Strong Offer Investment Ltd (in Liquidation) v. Nyeu Ting Chuang
Read the full judgment text of CACV 384/2004 on BabelCite. This Court of Appeal judgment was delivered on 4 April 2006.
1. This is an appeal by the defendant against the judgment given by Chung J on 9 November 2004 in favour of the plaintiff in the sum of $41,220,569.84, together with interest and costs.
Cites 4 cases
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CACV 384/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 384 OF 2004 (ON APPEAL FROM HCa NO. 10541 OF 2000) ____________________________ BETWEEN
____________________________ Before : Hon Woo VP, Yeung JA and Yuen JA in Court Date of Hearing : 21 March 2006 Date of Judgment : 4 April 2006 ----------------------- J U D G M E N T ----------------------- Hon Woo VP: Introduction 1.This is an appeal by the defendant against the judgment given by Chung J on 9 November 2004 in favour of the plaintiff in the sum of $41,220,569.84, together with interest and costs. 2.The judge handed down his Reasons for Judgment on 3 December 2004. Background 3.The plaintiff was at all material times a licensed moneylender. Its claim against the defendant for the judgment sum arose out of loans advanced to the defendant for the purchase and sale of listed shares in Hong Kong through Okachi Investment (HK) Co. Ltd (“Okachi HK”), a stockbroker who was also a sister company of the plaintiff, both being subsidiaries of Okachi & Co Ltd, a company incorporated in Japan. 4.In about April 1995, the defendant, a permanent resident of Taiwan, was introduced by one whom he called “uncle”, Mr Fan Che On (“Fan”) to Mr Ying Chau Fung (“Ying”), an account executive of Okachi HK. 5.On 10 May 1995, the defendant signed a Cash Client’s Agreement with Okachi HK, thereby opening a securities dealing account with Okachi HK (“the shares account”) and a General Commercial Agreement and Memorandum of Deposit with the plaintiff (“the plaintiff’s agreement”) for opening a margin finance account with the plaintiff to obtain margin finance from the plaintiff for the operation of the shares account. This margin account was numbered M3001 (“M3001”). 6.In about November 1996, after trading for 1½ years through Okachi and using M3001 to borrow money for financing the shares account, the defendant opened a second set of accounts, ie, a second stock trading account with Okachi HK and a second margin finance account with the plaintiff, numbered M3480 (“M3480”). M3001 and M3480 are collectively referred to as the “margin accounts”. 7.The judge summarised succinctly the relevant facts that gave rise to the plaintiff’s claim, as follows:
8.The defendant raised a number of defences before the judge, which were all rejected. 9.The judge found that the witnesses for the plaintiff were honest and reliable whilst the defendant and those who gave evidence for him were the opposite. 10.In particular, the judge rejected the defence evidence that in early October 1997 and later in November 1997, the defendant instructed Okachi HK (through Ying) to sell off all the shares in the margin accounts and close them. He also rejected the evidence that the four partial payments referred to in paragraph 9 of his Reasons were made without the defendant’s consent or knowledge. 11.The judge also dealt with two discrete defences, one based on the Money Lenders Ordinance, Cap 163 and the other based on the plaintiff’s duty to mitigate loss. Despite finding certain breaches of the Ordinance by the plaintiff, the judge exercised his discretion to enforce the loans. He also found that there was nothing unreasonable in the plaintiff’s decision to liquidate the margin accounts in December 1998 and not earlier. Grounds of appeal 12.Four grounds of appeal are raised. The first three grounds deal with matters relating to the Ordinance and the fourth ground concerns the issue of mitigation. 13.The first three grounds can be summarised as follows:
14.On behalf of the defendant, Mr Coleman stressed that it would not be appropriate to view the two subjects of the Ordinance and mitigation as discrete and separate, for in the present case, they were inextricably intertwined. He asked us to view them cumulatively, which he submitted the judge had failed to do. I will proceed to deal with these two subjects separately before turning to deal with their cumulative effect. Breaches of the Ordinance and the judge’s discretion 15.Section 18 of the Ordinance provides as follows:
16.As the judge noted in his Reasons (paragraph 59), the plaintiff conceded that there had been breaches of section 18(2)(d) and section 18(2)(i). 17.The judge also found that there was a breach of section 18(2)(f) because details of the advances, although clearly set out in the faxes sent by Ying to Taiwan and in the plaintiff’s monthly statements, were not contained in the “note or memorandum” required by section 18(1). He also found that there was a breach of section 18(2)(j) because there was no declaration as to the place of the agreement required by that provision. 18.The judge, however, held:
19.Mr Coleman, on behalf of the defendant, challenged this holding. I think it only necessary to cite what Mr Shieh SC (for the plaintiff) has referred to in response to the argument. In Celestial (International) Securities & Investment Ltd v William Henry Woo, HCA 9659/2000 (4 Dec 2001, unreported), Deputy Judge Lam (now Lam J) said:
20.In any event, despite the breaches of section 18(2)(d), (f), (i) and (j) found by the judge, he exercised his discretion under section 18(3) in favour of the plaintiff to enforce the plaintiff’s agreement. 21.It is necessary to set out the factual findings made by the judge in order to examine if the exercise of his discretion in favour of the plaintiff can be flawed. The judge gave a description of the defendant in paragraph 31 of his Reasons:
22.The judge stated the reasons for his exercise of discretion, in the following passages:
23.The contentions raised in the Notice of Appeal and repeated by Mr Coleman in his submission to challenge the judge’s exercise of discretion can be summarised as follows. Based on the premise that the burden rests with the plaintiff to satisfy the judge to exercise his discretion in its favour, it is contended that there was no explanation from the plaintiff for the breaches. Our attention is drawn to the fact that the contractual documents were pro forma documents furnished to most if not all of the plaintiff’s customers, which give rise to an inference that the plaintiff had repeatedly breached the requirements mandated by the Ordinance. There was no demonstrable or conceivable difficulty for the plaintiff to comply with the requirements of section 18 of the Ordinance or apply for an exemption under section 33B of the Ordinance. It is contended that there was no or no sufficient evidence upon which the judge should find the absence of conceivable practical advantage for the plaintiff to deliberately contravene the requirements of section 18 of the Ordinance. It is also said that the plaintiff and Okachi HK were both lender and broker and had effective control over all the matters below, namely, the type and quantity of shares traded through the defendant’s shares accounts which were held as security for the loans, the margin deposits credited to the margin accounts, the sale proceeds and the sums advanced under the margin accounts. Thus, it is contended that the plaintiff was able to act in its own interest to the defendant’s detriment by making advances to the defendant at its discretion (without the need to have the defendant’s knowledge or consent) so that more business could be generated for the plaintiff and Okachi HK. 24.As can be seen from the passages of the judge’s Reasons set out above, all these arguments had been raised before the judge and rejected by him. While it is true that the burden rests with the plaintiff to convince the court that the discretion under section 18(3) should be exercised in its favour, the court can certainly act on all the evidence before it, whether adduced by the plaintiff or by the defendant. 25.Despite the contentions now made on behalf of the defendant, Mr Coleman has not been able to point his finger to any prejudice suffered by the defendant caused by the non-compliance with the statutory requirements, nor is Mr Coleman able to point to any evidence that the plaintiff acted in its own interest to the defendant’s detriment by making advances to the defendant at its discretion for generating more business for itself and Okachi HK, despite the contention that the plaintiff was able to do so. The judge was certainly correct to point out the defendant’s failure in proving that the unlimited potential exposure on the part of the defendant could in any way be related to the breaches of the requirements of the Ordinance. The exposure rather stemmed from the trading of shares carried out pursuant to the arrangements between the defendant and Okachi HK, through Ying as the account executive. There is no evidence that the defendant objected to any of the share trading transactions. Nor is there any evidence that the defendant had complained about the loans being made to him. 26.In Emperor Finance Ltd v La Belle Fashions & Ors [2003] 3 HKLRD 995 at 1033, Ribeiro PJ, with whom all their Lordships in the Court of Final Appeal agreed, stated what the court should consider in exercising its discretion under section 18(3) of the Ordinance:
27.In this connection, it is pertinent to have regard to the policy underlying the Ordinance, which had also been alluded to by Ribeiro PJ in Emperor Finance:
28.Mr Shieh has also referred us to Celestial Finance Ltd. v Yu Man Hon & others (2004) 7 HKCFAR 450 at paragraph 21, where Ribeiro PJ said:
29.This, if I may say so with respect, must be the right approach, for on the one hand, the court should not readily countenance breaches of the statutory regulatory requirements, but on the other hand, the court should be aware of unscrupulous borrowers attempting to avoid paying their just debts to moneylenders, referred to by Kempster JA in New Japan Securities International (HK) Limited v Lim Yong Lin [1987] HKLR 447at 448E-H. 30.In the circumstances, in view of the judge’s finding that the defendant was a man of sophistication and the absence of any evidence that the defendant was in any way prejudiced by the plaintiff’s non-compliance with the requirements of the Ordinance, there is no basis for this Court to interfere with the discretion the judge exercised in favour of the plaintiff. Even if I were asked to exercise my discretion afresh, in the circumstances of this case, I would do so in favour of the plaintiff. Mitigation of loss 31.On this subject, the judge said:
32.Mr Coleman contended that the judge correctly identified a well-settled principle that the plaintiff is under a duty to take all reasonable steps to mitigate its loss and damages. He relies on the authorities referred to in paragraph 65 of the judge’s Reasons. However he submits that the judge’s consideration of the material available and necessary to be taken into account was cursory in the extreme, without referring to the substantial evidence that had been adduced before him. 33.Mr Shieh submitted that to proceed on the basis that the judge had found that the plaintiff was under a duty to mitigate its loss and damage is wrong. I think Mr Shieh is correct because the judge did make a “fall back” finding that clauses 5, 7 and 8 of the plaintiff’s agreement conferred a right to the plaintiff to liquidate the margin accounts. 34.For present purposes, it is only necessary to recite clause 5 of the plaintiff’s agreement as that alone will cover the situation. It reads:
35.Mr Shieh submitted that the notion of duty to mitigate one’s loss only arises in a claim for damages but here the plaintiff’s claim is for the repayment of a debt, not damages. The plaintiff’s liquidation of the margin accounts was the exercise of a contractual right conferred by the plaintiff’s agreement which the plaintiff could exercise in any way most beneficial to it. This is akin to a case where the contractual right to sell the security has accrued to a mortgagee. He referred us to Cuckmere Brick Co v Mutual Finance Ltd [1971] 1 Ch 949, at pp 965G-966A, per Salmon LJ; Richardson Greenshields of Canada (Pacific) v Tze Yim, HCA No. A6690/1987 (18 October 1991, unreported) at paragraphs 94, 96, per Kaplan J; China and South Sea Bank Ltd v Tan Soon Gin George [1989] 1 HKC 155, at 159C-H, per Lord Templeman; and Richardson Greenshields of Canada v Chou Tai Chuan, Cecilia, Civil Appeal No. 130/1990 (7 June 1991, unreported), per Bokhary J (as he then was), at para 52. 36.Since the Chou Tai Chuan, Cecilia case also dealt with margin trading in securities and futures, and it is a decision that binds us, it is only necessary to refer to this judgment for present purposes. Bokhary J, with whom Kempster JA agreed (and on this point Mayo J did not dissent), stated:
37.Indeed, the position of the plaintiff in liquidating the margin accounts being likened to the realisation of a security by a mortgagee was addressed in counsel’s closing submission to the judge. Out of an abundance of caution, Mr Shieh has applied to us for leave to raise the point in a late respondent’s notice in support of the judge’s judgment. I do not think Mr Coleman can object to this. 38.The British Westinghouse case relied on by Mr Coleman is distinguishable in that clearly it is a case on damages for breach of contract where the House of Lords referred to the duty on the part of the plaintiff to take all reasonable steps to mitigate the loss consequent on the breach, which debars him from claiming any part of the damage which is due to his neglect to take such steps (page 689 of the judgment). 39.Bristol and West Building Society v Fancy & Jackson [1997] 4 All ER 582 was heavily relied on by Mr Coleman to say that the plaintiff in the present case had a duty to mitigate its loss. Page 623E-J of the report reads:
40.Mr Shieh pointed out that Bristol and West is a case where the solicitor was being sued by his client (a mortgagee in a transaction) for damages for professional negligence. The solicitor failed to report facts to the lender which might have an impact on the assessed value of the security, as a result of which the lender over-lent. The issue was what loss was caused by the erroneous valuation (consequential upon the solicitor’s breach of duty) and the issue of mitigation arose in the context of such a claim. It was not a claim by the creditor against the debtor for the underlying debt. As to the factual finding that there had been unreasonable delay in realisation of the security, the relevant part of the report did not set out the facts and one simply does not know the factual basis of the finding of failure to mitigate. I consider that this case is not helpful to the defendant. 41.Mr Coleman also referred us to Medforth v Blake & Ors [2000] Ch 86 for the proposition that a receiver managing mortgaged property owed duties to the mortgagor and anyone else with an interest in the equity of redemption. Applied to the present case, Mr Coleman argued, even accepting that the plaintiff was in the position of a mortgagee and had a contractual right to liquidate the margin accounts at any time it chose, it owed a duty to liquidate at a reasonable time. 42.As pointed out by Mr Shieh, the plaintiff likened to a mortgagee can do two things, to liquidate at any time it chooses (the first limb) and to carry out the liquidation (second limb). It owes no duty to choose any particular time under the first, but once he liquidates, he must exercise reasonable care and act in good faith in the liquidation process. Medforth v Blake dealt with the second limb, as is obvious from the following passages in the judgment of Sir Richard Scott VC (as he then was):
43.In the case before us, the defendant’s complaint is not that the plaintiff was not exercising due diligence in liquidating the margin accounts or that it failed to fetch the market price for the shares or that the liquidation process was carried out in bad faith. The complaint is that the plaintiff decided to sell at an unreasonable time. It follows that Medforth v Blake does not assist the defendant either. 44.As I consider that this Court is bound by the decision of Bokhary J in Chou Tai Chuan, Cecilia, the defendant’s argument of the plaintiff’s failure to mitigate damage on the basis of a delayed exercise of the right to sell must fail in limine. Facts relevant to mitigation 45.In the event that this case goes further, I think I should also express my view whether the judge was correct in holding that there was nothing unreasonable in the plaintiff’s decision to liquidate in December 1998 and not earlier. 46.Before referring to the evidence relied on by the parties, it is relevant to point out that it is well settled that the onus of proof on the issue of mitigation is on the defendant (see McGregor on Damages, 17th Ed para.7-019). Hindsight is to be avoided in reviewing the relevant circumstances, and the plaintiff is not under any obligation to do anything other than in the ordinary course of business. In Banco de Portugal v Waterlow and Sons [1932] AC 452 at 506, Lord Macmillan stated:
47.The facts relied on by the defendant in his contention that the plaintiff had failed to take reasonable steps to mitigate its loss within a reasonable time after mid-December 1997 or the end of April 1998 are as follows. Following the stock market crash in October 1997, on 21 October 1997, the value of the shares in M3001 dropped from about $112.8 million as at 13 October 1997 to $53.7 million at close of market on 31 October 1997, a reduction of over 50% in the value. By 31 October 1997, the margin usage of M3001 had increased to 228%, over 4 times the usual margin or lending ratio of 30-50% accepted by the plaintiff on red chips and other second or third line stocks. On 31 October 1997, the margin call under M3001 was for $25.2 million, whereas on 7 November 1997 the margin call under M3480 was for $3.2 million. Since late October and early November 1997, the plaintiff had begun to chase the defendant for additional margin deposit. As at 16 December 1997, the total outstanding indebtedness under M3001 was $50.9 million, while the market value of the shares in it was $46.2 million. The accept value of the shares was only $16.9 million, and the margin usage was more than 300% being almost double the margin usage prior to the market crash. The margin call required was $34.1 million. Regarding M3480, the total debt was $18.7 million, the market value of the shares $15.6 million, the accept value of the shares $7.1 million, the margin usage was over 260%, and the margin call required was $11.6 million. There was an agreement made in February 1998, under which the defendant agreed to make monthly margin deposits to cover the interest under the margin accounts, and to make a further payment of $2-3 million as margin deposit. There were four deposits made, as referred to in paragraph 9 of the judge’s Reasons, the last of which was made on 29 April 1998. By 3 June 1998, the debit balance of M3001 was $39.3 million, margin usage 311%, margin call $26.7 million, and under M3480 the debit balance $18.9 million, margin usage 326% and margin call $13.1 million. 