Osman Sadick v. Wong Wai Ling

HCA002355/1974

IN THE SUPREME COURT OF HONG KONG

(ORIGINAL JURISDICTION)

ACTION NO. 2355 of 1974

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Coram: Pickering J.

Date of Judgment: 6th November 1975.

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JUDGMENT

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1. The plaintiff is a stock broker and a member of the Hong Kong Stock Exchange Ltd. The defendant was a client of his, having been introduced to the defendant, from what the defendant regarded as a very good source, in February 1973 at which time all stock exchanges in Hong Kong were experiencing frenzied trading. The extent of that period of frenzy can be gleaned from the fact that in March of that year the Hang Seng Index peaked at 1,770 whereas by 10th July of that year it stood at 532.45 and was, on the date of the hearing of this action, at about 319.

2. The plaintiff claims that on her trading account with him the defendant is indebted to him in the sum of $134,552.44. It is common ground that the defendant was buying shares on a margin of 50%, that is to say, that in respect of purchases she would put up 50% of the purchase price of the shares bought and borrow the remaining 50% from the plaintiff's firm paying interest thereon at $5 per day per $10,000 borrowed - a figure which works out at approximately 18% per annum.

3. Two main issues arise between the parties. First the defendant claims that her oral agreement with the plaintiff was that upon any share which she purchased falling in value by 30% below the purchase price, the plaintiff was under a duty to sell the shares. The plaintiff's case, on the other hand is that the agreement was not that he must sell upon a fall of 30% in value but that once his own margin fell below 30% he was authorised to sell at his discretion and that this provision was designed for his protection. A simple example may illustrate the plaintiff's version of the arrangement; thus, if shares were bought for $10,000, he advancing $5,000 to the defendant for the purchase thereof, once the shares fell to a value of $6,500 or below, that is to a point at which the value of the shares represented no more than the $5,000 paid by the defendant and 30% of the $5,000 advanced by the plaintiff, he was authorised to sell.

4. In the event the shares did fall in value by more than 30% of the purchase price but they have not been sold by the plaintiff who has caused the shares to be transferred to his own name in order, he says, that dividends, bonuses and scrip issues may be credited to him for the account of the plaintiff and the defendant is willing to account to the plaintiff for the six parcels of shares involved and for the dividends, bonuses and other accretions thereto.

5. The second principal issue between the parties is that the defendant claims that the plaintiff is an unlicensed money-lender and that therefore her transactions with him were unlawful and void so that she is not obliged to pay him at all on his margin loans to her. The defendant denies that he is in any sense a money-lender but says that the margin facilities granted to the plaintiff were facilities given to her in connection with and for the purpose of his business of stock-broking. It is his contention that the primary purpose of stock-broking is to buy and sell shares on commission and that the provision of margin facilities is usual and the defendant claims that if, which is denied, he is in any sense a money lender he falls within the exception contained in s.6(c) of the Money-Lenders Ordinance (Cap. 163) so that the requirement of licensing would not apply to him.

6. In this connection Mr. Swaine, for the plaintiff, cited the case of Official Assignee of the Property of Koh Hor Khoon and others, Bankrupts v. Ek Liong Hin, Ltd.⁽¹⁾ in which it was held that loan transactions undertaken genuinely for the purposes of preserving, advancing or otherwise assisting the respondent company's business of rubber merchants and shippers, though not necessarily undertaken in connexion with its primary objects, were made "for the purposes" of that business within s.2 of the Singapore Money-Lenders Ordinance; and that accordingly, as the company had genuinely believed that if the loan transactions were not undertaken it would lose customers, it was within the exception from the definition of "money-lender", the material factor on this question being the genuineness of the belief not its correctness in fact. It is to be observed that the relevant portion of s.2 of the Singapore Money-Lenders Ordinance is in identical terms with s.6(c) of the Hong Kong Money-Lenders Ordinance.

7. Mr. Swaine's primary contention however, in regard to this "Money-lender" defence was that he did not need to rely upon the exception contained in s.6(c) of the Ordinance since nothing in the evidence brought the plaintiff within the primary definition of a money-lender contained in s.6. That definition reads:

"In this Ordinance, 'money-lender' includes every person whose business is that of money-lending, or who advertises or announces himself or holds himself out in any way as carrying on that business".

