China Industrial Securities International Brokerage Ltd v. Lou Yi

HCA 1073/2021

[2024] HKCFI 2127

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1073 OF 2021

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DECISION

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A.  Introduction

1.By summons of 4 December 2023 (the “Order 14 Summons”), the plaintiff (“P” or “CISI”) seeks inter alia judgment against the defendant (“D” or “Lou”) for what P says to be “outstanding indebtedness payable and owed by” D to P, in the sum of HK$93,101,730.47 (the “Alleged Outstanding Indebtedness”).  Having heard parties, Master D. To granted D leave to defend, but only on condition that D pays into court a sum equivalent to the Alleged Outstanding Indebtedness (the “Order”).  D appeals against that Order.  D says that unconditional leave to defend should have been and should be granted.  

2.This is the hearing of D’s appeal. Ms Maggie Wong SC leading Mr Ernest Ng and Ms Nicole Chui appeared for D.  Mr Jonathan Chang SC leading Mr Sik Chee Ching appeared for P.

B.  The affirmatory evidence

3.In support of its application, P relies on the 2^nd and 3^rd affirmations (“Kwok 2^nd” and “Kwok 3^rd”) of Kwok Kei Chi (“Kwok”).  Kwok is a director of P.  In opposition D relies on her 3^rd, 4^th, 5^th and 6^th affirmations (“Lou 3^rd”[1], “Lou 4^th”[2], “Lou 5^th”[3] and “Lou 6^th”[4]).  She has also filed her 7^th affirmation (“Lou 7^th”).  That was filed in support of her application to stay the execution of the Order.  Lou has also provided therein further information on her financial position.

C.  The pleadings, and parties’ respective cases

4.The current set of pleadings comprises:

(a)  The Re-Amended Statement of Claim of 4 January 2024 (the “RA-SOC”, which amended the Amended Statement of Claim of 16 November 2022, the “A-SOC”);

(b)  2 sets of further and better particulars provided by P, dated respectively 20 September 2021 and 15 October 2021 (“F&B/1” and “F&B/2”, the latter being further and better particulars given upon requests for further and better particulars of F&B/1);

(c)  D’s Re-Amended Defence and Counterclaim of 26 October 2023 (“RA-D&CC”); and

(d)  P’s Reply and Defence to Counterclaim of 8 March 2023 (“R&DC”).

5.P’s pleaded case can be summarised as follows:

(a)  P carries on business as a provider of financial services, including global securities and futures trading.  It has been licensed to carry out Type 1 and Type 4 activities under the Securities and Futures Ordinance (the “SFO”);

(b)  D has been a broker responsible for managing and conducting trading of securities for and on behalf of her clients.  D has also been a licensed representative of P to carry on Type 1 activities;

(c)  On 8 April 2015, P and D entered into a Broker Cooperation Agreement (the “Cooperation Agreement”), whereby D conducted securities trading for and on behalf of her clients through P on a commission-sharing basis.  Under Clause 3 of the Cooperation Agreement, D shall be held liable for her clients’ default in payment, failure in performing any contractual obligation or breach of any provisions in agreement.  In Mr Chang’s words, D has agreed thereby to guarantee the liabilities of her clients due to P[5];

(d)  Subsequently, 2 of D’s clients opened accounts with P and traded.  They were Tam Shuk Yi Fanny (“TSYF”, and “TSYF’s Account”) and Houghu Capital Co. Ltd (“Honghu”, and “Honghu’s Account”).  Those trading resulted in deficits:

(i)   TSYF owes P as a result HK$35,508,336.50;

(ii)  Honghu originally owed P HK$122,935,740.75.  P has obtained final judgment in HCA 667/2021 against Honghu for that sum (the “Judgment Debt”). Subsequently, deductions have been made from the Judgment Debt (deductions of D’s commission in the sum of HK$17,028,861.36, and of the proceeds upon realization of certain collaterals pledged by Honghu and its guarantor, in the sum of HK$30,014,177.44). Honghu now owes P HK$93,101,730.47 (i.e. the Alleged Outstanding Indebtedness);

(e)  Under the Cooperation Agreement, D is liable to P for those same sums, which D has failed to settle despite repeated demands.

6.P is only seeking summary judgment for the Alleged Outstanding Indebtedness owed by Honghu.

7.In respect of D’s proposed defences:

(a)  The state of the pleadings should first be noted.  P’s applications for leave to amend and for summary judgment were made in the same summons.  To save costs and time, D has not effected any consequential amendments to her RA-D&CC.  She reserves her right to do so upon disposition of P’s application for summary judgment.  The upshot is that D’s defences to P’s latest amended case have not been fully set out in her RA-D&CC.  It has to be read together with her affirmations set out above (in particular Lou 3^rd, Lou 4^th and Lou 6^th);

(b)  D has in her affirmations set out her defences in some details (see in particular Lou 3^rd where she summarises her defences in paragraph 20, and then deals with them one by one);

(c)  In her written submissions, Ms Wong has regrouped the matters raised into 4 groups:

(i)   Group #1 (the “Construction Issues”) – that on a proper construction of the Cooperation Agreement  (“D’s Construction”), compliance by P with Clause 6 of the same is a condition precedent to Clause 3, so that D should only be liable for the liability of clients that D referred to P (“D’s Referrals”) arising from genuine transactions in compliance with Clause 6.  There are triable issues as to whether D’s Construction is correct, and whether factually P has failed to comply with Clause 6;

