China Everbright Finance Ltd v. Chan Yung and Another
Read the full judgment text of HCA 18300/1999 on BabelCite. This High Court CFI judgment was delivered on 24 October 2006.
1. In November 1996, the 2 nd defendant, Mr So opened an account for a margin loan facility in the name of the 1 st defendant, Mr Chan, with the 1 st plaintiff, China Everbright Finance Ltd (“CEF”), for the purpose of trading in securities with a related company, China Everbright Securities Ltd (“CES”). Trading was carried out, but then the value of the shares, which were pledged to CEF, dropped sharply in about October 1997. Mr Chan was called on to reduce the margin, but did not. CEF procee
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HCA 18300/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 18300 OF 1999 ____________ BETWEEN
____________ Before: Deputy High Court Judge Muttrie in Court Dates of Trial: 7-8, 11-14 and 18 September 2006 Date of Judgment: 24 October 2006 _______________ J U D G M E N T _______________ Overview 1.In November 1996, the 2nd defendant, Mr So opened an account for a margin loan facility in the name of the 1st defendant, Mr Chan, with the 1st plaintiff, China Everbright Finance Ltd (“CEF”), for the purpose of trading in securities with a related company, China Everbright Securities Ltd (“CES”). Trading was carried out, but then the value of the shares, which were pledged to CEF, dropped sharply in about October 1997. Mr Chan was called on to reduce the margin, but did not. CEF proceeded to liquidate the shares. CEF now claims against Mr Chan for the outstanding balance on the account, which it says amounts, with interest, to $6,356,031.58. The 2nd plaintiff, Poseidon, also claims as assignee of the debt. 2.Mr Chan says that Mr So had no authority to open a margin trading account for him, but only a cash account; for this reason, and for other reasons detailed below, he is not liable. The plaintiffs also claim against Mr So for breach of his warranty of authority as agent, if it be found that Mr Chan is not liable; but Mr So maintains that, as agent, he acted within his authority, so that Mr Chan is liable, but he is not. Again there are other defences, but I will particularise them below. Background 3.Evidence in this case comes from a dealer representative of CES, Mr Mak King Wah, Johnny, and from Mr Chan himself. Mr So has not given evidence. I set out here what it is not in dispute or is indisputable on the documentary records. 4.CEF and CES are effectively wholly-owned by China Everbright International Ltd, a public listed company in Hong Kong. CEF was at all relevant times licensed as a money lender under the Money Lender Ordinance. CES provided securities trading services to the customers of CES. 5.Mr Chan was born in 1960, and came to Hong Kong from Fujian Province in Mainland China in about 1975. He completed Form 4 education in a Putonghua-medium secondary school in Hong Kong, and then helped his father in business here. He was provided with some family finance, and built up his own business interests, mainly in property development, so that by 1996 he was a shareholder and director of a number of companies, in particular Rich Sea Holding Ltd, of which he was the Vice Managing Director, and Kistna Development Ltd. 6.The registered office of these companies was at Room 8A, 8th floor, Winbase Centre, 208 Queens Road, Central, which was owned by Kistna. In June 1995, this office was leased to one Hoi Ning Engineering Co. Ltd for two years, and according to Mr Chan, his own business then moved to offices on the 20th floor of the same Winbase Centre, owned by a nominee of Kistna, where they stayed until the extended lease of Room 8A expired in June 1998, and then moved back. In any event, in November 1996, Mr Chan was operating his businesses from the 20th floor, but at the same time it appears he was using a business card of Rich Sea Holdings Ltd, which showed the office address on the 8th floor. 7.Mr Chan had a friend named So Sik, another successful Fujianese businessman. He was the major shareholder and effectively the head of a number of companies known as the Triplenic Group. The 2nd defendant, Mr So was So Sik’s associate, though not, it appears, a family member, and was a co-director with him of various Triplenic and other companies, in particular Triplenic Holdings Ltd. Mr Chan came to know Mr So through So Sik. The account 8.In November 1996, Mr Chan signed a number of documents for the opening of an account with CEF. These were:
9.All the documents were in English, except for the letter of authorisation, which was in Chinese with an English translation. Mr Chan signed the Chinese version. On the open account questionnaire, Mr Chan’s employer is shown as Rich Sea Holding Ltd, and his address is shown as Room 8A, 8/f, Winbase Centre, i.e. the address which appears on his business card. 10.It is not in dispute that Mr So obtained all these documents from Mr Mak, took them to Mr Chan at his office for signature, and later returned them Mr Mak. 11.The account was used almost entirely for the purpose of trading in shares in Triplenic Holdings Ltd, share no. 181. Whenever there was any dealing in the account, a contract note or statement would be sent on the next business day to Mr Chan. Whenever there was a change in the margin percentage or the interest rate, a letter would likewise be sent to Mr Chan. A statement was sent to him every month. The address used for such correspondence was Room 8A, 8/f, Winbase Centre, as shown above. No document sent to that address was ever returned by the Post Office to CES or CEF. Account movements and correspondence 12.Between 29 November 1996 and 22 January 1997, Mr Chan paid cheques totalling $10 million to the account. Triplenic Holdings shares were bought at $3.4 to $4 per share. As at 31 January 1997, the account held 5,940,000 shares with a closing price of $4 per share. The market value of the shares is shown at $24,057,000, the margin value at $4,811,400, and the debit balance carried forward at $11,472,547.69. 300,000 shares were sold for a consideration of $1,239,733.65 on 13 May 1997, and the proceeds went to reduce the debit balance on the account. Thereafter, until August 1997, the only entries relate to the debiting of interest. 