Chow Sang Sang Securities Ltd v. Shen Shuai
Read the full judgment text of HCA 190/2021 on BabelCite. This High Court CFI judgment was delivered on 24 February 2023.
1. By a notice of appeal of 5th May 2022 (“ the Notice of Appeal ”), the Defendant (“ Ms Shen ”) appeals against the decision of Master Phoebe Man of 22nd April 2022 ordering ( inter alia ) that final judgment be entered against Ms Shen for the total outstanding principal amount of $351,139,103.52, total outstanding interest in the amount of $123,601,317, and interest on the principal.
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HCA 190/2021 [2023] HKCFI 453 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 190 OF 2021 ____________
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_____________ D E C I S I O N _____________ A. INTRODUCTION 1.By a notice of appeal of 5th May 2022 (“the Notice of Appeal”), the Defendant (“Ms Shen”) appeals against the decision of Master Phoebe Man of 22nd April 2022 ordering (inter alia) that final judgment be entered against Ms Shen for the total outstanding principal amount of $351,139,103.52, total outstanding interest in the amount of $123,601,317, and interest on the principal. 2.As this is an appeal under RHC O.58 r.1, what is before me is a rehearing of the summons of 18th October 2021 issued by the Plaintiff (“CSSS”) seeking summary judgment. B. THE BACKGROUND 3.The following is not disputed. 4.CSSS is a securities firm. 5.Ms Shen was introduced to CSSS through her friend Mr Yan Yude (“Mr Yan”), the chief executive officer of Virscend Education Company Limited, a company listed on the Stock Exchange of Hong Kong (“Virscend”). 6.Ms Shen is the sole shareholder and director of Master Lead International Group Limited (“Master Lead”). Master Lead opened an account for securities margin trading with CSSS in May 2017. Ms Shen signed a letter of guarantee to guarantee the payment of all liabilities of Master Lead owed to CSSS (“ML Guarantee”); 7.Ms Shen opened a personal account with CSSS in September 2018. 8.On 27th March 2019, Ms Shen and a Mr Sun Tao (“Mr Sun”) each signed documents guaranteeing, as primary obligor, the margin trading liability of each other’s companies to SSSC. Specifically, Ms Shen signed:
9.Mr Sun was the sole beneficial owner and director of Ocean Power and Fantastic World. He similarly signed a Chinese guarantee letter and letter of guarantee in respect of Master Lead. 10.On 18th March 2020, solicitors for CSSS (“DLA Piper”) issued final payment demand letters to Ocean Power and Fantastic World, demanding the payment of outstanding amounts and interest. 11.On 25th March 2020, DLA Piper issued letters to Ms Shen, referring to the Chinese Guarantee Letter and Guarantees, setting out the liabilities of Ocean Power and Fantastic World, stating that Ms Shen was liable as guarantor and principal debtor to repay the amounts owed by Ocean Power and Fantastic World to CSSS, and that CSSS had exercised its lien over the funds and collateral opened in the accounts opened and controlled by Ms Shen in accordance with the terms of the Guarantees and other contract documents. 12.On 11th May 2020, solicitors for Ms Shen (“Li & Partners”) replied, stating that CSSS was not entitled to rely on the Chinese Guarantee Letter or the Guarantees, as they were liable to be set aside as:
13.DLA’s letter of 19th May 2020 denied these allegations. It set out what CSSS said was the background leading to Ms Shen signing the Chinese Guarantee Letter and Guarantees. CSSS’s case was that a Mr Chen Di (“Mr Chen”) introduced various customers, including Ms Shen and Mr Sun, to CSSS; in Ms Shen’s account opening documents she stated that she was a university graduate, operated a company engaged in the business of real estate and construction work, and had had several years’ experience of investing in derivatives; Ms Shen conducted transactions through her account and Master Lead’s account between 2018 to March 2019 with an aggregate value of some $50m; in March 2019, the value of collateral in the accounts of Ocean Power and Fantastic World was insufficient to cover the total loan facilities granted to those accounts and CSSS requested Mr Sun to provide further security or top up of the amounts in the accounts; on 26th March 2019 Mr Chen told CSSS that as an interim measure to deal with the situation, Mr Sun and Ms Shen would each provide personal guarantees for each other’s companies. DLA said that Ms Shen was fully aware of the legal effect and nature of the documents that she signed. 14.CSSS issued the writ in these proceedings on 1st February 2021. It filed its statement of claim on 27th September 2021 and applied for summary judgment on 18th October 2021. 15.Ms Shen filed an affirmation on 17th December 2021 to oppose the application for summary judgment (“Shen’s Affirmation”). In it, Ms Shen claimed for the first time that the reason[1] why she came to sign the Chinese Guarantee Letter and the Guarantees was that in around March 2019, Mr Yan recommended to Ms Shen to enter into an arrangement (“the Shared Limits Arrangement”) whereby the loan limits in her margin accounts could be shared with the loan limits in the margin accounts of Mr Sun, who was a friend of Mr Yan. Mr Yan told her that she and Mr Sun would have to sign some documents to give effect to the Shared Limits Arrangement. Ms Shen thought that this would be an attractive opportunity to increase the potential loan limits available to her. She trusted Mr Yan’s recommendation and did not consider it necessary to ask Mr Yan to provide details of Mr Sun’s accounts, expecting them to be healthy, and agreed to sign the relevant documentation even though she did not know Mr Sun. She did not pay attention to the details of the documents she signed as (a) she thought that they were for the purpose of giving effect to the Shared Limits Arrangement and (b) she trusted Mr Lee of CSSS, the one handling her accounts, who made the Representation that the English documents (ie. the Guarantees) were the same as those she had previously signed. However, it subsequently turned out that the documents were not for the purpose of giving effect to the Shared Limits Arrangement, and the Representation was false. There was no reference in the signed documents to her entitlement to use the unused loan limits in the margin accounts controlled by Mr Sun, and unlike the ML Guarantee, the new documents purported to impose an obligation on her to guarantee all liabilities of third parties with whom she had no pre-existing relationship. C. THE APPLICABLE PRINCIPLES 16.The principles on an application for summary judgment are well established. See Hong Kong Civil Procedure 2023, notes 14/4/4, 14/4/9, 14/4/9A, 14/4/9B.
D. MS SHEN’S DEFENCE D1. The defence 17.Leading counsel for Ms Shen, Mr Victor Dawes SC, submitted that the summary judgement application should be dismissed for the following reasons:
18.At the hearing before me, Mr Dawes confirmed that before any triable issues could arise in respect of these two matters, the court would first have to be sufficiently satisfied that Ms Shen’s factual case as to the Shared Limits Arrangement was capable of belief, as the factual case underpinned the defences. I turn to address the issue of credibility of Ms Shen’s factual case. D2. Credibility of the Shared Limits Arrangement 19.I agree with the submissions of Mr Laurence Li SC, leading counsel for SCCC, that Ms Shen’s case as to the Shared Limits Arrangement is not capable of belief. 20.The WeChat exchanges between Ms Shen and Mr Lee immediately prior to the signing of the documents on 27th March 2019 show that Ms Shen was aware that she was signing documents to guarantee the liabilities of Mr Sun’s companies and not to give effect to the Shared Limits Arrangement.