(ii)  Group #2 (the “Discharge Issues”) – that there are triable issues as to whether D’s liability under Clause 3(1) has been discharged by P’s conduct, namely (a) P’s bad faith (the “Bad Faith Sub-issue”); (b) P’s negligence so as to imply connivance  (the “Negligence/Connivance Sub-issue”); and (c) substantial variation of terms between P and Honghu (the “Substantial Variation Sub-issue”);

(iii) Group #3 (the “Some Other Reasons Ground”) – P has on the same fact pattern commenced, in addition to the present action, multiple other actions (the “Other Actions”) against D and other parties.  There are overlapping issues amongst them.  Invoking the “some other reason” limb under O.14 r.(3)(1), Ms Wong submits that the circumstances call for a full investigation at trial and for the actions to be heard together; and

(iv)  Group #4 (the “Impecuniosity Ground”) – that given D’s impecuniosity, even if D’s defences are shadowy, no financial condition should be imposed, and D shall be given unconditional leave to defend.

8.I will consider those Issues in turn below.

D.  The Construction Issues

9.On the general approach to interpretation, I remind myself of the elucidations by Ribeiro PJ and Lord Collins of Mapesbury NPJ in Eminent Investments (Asia Pacific) Ltd v DIO Corp (2020) 23 HKCFAR 487 at §§42 to 45.

10.On the approach when deciding whether a clause constitutes a condition precedent, I have been cited the following authorities which I have considered:

(a)  Bremer Handelsgesellschaft Schaft v Vanden Avenne Izegem [1978] 2 Lloyds Rep 109, where per Lord Wilberforce at p.113 observed that whether a clause is a condition precedent or a contractual term of some other character:

“must depend on (i) the form of the clause itself, (ii) the relation of the clause to the contract as a whole, (iii) general considerations of law.”

(b)  In AstraZeneca UK Ltd v Albemarle International Corp & Anor [2011] 2 CLC 252 at §§249-250, Flaux J (as he then was) observed that for performance of a provision in a contract to be a condition precedent to the performance of another provision, it is not necessary for the relevant provision to use the express words “condition precedent” or something similar. It is a question of proper construction of the contract.  His Lordship further, agreeing with counsel, observed that:

“… in the absence of an express term, performance of one obligation will only be a condition precedent to another obligation where either the first obligation must for practical reasons clearly be performed before the second obligation can arise or the second obligation is the direct quid pro quo of the first, in the sense that only performance of the first earns entitlement to the second.”

(c)  The implication of classifying a term as a condition precedent was discussed by Beatson LJ in Heritage Oil and Gas Ltd & Anor v Tullow Uganda Ltd [2014] 2 CLC 61 at §33, which Mr Chang relies upon.  There, the learned Lord Justice observed that:

“The starting-point of my analysis of this issue is the general appreciation by courts for over half a century that, while classifying a term as a condition precedent or as a condition may provide certainty, it can also have the effect of depriving a party to a contract of a right because of a trivial breach which has little or no prejudicial effect on the other and causes that other little or no loss. It was for that reason that, in the context of international sale and carriage contracts, the courts became more reluctant to classify terms as conditions precedent and conditions. This reluctance led to the identification and growth of the category of ‘intermediate’ terms and to require that clear words be used if a term is to be construed as a condition precedent or a condition.”

(d) Heritage Oil was discussed by Miles J in the subsequent case of Dreams Limited v Pavilion Property Trustees Limited & Anor [2020] EWHC 1169 (Ch) at §§66-68, that:

“66. The Claimant relies on a passage from Lewison on the Interpretation of Contracts (6th Ed.) at para 16.02:

‘Because the classification of a term as a condition precedent may have the effect of depriving a party to a contract of a right because of a trivial breach which has little or no prejudicial effect on the other and causes that other little or no loss, the court will usually require clear words before coming to that conclusion.’

67. That statement was based on Heritage Oil and Gas Ltd v Tullow Uganda Ltd [2014] EWCA Civ 1048. In that case, the failure to comply strictly with the condition precedent would altogether have deprived one of the parties of a right. This will often be the case if notification provisions in commercial contracts such as insurance or share sales or (closer to home) break clauses in leases are conditions precedent (as they often are). If they are not complied with on time the right in question is lost.

68. In the present case non-compliance with the term would not have such draconian consequences.  Under a contract to convey land time does not become of the essence until one or other party serves a notice to complete; a failure to comply with cl. 8 would not, on either party’s case, lead to the Claimant’s rights under the AFS dropping dead at once.  Moreover, the passage from Lewison para 16.02 refers to clear words ‘usually’ being required.  It does not say that the parties need always use such words to create conditional obligations.  There may be other factors, such as the general law concerning transactions of the type in question.  As Lord Wilberforce said in the Bremer case, the question is one of interpretation of the agreement in its context, including general considerations of law.”

11.I apply the above.

