Lau Wang Chi, Barry v. Cgs-cimb Securities (Singapore) Pte Ltd

HCSD 17/2023

[2024] HKCFI 493

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 17 OF 2023

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DECISION

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1.By an application filed on 11 April 2023, the Applicant seeks to set aside a statutory demand dated 6 October 2022 and served on him by the Respondent (respectively, “the SD” and “CGS”) on 22 March 2023 requiring him to pay a sum of US$11,039,857.47 (“the Debt”), being the principal amount of US$10,979,108.67 plus interest of US$24,789.10.

2.The Debt is said to have arisen out of the Applicant’s liability as guarantor of one ACCP Global Limited (“ACCP”) pursuant to a guarantee dated 14 May 2021 executed by him in favour of CGS (“the Guarantee”) under which the Applicant guaranteed ACCP’s liability under the Prime Services Agreement dated 30 April 2021 entered into between ACCP and CGS (“the PSA”).

3.Mr Charles Sussex SC (leading Ms Terri Ha) appeared for the Applicant and Ms Astina Au appeared for CGS.

Applicable Principles

4.An application to set aside a statutory demand is governed by Rules 47 and 48 of the Bankruptcy Rules Cap 6A. The relevant principles are well established and not seriously disputed.

5.The burden is on the debtor to satisfy the Court that there are valid grounds to set aside the statutory demand.

6.Where the debtor asserts that there is a bona fide dispute on substantial ground in respect of the debt, relying on Rule 48(5)(b), as the Applicant is now, he has to adduce sufficiently precise factual evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one (Re Leung Cherng Jiunn [2016] 1 HKLRD 850, at §27, per Kwan JA (as the VP then was)). Ms Au emphasized that this threshold test is higher than that for a defendant to obtain unconditional leave to defend under an O14 application[1].

7.She further emphasized that the Court would consider the case put forward by the debtor with a reasonably critical eye, testing the case against the other background facts and circumstances[2].

8.Mr Sussex cited, as a reminder and the above notwithstanding, a passage in Re Leung Cherng Jiunn in which the learned JA (now VP) observed :

“ This is not to say it should be easier for a creditor to succeed in a petition than in seeking summary judgment in a civil action, notwithstanding the higher threshold test for resisting a petition in the sense as explained above. It is well established that petitions are not meant to be used for the purpose of debt collection and the winding-up or bankruptcy jurisdiction of the court would be exercised only in very clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the court will dismiss the petition … ”. (§27(5))

The Basic Facts

9.Prior to the present events, the Applicant’s wholly-owned corporate vehicle one Surplus Gain Global Limited (“SGGL”) had been holding a prime broker margin account with Global Prime Partners (“respectively, “SGGL GPP Account” and “GPP”).

10.In 2019, GPP was winding down its operation. Thus, the Applicant looked for another prime broker. Through introduction, SGGL opened a prime services securities account with CGS (“SGGL CGS Account”), which was and is a Singaporean company. The shares previously held in the SGGL GPP Account were transferred into the SGGL CGS Account.

11.In or around November 2020, the Applicant set up ACCP to take over the equity trading business of SGGL. ACCP was a company registered in Hong Kong.

12.On 30 April 2021 and for ACCP to open a prime services account with CGS (“ACCP CGS Account”), the Applicant signed the Prime Services Account Application and entered into the PSA.

13.On 14 May 2021, the Applicant signed the Guarantee. On 1 June 2021, the share portfolio in the SGGL CGS Account was transferred into the ACCP CGS Account.

14.In or around January 2022, CGS started to express concerns about margin calls on the ACCP CGS Account. On 31 January 2022, HK$7.5 million was paid to CGS by the Applicant’s arrangement. The margin excess on the ACCP CGS Account was then US$117,187.57.

15.On 7 February 2022, the margin call on the ACCP CGS Account was US$1,983,643.82.

16.From the next day on, ie. 8 February 2022, CGS began, and continued, to sell down the portfolio and the margin continued to increase. By late February 2022, the margin call was over US$10,000,000.