21.The WeChat exchanges between Ms Shen and Mr Lee on 16th and 17th March 2020, some months after margin calls had been issued in respect of the accounts of Ocean Power and Fantastic World, also indicate that Ms Shen was well aware that she had entered into a guarantee for the companies’ liabilities. It is not suggested that Ms Shen’s state of knowledge was any different at this point in time as compared with the time when she signed the Chinese Guarantee Letter and the Guarantees. Furthermore, when Mr Lee informed Ms Shen that the accounts had become “insolvent” and that Ms Shen as guarantor bore a risk of liability, Ms Shen did not seem surprised, or upset; nor did she protest that she had all along thought that she had executed documents to entitle her to share margin account loan limits rather than to take on liabilities of third parties whom she did not know; instead, she acknowledged that she would be liable, and asked for information regarding Mr Sun’s financial position and details regarding the extent of her own liability. She asked for time to work out a solution. She also asked Mr Lee to withhold an amount which was about to be received into her account, clearly being aware that it would otherwise be used to settle Mr Sun’s liabilities. Some of the key parts of the discussions were as follows.[2]
22.The contemporaneous WeChat exchanges may also be contrasted with Shen’s Affirmation, where[3] Ms Shen claims that the Chinese Guarantee Letter and the Guarantees were not, contrary to her understanding, for the purpose of giving effect to the Shared Limits Arrangement. For example, Ms Shen said in her affirmation that “It turned out…” that the Chinese Guarantee Letter and the Guarantees attempted to impose a lien over her funds and securities, as if this was something which she was unaware of previously. However, the WeChat exchanges showed that when Mr Lee warned Ms Shen that her assets would likely be used as security for Mr Sun’s liabilities, she expressed no surprise. 23.This also deals with Mr Dawes’ submission that some of what was said by Ms Shen in the WeChat exchanges – her mention of a mutual guarantee, query as to whether the guarantee was limited or unlimited, and request for a statement of Mr Sun’s book position – were “not inconsistent” with the Shared Limits Arrangement. The context of the conversation was all about Ms Shen being liable for Mr Sun’s debts, and Ms Shen was not surprised by it. Nor was she making queries about the guarantees in the context of seeking to find out details of some mutually shared margin account limits arrangement. 24.Ms Shen’s evidence is self-contradictory. If she really believed that the documents she signed were to give effect to the Shared Limits Arrangement, she could not at the same time have believed that the documents were the same as the documents she previously signed, since the documents she previously signed were not for any such arrangement. 25.Ms Shen’s claim to have signed documents for the Shared Limits Arrangement without any awareness of the state of Mr Sun’s accounts is inherently incredible – on the one hand she says she thought it attractive to increase the potential loan limits available to her from others’ accounts, but on the other hand she says she made no enquiries as to the details of those accounts, such as the margin limits of the accounts or the unused margins on the accounts, so that she simply would not have known what “increase” she was getting, and consequently whether it was attractive or not. 26.The Shared Limits Arrangement was not mentioned in Li & Partners’ letter of 11th May 2020, which sought to deny Ms Shen’s liability. Whilst the letter claimed that the Chinese Guarantee Letter and the Guarantees should be rescinded, one of the reasons for this being Mr Lee’s false Representation (that the documents were the same as those previously signed), no mention was made of the complaint that the documents signed by Ms Shen failed to give effect to the Shared Limits Arrangement. In fact, the Shared Limits Arrangement was not mentioned until Shen’s Affirmation of December 2021. Mr Dawes submitted that the letter was not inconsistent with what Ms Shen said later. I disagree. Paragraph 5 of the letter, for example refers to the background to the signing of the documents in March 2019, and says that Ms Shen did not know Mr Sun and had no relationship with either him or his companies. If there had been any arrangement to share margin limits, it is inconceivable that it would not also have been mentioned as part of the background, in the same way that it is referred to in paragraph 11 of Shen’s Affirmation as part of the explanation as to why Ms Shen signed the documents: “I do not know Sun Tao personally and have never met him. Nevertheless, I trusted Mr Yan in his recommendations and believed that there was nothing wrong with the Shared Limits Arrangement he recommended to me…” It is also inconceivable that in complaining that the documents had been falsely represented as being the same as those previously signed, complaint was not also made at the same time that the documents failed to give effect to the Shared Limits Arrangement. 