12.The Cooperation Agreement contains, amongst others, the following terms:

“一、 合作方式

1. [D]通過[P]，而且只限於是[P]，代[D]的客戶買賣證券，惟[D]的客戶須在[P]開立帳戶。[P]從[D] 客戶交易收到的佣金，將根據本協議第二條所述之比例與[D]攤分。

二、 佣金分配

1. 以每筆交易所收客戶佣金率，[P]實佔0.055%，[D]收取餘下的客戶佣金率(即客戶佣金率減0.055%)。以每筆交易所收[D]本人戶口佣金率，[D]實佔0.055%。

2. [P]與[D]可隨時協商任何一筆交易的佣金或更改佣金之分配辦法。

三、 客戶資信

1. [D]的客戶於[P]開立帳戶後，因證券買賣、保證金貸款、過期交收、服務收費及利息等償付責任，若[D]的客戶未能如期償付、出現失責或違例事故，包括但不限於導致[P]的損失，概由[D]負責，[P]可向[D]或其客戶分別或共同作出追討。

…

六、 交易確認

1. 客戶之買賣由[D]於買賣「盤紙」或日報表上簽署；

2. 有關交易紀錄於第二個交易日送[D]確認；

3. 客戶結單由[P]直接寄予客戶。

…

十. 終止合作

1. 任何一方擬終止合作關係，須給予對方14天通知；

2. 如[D]違反法律、交易規則或規例，牌照被停牌或吊銷，[P]得即時終止本協議；

3. 合作終止前[D]的客戶已產生之償付責任或已成交的證券買賣，服務收費及利息等償付責任，若客戶未能如期償付、出現失責或違例事故，[D]需即時清還。”

13.Ms Wong submits that P’s performance of Clause 6 is a direct quid pro quo of D’s liability under Clause 3.  She submits that the operation of Clause 3 must be subject to the confirmation procedure under Clause 6, which allows D to make an informed decision as to whether she would like to shoulder the risk of the related liability or whether she would instead terminate the Cooperation Agreement pursuant to Clause 10(1).  She submits that Clause 6 should be taken into account when construing Clause 3.  Clause 6 would be rendered wholly otiose if D is to be held liable for D’s Referrals’ default notwithstanding non-compliance with Clause 6.  Ms Wong further submits that D’s Construction makes commercial and common sense, the rejection of which would lead to a wholly disproportionate and unconscionable outcome resulting in D shouldering an unlimited liability.

14.Mr Chang submits that D’s Construction is impermissible and must be rejected.  He has raised 5 points[6]: (a) absence of express, let alone clear words, to that effect; (b) the different purposes which Clauses 3 and 6 serve, the latter setting out D’s obligations to confirm her Referrals’ transactions, so that the 2 clauses are operable independently; (c) Clause 10(3) providing for continuation of liability for pre-termination transactions, so that D could not disown them; (d) that non-compliance of Clause 6 included D’s own breach of duty, that D had access and did access the trading records, so that it makes no commercial sense, and is unthinkable, that the parties would have intended to absolve D just because Clauses 6(1) or 6(2) have not been complied with; and (e) given D’s entitlement to a substantial commission without having to do anything except making referral, there is nothing “disproportionate” or “unconscionable” in Clause 3.  During the hearing, Mr Chang further invited this Court to heed the big picture, that when things went well, no complaint had been raised, and she had been claiming commission even in respect of the transactions which she is now seeking to disown.

15.For the reasons set out below, I am of the view that the Constructions Issues (both in respect of the correctness of D’s Construction and P’s non-compliance of Clause 6) are triable issues:

(a)  There is no express provisions stating that the performance of Clause 6 is a condition precedent to D’s liability under Clause 3.  Whilst this is so, the correctness of D’s Construction remains one of contractual construction;

(b)  On its face, D’s liability on based on the guarantee Under Clause 3 has no ceiling.  Importantly, she has no control over the business and affairs of her Referrals, and in particular as to whether they may act in ways resulting in defaults in manners as provided in Clause 3;

(c)  According to D, Honghu “conducted trades behind my back with [P] directly.  I had no knowledge to the particulars of each of Honghu’s Transactions”[7];

(d)  Honghu’s Account is a margin account.  The stakes are high.  Any commission which D might earn therefrom is most likely much less in comparison. Some idea in this regard can be gleaned from Clause 2.  And as things turn out:

(i)   The Judgment Debt was more than HK$120 million;

(ii)  That arose only from Honghu’s Account.  According to P, when the deficits all of D’s other Referrals are taken into account, D’s liability to P under Clause 3 is in fact HK$503,725,070.65[8];

(iii) D’s total commissions from May 2015 to May 2021 from all D’s Referrals (more than 70), before set-offs, were in the much lower figure of about HK$28,000,000[9]. After set-offs, according to P, the figure got reduced to HK$17,028,861.36;

(e)  The above militate against Mr Chang’s submissions based upon D’s entitlement to commission (point (e)), and support Ms Wong’s submissions on commercial sense (or lack of it);

(f)   Some facts relevant to the factual matrix to be taken into account for the purpose of construction are also in dispute, the significant ones are as follows;

(g)  D has in Lou 4^th described the circumstances and background relating to the signing of the Cooperation Agreement.  She sets out what she says Mr Wong Yung Pang (王勇鵬, “Mr Wong”, he being the Deputy Chief Executive Officer of P, and P’s RO between 8 June 2015 and 4 September 2020) informed her when he tried to recruit her, which included:

“7.4. CISI would like me to procure potential clients for CISI so that after such clients opened securities accounts with CISI and traded securities through CISI, CISI would have additional brokerage income.