8. In my view this contention is entirely right, there being nothing in the evidence to bring the plaintiff within the four corners of that primary definition. Moreover, were it otherwise, the plaintiff would fit precisely and neatly into the exception contained in s.6(c):-

"Any person bona fide carrying on the business of banking or insurance, or bona fide carrying on any business not having for its primary object the lending of money, in the course of which and for the purposes whereof he lends money".

There is no substance in the defence that the plaintiff is an unlicensed money-lender.

9. Moreover, despite valiant efforts by Mr. Mumford, for the defendant, to make bricks without straw, I can find no merit in her version of the agreement reached between the plaintiff and herself. It was the defendant's case that margin facilities which she had previously enjoyed from another broker dried up and that she was introduced to the plaintiff by a friend for the precise purpose of continuing to buy shares upon margin. She was taken by her friend to see the plaintiff in his office and she says that at that first meeting there was some general discussion about which shares were worth buying and which were not but that nothing was said upon that occasion about margin facilities. On that day she made a purchase of 1,000 Wheelock Marden shares and 5,000 shares of Overseas Trust Bank and, on the following day again called on the plaintiff, this time for the purpose of paying for the shares. She was expecting margin facilities and did not go prepared to pay the full price of the shares. The plaintiff, she says, asked her whether she wished to pay for the shares in full or to pay half the price. In fact she paid half the price, borrowing the balance from the plaintiff upon margin and, upon that day, she signed a loan note in the following terms:

This was the first of several such loan notes signed by the defendant during the course of her dealings with the plaintiff. The defendant, who speaks and reads limited English, says that she asked the plaintiff whether the final paragraph of the loan note meant that if the shares dropped in value by 30% he would sell them and he confirmed this meaning. She went on to say that the question, as put to the plaintiff, was a casual one addressed to him as he was very busy typing and that it was answered equally casually and this, she says, was the only occasion upon which the defendant ever mentioned what could happen if the margin fell. Her arrangement with her former brokers had been that if shares fell by 30% below the purchase price the brokers would ask her to bolster her margin or whether they might sell the shares; she assumed that to be the practice in general amongst brokers and this was what led her to the understanding of the last paragraph of the loan note to which I have referred.

10. It is of course the defendant's complaint that when the market began to slide and the value of the various shares which she held and had purchased on margin through the plaintiff, dropped by 30% he was under a duty to sell the shares. It is apparent that had that been done the plaintiff would have had ample proceeds out of which to repay his loan to the defendant and this action would never have arisen. In cross-examination the defendant first said that the plaintiff never telephoned her in regard to his diminishing margin but later agreed that he did telephone her twice asking her for payment, and that in April 1974 he wrote to her to the same effect.

11. It is the plaintiff's case that it was the defendant who asked him for margin and that she never in fact queried the meaning of the last paragraph of the loan note which she signed following her first purchase of shares with him. He claims that he explained the note to her and that the last paragraph was not intended to mean that he was to be under a duty to sell if the share price fell by 30%. I have already detailed, by way of example, the interpretation which the plaintiff says is to be given to that last paragraph. In the event, of course, the overall position in regard to the shares with which we are concerned was both that their value had dropped by more than 30% and the plaintiff's margin had fallen below 30%. It follows that the plaintiff was thereupon entitled to sell the shares. His only reason for not so doing, he says, is that the defendant repeatedly begged him not to do so saying that if he sold there would be a total loss whereas if the shares continued to be held there was still hope. In support of this version the plaintiff adds that at no time did the defendant reproach him with not having sold the shares as she now claims was his duty and the very first suggestion that he ought to have sold came in a letter from her solicitors to his solicitors after the parties had resorted to their legal advisors.

12. Not only, the plaintiff says, did he explain the loan note to the defendant at the time she signed it but on the previous day the lady who had introduced the defendant to his firm had explained to her, in his presence, how the process of buying on margin operated within his firm. He categorised as "absolutely untrue" the defendant's claim to have put to him the casual question as to his selling the shares should they drop by 30% in value.