13.The monthly statement for August 1997 shows a transfer in of 970,000 shares in Fu Hui Holdings Ltd (share no. 639) on 28 August to cover a sale of this number of shares on 26 August. The shares were transferred from Mr Chan’s securities trading account with OSK Securities Co. Ltd following a letter of instruction dated 28 August 1997, the authorship of which is in dispute; Mr Chan says that it was forged. 14.The monthly statement for September 1997 shows a transfer out of 760,000 Triplenic shares to the OSK account. This follows on a letter of instruction dated 1 September 1997. Again Mr Chan says that his signature on this letter was forged. 15.Also in September, there was a bonus issue of 5,640,000 Triplenic shares. These, along with the 5,640,000 shares by then held in the account, brought the number of shares in the account, by the end of that month, to 10,486,000. The closing price is shown as $3.100, the market value at $32,506,600, the margin value at $13,002,640, and the debit balance carried forward at $8,405,717.44. 16.On 9 October 1997 a cheque payment was made from the account to Mr Chan of $880,000. He received this sum and transferred it to a company called Casablanca Star incorporated in Singapore. I will deal with his reasons for doing so when I come to his evidence. 17.By this time, the value of the shares had started to fall. At 31 July 1997 the closing price was shown at $4.40. However, by the end of October, the closing price was shown at $2.00. By the time liquidation of the shares commenced in August 1998, the market price had dropped to about $1.00. 18.CEF on 1 May 1998 wrote to Mr Chan to notify him at that with effect from 11 May 1998 it would charge him interest at the prime rate plus 6% on a daily (non-compound) basis. This was apparently answered by a letter in Chinese, bearing to come from Mr Chan and dated 18 May 1998 in which it was requested that the interest rate for the loan should remain unchanged and a promise was made to reduce the percentage of mortgage charge to 35 per cent before 30 June 1998. Again, Mr Chan disputes the authorship of this letter. He says it did not come from him and is a forgery. 19.CEF on 12 June 1998 sent out another notification of change of interest rate to prime plus 8% with effect from 19 June 1998. On 23 June 1998, a letter was sent out advising Mr Chan that the ratio of debit and market value of stocks in his margin account was 70%, and requesting him to lower the ratio of debit and market value of stocks to 30% before 30 June 1998. At the same time there was a notification of change of interest rate to prime plus 10%. On 3 July 1998, a further letter was sent out advising that the ratio of debit and market value of stocks in the margin account was 81%. Reference was made to the earlier request, and the company asked for compliance with it, otherwise it would sell the stocks in the accounts starting on 11 July 1998 until the ratio reached 30% or below. At the same time, the interest rate was to be increased to prime plus 12 per cent. 20.On 30 November 1998, CEF sent out a letter to notify Mr Chan of a debit balance of $6,219,137.62 without sufficient collateral. Notice was given that unless the loan outstanding together with subsequently accrued interest was paid that before 18 November 1998 the company would take steps to enforce its right including but not limited to instituting legal proceedings, and also that it would exercise its rights to sell the securities without further notice. 21.This appears to have generated a response, because on 28 December 1998, the company wrote to Mr Chan referring to a registered letter from him dated 11 December 1998. This registered letter has, apparently, been lost by CEF. The letter of 28 December simply demanded that Mr Chan immediately settle the loan. However, there was no response to that letter. 22.In fact, liquidation of the shares had commenced on 3 August 1998 and continued until 1 September 1998. It then ceased, and resumed from 5 to 31 March 1999. 23.On 10 May 1999, CEF again wrote to Mr Chan, this time giving notice of termination of the cash client’s agreement and margin client’s agreement, and enclosing a statement of account. On 13 May, the company wrote to him giving notice of assignment of its right, title and interest in the sum of $6,697,446.13 to Poseidon Treasure Ltd. These letters generated a response from Mr Chan, who replied through his solicitors denying liability and advising that he had never given the relevant instructions or directions to CEF to deal with certain shares resulting in certain alleged used margins under the account, nor authorised formally any one else to do so on his behalf. The plaintiffs instituted proceedings on 26 November 1999. The plaintiffs’ pleaded case 24.The plaintiffs plead that a contract, partly oral and partly written was made in November 1996 for a margin loan facility to enable Mr Chan to trade with CES. Insofar as it was made orally the contract was made between Mr Mak for CEF and Mr So, acting for Mr Chan, at CEF’s office. Insofar as the contract is written it is contained in or to be inferred from the documents signed by Mr Chan, and delivered to CEF by Mr So on Mr Chan’s behalf. It was further orally agreed that Mr So, or one Ms Janet Lau would place orders with CES on behalf of Mr Chan. In the premises Mr So warranted that he had Mr Chan’s authority to enter into the contract and present the documents to CEF and that he and Ms Lau had authority to place orders with CES. Pursuant to the contract and the oral agreement as to the placing of orders, CEF made the margin loan available to Mr Chan. On 10 May 1999 Mr Chan owed CEF $6,356,031.58, as set out in an attached schedule. On the same day CEF assigned the debt to Poseidon. Mr Chan has failed to pay despite demands for payment, and is liable in the sum of $6,356,031.58 and interest on $4,355,395.21 at the agreed interest rate from 11 May 1999 to the date of payment. In the alternative, if Mr So did not have the authority of Mr Chan, he is liable for damages in the same sums for breach of his warranty of authority. There is an alternative claim for interest under section 48 of the High Court Ordinance Mr Chan’s pleaded case 25.Mr Chan pleads that in about November 1996, So Sik introduced him to Mr So, who invited him to join a scheme under which Mr Chan would buy $10 million worth of shares in Triplenic Holdings, and hold them for one year, in which time their value would increase substantially. Mr So said that there were other investors in the same scheme. 