7.5. I would not receive any salary from CISI and the only remuneration I earned would be a percentage of commission CISI earned from the trading activities of the clients I procured for CISI. This would be similar to how introducing broker firms licensed by the SFC would receive commission from trades of clients introduced by these firms. Typically, the role of these introducing broker firms is limited to introduction of clients and these firms would not execute trades for these clients or be held responsible for trades that resulted in any liability or related losses (the ‘Loss’) which the client account holder failed to repay to the brokerage (e.g. CISI). The difference was that in my case, I would be authorised to execute trades for CISI Clients. In this situation, CISI would require my confirmation of the trades and I would be responsible for the Loss arising from such trades.

7.6. At the same time, CISI or Mr. Wong also had the rights to choose to contact, execute trades for or advise the CISI’s account holders directly (‘Direct Dealing’) without my involvement or knowledge.  In such case, I would not be responsible for the Loss arising from trading activities resulting from Direct Dealing.”

She further says at §§8 and 9 that:

“8. After Mr. Wong’s discussion with me, it was clear to Mr. Wong and I that:-

8.1. If the trades of the Assigned Accounts were not consented to and/or confirmed by me under the requirements in clauses 6(1) and 6(2) of the Cooperation Agreement, I would not be responsible for the Loss in relation to such trades. The purposes of clauses 6(1) and 6(2) was to ensure I was consented to, confirmed and/or was notified of trades (i.e. where I had signed on the trading slip or daily report/transaction record) for which the Loss I would be potentially responsible for.

8.2. My entitlement to commission was unrelated to whether I would be responsible for the Loss or not (contrary to the suggestion in Kwok 2^nd §11). I earned commission because I successfully introduced or procure potential clients to open securities accounts at CISI, enabling CISI to earn income. My responsibility for the Loss would depend on whether I had consented to, confirmed and/or was notified of the trades which I would execute for CISI Clients.

9. It was also clear to Mr. Wong and I that it would be absurd for me, as a mere AE, to be responsible for the Loss in relation to CISI’s negligence or unreasonable or arbitrary use of discretion or irregular conducts or CISI's acts to my prejudice (paragraphs 7 to 9 above together constituting the “Mutual Understanding”)”;

(h) P has adduced no evidence in relation to the pre-execution discussions;

(i) In relation to the purpose of Clause 6 and its compliance, P has at different stages put forward the following matters. They are not fully consistent with each other:

(i) Prior to re-amendment, P’s pleaded case was that trades were conducted by Honghu “and/or” D acting for and on its behalf of Honghu, and that D “at all material times had knowledge of the same” – §13E of the A-SOC[10];

(ii) §13E of the A-SOC has been deleted in the RA-SOC. P’s case in this regard is now pleaded in the passive, simply that “Trades were conducted through the Honghu’s Account with the margin facility extended by [P], which has led to deficit therein.”[11]

(iii) In Kwok 2^nd in §§27 to 30, Kwok says that P has complied with Clause 6. He says, relevantly, that :

(1) “Clause 6(2) of the Cooperation Agreement provides [P] shall provide the relevant transaction records of the clients’ transactions for [D’s] confirmation on the next transaction day” (§27, with emphasis added);

(2) D had access to the iAsia System “which provides full particulars of Honghu’s transactions, and an internal public folder to review the Margin Call Report, which sets out Honghu’s margin call status” (§27.1.1);

(3) “From time to time, the Hong Kong Brokerage Department of [P] printed reports, including the Margin Call Report and the Daily Business Transaction Report, for [P’s] account executives (including [D])” (§28);

(4) “There has also never been any complaint by [D] as to her inability to access the details of transactions of Honghu’s Account” (§29);

(5) “I am advised and verily believe that [P] has complied with the notice requirements under Clause 6 of the Cooperation Agreement” (§30);

(iv) No transactions signed by D has however been produced;

(v) Despite what Kwok has said in §27 of Kwok 2^nd (that “[P] shall provide” …), Kwok says in Kwok 3^rd in §§6-10, with reference to a set of “Notes to AE (經紀需知)”, says that:

“… it was [D’s] duty to sign any trading slips …”[12]

“… if there were transactions for an account, [P’s] account executives shall print the relevant report …, sign on the said report and hand in the signed report together with trade order (盤紙) (if any) to the relevant colleague …”[13]

“The purpose of the trade order system is to ensure that [P] is properly informed of the transactions of each client. It is there to protect [P’s] position. It is not to allow account executives to disown transactions belonging to their clients.”[14]

(j) D disputes the facts Kwok puts forward. She says that she has not seen the Notes to AE;

(k) The above (and in particular those in relation to the pre-execution discussions, the purpose of Clause 6, D’s knowledge (or otherwise) of the Notes to AE, and the practice and procedural-flow in respect of the printing (and by whom) and signing of trading slips) are part of the factual matrix which are relevant to the Construction Issues, which this Court cannot decide on affirmations.

16.For the reasons set out above, I am of the view that in respect of the Construction Issues alone, unconditional leave to defence should have been and should be granted to D.  On this basis alone, the appeal should be allowed.

17.In deference to submissions made, and lest this Court be wrong above, I proceed to consider the other issues, though not as detailed as I would otherwise be.

