Sarah Kwok Hon Wah t/a S. Tone & Company v. Cheung Tat Securities Co (A Firm)

HCA000798/1976

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO. 798 OF 1976

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Coram: Li, J.

Date of Judgment: 22nd September 1977 at 3.33 p.m.

Present: Charles Ching Q.C. leading Robert Tang (Ng & Lee) for Plaintiff

Robert Wei (P.H. Sin & Co.) for Defendants

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JUDGMENT

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1. The plaintiff and the defendant company are stockbrokers. The plaintiff and one Kan Si Loon, a partner of the defendant company, are members of the Far East Stock Exchange Limited. On the 11th December 1975 there was an oral agreement between the plaintiff and Kan Si Loon to the effect that the defendant company's authorised clerk, Shek Bing Kwan, would be allowed to transfer some of the orders of the defendant company's clients to be executed by the plaintiff. The plaintiff would then execute the order and share the brokerage of 0.5% with the defendant company on a fifty-fifty basis. The plaintiff, on having executed the orders, would have to deliver the instrument of transfer and the share certificates to the defendant company, whereby the defendant company would be liable for payment to the plaintiff. The limit of such transfer was originally $300,000 per day. Since then orders had been executed, delivered to the defendant company and paid for by the defendant company up to the 10th March 1976. These are common grounds in this Action.

2. The gist of the plaintiff's claim is for two transactions only. The first one is for the transaction on the 11th March 1976 when the plaintiff alleges that the following orders were transferred by the defendant company, through Shek Bing Kwan, to the plaintiff. They are:-

to the total value of $940,479.50. The plaintiff alleges that all these shares were delivered to the defendant company on the 12th March 1976, except a short delivery of 2,000 shares of Cheung Kong (Holdings) and 4,000 shares of Hong Kong & Kowloon Wharf. The second transaction was placed on the 12th March 1976, whereby the plaintiff was required to buy a list of shares as set out in paragraph 7 of the Statement of Claim to the total value of $844,006.375. These are of no great significance because the plaintiff alleges that on the 15th March Mr. Shek of the defendant company instructed the plaintiff to sell, and the plaintiff did sell them for the defendant company for the price of $836,277.625 thereby suffering a deficit or loss of $7,728.75. Further, on the 16th March 1976, the plaintiff sold the 4,000 Hong Kong & Kowloon Wharf shares and 2,000 shares of Cheung Kong (Holdings), which had not then been delivered to the defendant company, for the sum of $81,662.50. It is the plaintiff's case that on the 19th March the defendant company returned 2,000 shares of Hong Kong & Kowloon Wharf to them, which they sold for $34,287.00. However, the defendant company failed to pay the plaintiff for the purchase on the 11th March 1976 and for the loss of $7,728.75 as a result of the 12th March and 15th March transactions. Thus the plaintiff claims a sum which is the total of $940,479.50 plus $7,728.75 less the value of the shares sold, namely $81,662.50 and $34,287.00. The sum claimed when calculated, is $832,258.75.

3. The defence is that the original agreement is subject to two conditions. First of all there is a $300,000.00 limit per day. The second condition is that the share certificates must be delivered to the defendant company. It is the defence case that as from the 19th January 1976 the plaintiff started to deliver direct to its client instead of to the defendant company. The defendant company then paid the plaintiff for the orders against cheques for the sum due which was paid in by the client to it. The defendant company admits that the transaction as set out in paragraph 4 of the Amended Statement of Claim was made by Shek on the 11th March 1976, However, the defence pleads excess of $300,000.00 and that such excess was without the defence company's consent. The defendant company denies that any share certificates of transfer of that transaction per Shek's order had ever been delivered to it. It is alleged by the defence that on the 12th March 1976, in the afternoon, the plaintiff and the defence company agreed, as a result of a negotiation between Kan Si Loon, Shek Bing Kwan and Sarah Kwok (the plaintiff) to cancel the prevailing agreement. It was also agreed as a result of that negotiation, that the orders already placed but delivery pending would leave the plaintiff a choice. The plaintiff could either deliver to the defendant company the shares not yet delivered, whereby the defendant company would be responsible for payment. If the plaintiff delivered direct to the client, then the client would be responsible for payment and not the defendant company. It is also alleged that a new agreement was formed at that meeting whereby the plaintiff would accept orders from defendant company's client direct provided the defendant company would have a guarantee in draft approved by the plaintiff's legal adviser. Such draft was never approved. It was admitted by the defence that Shek did transfer the order, as set out in paragraph 7 of the Amended Statement of Claim, on the 12th March 1976. Again, the question of excess over and above $400,000.00 is pleaded. It is admitted that Shek instructed the plaintiff to sell and that the plaintiff did sell the shares as set out in paragraph 8 of the Amended Defence. While admitting that the defendant company had made no payment in respect of the 11th March transaction, the defendant company pleads the excess and denies having obtained delivery. The defence also denies the return of 2,000 shares of Hong Kong & Kowloon Wharf on the 19th March and also pleads that the plaintiff had accepted a cheque of $477,147.50 from a client, Wong Choi Chun. It is alleged that Shek acted as an independent share broker when he placed an order in excess of the limit agreed between the plaintiff and the defendant company. In support of this defendant company alleges that a cheque for the sum of $5,674.00 was paid directly to Shek by the plaintiff.