17.By their solicitors’ letter dated 21 September 2022, CGS formally terminated the ACCP CGS Account and demanded the payment of the settlement sum of US$10,979,108.67.

18.As said, on 6 October 2022, CGS issued the SD against the Applicant and served it on the Applicant on 22 March 2023.

19.On 15 December 2022, CGS presented a winding up petition against ACCP under HCCW 466/2022. On 24 April 2023, a winding up order against ACCP was made.

The Disputes on Substantial Grounds

20.In his written submissions, Mr Sussex raised 4 disputes by way of defence :

a.  Illegality;

b.  The Guarantee was limited to the initial margin for completing the transfer of the portfolio from SGGL CGS Account into the ACCP CGS Account;

c.  Misrepresentation on the share portfolio in that CGS falsely represented to the Applicant that the portfolio in the SGGL CGS Account to be transferred to and held in the ACCP CGS Account consisted of actual shares and the latter account was a “usual prime broker margin account” trading and dealing in actual shares, when in fact the ACCP CGS Account only consisted of and was trading solely in “contracts for difference” (“CFDs”); and

d.  CGS’ breach of duty to act in good faith in that when exercising the power of sale in that CGS was deliberately pushing the share prices down to balloon out the margin deficit of ACCP.

21.At the hearing, Mr Sussex focused on the “illegality” dispute and the “misrepresentation on share portfolio” dispute.

Illegality

22.It is CGS’ case that the Debt arose out of ACCP’s trades in CFDs, and that a CFD was “an agreement between two parties to exchange, at the close of the contract, the difference between the opening price and closing price of the contract, multiplied by the number of underlying stocks specified in the contract”[3] and “an arrangement made in financial derivatives trading between a securities brokage [CGS] and its customer [ACCP] where the differences in the settlement between the open and closing trade prices are cash-settled. There is no delivery of physical goods or securities with CFDs”[4].

23.The Applicant pointed out that while the sum demanded by CGS was called “a debt”, the sum was essentially the outstanding balance of the amount that ACCP had lost to CGS under the CFDs. This was not seriously disputed by CGS.

24.The Applicant’s contention was that if the CFDs in question were unlawful, the Debt would also be infected by the illegality as “they help a person to perform an illegal contract, …. Thus, a loan of money is illegal if it is made to enable the borrower to make or to perform an illegal contract…”[5].

25.First, the Applicant contended that there was a substantive dispute that the CFDs in question constituted “gambling” under the Gambling Ordinance Cap. 148 (“GO”) and contravened the GO. The contention ran thus.

26.Under section 2 of the GO, gambling is defined as including betting and bookmaking, and bookmaking means the soliciting, receiving, negotiating or settling of a bet by way of trade or business.

27.A “bet” was defined in The Queen v Currency Brokers (H.K.) Ltd and Another[6] where the issue before the Court of Appeal was whether the business of entering into foreign currency “leverage contracts” with members of the public constituted bookmaking :

“A bet is not specifically defined but in ordinary English usage it means the staking of money or other value on the outcome of an uncertain event or doubtful issue or in support of an affirmation or forecast. The term “wager” may be regarded as synonymous. The best-known legal definition of a bet or wager, to be found in the judgment of Hawkins J in a redoubtable case known to all students of the law, is a transaction:

“by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agreed that, dependent upon the determination of that event, one shall win from the other, and that the other shall pay or hand over to him, a sum of money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party may under it either win or lose, whether he win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract.” (Carlill v The Carbolic Smoke Ball Company [1892] 2 QB 484 at p.490)

…

Whether or not reputable financial institutions offered contracts of a similar nature is neither here nor there.” (p.1141-1142, Kempster JA)

28.Mr Sussex submitted that the CFDs in question bore considerable similarity to the foreign currency leverage contracts in that case, and that as the parties did not have any interest in the CFDs other than their sums at stake and neither party obtained any interest in the underlying shares, the CFDs in question fell within the definition.