E.  The Discharge Issues

E.1.   The Bad Faith Sub-issue

18.I consider the Bad Faith Sub-issue first. 

19.On the applicable law, I have been cited Bank of Credit and Commerce Hong Kong Limited (in Liquidation) v Quadrutec Hotel Management & Development Limited & Ors [1996] 4 HKC 316.  At page 323G-I, Godfrey JA observed as follows:

“There is no general principle that ‘irregular’ conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety: see Bank of India v Transcontinental Commodity Merchants Ltd and Patel [1983] 2 Lloyd’s Rep 298, per Goff LJ, at p 302. There are particular circumstances in which the conduct of the creditor may discharge the surety, for example, if the creditor acts in bad faith towards him; or is guilty of concealment amounting to misrepresentation; or connives at the default by the principal debtor; or varies the contract between himself and the principal debtor. These are, as Goff LJ points out, ‘certainly the most significant, and possibly the only, examples.’ (loc cit).”

20.The Bad Faith Sub-issue engages the “bad faith” circumstance.

21.D’s case in this regard is, in gist, as follows.  In addition to the TSYF’s Account, TSYF in fact had another account with P (“TSYF’s Other Account”).  D was not the assigned account executive of the TSYF’s Other Account.  Until F&B/2 where P provided particulars on that account, D was not aware of its existence.  She was not involved in the transactions through it, and had no knowledge on them.  For reasons yet to be explained, shares in 7 listed companies were transferred from TSYF’s Other Account to TSYF’s Account, resulting immediately in a margin call of HK$25,337,132.74, which margin call continued to accumulate without settlement, leading (with other transactions) and contributing substantially towards the deficit in TSYF’s Account which P is now claiming against D.  In D’s words[15]:

“… on 15 August 2017, without any justifiable reasons (apart from for the ulterior purpose of holding me liable to the amount due by TSYF in TSYF’s Other Account), shares in seven listed corporates (‘Seven Shares’) were transferred from the TSYF’s Other Account to TSYF’s Account, whereas HK$26,276,167.53 were debited in the TSYF’s Account despite there was simply no change of beneficial ownership of the Seven Shares at all. Prior to the transaction, there was no cash balance in TSYF’s Account ... In breach of Clause 6 of the Cooperation Agreement, I did not sign on the said transaction in relation to the Seven Shares. I was also not given any transaction record on the next day or at all. I simply had no knowledge and did not receive, execute, consent to or confirm any transaction in relation to Seven Shares. Yet, by executing the above transaction behind my back, [P] stood to gain by dragging me into the transactions of the Seven Shares (and deficit balance in TSYF’s Other Account) which was unbeknownst to me. Such an act was clearly to my prejudice. As can be reflected in the statement of TSYF’s Account dated 5 September 2017, immediately after the transaction in relation to Seven Shares, the TSFY’s Account reported a margin call amount of HK$25,337,132.74 as the Seven Shares had the collateral value of only HK$1,040,000. Without any justifiable reason to effect the said transaction to shift the liability from one account to another, the only plausible reason was that [P] acted in bad faith to my prejudice in order to hold me liable for transactions which I was not involved, had no knowledge and did not consent to.”

22.Mr Chang submits that D is alleging fraud against P.  He points to §19.19 of D’s RA-D&CC which I have considered.  He urges this Court to examine the foundation of the allegations and scrutinize the plea with care – Chinachem Charitable Foundation Ltd v Chan Wai Tong Christopher [2021] HKCFI 1347 at §22.  During the hearing, Mr Chang queried the reason for P seeking to drag D into the previous purchases under the TSYF’s Other Account when D might not be good for the money.  He queried the inherent probability of D’s case. He further pointed to the August 2017 statement of TSYF’s Account and submitted that if the account had been liquidated at that stage, the margin call and deficit would have been mostly met by the collaterals (the transferred shares), and D would only have been held liable for a small balance.

23.I have considered those submissions.  But there can be no dispute that the transfers from TSYF’s Other Account to TSYF’s Account did take place, resulting immediately in a very substantial margin call which grew with other transactions into the deficit being claimed.  What would have happened had the account been liquidated earlier means little, as it was not.  P has offered no explanation for the transfers.  They were transfers between the same client’s accounts. There was no change of beneficial ownership.  They were unusual in nature to say the least.  What inference to be drawn therefrom can only be decided after a trial.

24.Added to the above is this.  The “guarantee” under Clause 3 is not account specific.  Whilst P is not seeking summary judgment in relation to the deficit from TSYF’s Account, if circumstances relating to it has the effect of discharging D’s liability under Clause 3, D’s liability for Honghu’s Account could also have been discharged.

25.I have also asked myself that same question which Bokhary JA (as he then was) formulated in Bank of Credit and Commerce at 325B-C, that “is there in the suggested defence at least the embryo of something which goes beyond merely irregular conduct on the part of the creditor prejudicial to the interests of the surety?”  In my view, there is more than that.

26.I hold that:

(a)  triable issues have been raised in relation to the Bad Faith Sub-issue;

(b)  the facts in relation thereto in any event constitute, by themselves and in conjunction with the matters to be discussed below, “some other reasons” such that there ought to be a trial.