26.Mr Chan agreed to join the scheme. Mr So brought the account opening documents to Mr Chan for signature. Mr Chan signed them in reliance on Mr So’s false and fraudulent representation that they were documents for opening a cash securities trading account. He never intended to open a margin account. 27.Mr Chan therefore denies having entered into the contract relied on by the plaintiffs. He says that the documents did not embody the actual agreement between himself and CEF and (by way of further and better particulars) that the actual agreement was made orally by Mr So, on his behalf, with CEF. He denies that Mr So had any authority to act as his agent to open the account, or that he or Janet Lau had his authority to trade. 28.He further pleads that if, which is denied, the contract was contained in or to be inferred from the documents he signed, the contract is unenforceable for uncertainty. Alternatively the documents are an inadequate note of memorandum in writing as required by the Money Lenders Ordinance, Cap. 163, and therefore the contract is unenforceable, or it would be inequitable for the court to enforce it by virtue of section 18. Further alternatively, the contract is unenforceable or it would be inequitable for the court to enforce it by virtue of section 22. 29.As to the sale of 970,000 shares, Mr Chan says that he lent these to Mr So. Their transfer to his CES account and subsequent sale were carried out without his knowledge and consent and the letter of authority dated 28 August 1997 and purporting to be signed by him was a forgery. The transfer of 760,000 shares out of the account was likewise carried out without his knowledge and consent, and the letter of authority dated 1 September 1997 was a forgery. The letter of 18 May 1998 purportedly written by him to CES was also a forgery. 30.Finally Mr Chan pleads that CEF failed to mitigate its loss by failing to sell all the shares in the account when it decided to liquidate the same in August 1998. Mr So’s pleaded case 31.Mr So’s case is that he, at the request and authorisation of Mr Chan, delivered the documents to Mr Mak for opening the account. He told Mr Mak that he had Mr Chan’s authority to present the documents and to buy and sell shares through the account. In fact he did not operate the account. On some occasions when CES brokers were unable to contact Mr Chan, they contacted Mr So to tell him that there was a deficit balance in the margin account and he would tell Mr Chan of it, but CES and CEF sent all statements to Mr Chan direct, so that Mr So had no knowledge of the account balance. All credits to the account were made by Mr Chan directly without involvement or knowledge of Mr So. 32.Mr So accordingly denies any breach of warranty of authority. 33.Mr So adopts the defences raised by Mr Chan. In addition he avers that the margin loan agreement is illegal in that it contravenes section 22 of the Money Lenders Ordinance. The particulars on which he relies are somewhat different from those relied on by Mr Chan. He further says that no cause of action can lie against him as agent for breach of implied warranty of authority to enter into an illegal agreement on behalf of his principal. 34.He also avers that CEF failed to mitigate its loss. Again, the particulars are somewhat different from those relied on by Mr Chan. Reply 35.By way of reply, the plaintiffs say that even if Mr So had no authority to enter into the contract on behalf of Mr Chan, Mr Chan ratified the contract by receiving contract notes, accounts and letters, by writing the letter of 18 May 1998 and by receiving the cheque for $880,000 in October 1997. 36.They deny that the contract was unenforceable by reason of uncertainty. They deny that it was unenforceable under the Money Lenders Ordinance, but if it was, they rely on the court’s discretion under section 18(3). They deny illegality under section 22 but again rely on the court’s discretion, if illegality be found, under that section. 37.The plaintiffs further deny that they were under any duty to mitigate their loss. Issues 38.The main issue is, therefore, whether Mr So had Mr Chan’s authority to open a margin trading account or whether his authority was restricted to the opening of a cash trading account with a specific limit. If Mr So had authority to open a margin trading account then obviously (subject to other defences) Mr Chan must be liable, but Mr So is not. If, however, Mr So fraudulently represented that a cash account was being opened, he exceeded his authority and will be in breach of the warranty of authority given to the plaintiff; but Mr Chan will not be liable for the contract between him and CEF was never concluded. 39.There is also a sub-issue relating to the authority of Janet Lau to trade under the account, once it was opened. 40.Closely linked to the question of authority is the question of ratification; if Mr So, without authority, opened a margin account, did Mr Chan thereafter ratify it? If Mr Chan ratified the margin trading contract, then again, he will, subject to other defences, be liable and Mr So will not. Relevant to this are the issues as to the forgeries of his signature which Mr Chan alleges. 41.If Mr Chan is liable as principal, the next issue for decision is whether the contract is unenforceable at common law or under statute, and if the latter, whether the court should exercise discretion in favour of enforcing it. Finally there is the issue of mitigation. 42.If Mr Chan is not liable, but Mr So is in breach of warranty of authority, questions of enforceability and mitigation also arise. There is also the question, raised in argument, of whether Poseidon, as assignee of the debt, has any claim to damages for breach of warranty of authority. There seems to be no objection by either defendant to the fact that both plaintiffs still claim notwithstanding that the debt has been assigned to Poseidon. Authority and Ratification 43.It is convenient to deal with these two issues together, because both depend on the evidence of Mr Chan as to how the account was opened, and what he knew of its operation thereafter. 