27.Mr Dawes submitted that the absence of Mr Lee’s evidence prevented the court from reaching any conclusion as to liability, as Mr Lee was the only person from CSSS who dealt with Ms Shen, and Ms Shen was entitled to cross examine him. He relied in particular on the fact that there were two phone calls on 26th March 2019 between Ms Shen and Mr Lee, and there was a conflict of evidence as to their contents. Ms Shen says that Mr Lee never explained the nature of the Chinese Guarantee Letter and Guarantees to her. CSSS’ evidence on this point was given by a deputy general manager, who said that she believed that Mr Lee would have asked Ms Shen whether she was aware of and agreed to the cross-guarantee arrangement. (Mr Lee left the employment of CSSS in February 2021 and emigrated in August 2021.) However, even if it were the case that Mr Lee never explained the documents to her, this would not detract from the points set out above as to why Ms Shen’s case is not credible. 28.Furthermore, as Mr Li submitted, Ms Shen’s own evidence[4] is that she signed the Chinese Guarantee Letter and Guarantees in reliance on Mr Yan’s recommendations, and Mr Lee simply provided the documents for Ms Shen to sign. The only reliance by Ms Shen on what Mr Lee said is his explanation that the Guarantees were the same as the documents that she had previously signed (in other words, the Representation). There is no dispute by CSSS that Mr Lee did say this. They say however that it is entirely correct, because the wording of the Guarantees was indeed the same as the ML Guarantee. 29.Mr Dawes also submitted that the cross-guarantee arrangement made no commercial sense and therefore supported the credibility of Ms Shen’s case. There was no urgency for Ms Shen to have signed the Guarantees; it was Mr Sun’s companies which needed additional funds, not hers. However, her claim not to have known what she was doing is simply not credible in the light of the contemporaneous evidence. 30.I therefore do not consider Ms Shen’s factual case as to the Shared Limits Arrangement is capable of belief. This alone is sufficient to dispose of Ms Shen’s appeal. 31.For completeness, I go on to set out, briefly, my observations regarding the two defences relied on by Mr Dawes as justifying the dismissal of the application for summary judgment: (1) the absence of evidence from Mr Lee and Mr Chen, and (2) the alleged breach of fiduciary duties by CSSS. I do not consider that either of these defences raises any triable issue, even if Ms Shen’s factual case could be said to be credible. D3. Absence of Mr Lee and Mr Chen 32.Mr Dawes submitted that the absence of Mr Lee’s evidence is relevant to the issue of whether Ms Shen’s case is worthy of belief. In particular, it was said that:[5]
33.I have addressed these points in the previous section. First, the WeChat records speak for themselves. Second, it was Mr Yan (rather than Mr Lee) who asked and convinced Ms Shen to sign the documents. Third, even if Mr Lee had not explained the documents to her, this would make no difference to the credibility of Ms Shen’s case. 34.It was also submitted that without Mr Lee, CSSS fails to establish that Ms Shen gave informed consent[6] to signing the Chinese Guarantee Letter and the Guarantees, and that there was such a requirement (of consent) as CSSS had fiduciary obligations to Ms Shen. I do not agree that CSSS had any relevant fiduciary obligations to Ms Shen, as I explain further below. 35.As to Mr Chen, it is said that it is CSSS’ evidence that he introduced various customers, including Ocean Power and Fantastic World, to CSSS; and that he participated in the negotiation of the cross-guarantee arrangement. I do not agree that Mr Chen’s evidence is necessary in order for CSSS to prove its case. CSSS’ case relies on the signed Guarantees, not on what Mr Chen may or may not have said. D4. Alleged of breach of fiduciary duties by CSSS 36.It is said that CSSS owed fiduciary duties to Ms Shen by reason of (1) CSSS being a statutory trustee as regards its clients’ securities and monies; (2) case law recognising a stockbroker as a fiduciary vis-à-vis its clients; and (3) CSSS’ obligations as codified by the SFC’s code of conduct. 