4. In her reply the plaintiff pleads that the original limit had been removed. The plaintiff also denies that she delivered the shares directly to the defendant company's client instead of to the defendant company. Referring to the meeting on the 12th March 1976, the plaintiff asserts that it was the defendant who went to see her and asked her to accept one Wong Choi Chun as the plaintiff's client and accept payment direct from her, whereupon the plaintiff said that she would agree to do that only provided the defendant company would furnish her a guarantee to the extent of up to $400,000.00. Such guarantee should be in the form of a draft to be approved first by the plaintiff's legal adviser. Kan Si Loong later produced a draft signed only by himself and not by the defendant company. The plaintiff refused to approve it. There was no mention whatsoever of the cancellation of the prevailing agreement, nor was there any mention about the change in the mode of delivery. The plaintiff denies that she agreed with Shek that the defendant company should pay upon condition that share certificates be delivered to the defendant company only. The plaintiff admits that she paid Shek a cheque of $5,674.00 but that payment was on Mr. Kan Si Loong's instructions. Plaintiff alleges Shek never placed orders as an independent broker, nor did she pay the cheque to Shek in his capacity as an independent broker. It is finally alleged that the plaintiff only accepted the transfer of orders by Shek on the basis of an agreement. To this the defendant company rejoins that there was an agreement to cancel the prevailing agreement on the 12th March that the defendant company never agreed to provide any guarantee and that Kan never instructed the plaintiff to pay Shek the cheque of $5,674.00.

5. In the course of the hearing, learned counsel for the defence conceded that all the shares listed in paragraphs 4 and 7 of the Amended Statement of Claim were actually purchased by the plaintiff at the prices as set out therein and that the order on the 12th March 1976 was resold as set out in paragraph 8 of the Amended Statement of Claim. Counsel for the defence also conceded all the shares as listed in Exhibit C, which were bought in the name of Ko Ming, Cheung Fat and Hui Hing, were actually purchased. He also conceded that Exhibit A listed all the transactions between the plaintiff and the defendant company during the relevant period and paid for by the defendant company to the plaintiff with the exception of the payments evidenced by the cheques that were paid-in by the plaintiff to her bank account, namely, Exhibit D.1, D.2 and D.3 and the two transactions on the 11th March and 12th March 1976. At the end of the hearing, learned counsel for the defence quite properly further abandoned the defence that the transactions were invalid on account of their exceeding the limit of $300,000.00 or $400,000.00 in all the cases. He abandoned the defence that there was non-delivery to the defendant company or direct delivery to the defendant company's client, at least, as I understand it, up to the 10th March 1976. He further abandoned the allegation that Shek's orders were independent orders or independent orders by the client of the defendant company.

6. The thus considerably simplified issue. Everything hinges on what happened in the afternoon on the 12th March 1976. In this respect it's common ground to both parties that on that day, at about 1.50 to 2 p.m., there was a discussion between the plaintiff, Mr. Kan Si Loong and Shek Bing Kwan in the plaintiff's office. What differs are the two versions - the one given by the plaintiff and the other given by Kan Si Loong of the defendant company. According to the plaintiff, Kan Si Loong and Shek Bing Kwan went to her office at the material time, when Kan told her that the prevailing method of delivery and method of payment were too troublesome for the defendant company and that he wanted the plaintiff to accept orders from Wong Choi Chun direct and to deal with Wong Choi Chun direct. Upon this request the plaintiff said she would be agreeable if the defendant company could furnish her a guarantee of up to $400,000.00 per day for transaction and that such guarantee should be in a draft to be approved by her legal adviser. The defendant agreed to this demand. She then assumed that the transaction would go on the same way. She said that the orders placed on the 11th March - that is the day before - had all been completed and the share certificates delivered by the 12th March 1976, and that the order on the 12th March - that afternoon - was completed and the certificates delivered on the 15th March 1976 to the defendant company. Then in the afternoon of the 12th March she telephoned one Annie Wong of the defendant company for payment. She was informed to go to Room 802 of Hing Wai Building to obtain a cheque - that was the cheque she obtained, Exhibit M, for the sum of $477,147. That cheque, upon presentation, was dishonoured. Perhaps I should add that the plaintiff said there was certainly no mention of cancelling the then prevailing agreement, nor was there any mention of changing the mode of delivery or demanding delivery to the defendant company. No complaint had been made on that occasion the delivery of the share certificates had been made direct to the client.