44.There is no dispute that Mr So had Mr Chan’s authority to present the account opening documents signed by Mr Chan, for the purpose of opening an account, and further to operate the account by buying shares. What is in dispute is the nature of the account and the operating limit. 45.It is true that the uniform cash client’s agreement and the open account questionnaire may be seen as equivocal as to the nature of the account. No one crossed out “margin” or “cash” where those words appear. But on the face of all the documents read together, what was to be opened was a margin account. That is the import of the agreement for margin loan which Mr Chan signed by way of acknowledgment, whether or not he understood what he was signing. A margin account was opened. It is for Mr Chan to establish that this was not his intention and that he was induced by fraudulent misrepresentation to sign the documents. 46.Fraud is a serious allegation. The more serious the allegation, the more cogent must be the evidence to prove it. But the standard of proof is the balance of probabilities. There is a logical difficulty of requiring more cogent evidence on fraud than otherwise, while still holding that the allegation is to be proved on the balance of probabilities but the resolution of this problem was explained in Re H (minors) [1996] AC 563. In that case the House of Lords held that even where a serious allegation is in issue, the standard of proof remains the same. Per Lord Nicholls:
47.The same consideration applies to Mr Chan’s allegations that the three letters purporting to come from him and apparently bearing his signature were forgeries. On the face of the letters, they did come from him, and they bore his signature. There was no way for the CEF to know if that was not the case; Mr Mak apparently received the letters, so far as he knew, from Mr So as Mr Chan’s agent and simply passed them on to his accounts department in the due course of business. 48.In brief, Mr Chan’s evidence is that he came to know Mr So in about November 1996 through the introduction of his friend, So Sik. He knew that So Sik was the “boss” of Triplenic and he knew that Mr So was connected with Triplenic. Mr So invited him to invest $10 million in the shares, and told him that other investors were also asked to invest in them. So Sik and Mr So told him that the plan was very safe, and he would make 50% on the value of the shares if he sold them a year later. Mr Chan was then worth about $100 million, and he had $10 million available, so he agreed to invest. 49.Accordingly, on a day in November 1996, Mr So visited Mr Chan’s office with the documents. Mr So told Mr Chan that the documents and forms were prepared for the purpose of opening a cash securities trading account. Mr Chan, who could not read English, believed him and signed the forms, which were not otherwise filled in, where indicated by a pencilled cross, and Mr So took them away. Thereafter, when Mr So told him that he had bought shares up to a given value, Mr Chan issued the various cheques in favour of the plaintiff, up to a total of $10 million. Otherwise, according to Mr Chan, he paid no attention to what happened to the account or the shares, although it does appear that he checked the value of the Triplenic shares according to the newspapers from time to time. He told his staff that he did not want to receive any documents relating to the account, because he left all that to Mr So. 50.Mr Chan also says that by the time of the meeting with Mr So, his office was on the 20th floor of the Winbase Centre. He had moved his business out of the 8th floor, when those premises were leased to the Hoi Ning Engineering Co. Ltd, a company not related to his own companies, and indeed he continued to use the 20th floor offices as his base right up to June 1998. He does not know how CEF and CEJ came to use the 8th floor address; he thought he must have given Mr So his old business card, showing that address, at some time, but he did not give Mr Chan a card when he signed the documents. He did not know what arrangements his staff made for mail redirection, or whether the tenant might have redirected or delivered mail sent to him at the 8th floor address. In any event, he says he never received any of the monthly statements, or any of the documents relating to individual transactions, sent out by the CEF or CES. 51.As to the sale of shares in Fu Hui Holdings Ltd, Mr Chan’s evidence is that he lent these shares to Mr So at the latter’s request. He did not know why Mr So wanted the shares; Mr So did not tell him; but apparently he thought that Mr So wanted to push up the price of the shares in some way, so that he would benefit from it himself. He did not know they were sold, and he did not know of the letter of 28 August 1998 which he says is forged. He did not know about the sale of 760,000 Triplenic shares, and the letter of 1 September 1997 apparently authorising the transfer of the shares was a forgery. As to the cheque for $880,000 disposing of the proceeds of this sale, Mr Chan’s evidence is that Mr So told him that he, Mr So, was to receive this sum from the plaintiff, but he did not want the money to go directly to him on record. So, as a favour, Mr Chan agreed that Mr So should have the cheque issued to him; and he paid it, at Mr So’s request, to the Singapore company. 