37.In relation to the first point, reliance was placed on s.4(1) of the Securities and Futures (Client Money) Rules (Cap.571I), which provides that a licensed corporation that receives or holds client money has to establish a segregated account for client money, designated as a trust account or client account; and ss.5(1)(a) and 5(2)(a) of the Securities and Futures (Client Securities) Rules (Cap.571H), which provides that an intermediary which receives any client securities or securities collateral shall ensure that they are deposited in safe custody in a segregated account which is designated as a trust account or client account. 38.However, even if CSSS held Ms Shen’s securities and monies on trust for Ms Shen, it does not follow that CSSS somehow owed fiduciary duties to Ms Shen in relation to the separate transaction of her signing the Chinese Guarantee Letter and the Guarantees. See Forsta AP-Fonden v Bank of New York Mellon SA/NV and others [2013] EWHC 3127 (Comm) at [174] (Blair J):
39.In the present case, it is not entirely clear what fiduciary duty is alleged to have been breached. It is said that CSSS was in breach of its fiduciary duties in that it placed itself in a position where its interests as creditor vis-à-vis Ocean Power and Fantastic World were in conflict with its duty as trustee and fiduciary for Ms Shen.[7] However, there could not have been a duty on CSSS not to place itself in such a position, given the terms of the client agreement which each of Ms Shen and Master Lead entered into with CSSS, which provided that:
40.The extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties. The contract can, and does, modify the extent and general nature of the general duty that would otherwise arise. See Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at [141] (Stock JA). There has been no explanation as to how the fiduciary duty contended for can arise in the face of the terms of the client agreement. 41.In relation to the second point, reliance was placed on Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371, where at 377 Gibbs CJ said:
42.However, it is clear from the immediately preceding passage that this was said in the context of a case where the stockbroker had taken on the duty to give investment advice to the client:
43.In the present case, it is not Ms Shen’s case that SCCC took on any duty to advise her, or that she sought SCCC’s advice and relied on it. On the contrary, her evidence is that her decision to sign the Chinese Guarantee Letter and the Guarantees based on Mr Yan’s recommendations. 44.It was also said that there is a consistent line of authorities in England recognising the fiduciary nature of the relationship between a stockbroker and its client; I need not deal with these, as it was recognised that these were all in the context of secret commissions received by the stockbroker.[8] 45.In relation to the third point, reliance was placed on certain provisions of the Code of Conduct for Persons Licensed by or Registered with the SFC. It was said that these provisions are “the codification of fiduciary duties imposed by equity in general”.[9] However, the Code cannot override express contractual provisions: Kwok Wai Hing Selina v HSBC Private Bank (Suisse) SA [2012] 4 HKC 260 at [135] (Reyes J). E. DISPOSITION 46.For the above reasons, I dismiss Ms Shen’s appeal. 47.The parties agreed that costs should follow the event, with certificate for two counsel, and that costs should be assessed summarily. I therefore order that Ms Shen pays CSSS the costs of and occasioned by the Notice of Appeal, with certificate for two counsel, to be assessed summarily. CSSS should lodge and serve its statement of costs within 7 days; Ms Shen should lodge and serve her list of objections within 7 days thereafter; CSSS should lodge and serve its reply, if any, within 4 days thereafter. The costs will then be assessed summarily on the papers.
Mr Laurence Li SC leading Ms Astina Au, instructed by DLA Piper Hong Kong, for the Plaintiff Mr Victor Dawes SC leading Mr Isaac Chan and Mr Jeff Chan, instructed by Li & Partners, for the Defendant [1] See Shen’s Affirmation paragraphs 9 to 17. [2] The translations of the WeChat exchanges were agreed. [3] Paragraph 17. [4] Shen’s Affirmation paragraphs 9 to 11. [5] Skeleton paragraphs 19 to 20. [6] Skeleton paragraph 21. [7] Shen’s Affirmation paragraph 27(c); skeleton paragraph 8. [8] Skeleton paragraph 43. [9] Skeleton paragraph 51. | ||||||||||||||||||||