29.Mr Sussex also referred to the fact that “contract for differences” was defined in section 2 of the GO, and that certain such contracts were excluded under section 29 of the GO, which reads :

“29. Exclusion of contracts under the Securities and Futures Ordinance

This Ordinance shall not apply to any contract for differences which is listed on any specified stock exchange, or traded on any specified futures exchange, within the meaning of section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571), save to the extent that this Ordinance applies to the contract by virtue of section 404(2) of that Ordinance.”

He contended that the legislative intent seems to imply that CFDs would prima facie be gambling unless excluded under section 29. In support, he referred to the press release of the Securities and Futures Commission (“SFC”) dated 6 November 2019[7] in which, among others, SFC made express mention of CFDs and the GO and warned that CFDs might be illegal.

30.It is common ground that the section 29 exclusion is not applicable to the CFDs in question. Ms Au also did not seriously contend that CFDs were not “bets” within the meaning of the GO.

31.Ms Au submitted that the GO only prohibits gambling within Hong Kong (see Re SJM Holdings[8]) and that Hong Kong Courts regularly enforced loans connected with gambling overseas (see Wong Hon v Sheraton Desert Inn Corp[9] and Wynn Las Vegas LLC v Mong Henry[10]). She emphasized that CFDs were lawful in Singapore and that the governing law of the PSA was Singaporean law.

32.Mr Sussex did not dispute that the GO generally prohibits gambling within Hong Kong. He submitted that it was arguable that the gambling activity took place in Hong Kong in that

a.  ACCP, being the counterpart conducting the “gambling” was located in Hong Kong, being incorporated in Hong Kong and having its registered address here;

b.  According to the Applicant’s evidence, and not disputed by CGS, the Applicant (who was the sole director of ACCP) and his other associates who executed the trades on behalf of ACCP were in Hong Kong when each of the CFDs were entered into; and

c.  At §13 in Re SJM Holdings Ltd, Ma CJHC (as he then was) observed obiter that “the Gambling Ordinance generally prohibits gambling within Hong Kong (and this of course includes gambling on the Internet here)”. Thus, the placing of the trade orders of the CFDs by the said persons in Hong Kong through some use of the Internet could arguably amount to gambling within Hong Kong.

33.I note that the facts of Wong Hon and Wynn Las Vegas LLC were rather different than the present facts in that the debtor in both cases were physically present and gambling in the casinos in Las Vegas where the respective gambling debts were contracted. There was thus no issue in both the cases that the gambling took place in Hong Kong.

34.Importantly, Mr Sussex referred to section 7(1A) of the GO, which stipulates :

“7. Bookmaking

…

(1A) Any person who engages in bookmaking, whether on one occasion or more than one occasion, by receiving, negotiating or settling outside Hong Kong a bet –

(a) which is placed from Hong Kong; or

(b) placed by a person who is in Hong Kong when the bet is placed,

commits an offence and is liable…”

35.Mr Sussex highlighted that section 7(1A) specifically intended to criminalize such bookmaking, even though receiving, negotiating or settling the bet was outside Hong Kong, when the bet is “placed from Hong Kong” or “placed by a person who is in Hong Kong when the bet is placed”.

36.As it is arguable that the CFDs in question were “bets” within the meaning of the GO and CGS did receive, negotiate and settle the CFDs in question by way of trade or business, and (as aforesaid) that they were placed from Hong Kong by persons who were in Hong Kong at the time they were placed, Mr Sussex submitted, and I accept, that it was very arguable that CGS had thereby contravened section 7(1A).

37.Ms Au submitted that on a proper interpretation of section 7(1A), the words “within Hong Kong” should be read into it after the words “any person” such that that person would only contravene section 7(1A) when he is within Hong Kong. She has not cited any authority in support. With respect, I cannot see any basis for so reading, especially by reading additional words into a criminal statute to limit its ambit. In any case, I do not think such a point can be summarily decided against the Applicant here in the manner submitted by Ms Au.