52.As to the opening of the account, and on the question of authority, there is no evidence from Mr So; and I will return to this point shortly. There is some evidence from Mr Mak, the plaintiff’s account executive, that Mr So told him that he had full authority to deal for and on behalf of his principals, including Mr Chan, for whom he opened accounts with CEF and CEJ at about the same time. He also says that in respect of the share transactions in August and September 1997, he received instructions from Mr So or the latter’s assistant, Ms Janet Lau. 53.There is also evidence from Mr Mak that he later met Mr Chan at a social occasion with Mr So and some of the other investors. This was about a month after the accounts were opened. On this occasion Mr So introduced Mr Chan to Mr Mak, and Mr Chan told Mr Mak that Mr So had his full authority in matters relating to the account. There was also some general discussion among the investors about investing and borrowing, and the term “margin account”, “margin” in English and “account” in Cantonese, was used. 54.Mr Mak was cross-examined at length on this matter, and his evidence has been the subject of lengthy submissions by Ms Lan, counsel for Mr Chan, because nowhere in his three witness statements did Mr Mak ever say more than that he had been introduced to Mr Chan. There was nothing about any confirmation of authority, even in the latest supplemental statement, made shortly before the trial, when Mr Mak and whoever took his statements must have known what the issues were. Mr Mak’s explanation that he did not think it important, because he had been saying all along that he knew about Mr So’s authority, is not convincing. There is obviously a question mark over his evidence on this point. But even if this evidence has simply been made up to suit the plaintiffs’ case against Mr Chan (because it appears that Mr So is no good for the money), that does not assist Mr Chan. As far as Mr Mak and the CEF knew, the account was never intended to be anything other than a margin account. If Mr So deceived Mr Chan, CEF had no way of knowing it. 55.At the same time, I did not find in any way unconvincing Mr Mak’s evidence that Mr Chan’s account, or the investors’ accounts generally were referred to as margin accounts. That is what Mr Chan’s account was intended to be, so far as Mr Mak knew; and there is no evidence that the other accounts in respect of which there was dealing in Triplenic shares, and which also came to be liquidated, were anything other than margin accounts. 56.As I have said, there is no evidence from Mr So. We only have the evidence of Mr Mak and Mr Chan. Ms Lan relies on the principle in Armory v Delamirie (1722) 1 Str 505, that the failure to bring before the court some circumstance, document or witness favourable to a party’s cause indicates that the party fears to bring it. She argues that the absence of Mr So is a decisive factor when the issue of misrepresentation falls to be determined. In particular she notes that Mr So pleaded that it was Mr Chan who negotiated the terms of the agreement and that he himself had absolutely no involvement in the operation of the margin account but neither is true, on the evidence. 57.Mr So’s failure to give evidence indeed counts against him, but I do not see that it is decisive. If Mr So came to court, it would be his evidence against Mr Chan’s as to what instructions the latter gave him. The demeanour of the two witnesses might help the court, but demeanour is never entirely reliable; there are too many excellent poker-faced liars in the world for that. A better guide is, as the courts have said on many occasions, the comparison of the oral evidence with the agreed or incontrovertible facts and the inherent probabilities of the situation. At the end of the day the question is whether Mr Chan can satisfy the court on the balance of probabilities of the fraudulent misrepresentation that he alleges, against the incontrovertible facts and inherent probabilities. Mr So’s silence is only one of those facts. 58.Much has been made, in argument, of Mr Chan’s allegations of an investment scheme. It may well be that there was such a scheme. Mr So opened accounts for other investors. These all appear to have been margin accounts. Given that Mr So was connected with the Triplenic group and So Sik was in effect its head, the whole thing has the ring of some kind of market manipulation or insider dealing, although I do not need to make any finding on that. In any event, I do not see that the existence of such a scheme would necessarily assist Mr Chan’s case. We know that he intended to buy Triplenic shares, because he expected a handsome profit on them, after a year. Whether or not others were doing the same would be equivocal as to whether or not he intended to buy only $10 million worth of shares, or buy more on margin. 59.Much has also been made of the fact that after Mr Chan put in $10 million, there were very few account movements. He was not a short term investor playing the account to make more profit. It is argued that the lack of movement is consistent with his wish simply to buy shares and leave them for a year and then reap the expected profit. That may be, but it does not follow that because there is a margin facility, one must buy and sell on the account; one can use the facility at the outset to buy more shares and then hold them. So this also is equivocal. 60.Indeed, if what was in Mr Chan’s mind was profit on a winning tip, as he says it was, it is difficult to see why he would not, if the opportunity was there, borrow on margin to buy more shares than his $10 million stake would get him, and so make more profit. In his second supplemental statement he says that “relying on the assurance given by So Sik and the 2nd defendant, with the rosy picture of making huge easy money as painted by them, I agreed to participate in the 2nd defendant’s scheme.” Of course the easy money could be more huge and the picture more rosy if he took that opportunity. One does not succeed in amassing a net worth of $100 million by allowing opportunities to pass by. 61.It is also difficult to understand why Mr So would have defrauded Mr Chan in the manner pleaded. Generally fraud is done for profit, not sport. If the value of the shares went up, as expected, that would benefit Mr Chan, whose account it was, and not Mr So. Indeed on Mr Chan’s case the only personal profit Mr So achieved was the sale of shares and payment out of $880,000 to his nominee in Singapore, by way of a new deception, if deception it was. But also by deception, on Mr Chan’s case, Mr So sold the Fu Hui shares; and the proceeds did not go to benefit Mr So, but to reduce the indebtedness in the account. 