7. The version given by Mr. Kan is somewhat different. He said that on that day he and Shek Bing Kwan went to see the plaintiff and he told the plaintiff that his company found that the method of delivery and payment far too dangerous and for this reason the defendant company wanted to cancel the prevailing agreement and stipulated that for any orders pending delivery of the transfers and shares certificates the plaintiff should have a choice of either delivering them to the defendant company, whereupon the defendant company would pay for the shares so delivered, or the plaintiff could choose to deliver direct to the defendant company's client, whereupon the defendant company would be absolved from all liability of payment. He said that the plaintiff readily agreed to the cancellation as well as to this arrangement. He said that the plaintiff then mentioned about the future co-operation and business. Mr. Kan told her to ask Shek Bing Kwan, whereupon Shek said it could be discussed. After some discussion it was agreed that the business could be carried on if the defendant company would give a guarantee of up to $400,000.00, and Kan said that he would have to consult his company and consider the proposition. The next day Kan did produce a draft of guarantee to the plaintiff, which was not approved.

8. Coming back to the events in the afternoon of the 12th March as alleged by Kan Si Loong, he said that he went to the trading hall of the Far East Exchange Limited after the conclusion of the discussion. He proceeded to the office of Mr. Chau's, the Assistant Manager of the Far East Stock Exchange Limited, on some business. About ten or fifteen minutes past three that afternoon, Shek came in to the office of Mr. Chau and told Mr. Kan that he had a big order from Wong Choi Chun. Mr. Kan said he would have to telephone Mr. Chu to ask if the defendant company's credit facilities could stand up to this big order. He telephoned Mr. Chu and mentioned about the question of guarantee, whereupon Mr. Chu said that the defendant company could accept an order of up to $400,000.00 but that the defendant company would not be prepared to give the plaintiff a guarantee. Kan had a word with Shek, who urged him to accept the order. To use the defendant's own words in evidence, he then told Shek, "You can have it done with Mrs. Tong." Thus the order was placed on the 12th March 1976.

9. Having regard to such evidence it is a matter of credence of either version. The order on the 12th March presented little difficulty because after all, the amount in issue was very small. However, the amount involved in the order on the 11th March is of a significant sum. If the negotiation and the result of negotiation came out exactly as the plaintiff put it, then obviously the defendant company would be liable. If, however, the result of the negotiation and the events of the afternoon occurred in exactly the way as Mr. Kan Si Loong put it, then it is doubtful whether the plaintiff can succeed. I say "doubtful" deliberately because even if the events turned out to be exactly as Mr. Kan said it, I am not all too sure that the plaintiff must have failed in this action.

10. Having considered the evidence of various witnesses and having heard counsel, I find the following facts. First of all, I find that by 2 p.m. on the 12th of March at least if not all part of the share certificates of shares ordered on the 11th of March must have been delivered. There is evidence that Tam Sai Kong had been to the plaintiff's office three times on the 12th of March, once immediately after noon, once about one or two o'clock and once after three o'clock. However, the defendant company refused to make any payment whatsoever in respect of that order and refused to issue any cheque. In this connection I observe that it is Mr. Kan Si Loong's evidence that in the course of dealings Wong Choi-chun invariably deposited a cheque with the defendant company to cover the orders placed with the defendant company and placed through Shek on S. Tong & Co. each day. In other words, the total value of her orders would be covered either at the time when the order was made or on the following day after the order was placed. Thus, in respect of the 11th of March order, either Wong Choi-chun had already deposited a cheque with the defendant company on the 11th of March or the latest in the morning on the 12th of March. That being the case, it is surprising that there was no mention in the afternoon at the plaintiff's office as to payment for the shares that had already been delivered, or that for the sums of money that the defendant must have received from Wong Choi-chun either on the 11th of March or on the 12th of March in respect of the 11th of March transaction.

11. Secondly, I find as a fact that even if the practice of payment or delivery were too dangerous to the defendant, there was no need for the defendant company to cancel the prevailing agreement. The arrangement can be put on the former basis which prevailed between the 11th or the 12th of December 1975 up to the middle part of January, namely, the plaintiff must physically take the share certificates and transfers to the defendant company premises and to hand them over to the despatch clerk of the defendant company.

