Re K&R International Limited, the High Court Registry is not an extended back office of the applicants.  Payment into court is not a proper solution for the applicants’ problems.  They are resolvable if the applicants do put in some more efforts. 

35.Lastly, the evidence shows that the applicants are subsidiaries of RHB Bank Bhd, a listed Malaysian banking group.  It would appear that the applicants should therefore have the resources to properly deal with the unreturned client assets.  There also does not appear to be any urgent need for the applicants to wrap up their businesses right away.  In the circumstances, I decline to grant the payment in order now.

Conclusion

36.I would adjourn the amended originating summons sine die with liberty to restore.  I grant leave to the applicants to file further affirmation, if so advised, to give an update on the progress of the return exercise at least 7 days before the resumed hearing.  Fresh skeleton submissions should be lodged at least 5 days before the hearing.

37.I make no order as to the costs of today’s hearing.

Mr Alvin Hor, instructed by Ribeiro Hui, for the 1^st and 2^nd applicants