Securities and Futures Commission v. Whole Win Securities Ltd

HCMP 1093/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1093 OF 2006

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BETWEEN

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Before: Hon Sakhrani J in Chambers

Date of Hearing: 28 June 2006

Date of Judgment: 28 June 2006

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J U D G M E N T

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1.By the originating summons filed on 1 June 2006 the plaintiff the Securities and Futures Commission (“the Commission”) seeks an order that Mr John Lees, a Certified Public Accountant, be appointed Administrator of the defendant Whole Win Securities Limited to administer the property of the defendant pursuant to section 213(2)(d) of the Securities and Futures Ordinance, Cap. 571 (‘the Ordinance’).

2.The defendant is a corporation licensed under the Ordinance to deal in securities.  The defendant is an exchange participant as defined in Schedule 1 to the Ordinance.

3.On 26 May 2006 the Commission issued a notice under sections 204 and 205 of the Ordinance giving notice that the defendant was prohibited from carrying on whether directly or through agents all of the regulated activities for which it was licensed by the Commission.  The defendant was also prohibited from disposing of any relevant property and dealing with any relevant property pursuant to section 205(1) of the Ordinance.  This was the restriction notice issued by the Commission against the defendant. 

4.On 31 May 2006 on an ex parte application made by the Commission, an interim order was made by Barma J appointing Mr Lees Administrator of the property of the defendant and property held by or to the order of the defendant on behalf of its clients pursuant to section 213(2)(d) of the Ordinance.  The order also specified the powers of the administrator.  The ex parte order of 31 May 2006 was continued by Barma J at an inter partes hearing on 9 June 2006. 

5.This is the first hearing of the originating summons which is conducted in Chambers.  However, if the Court decides that the matter can be dealt with summarily at the first hearing, then an order disposing of the entire proceedings can be made at the first hearing without giving directions for a full hearing (International Bank of Asia Limited v. Kewpaisal Warranuch and others HCMP No. 1421 of 1998, unreported decision 4 March 1999).

6.Mr Swain, on behalf of the Commission, submits that the matter ought to be dealt with summarily since the time for acknowledgment of service has expired and no notice of intention to defend has been given.  Mr Leung, who is a director of the defendant, has appeared before me today and has the authority of the defendant to represent it.  He has confirmed that the defendant has no objection to the order sought. 

7.I accept that the matter ought to be dealt with summarily.  I observe that there has been no dispute or challenge to the factual matters raised by the Commission in the supporting affirmations.  Mr Leung also confirmed that he does not dispute the matters that have been raised.

8.The evidence in support shows that the defendant has been in contravention of the relevant provisions in the Ordinance and the subsidiary legislation. 

9.The Court’s jurisdiction to appoint an administrator under section 213(2)(d) of the Ordinance is triggered by contravention of :

(a) the relevant provisions;

(b) any notice or requirement given or made under or pursuant to the relevant provisions;

(c) the terms and conditions of licence or registration under the Ordinance;

(d) any other condition imposed under or pursuant to the Ordinance (section 213(1) of the Ordinance).

10.The relevant provisions are defined in Schedule 1 of the Ordinance as including the provisions of the Ordinance.  This includes subsidiary legislation. 

11.The evidence of Mr Pabby Lee Shung Man shows clearly that the defendant has failed to comply with the requirement under the Securities and Futures (Financial Resources) Rules to maintain liquid capital of not less than HK$3 million (paras. 8 to 13 of the first affirmation of Mr Lee).

12.The evidence also shows that there has been a breach of section 146 of the Ordinance in that the defendant failed to notify the Commission as soon as reasonably practicable of its inability to maintain financial resources (paras. 8 to 13 of the first affirmation of Mr Lee).  

13.Also, on the stock reconciliation in respect of all stock held by the defendant conducted by the Commission’s staff it was found that there was a discrepancy between the number of securities that the defendant claims to hold for cash clients and the number actually held by the Central Clearing and Settlement System (“CCASS”).       It was discovered that the defendant pledged securities in a number of companies belonging not to the defendant but to its cash clients.  There was no evidence that the affected clients gave written directions or standing authority for those securities to be withdrawn from CCASS and pledged to the defendant’s bankers.  It was admitted by Mr Leung, the director, that no such authorization had been obtained from cash clients and that they had not been informed by the defendant that their securities had been pledged (para. 14 of Mr Lee’s first affirmation).  This was in contravention of the Securities And Futures (Client Securities) Rules. 

14.Para. 15 of of Mr Lee’s first affirmation also shows that on 27 May 2006 the same Mr Leung acknowledged that upon receiving cash clients’ money the defendant did not always deposit cash clients’ money into a segregated account as it was required to do under the Securities And Futures (Client Money) Rules. 

15.Notwithstanding the restriction notice issued on 26 May 2006 it appears from para. 20 of Mr Lee’s first affirmation that on 29 May 2006 in breach of the restriction notice the defendant delivered shares to Hantec Securities.  It was learnt that the instruction of transfer had been given by the defendant that day. 

16.Section 213(4) of the Ordinance provides that the Court of First Instance shall, before making an order under subsection (1), satisfy itself, so far as it can reasonably do so, that it is desirable that the order be made, and that the order will not unfairly prejudice any person. 

17.There is no doubt in my mind that the investing public must be protected and that the interests of the clients of the defendant must be preserved. 

18.It is clear that on the evidence there are grave concerns over the fitness of the current management of the defendant.  There is clear evidence that there is serious liquidity deficiency.  There is also clear evidence that clients’ securities have been wrongfully pledged with the defendant’s creditors and there is also clear evidence that not all clients’ money have been kept in a segregated trust account. 

19.In my view it is highly desirable that an order as sought should be made.  No alternative viable proposal has been put forward up to date.  No challenge has been made by the defendant and there has been no evidence of any prejudice to any party. 

20.In the circumstances, I am satisfied that an order should be made.  I make an order in the terms of the order made by Barma J on 31 May 2006 save as to para. 12 and 13.  The words “Subject to paragraph 12 below” in para. 10 of the said order of Barma J are to be deleted.

Mr Patrick Swain of M/s Freshfields Bruckhaus Deringer for the Plaintiff

Mr C Dobby of M/s Johnson Stokes & Master for the Administrator of the Defendant

Defendant in person, represented by Mr Leung Kin Man, Kenny