12. I find it also difficult to explain why since the agreement had been cancelled, there must be a revival of the arrangement whereby the plaintiff would execute orders from the defendant company or from Wong Choi-chun up to the extent of $400,000.00 and that Kan Si Loong would even consider the proposition of giving a guarantee of up to $400,000.00. Again, there is no explanation as to why the defendant company should want this sort of arrangement to carry on. I find Kan Si Loong's explanation that the only reason why he was prepared to give a guarantee was to retain Wong Choi-chun's goodwill as a client untenable and unacceptable. From his evidence, all the business that was brought in by Shek Bing Kwan and transferred to the plaintiff gave the defendant company no benefit whatsoever. The so-called sharing or brokerage between the plaintiff and the defendant company was all for the benefit of Shek Bing Kwan. Whatever refund that was given and all reductions in brokerage that had been made in the transaction with S. Tong & Co. was all settled with Shek Bing Kwan on an early days of each month and repaid to Shek Bing Kwan. If there was no guarantee forthcoming up in that afternoon, it is a very strange thing that Mrs. Tong would ever agree to accept the order that was placed in the afternoon on the 12th of March. There is also an inconsistency that the defendant would have to telephone Mr. Chu, the accountant of the defendant company, to enquire whether the defendant company's credit facilities would stand up to another order of $400,000 or more. He had Shek Bing Kwan with him and Shek Bing Kwan said in his evidence he had told Mr. Kan that the defendant company had no more credit facilities to absorb the order of $400,000. That was precisely why he had to ask Kan's authority to place the order with the plaintiff.

13. Having regard to all these inconsistencies I am inclined to accept the plaintiff's version as to what transpired in the afternoon on the 12th of March 1976 as being more reasonable and that her subsequent actions were more consistent with what she told. Apart from that, I do find that Mr. Kan is not to be described as an honest witness. Apart from what I have already said, I find that his answers to cross-examination are very evasive. From cross-examination it is obvious that the defendant company had to transfer the business of their clients to another firm of which the plaintiff was only one of them because the defendant had not sufficient credit facilities to take on the business and yet he persisted in telling me that the transfer was due to the fact that their staff were overworked. His evidence is contradicted by Shek Bing Kwan in another aspect. He said that in the afternoon on the 12th of March he merely consulted Mr. Chu, the accountant, in connection with the defendant company's credit facilities. He never mentioned that he consulted the plaintiff as to how the order was to be paid on the 12th of March. However, Shek Bing Kwan said that he saw Mr. Kan telephone Mrs. Tong about the order on the 12th of March. Either Mr. Shek was lying or Mr. Kan is not telling me the whole truth. Apart from these contradictions and evasive answers he also admitted that he is the person who received kick-backs from Mr. Shek Bing Kwan. That probably explained the reason why he was so anxious to have the orders transferred to the plaintiff and, as such, he has defrauded his own partner and, possibly, the Inland Revenue. His action is inconsistent in that, despite the defendant company policy to reduce the business, he took a completely different course. That was why as late as the 11th of March there was an order placed on S. Tong & Co. to over $900,000.00. Whenever he was asked about the record of the company and accounts of the company, he failed to produce them even though he was a partner. He said that Annie Wong had all the accounts. In fact Annie Wong produced no accounts at all. For these reasons I find as a fact that the purchase order on the 11th of March and the 12th of March were placed by Shek with S. Tong & Co. in the name of Cheung Tat. This is supported by the evidence of Shek Bing Kwan. In answer to one of the questions in cross-examination: "All your orders with S. Tong & Co. were orders by Wong Choi-chun on Cheung Tat." he said that "Through me the business was transmitted to S. Tong & Co." He said that Wong Choi-chun to him she was buying for her client. Earlier on he said he placed the order in the name of Cheung Tat.

14. I find also as a fact that the 30,000 Wheelock "A" shares were probably delivered not on the 15th of March but much earlier, probably, the 12th of March. I say so for this reason. First of all, despite the evidence of Henry Leung, he made it quite plain that his answers in evidence in chief and cross-examination were completely based on routine practice and that the pay-in slip of the cheque in payment for those 30,000 shares was paid in on the 15th of March. However, he admitted that he had no personal knowledge as to the actual delivery because he was not the person who delivered them. In this connection Tam Sai Kong, a defence witness, said that on the 15th of March he took some shares to Wong Choi-chun to give to her. This might lend some colour that these might be the 30,000 Wheelock "A" shares. However, I must observe that it was on the 15th of March that one of Wong Choi-chun's cheques to the defendant company was dishonoured and it was because of that the defendant traced Wong Choi-chun. But there appeared to be no mention of the 30,000 Wheelock "A" shares that could be traced at all. Again, Tam Sai Kong also said in answer to a question by learned counsel for the plaintiff, why he should put up a rather peculiar expression when he was asked as to the events of the 12th of March. Tam said that around that time he took some shares to Wong Choi-chun and failed to locate her. He took them back to Cheung Tat and later it was on the instruction of an officer in Cheung Tat that he returned the shares to the plaintiff. Now, he could not remember what shares he took to Wong Choi-chun, he could not recall what shares he took back to Cheung Tat and what shares he returned to the plaintiff company. However, if the 30,000 Wheelock "A" shares were the subject matter of delivery around that time, on the 15th, Tam Sai Kong would have returned them to the plaintiff. There was no mention of that.