E.2.   The Negligence/Connivance Sub-issue

27.I have been cited a number of authorities.  Suffice for me quote The China State Bank Ltd v King Pacific International Holdings Ltd (CACV 26/2003, 4 March 2004) at §§14-15 where the relevant principles were, with reference to counsel’s submissions, recited:

“14. To found her case Ms Eu relied upon the proposition that the plaintiff had done some positive act which prevented it from recovering against the 3^rd defendant under the guarantee. The foundation of the argument was based on a passage from the speech of Lord Kingsdown in the case of Black v Ottoman Bank [1862] XV Moore 472 at p.483:

‘From these cases it is clear that, upon the point now in dispute, the rule at law and in equity is the same, that the mere passive inactivity of the person to whom the guarantee is given, his neglect to call the principal debtor to account in reasonable time, and to enforce payment against him, does not discharge the surety; that there must be some positive act done by him to the prejudice of the surety, such degree of negligence as, in the language of Vice-Chancellor Wood in Dawson v. Lawes, “to imply connivance and amount to fraud.” ’

15. The reference to fraud as used by Wood VC was taken up by Denman J, as he then had been, in the case of The Mayor, Aldermen, and Citizens of Durham v Fowler and another [1889] 22 QBD 394 when he said at page 420:

‘Here, again, the language must be understood to mean at least connivance in acts contemplating the probability of a default occasion, and so being guilty of a fraud that the surety is, in the sense of assisting an act which must be detrimental to them.’ ”

28.In developing her submissions, Ms Wong refers to and relies on the Code of Conduct for Persons Licensed By or Registered with the Securities and Futures Commission (the “Code”) and the Commission’s Guidelines for Securities Margin Financing Activities (the “Guidelines”) which governed P, and in particular:

(a)  The Code, Schedule 5, clause 2, on “Margin lending policy”[16], that:

“A licensed person should have a prudent margin lending and margin call policy set out in writing and properly communicated to its staff.”

(b)  The Guidelines at:

(i)   §1 on “Total margin loans controls”[17];

(ii)  §2.1[18], that:

“An [Securities Margin Financing, (“SMF”)] broker should set prudent credit limits for Individual margin clients or groups of connected margin clients to ensure the obligations of margin clients arising from the financing provided by it are commensurate with the financial capability of the margin clients.”

(iii) §3 on “Securities collateral concentration controls”[19];

(iv) §6 on “Margin calls, stopping further advances and further purchases of securities, and forced liquidation”[20], and in particular:

“6.1. An SMF broker should prudently set the triggers for margin call, for stopping further advances to, and further purchases of securities by, margin clients, and for forced liquidation of margin clients’ securities collateral.

…

6.3. In general, margin calls should be made immediately when the outstanding margin loan balance exceeds the margin value (ie, market value minus haircut amount) of the underlying securities collateral, the margin client’s credit limit, or such other amount as may be determined by the SMF broker according to its margin call policy, whichever is the lower (the excess amount is referred to as margin shortfall), except where the margin shortfall is within the minimum transfer amount set by the SMF broker. The minimum transfer amount should be reasonable and prudent in light of the circumstances of both the margin client and the SMF broker.

…

6.5. An SMF broker must stop waiving margin calls on any margin client:

(a) who has a poor history of settling margin calls (eg, who has failed to settle margin calls on a total of 15 days or more in the preceding 30 calendar days, has had an amount of long-outstanding margin call in one or more occasions in the preceding 12 calendar months or currently has an amount of long-outstanding margin call in his account); or

(b) whose outstanding margin loan balance exceeds the market value of the underlying collateral.

6.6. An SMF broker must stop any further advance to, and any further purchase of securities using the margin facility by, any margin client:

(a) whose outstanding margin loan balance exceeds the market value of the underlying collateral; or

(b) who has an amount of outstanding margin call in his account and a poor history of settling margin calls,

except where the further purchase has the effect of reducing the risk of the margin loan, for example, improving the overall quality of its underlying collateral or reducing the margin shortfall.

6.7. An SMF broker should strictly apply its policies on margin call, on stopping further advances to, and further purchases of securities, by margin clients, and on forced liquidation of margin clients’ securities collateral. Where a deviation from any of these policies is considered justifiable in respect of a client, the SMF broker should exercise its discretion prudently after duly assessing the additional risk that may result from the deviation and its financial capability to take up the additional risk, and taking risk mitigation measures in respect of the additional risk. The assessment results should be properly documented and approved by senior management.

6.8.     An SMF broker should immediately review the credit limit of any margin client found to have a poor history of settling margin calls, as well as the credit limit of any other margin client connected to that client.”

29.On the evidence, Ms Wong submits that Honghu only had a paid-up capital of USD1,000 and an authorised capital of USD50,000.  P knew about that.  Despite its duties under the Code and Guidelines, P allowed significant calls to remain unsettled for more than 6 years, increased Honghu’s credit in the meantime[21], and continued to execute transactions for Honghu to purchase inter alia more than 20 million shares in Asia Television Holdings Limited (formerly Co-Prosperity Holdings Limited) (stock code 707) (“707”).  Those shares were only liquidated in August 2020, by which time the price in 707 shares had fallen more than 90% from the highest.