48.The defendant also relied on the evidence of Mr Naruhito (the plaintiff’s director) that the shares were likely to be capable of being disposed of at a reasonable time after mid-1997 or late April 1998. 49.It is contended that the defendant’s request for indulgence, relied on by the judge, would not relieve the plaintiff from its duty to take reasonable steps to mitigate its loss, which must be assessed objectively in the light of all the surrounding circumstances. 50.Mr Shieh drew our attention to the following matters, to justify the judge’s rejection of the mitigation defence. 51.As the judge said, the stock market is a highly volatile market. There was no evidence that a falling market trend between October 1997 and December 1998 was obvious at the time or indeed at any time. The evidence instead showed the contrary. In August 1998, the Government announced it would intervene in the stock market, which pushed the Heng Sang Index up by 8.25%. It must have generated some reasonable expectation that the market might consolidate later on in the year. As it transpired (which is hindsight), the measures did not quite work. However, one never knows how the market would fluctuate, although one can always be wise after the event. The defendant’s own attitude towards market movements was that ‘it goes up, it goes down’, and that the market would always go up again after a crash. Liquidation of an account was a drastic step and many customers did not want that to happen. 52.The defendant did not want his margin accounts to be liquidated and repeatedly asked for indulgence. At the end of December 1997, the value of the shares in the shares accounts first dropped well below the level of indebtedness. Ying requested the defendant to pay margin deposit. A meeting was scheduled on 7 January 1998. The defendant wrote on 9 January 1998 to Fan to get Fan involved. The letter was copied to Ying. As it happened shortly afterwards, Fan became a source to assist the defendant in the payment of deposit. At the end of January 1998, after repeated demands by Ying, the defendant agreed to deposit about $2-3 million and then monthly $500,000 to pay for the margin interest. That indulgence was eventually given by the plaintiff. On 4 February 1998, Fan paid the first sum of $750,000 as margin deposit on behalf of the defendant. Similarly, on 4 March 1998, Fan paid the second $750,000, and on 26 March 1998 the defendant remitted the third sum of $500,000 (or $499,900) as margin deposit. By a fax of the same date, Ying acknowledged receipt of the defendant’s $500,000 and advised him that he would sell some shares in his portfolios in order to reduce the interest burden and would liaise with the plaintiff not to liquidate the accounts. By a fax of 30 March 1998, Ying told the defendant that he would, as instructed by the defendant, negotiate with the company to keep the accounts and to sell some odd-shares. On or about 14 April 1998, Fan had a telephone conversation with Ying and related to Ying the defendant’s request not to liquidate the accounts. On 20 April 1998, Ying wrote to the defendant urging him to make payment as soon as possible, otherwise the plaintiff might not accede to his request not to liquidate the accounts. No deadline was imposed. On 29 April 1998, Fan paid the fourth sum of $500,000 as margin deposit on behalf of the defendant, making a total of $2.5 million. On 15 June 1998, Ying further wrote to the defendant to ask him to make payment of interests as soon as possible but no deadline was imposed. 53.The Government then intervened in the stock market in August 1998, giving some hopes of a market rebound. 54.The defendant’s margin accounts were liquidated in December 1998. 