15. I find that in all probability Tam Sai Kong was employed by Wong Choi-chun but this was not to the knowledge of the plaintiff. The reason why I say this is that Tam in his own evidence said that he spent most of his time in Cheung Tat and unless he was going to deliver shares or take delivery of shares he would remain in Cheung Tat. In short, he used defendant company as his base. I find it quite probable that Shek Bing Kwan told either Sarah Kwok or her staff that delivery to Tam Sai Kong was as good as delivery to the defendant company, I say this deliberately because the plaintiff as a stockbroker would not be so foolish as to deliver share certificates and blank transfers to a third party without obtaining payments and I still have to find one sharebroker who would be prepared to deliver any share certificate to a private individual in one hand without accepting a cheque of the equivalent value on the other. Thus when I earlier made the comment that if the defendant's version of what transpired in the afternoon on the 12th of March were true, the plaintiff might or might not succeed. Having regard to this finding that the plaintiff did not know that Tam Sai Kong was employed by Wong Choi-chun, that the defendant whether by words or conduct made Tam Sai Kong apparent to be their officer, I come to the conclusion that delivery to Tam Sai Kong was as good as delivery to the defendant company as far as the plaintiff was concerned, Besides, throughout the period as from January down to March, the defendant paid the plaintiff even though deliveries were taken by Tam Sai Kong.

16. In view of the foregoing and in summary, I find that in the afternoon on the 12th March all that Kan Si Loong and Shek Bing Kwan told the plaintiff was that they requested the plaintiff to take Wong Choi-chun directly as her client and to accept payment by Wong Choi-chun. However, the plaintiff demanded a guarantee of up to $400,000 per day a demand which the defendant failed to meet. I also find that there was no mention of any cancellation of the previous arrangements, that the order on the 11th of March had been fulfilled and the shares delivered on the 12th of March and that the order on the 12th of March was placed in the name of Cheung Tat Company in accordance with the agreement between the plaintiff and the defendant company. I further find as a fact that the cheque for $477,174.00 was given by Wong Choi-chun to the plaintiff at the request of the defendant and it was not the plaintiff who asked for Wong Choi-chun's payment. Annie Wong, the defendant company's accountant, said in so many words in cross-examination that she could not remember what Mrs. Tong said in the afternoon of the 12th March and that possibly she could be the person who told Mrs. Tong of her own volition the address at Hing Wai Building. I do not accept the defence proposition that, having delivered shares to the defendant company, the plaintiff would then ask for payment by Wong Choi-chun. I find as a fact that the shares having been delivered to the defendant company on the 11th of March 1976, the plaintiff is entitled to payment.

17. That should conclude what I have to say but for the fact that learned counsel for the plaintiff invited me to make a comment as to who was the approaching party in respect of the 11th of December 1975 agreement. I have no hesitation to find as a fact that it was the defendant company which approached the plaintiff for taking on some of its business. The reason is simple. First of all, the defendant company had not sufficient credit facilities and it did not want to lose their clients completely. Secondly, according to Mr. Kan, the plaintiff was introduced by a certain Mr. Lai and Mr. Au, both authorized clerks of other stockbroker firms. He would have me believe that these two authorized clerks, knowing that the defendant company was prepared to dish out or share its business or its clients with some other firms, would not take them on themselves but, instead, must bring Mrs. Tong to Mr. Kan to get the business. This is far too simple to be right and far too illogical to be right.

18. For these reasons, I find that the plaintiff is justified in claiming the sum of $832,258.75. This sum I will award to the plaintiff with interest at 8% per annum as from the date when the sum was payable, namely, the 12th of March 1976.

19. Costs would have to follow the events and the plaintiff is to have costs.

Representation:

Charles Ching Q.C. leading Robert Tang (Ng & Lee) for Plaintiff

Robert Wei (P.H. Sin & Co.) for Defendants