13. The weakest feature of the plaintiff's evidence lay in his initial inability to illustrate to me by way of an example, the meaning to be attributed to the last paragraph of the loan note. There was a lengthy pause in the witness-box and an abortive fumbling with figures but the plaintiff did eventually produce the illustration which I have set out previously. Surprising as his hesitation was, I do not find anything sinister in it. The plaintiff was perhaps taken by surprise by my request for an illustration and although he hesitated and fumbled, the illustration which he eventually produced was a logical interpretation of the paragraph in question. I accept what he said in explanation of his inexplicable hesitancy, that is, that every clerk in his office knows how the margin facilities work and I accept that the illustration he gave is typical of the procedure adopted in his office.

14. On the other side of the coin the plaintiff was able to point to actions on the part of the defendant quite inconsistent with any belief on her part that the stage had been reached at which it was his duty to sell the shares. In the first place, the plaintiff pointed out, she herself could have sold the shares at any time with the aid of a more telephone call and was in fact buying and selling shares by such means during the months of February to April 1973. Moreover at dates after the plaintiff's alleged duty to sell had arisen, the defendant made part payments of her outstanding balance, namely on 6th and 9th April and 19th July; made also interest payments on that balance on 10th July and 17th August and, on 15th May, put up additional security against her margin account. The plaintiff points to these actions as being wholly inconsistent with any belief on the part of the plaintiff that the stage had been reached at which it was his duty to sell the shares.

15. Moreover, it is abundantly clear that no matter which interpretation was given to the disputed paragraph, it was in the plaintiff's interest to sell the shares. By so doing, he would have protected the capital which he had loaned to the defendant and a surprising feature is that he did not in fact sell. His explanation that he did not do so because the defendant begged him not to do so and because he accepted her word that she would pay and trusted her, is perhaps the only logical explanation for his continuing to hold the shares.

16. Her counsel presented the defendant as a wide-eyed innocent unfamiliar with the ways of the business world. She was in fact sufficiently sophisticated to be employing the technique of margin buying at the height of the stock exchange boom and to be buying shares to the tune of almost a million dollars in a few months. I find as a fact that the meaning of the last paragraph of the loan note was explained to the defendant by the plaintiff and that she already knew the technique of margin buying from her introducer. I find also that the casual question alleged to have been addressed by her to the plaintiff with regard to the interpretation of that paragraph was never so addressed or, if in fact put, was not answered by the plaintiff in the manner alleged by the defendant.

17. Certain peripheral matters were argued on behalf of the defendant. It was suggested that the plaintiff was under a duty to advise her of the dangers of margin trading and with the fact that the Hang Seng Index was very high. I find that he was under no such duty. He was never asked for any advice and never gave any. The dangers of margin trading are blatantly obvious and the defendant, who had been so trading through her previous brokers, needed no advice in this regard. As to the matter of the Index, the defendant came to the plaintiff at a time when a purchase on one day gained a profit on the next. Like many other people in Hong Kong at that time she was in no mood to listen to advice not to buy and, as the plaintiff observed, had he tendered such advice and it had been acted upon, and had the market then continued to rise he would quickly have been blamed.

18. It was further suggested that since in the arrangements between the parties there was no specific provision for repayment of the capital advanced by the plaintiff to the defendant, the plaintiff could not now sue for that capital sum but must be left such remedy as is constituted by the securities he holds. No authorities were quoted for this somewhat startling proposition. In fact, notwithstanding the provision of security, his right to repayment and an action on the debt remained unless it could be shown that there was an express agreement that the security was to constitute the only remedy.

19. There must be judgment for the plaintiff in the amount claimed with interest as claimed and costs. The defendant succeeds on her counterclaim for delivery up to her of all share certificates relating to shares owned by her and held by the plaintiff and for the accounts referred to in paras. 3, 4 and 5 of the counterclaim together with an order for payment by the plaintiff of all sums found due upon the taking of such accounts. As to the costs of the counterclaim, in the Statement of Claim there was an offer to account to the defendant; although that offer did not specifically mention dividends, bonuses and other accretions it was I think implicit in that offer that these would also be accounted for. It follows that although the defendant succeeds technically upon her counterclaim she is getting from it no more than had already been offered to her. Indeed the counterclaim may be said to be substantially the defence. In those circumstances the plaintiff will also have the costs of the counterclaim. By consent stay of execution for 14 days. Liberty to either party to apply.

Representation:

J. Swaine, Q.C. (Hon. & Co.) for Plaintiff.

E.C. Mumford (Hastings & Co.) for Defendant.

(1) 1960 1 All E.R. 440.