55.In Mr. Coleman’s skeleton submission, he gave us the indebtedness of the defendant as at 6 July 1998, being about $15 million under M3001 and $7.5 million under M3480. His explanation for choosing the date of 6 July 1998 (as it was pleaded in the Defence) was that it was about two months after April 1998, when the last margin deposit of $500,000 was paid and that there is no evidence of the defendant making any further request to the plaintiff not to liquidate the margin accounts. However, Mr Shieh pointed out, I consider correctly, that the defendant did not instruct the plaintiff to liquidate the accounts either. This entitled the plaintiff to treat the defendant’s request not to liquidate as continuing. Mr Coleman argued that two months after the margin deposit stopped forthcoming would have been most reasonable for the plaintiff to liquidate the accounts, and any later date was unreasonable. I am not persuaded, especially because of the Government’s announced intervention in August 1998 which must have given rise to hopes for a rebound. Any date which is earlier than the Government’s announcement could be said to be an unreasonable time for the plaintiff to liquidate the margin accounts. If a reference date were to be picked after August 1998, the question then arose as to how long the plaintiff had to wait. In my view, it would be unreasonable to venture into the realm of conjectures. 56.The important facts to note in this case are that the defendant had been requesting the plaintiff (through Ying) not to liquidate his margin accounts. The defendant was, as found by the judge, a man of sophistication and obviously appreciated the Hong Kong Stock Market was highly volatile and it could go up and down drastically. Obviously he was taking a gamble that the market was going to turn in his favour. It was at his request that his margin accounts were not liquidated. The requests were supported by the margin deposits made up till the end of April 1998. It lies ill in his mouth to criticise the plaintiff as acting unreasonably for having acceded to his requests to keep the accounts open. 57.In all the circumstances, I share the judge’s view that it was not unreasonable for the plaintiff to have liquidated the accounts in December 1998 and not earlier. Cumulative effect 58.Mr Coleman asked us to view the breaches of section 18 of the Ordinance together with the plaintiff’s conduct in liquidating the margin accounts only in December 1998 cumulatively. He argued that the loans advanced by the plaintiff for dealing in shares and thus the debts owed by the defendant were inextricably linked. Even if the plaintiff had the right to liquidate at any time, it should have done so at a reasonable time. Owing to the plaintiff’s breaches of section 18, making the plaintiff’s agreement unenforceable, the court is entitled to curtail or reduce the plaintiff’s contractual right to liquidate at any time, so that the court could instead pinpoint a particular time for the liquidation under all the relevant circumstances. Mr Coleman contended that that would be an equitable way of allowing the enforcement of the plaintiff’s agreement. He argued that 6 July 1998 was the reasonable date, and it was unreasonable for the plaintiff to liquidate the margin accounts after that date, and in particular, as late as December 1998. 59.To say this is a submission on the basis of equity would be an over-statement. I view it as an argument that the court should penalise the plaintiff for breaching section 18(1) and (2) of the Ordinance, equitable or not, or it is a plea for mercy. The plaintiff’s breaches of the Ordinance did not prejudice the defendant in any way. He is a sophisticated man who knew what was involved in operating margin accounts to purchase and sell shares. He appreciated that the stock market was very volatile and he was as capable of making great profits as of suffering huge losses. He must have been fully aware of the risk involved. He was fully apprised of the transactions carried out for his shares accounts and the position of his margin accounts, shortly after the transactions had been effected. The judge described his defence and evidence in support as he “made them up in a pathetic attempt to avoid the plaintiff’s claim”. For the reasons I have given relating separately to each of the two subjects discussed, I do not consider that even if the two matters are cumulatively considered, equity calls for the court’s interference in the way suggested by Mr Coleman. I am not at all persuaded that the judge’s decisions are in any way flawed. Conclusion 60.For the above reasons, I would dismiss the appeal with an order nisi that the defendant pay the plaintiff’s costs. Hon Yeung JA: 61.For the reasons given by Woo VP, I too would dismiss the appeal with costs. Hon Yuen JA: 62.I agree.
Mr Paul Shieh SC and Ms Jane Lo instructed by Messrs J Chan & Lai, for the Plaintiff (Respondent) Mr R A Coleman instructed by Messrs Charles Chu & Kenneth Sit, for the Defendant (Appellant) Appeal to Court of Final Appeal dismissed: see FACV21/2006 dated 30 March 2007 |
Cases cited in this judgment
Further hearings and rulings under CACV 384/2004