30.Mr Chang pointed to 2 statements of Honghu’s Account (for months May and June 2017) and submitted that the worth of the shares in the account were at a comfortable margin above the outstanding balances, with substantial net asset value.  What is however also significant is that according to those statements, the stated “mortgage percentage” (“按揭%”) of all but one share was 0%, with the result of the stated “collateral value” (“按揭價值”) being substantially lower than the stated “market value” (“市值”), resulting in turn in very substantial “margin calls” (“需補回保證金”) on the face of the statements.

31.How those statements are to be read and understood have not been canvassed in any detail at this stage.  But D has produced those from July 2015 to November 2022.  With reference to them, she has prepared a table at §38 of Lou 4^th.  Therein, figures for 15 months are set out, showing indeed that between January 2016 and October 2022:

(a)  The “Deficit Balance” increased from ($30,185,168.42) to ($111,682,313.49), peaking at ($141,247,904.50) in June 2020;

(b)  The “Collateral Value” fluctuated significantly; and

(c)  The “Margin Call” increased from ($22,986,226.42) to ($111,682,313.49), peaking at ($125,623,268.55) in August 2021.

32.Mr Chang further submits that contemporaneous documents show that D told CISI to delay liquidation.  I have considered the meeting minutes produced by Kwok (“KKC-20”) in Kwok 3^rd.  The facts are subject to dispute – see §10 of Lou 6^th.  I do not find it possible to dispose of the same on affirmations. 

33.I remind myself that the burden is on D to show an arguable defence or triable issue, that particulars must be condescended to, and the evidence has to be capable of being believed.  But I am not to conduct a mini-trial.  On the evidence, given P’s duties and obligations under the Code and Guidelines, the prolonged period during which very substantial margin calls had been shown on the account statements, and the absence of any payment, which ultimately led to the very substantial Judgment Debt, I hold that D has discharged that burden under this sub-issue, and that it is arguable that the case is beyond one of mere inaction[22].

34.Again, and in any event, I hold that the facts in relation this sub-issue (as discussed above) in any event constitute, by themselves and in conjunction with the matters discussed above and below, “some other reasons” such that there ought to be a trial.

E.3.   The Substantial Variation Sub-issue

35.Relevant to this Sub-issue, I have been cited:

(a)  The Law of Guarantees (7^th ed.), that inter alia:

“It is not material what form the giving of time by the creditor takes, so long as there is a legally binding and enforceable agreement by the creditor that he will suspend his rights against the principal.” (9-030)

“The class of cases where the creditor gives time to the principal is never closed, and depends on the circumstances of each case.” (9-031)

(b)  Phillips and O’Donovan, Modern Contract of Guarantee (4^th ed.) at §7-080, that:

“For the guarantor to be released, there must exist a legally enforceable agreement which gives the principal extra time for the performance of the obligations under the principal contract. That is, the creditor must not be able to sue the principal at the time originally fixed by the terms of the principal contract ... It also follows that mere failure of the creditor to sue the principal for any default does not release the guarantor.”

36.In his oral submissions, Mr Chang stressed the requirement that for a guarantor to be released under this principle, the agreement to give time has to be a legally enforceable one.  Ms Wong does not dispute this.  I bear this in mind.

37.During the hearing, Ms Wong referred this Court to the minutes of a meeting on 16 September 2020 (the “16/9/2020 Minutes”) between Mr Tang Siu Kei of P and Mr Deng Jun Jie (“Deng”)[23]. Deng was the sole shareholder and director of Honghu.  He was one of D’s Referrals.  That minutes are part of KKC-20 produced by Kwok.  Therein, it is recorded that:

“另外本次會面要求鄧總落實執行於上年度簽署的還款方案，即安排把惠洲的工業地抵押予公司，但鄧俊傑支吾以對，表面上說是配合但實際態度並不顧意配合。另外又說由於公司平倉#707，不願意再擔保其他已經被平倉的帳戶。”

38.Kwok says that although D was not in attendance, she had been contemporaneously been provided with a copy of the minutes via email.  D disputes that.  With reference to other emails, Ms Wong submits that that email was sent to D’s office email address with P.  D says[24] that she had rarely attended P’s office D since 2018, and even less frequent from 2020.  I cannot resolve this dispute on affirmation.

39.Whether D did receive the email apart, of more significance is the reference in the 16/9/2020 Minutes to the 還款方案.  Kwok has offered no explanation on its existence, terms, or effects.

40.In respect of this 還款方案, Mr Chang stressed the legal requirement of the existence of a binding and enforceable agreement.  He further stressed that the burden is on D, and that she would have to do better than simply making reference to the 16/9/2020 Minutes.

41.However, simply from the 16/9/2020 Minutes, it is apparent that the 還款方案 indeed existed, that it had been signed, and that Deng was urged to “落實執行”.  It was beyond mere negotiation. 

42.D also relies on other factual evidence showing that there had been direct discussions between Deng and the senior management on repayment[25]. She has affirmed to her belief that P and Deng had reached other repayment arrangements.  The evidence is not incredible.

43.On the evidence, primarily on the 16/9/2020 Minutes, as supported by other factual evidence raised by D, I am of the view that:

(a)  a triable issue has been shown that a legally binding and enforcement might have been reached between P and Deng giving Honghu time to repay, thereby having the effect of discharging D;

(b)  again, and in event, the facts relevant to this sub-issue constitute, by themselves and in conjunction with the matters discussed above and below, “some other reasons” such that there ought to be a trial.