38.I thus take the view that there is a substantial dispute raised that the CFDs in question and CGS might have contravened the GO.

39.There are two more statutes that the Applicant said have been contravened. I need only to deal with them briefly.

40.The Applicant said that arguably CGS contravened section 114 of the Securities and Futures Ordinance Cap. 571 (“SFO”) in that CGS carried on a regulated activity without a license. The Applicant said that the CFDs would likely be “OTC derivatives” under Schedule 5 to the SFO requiring a Type 11 license. However, as pointed out by Ms Au, under Part 1 of Schedule 5 to the SFO, “Type 11” license is noted to be “Not yet in operation”.

41.Moreover, to contravene section 114 of the SFO, and under section 115 of the SFO, CGS would have to be an entity who “actively markets, whether by himself or another person on his behalf and whether in Hong Kong or from a place outside Hong Kong, to the public any services that he provides”. I accept Ms Au’s submission that the bare assertions by the Applicant that “Mr Obafemi was very keen to get SGGL’s business as they were trying to establish presence in Hong Kong” and that the Applicant understood that “CGS was marketing to several HK clients”[11] were far from sufficient or sufficiently particularized evidence to raise the factual issue that CGS was actively marketing its service in Hong Kong.

42.I do not think there is a bona fide dispute on substantial ground that CGS has contravened section 114 of the SFO.

43.Next, the Applicant said that CGS has contravened the Money Lenders Ordinance Cap.163 (“MLO”) by having carried on business as a money lender without a licence.

44.Both the Applicant and CGS cited Central Southwood Limited v Ma Wai Kin and Another[12] in which “the business test” and “the proper law test” were discussed and applied in deciding whether a loan said to have been made outside Hong Kong was within the ambit of the MLO. Save that ACCP was a Hong Kong company and both ACCP and the Applicant were in Hong Kong, there were no further factors or features put forth by the Applicant under “the business test” to advance the position that the MLO was applicable. The applicable laws under the PSA and the Guarantee were stated to be the laws of Singapore.

45.I thus readily conclude that there is no bona fide dispute on substantial ground that CGS has contravened the MLO.

46.Ms Au raised an argument that the Applicant should not be allowed to now raise the illegality dispute as it was “a new point” only raised in the Applicant’s 3^rd Affidavit filed on 13 November 2023 and that its brief mention (that the CFDs might be in breach of the GO) in the Applicant’s 2^nd Affidavit filed on 24 July 2023[13] should not be counted as having properly raised the dispute.

47.However, I note (a) that there was no complaint that the Applicant’s 3^rd Affidavit ought not have been adduced or admitted, (b) that there was no mention in CGS’ written submissions dated 16 November 2023 that there was a need to file further evidence in response to the Applicant’s 3^rd Affidavit, and (c) in its said written submissions, CGS was able to make a full response to the illegality points raised by the Applicant in his written submissions dated 15 November 2023. At the hearing, Ms Au also did not seek any adjournment, but submitted that the Applicant be completely disallowed. I see no basis or merits in pre-emptively shutting the Application out from raising the illegality defence and have no hesitation in rejecting CGS’s said argument.

48.Ms Au submitted that the contravention of the GO did not automatically render the PSA, the CFDs or the Guarantee void or unenforceable, citing a number of English cases decided before Patel v Mirza[14]. She also very briefly referred to Clause 3 in the Guarantee[15], a long clause that began with providing that the guarantor will be liable as if he were the sole principal debtor and that the guarantor shall not be discharged, or his liability affected, by anything which would not discharge him if he were the sole principal debtor, and pointed to one of the examples mentioned by way of sub-clause (8) there and said that sub-clause (8) “may be construed as a waiver of illegality”[16].

49.Evidently, the Applicant does not need to satisfy me that the illegality will be a successful defence, but only that it is a bona fide defence of substance.