62.When one looks at the evidence of the opening of the account, further improbabilities are apparent. In the first place, of course, there is the evidence that Mr Chan did not, by reason of not understanding English, know what he was signing. Of course if Mr Chan only learnt a little English at school, in Form 4, many years ago and has never used it since, he has probably forgotten much of what he learnt. However, in business over the years and as a director of many companies, Mr Chan would no doubt have had to sign many English documents. The idea of a man of Mr Chan’s business acumen, able to build up the fortune he had built up, not taking some steps to find out what he is signing (and indeed reposing the kind of naïve trust in Mr So which he says he reposed) is difficult to swallow. 63.On this point, evidence of Mr Chan’s experience of trading in shares through accounts with OSK Securities Ltd and Master Trademore Ltd (though he says he did not know whether the accounts were cash or margin) is relevant. He could not have been as unsophisticated in share dealings as he presents himself. 64.Further, if Mr So told Mr Chan that the documents were for opening a cash account, not a margin account, and opened such account against his authority, he ran the risk of being found out very quickly; indeed as soon as documents started to come through to Mr Chan from the plaintiff. Mr So was himself a sophisticated businessman with interests in various companies and one would have expected him to take some steps not to be found out. 65.It is Mr Chan’s evidence that Mr So told him that he did not need to read any statements or documents sent to him by CES, because Mr So would receive them as well. It is certainly true that Mr Mak sent copies to Mr So. But Mr So’s statement, if made, is hardly evidence of steps taken to hide the fact of the margin account. 66.The matter of the 8th floor address is relevant here, as it is to Mr Chan’s evidence that he never received any documents. He says that by November 1996 he was using the offices on the 20th floor. The 8th floor office had been leased to another company since June 1995. It may be suggested that the use of this address by Mr So indicates that he did not intend correspondence to reach Mr Chan. 67.The address which CEF and CEJ had for Mr Chan was the 8th floor, Winbase Centre; it had, and gave discovery of his business card bearing that address. It could only have obtained that address and, by extension, that card from Mr So. Mr Chan says that he did not give Mr So a business card at the meeting when he signed the documents. That meeting must have been held on the 20th floor. Mr Chan did not, as he said in re-examination remember if he still gave out cards with the old address after moving office; but he only met Mr So in late 1996, so it seems that he must have done, either at that meeting or at some other time; otherwise how would Mr So have obtained it? Further, Mr Chan admitted that he did not tell Mr So of the tenancy of the 8th floor premises. It would follow that, notwithstanding that the meeting was on the 20th floor, Mr Chan must have held out and Mr So must have believed the 8th floor address was valid; therefore, Mr So’s passing on of the 8th floor address to CEF and CEJ cannot be seen as any kind of attempt to keep Mr Chan in the dark about the account. 68.This brings me to the evidence of Mr Chan as to his total non-receipt of correspondence. All correspondence was sent to the 8th floor address. None was ever returned. The inference must be that it was all received, at least at the 8th floor. As indicated, Mr Chan must have held that out as a valid address to Mr So. 69.In his second supplemental statement, Mr Chan says that he told his staff not to pass on the correspondence to him, because he trusted Mr So to take care of the matters for him. There is no mention of the 20th floor address in the witness statements. This is only advanced, as a reason for Mr Chan’s not having received any correspondence, in the oral evidence. That is inconsistent. 70.Even if Mr Chan did not continue to use the 8th floor as a postal address when he moved office to the 20th floor it would be natural for his staff to make arrangements for mail forwarding. Mr Chan says that he does not know if this was done; but it would be surprising if it were not; moving house or office is common in Hong Kong and people may be expected to know of the Hongkong Post’s cheap and efficient forwarding service. But even if Mr Chan’s staff made no such arrangement, and the tenant on the 8th floor received mail in the absence of any arrangement, it would only be natural for the tenant to send it on, by hand or by post, or make some other arrangement for redirection especially since accounts were received monthly. It is therefore most unlikely that none of the correspondence aimed at Mr Chan at the 8th floor ever got to his office on the 20th floor. 71.It is further most unlikely that Mr Chan would never have looked at any of the correspondence. Now it may be that, if he really did intend to buy $10 million worth of shares, and forget about them for a year in the secure knowledge of a 50% capital gain, he would not have been interested in looking at all the account statements, once the shares were bought. But the shares were bought over two months; and he was told from time to time how much to pay over. It is most unlikely that, at that stage, he would have had no interest in checking that the money had gone to the right destination, and the shares had been bought with it. The idea of a man of Mr Chan’s business acumen, able to build up the fortune he had built up, failing to take such elementary steps to check that all had been done correctly is again hard to swallow. 72.It appears that Mr Chan knew the market value of the shares from time to time. If he had looked at the account documents as they came in, as I think he would necessarily have done in the early stages, he would have found, for instance, that the credit of his first $3 million coincided with the purchase of over 21 million shares. At that stage the market value per Triplenic share was $3.65. If his intention was only to buy $3 million worth of shares, he should have had, in his account, only about 800,000 shares; and that would necessarily have alerted him to the fact that what was happening was not simple share purchase by a cash account. 73.Looking, therefore, at the evidence of Mr Chan against the background facts and the improbabilities inherent in that evidence, I do not believe him. I am not satisfied on the balance of probabilities that he was induced by fraudulent misrepresentation to sign the account opening documents. I am satisfied that he knew well what he was signing and intended to open the margin account. 