44.There are other variations which D has complained about –the variations to the credit limit and collateral ratio.  I have considered §§63 to 67 of Ms Wong’s submissions.  Clauses 4 and 7 of the Cooperation Agreement should be noted, which give P the discretion to adjust them.  In my view, the issues suggested to have thereby arisen and triable are speculative, both legally and factually.  However, whilst those variations by themselves do not in my view give rise to any triable issue, they form part of the factual background which go to and reinforce the “some other reasons” ground.

F.  The Some Other Reasons Ground

45.I repeat §§ 26(b), 34, 43(b) and 44 above.

46.There are more under this ground, as follows.

47.The present action is not the only one which P has, on a similar factual pattern, initiated against D and her Referrals.  P has started 3 more – HCA 1688/2021 (5 November 2021, “HCA 1688”), HCA 1760/2021 (19 November 2021, “HCA 1760”), and HCA 1866/2021 (10 December 2021, “HCA 1866”, and collectively the “Other Actions”).  In all 3, D is sued for her liability under Clause 3.  The account holders and guarantor being sued differ, as follows:

(a)  In HCA 1688, the account holder is Wan Chi Yung (“Wan”);

(b)  In HCA 1760, the account holder is Tang Wai Kuen (“Tang”); and

(c)  In HCA 1866, the account holder is KKC Capital SPC (“KKC”), with its director Chan Chi Kit also being sued as the guarantor.

48.D’s case is that Wan, Tang and KKC are all related to Deng:

(a)  Wan and Tang are Deng’s agents, and were introduced by him to open accounts with P as such.  In their respective Defences filed in HCA 1688 and HCA 1760, they both plead that they open accounts with P upon Deng’s requests, and that they held shares for him.  Wan says that he was one of Deng’s personal drivers, and Tang says that he was Deng’s company driver.  Both plead that their accounts were used by Deng to purchase 707 shares, after which Deng became the Chairman of 707.  Both plead further that P allowed/helped Deng control different accounts opened by his agents with P to hold around 1,289,028,000 707 shares (around 32.34%).  Such arrangements allowed P to earn interest thereon, and helped Deng conceal the need to make disclosure of his substantial shareholding in 707 pursuant to the provisions of the SFO;

(b)  Deng introduced KKC and Chan Chi Kit to D.  KKC is a fund company set up by Deng and/or his representative;

(c)  That Deng is interested in the above mentioned accounts is clearly supported by the Liability Letter which he has signed[26], whereby he agreed to be responsible for, inter alia, all those 4 accounts.

49.The Other Actions are all on-going, save that in HCA 1866, the case against KKC (and against KKC only) has since been discontinued.  They have been ordered to be tried together or heard at the same time.  By summons of 27 March 2024, D seeks an order that this action be tried together with the Other Actions.  That summons has been adjourned pending disposition of the present appeal.

50.Mr Chang submits that to invoke the “some other reasons” limb, it is not enough for there to be matters for investigation.  The circumstances said to require investigation must be relevant to the issue in dispute: Nice Plan Development Ltd v Ke Jun Xiang (CACV 259/2014, 25 June 2015) at §§19 and 25. 

51.The present action and the Other Actions share the same factual pattern, are linked by Deng and a group of account holders connected to him, all related to shares in 707 and Deng’s interest in them, and with claims by Wan and Tang of financial misconduct.  All the related accounts were managed by P and the same group of senior management.  I accept Ms Wong’s submissions that P’s conduct in relation to Honghu’s Account calls for further and fuller investigation together with the Other Actions.  In particular, the Discharge Issues ought in my view to be fully investigation in conjunction with the Deng’s and P’s conduct in relation to the Other Actions.  I accept Ms Wong’s submission that it is inappropriate to determine P’s present application for summary judgment on a standalone basis, ignoring the full factual background against which the present claim arose.

G.  Conclusion

52.For the above reasons, I allow D’s appeal.  I grant her unconditional leave to defend.

H.  Impecuniosity Ground

53.Given my conclusion above, the Impecuniosity Ground is not engaged.  I only record that on the evidence before me in respect of D’s financial position, and given the magnitude of the claim, if it had been necessary, I would have applied the principles and approach laid down by the Court of Appeal in Kwong Key Construction & Engineering Ltd v Sunlink Ltd [2003] 4 HKC 300 at 305B-306D and granted D unconditional leave to appeal.

I.  Costs

54.I have considered §14/7/18 of the Hong Kong Civil Procedure 2024.  I make a costs order nisi that P shall bear the costs of and occasioned by the Order 14 Summons (inclusive of this appeal for avoidance of doubt), with certificate for 2 counsel, to be assessed summarily.  Any application for variation shall be made by way of letter to this Court within 7 days from the date of this Decision, upon receipt of which further directions will be handed down.  In the absence of any such application, D may lodge and serve her statement of costs within 14 days from the date of this Decision, P to file its statement of objections within 14 days of receipt, and D to file her reply within 7 days thereafter.

Mr Jonathan Chang SC leading Mr Sik Chee Ching, instructed by DLA Piper Hong Kong, for the Plaintiff

Ms Maggie Wong SC leading Mr Ernest Ng and Ms Nicole Chui, instructed by Hau, Lau, Li & Yeung, for the Defendant