50.Mr Sussex referred to the analysis of Wilson Chan J in Wong Lung v The Chinese University of Hong Kong Employees Credit Union[17] concerning the civil consequences a breach of statute may have, and to the recent Court of Appeal case of Monat Investment Ltd v All Persons in Occupation of Part of No 16 Ma Po Tsuen[18] in which the CA held that the “range of factors approach” in Patel based on the trio of necessary considerations should be adopted in Hong Kong in deciding whether the Court would assist a plaintiff who has been guilty of illegality.

51.There are clearly bona fide and substantial disputes over the consequences of the contravention of the GO (if established) in relation to the enforceability of the Debt and the Guarantee as against the Applicant, and whether Clause 3 amounted to a waiver on the part of the Applicant.

52.On this ground alone, I would set aside the SD.

Misrepresentation On Share Portfolio

53.For completeness, I will also deal briefly with this dispute.

54.The Applicant’s case in gist is :

a.  The SGGL GPP Account was a normal prime brokage securities account with margin facilities in that the securities account would hold the shares acquired and therefore owned by the account holder and GPP would provide margin facilities[19].

b.  Prior to the opening of the SGGL CGS Account, the Applicant negotiated by telephone with one Ade of CGS in which Ade represented that the securities account that CGS would provide to SGGL will be a usual prime brokage securities account with margin facilities. There was no mention or indication that the transactions would be CFDs[20].

c.  The Applicant also had conversations with Mr Obafemi and/or Mr Yap in which he told them that he simply needed a replacement broker for SGGL and he did not want it be any different from the SGGL GPP Account, and he was re-assured so by Mr Obafemi[21].

d.  In April 2021, when ACCP opened the ACCP CGS Account, Mr Yap and Mr Obafemi re-assured the Applicant that the ACCP CGS Account would be the same as the SGGL CGS Account[22].

e.  Had he known that the ACCP CGS Account only traded in CFDs, as CGS now claimed, the Applicant would not have procured ACCP to open that account, nor would he sign the Guarantee, as he understood CFD transactions to be much riskier and would leave much room for a conflict of interest between ACCP and CGS[23].

55.CGS did not respond to the Applicant’s case concerning the opening of the SGGL CGS Account. It merely said that they were irrelevant[24]. Regarding the ACCP CGS Account, CGS relied on the contractual documents and said that the Applicant’s understanding of the features of the ACCP CGS Account “is wholly inconsistent with and/or flatly contradicted by the available documents, including in particular the PSA and the Guarantee”[25], and also that no representative of CGS had actual authority to make any of the alleged representations, nor to Mr Obafemi’s knowledge, had any of such representations been made[26].

56.However, contrary to CGS’ claim, the PSA[27] did not at all make it clear that the ACCP CGS Account would be for CFD transactions (not to say only or solely for them), as pointed out by the Applicant in his 3^rd Affidavit and elaborated by Mr Sussex at the hearing:

a.  The pre-emble of the PSA stated that ACCP wished to appoint CGS as its prime broker to provide dealing, financing, settlement and custody services.

b.  “Part 1 – Definitions” of the PSA did not contain any definition of CFD or “contract for difference”; rather, “securities” were defined as any bond, debenture, share, interest or participation in the issued share capital of a company, warrant or future on or any option to subscribe, other securities or instrument as agreed between the parties, and such.

c.  There were no provisions in the PSA whatsoever even mentioning CFDs.

d.  There was an Appendix 2[28] entitled “Trading in Contract For Differences (CFD)”. However, there was no provision in the PSA mentioning, referring to or incorporating this “Appendix 2”.

e.  Clause 3 of Appendix 2 entitled “Entering into a CFD” provided, among others, by Clause 3.2 that “[ACCP] may request [CGS] to quote the price at which [CGS] may be prepared to enter into a CFD”, and by Clause 3.3 that “[ACCP] may offer to enter into a CFD at the quoted price”.

57.Ms Au was not able to point to any provisions in the PSA to contradict the above.

58.Mr Sussex therefore pointed out that under the PSA, brokerage service was to be provided by CGS which would have entailed the purchase of shares by CGS on ACCP’s behalf to be deposited into the ACCP CGS Account. Apparently, if ACCP chose to trade in CFDs, under Appendix 2, there would have to be communications by ACCP specifically requesting a quote for CFD and then making an offer to enter into a CFD on the price quoted by CGS.

59.There was no such mention by CGS about such communications, nor was any documentary evidence or records on such communications proffered by CGS.

60.Ms Au, on behalf of CGS, merely alluded to certain information set out in the Account Summaries sent by CGS to ACCP, and the information consisted of the “Portfolio Number” of “CC114368CFD” and occasional entries in the Account Summaries “CFD RealisedPnL - [stock code]”. She said that the last 3 letters of the Portfolio Number and the first 3 letters in these entries, namely “CFD”, showed that this was an account trading in CFDs and there were CFD transactions. I do not think such on its face could amount to the communications or mechanism stipulated under Appendix 2 for the parties to enter into a CFD transaction.

61.The Applicant also said that the following documentary evidence lent support to his case that CGS represented, and ACCP and the Applicant relied on the representation and were under the belief, that the ACCP CGS Account was trading in actual shares:

a.  The Applicant was under the impression that ACCP CGS Account was a usual prime broker account such that shares held therein belonged to ACCP thereby might trigger the obligation to file Disclosure of Interest Notices as required under Part XV of the SFO. The Applicant therefore by Whatsapp messaged Mr Yap of CGS on 20 July 2021 to ask whether ACCP would have to file a Disclosure of Interest Notice, Mr Yap replied “CS will do the reporting if they need to”, the Applicant then queried, “So accp does not ?”, Mr Yap then replied “it’s abit [sic] convoluted .. Shares bot [sic] through us will be in our name … shares transferred to us via surplus will still be in surplus name .. as we have move [sic] the shares from surplus to accp”[29].

b.  In this Whatsapp conversation, Mr Yap could easily have said that ACCP were trading in CFDs, instead, Mr Yap referred to “CS will do the reporting”, “shares bought” and “shares transferred”, giving the impression that actual shares had been purchased.

c.  Thinking that ACCP actually acquired and owned the shares,

i.  the Applicant went on to cause ACCP to file two “Shareholding Disclosures: Disclosure of Interests” respectively dated 11 October 2021 and 11 February 2022 in respect of shares in HK Asia Holdings Ltd (stock code: 01723) naming ACCP as the “substantial shareholder”[30].

ii.  In around February 2022, the Applicant tried to liquidate shares it thought it held in the ACCP CGS Account by block trades[31]. That was shown by a draft agreement between ACCP and Squadron Investor SPV2022HK, Ltd for the sale by ACCP of 12,000,000 shares in 620 HK (in which ACCP undertook to transfer the proprietary interest in the stock)[32] and various Whatsapp messages and emails with other parties[33].

d.  ACCP’s intention to execute block trades of shares it thought it owned and held in the ACCP CGS Account was discussed in Whatsapp messages with Mr Obafemi and Mr Yap, but they remained silent and did not correct the Applicant’s belief that ACCP had a proprietary right to sell the shares[34].

62.In the round and on the available evidence, as I set out above, I take the view that there is sufficient evidence to show that the Applicant’s case on this alleged misrepresentation has some substance and has reached the threshold of a bona fide dispute on substantial ground.

63.Ms Au made various forensic criticisms against the Applicant’s case in this regard and asked this Court to conclude that it was unbelievable or bound to fail. In light of my above view and without disrespect to Ms Au, I do not think it necessary or appropriate for me to delve into them here, as it seems clear to me that those matters should be properly explored and adjudicated in a trial.

Disposal

64.In the premises, I set aside the SD with a costs order nisi that CGS do pay the costs of the Applicant to be taxed if not agreed.

65.I thank Mr Sussex, Ms Ha and Ms Au for their assistance.

Mr Charles Sussex SC and Ms Terri Ha, instructed by Wellington Legal, for the Applicant

Ms Astina Au, instructed by Eversheds Sutherland, for the Respondent