74.I also do not believe that he never received or read any of the account documents sent to him. I find that he must necessarily have read them, and that he ratified the contract by giving instructions through Mr So for the continued investments and the later transactions. It is unbelievable that he would not have read the documents especially after the one year period, and after the Asian financial crisis set in when, as it appears from his first statement, he knew that the value of his shares had fallen. 75.As to the letters instructing the later transactions and that of 18 May 1998, there is no evidence of forgery other than Mr Chan’s bare assertions. As to the sale of the Fu Hui shares, Mr Chan’s story of a loan to Mr So could not be properly explained; he could not explain how this could boost the value of the shares. As to the transfer of 760,000 shares from OSK Asia Investments Ltd, Mr Chan must have known about this; his story that somehow Mr So was allowed to deal with that account also seems to have been a leter invention. 76.There is no reason why anyone but Mr Chan would have written the letter of 18 May, requesting that the interest rate remain the same and promising to reduce the margin. The fact that the letter contains thanks for support and provision of securities finance “to us” does not indicate that Mr So must have written the letter, as has been argued. 77.I am satisfied therefore that Mr So did have Mr Chan’s authority to open the margin account for Mr Chan with the plaintiff, and that there was no fraudulent misrepresentation and no breach of warranty of authority by Mr So. I also accept Mr Mak’s evidence that he told Mr So of the interest rate of prime plus 3% and the margin ratio obtaining at the time. Since Mr Chan knew, on my finding, that he was opening a margin account, he must necessarily have known that there was an interest rate and a margin ratio, as against the situation of a cash account where there could be neither. I think it must be taken as a necessary inference that Mr So would have passed on to him the interest rate and margin ratio. Any later changes would have been communicated to Mr Chan from time to time in the documents sent to him by the plaintiff. 78.As to the authority of Janet Lau, it is pretty clear from the evidence of Mr Mak that her position was simply that of an assistant to Mr So. There is nothing to suggest that she ever made any discretionary decision on her own. Her role was a ministerial one; she simply passed on information for her superior, as required. There is no need to consider whether she needed any separate authority from Mr Chan. 79.The net result of this is that, subject to the other defences he has raised, Mr Chan will be liable to the plaintiffs on the margin loan agreement, but Mr So will not be liable in any event. Enforceability 80.The pleaded defence that the written contract is unenforceable for uncertainty was not relied on in argument and I take it to have been abandoned. In any event, I do not think there is anything in it. All the essential terms had been agreed even if the agreement was partly oral. More important are the arguments on enforceability under the Money Lenders Ordinance, Cap 163, section 18 and section 22. 81.Mr Chan pleads that the contract is unenforceable in that it lacks an adequate note or memorandum in writing under the Ordinance. The relevant provisions are contained in section 18. He also pleads unenforceability under section 22. In fact this was first relied on by Mr So in his pleadings, on the ground that the agreement provided for compound interest in contravention of section 22(1)(a), and compound interest was charged, and further that it contravened section 22(1)(c) in that CEF effectively increased the interest by reason of default. Mr Chan by re-amendment of his defence also relies on the same subsections. 82.Section 18 of the Ordinance provides:
Section 22 provides:
83.The court’s discretion is the same under both sections. I will therefore consider first whether and to what extent the agreement fails to comply with these sections and will then move to the question of discretion. 84.The clauses with which the court is concerned here are clause 11 of the agreement for margin loan and clauses 4 and 5 of the memorandum for securities deposit. 85.Clause 11 of the agreement reads:
Clauses 4 and 5 of the memorandum of securities deposit read:
Non-compliance with section 18 86.Mr Chan signed the contract opening documents in blank. The spaces were not filled in. The documents, and in particular the margin loan agreement, do not comply with the requirements of section 18(2) of the Ordinance, in various respects simply because of that. Further there is no evidence that any copy was given to Mr Chan as required by subsection (1) 87.In addition, the interest rate is a floating rate. In Emperor Finance Ltd v La Belle Fashions & Ors, (2003) 6 HKCFAR 402, it was held that the policy of the Ordinance is to exclude floating rates except where exemption is available (see paragraph 105). The court held in that case that the use of a floating rate based on the prime rate amounted to a breach of section 18(2)(i), in the circumstances of the case held also that upholding unenforceability on that ground, and on a breach of subsection (1), would be inequitable. 88.I therefore accept that that the note or memorandum required by section 18 was inadequate, and that, subject to the court’s discretion, the margin loan agreement is unenforceable on that ground. Non-compliance with section 22 89.Clause 5 set out above provides for the addition of interest to capital and for charging interest on the total. It therefore appears to be a provision for compound interest. Mr Shieh SC argues that it comes within the proviso to subsection (1) and I think this must be right. He also argues that the plaintiffs are only seeking simple interest on the sums outstanding from time to time. In case the proviso does not apply I will return to this point when considering the court’s discretion. 90.As to default interest, there is no direct provision. The clauses set out above give the lender an absolute discretion, and there is nothing to prevent CEF from charging whatever interest rate it wants to charge, up to the maximum legal rate. By extension, there is nothing in the clause to prevent the lender from increasing its rateby reason of the borrower’s default. However, I do not see that the absence of a prohibition of the charging of default interest is the same as an indirect provision for it. 91.The argument that CEF did in fact charge default interest came primarily from Mr Yau, who appeared for Mr So. He argued that CEF, having charged interest at 3% above prime all along, and allowed the interest to mount up, penalised Mr Chan for his default in meeting the margin requirement by increasing the rate in May 1998. 92.The stated reason for the increase appears in the letters of 1 May and 12 June 1998 where CEF states:
before going on to announce the rate increase. In the letters of 23 June and 3 July 1998, where CEF announces its intention to sell stocks in the account, no reason is given for the further rate increases. Mr Mak said that the first increase came because at that time the market rate had risen a lot, so the company made adjustments according to the market rates. He also said that he knew that the market was volatile at that time. 93.In fact the increases started in May 1998. The monthly account for 29 May shows the percentage of margin used as 78.93, which is over the agreed limit. A margin call was made on 23 June, and the liquidation started in August when, as we have seen, the rate went to prime plus 19% but then dropped back again. I do not that it can be inferred that the increases were intended to penalise Mr Chan for failing to comply with the margin agreement or indeed for his default in payment of interest, particularly where there is actual evidence that at least one increase came because of the market rate. Discretion 94.There was non-compliance with section 18(1) and (2). I do not see that there was non-compliance with section 22(1)(a) or 22(1)(c). The question of discretion arises under section 18, and, if I am wrong in my finding on section 22, it arises under that section as well. The discretion is the same under both sections. In effect I have to consider whether it would be inequitable to keep CEF as lender and Poseidon as assignee from recovering the whole or part of the principal sum lent and the interest accrued. If it would then discretion should be exercised in favour of enforceability. 95.In support of the non-exercise of discretion, Ms Lan relies primarily on the fact that the CEF never had any direct dealings with Mr Chan. It was never the plaintiff’s intention to explain the terms and conditions to him, notwithstanding that he was a complete stranger and known to come from the Mainland. Mr Chan’s origins are, of course, irrelevant; he was a rich and successful businessman, operating in Hong Kong for years. The rest of Ms Lan’s points really have no further application in the light of my findings above. But I take into account that this was a pure agency situation in which there was no direct contact between borrower and lender. 96.I also take into account that, so far as I can see, there is no evidence that a copy of the agreement was ever given to Mr Chan at the time of signing, as required by section 18(1). According Mr Chan, Mr So took away all the documents, once they were signed. There is nothing from Mr So to contradict this, and of course Mr Mak would not know. 97.Ms Lan refers to the case of Brother’s Company (A Firm) v Ah Puk Transportation (A Firm) [1986] HKLR 821, a case relied on by Ms Lan, Mayo J adopted the approach of Woodhouse J in Adams v Paul’s Properties [1965] NZLR 161 at p.171:
98.In support of the exercise of discretion in the plaintiff’s favour Mr Shieh argues that Mr Chan is a successful businessman, willing to put forward $10 million of his own. He had previous experience of securities trading and was not the type to be exploited by a finance company. He was driven by the desire for profit. The interest rates, though not specified in the documents, were communicated to him promptly from time to time. The omissions in the document were relatively insignificant, and in particular, it was agreed from the outset that the interest rate was prime plus 3% subject to adjustment. There was no allegation that CEF had intentionally omitted particulars or that it had practised any dubious or uncommercial behaviour. There was no evidence that Mr Chan was materially prejudiced by any of the provisions. 99.Mr Shieh relies the judgment of Ribeiro PJ in Emperor Finance Ltd v La Belle Fashions & Ors, (2003) 6 HKCFAR 402 in support of the argument that the statutory intent of the Ordinance is not to govern margin trading, and there is room for easing some of the constraints imposed by the legislature on the provision of finance for properly regulated margin trading activities. 100.This appears to refer to paragraph 120(d) of the judgment where Ribeiro PJ said:
As had been remarked earlier in the judgment, this exemption provision came into the law in 2000, and was relevant to, but too late to benefit, the plaintiffs those proceedings. 101.What his Lordship said about policy generally was this:
Mr Shieh also says that the court:
per Ribeiro PJ in Celestial Finance Ltd v Yu Man Hon, (2004) 7 HKCFAR 450, at paragraph 21. 102.That approach was followed by Woo VP in Strong Offer Investment Ltd v Nyeu Ting Chuang, CACV 384 of 2004 where he said at paragraph 29:
103.I note that in Emperor Finance v La Belle Fashions, Ribeiro J said at paragraph 119 that
104.As I have indicated, there appears to be a breach of section 18(1) in that no copy was given to Mr Chan when he signed the agreement. As seen from the above citation, this is regarded as a basic part of the protection. 105.The agreement is in breach of section 18(2), because the forms were not filled in. In the first place they do not specify the address of the borrower. But if they had, the address put in would have been that on the 8th floor. The factual arguments in this case would have been no different, and my findings in respect of what Mr Chan must have received would no doubt have been the same. 106.The subsection also requires that the amount of the principal in words and figures be set out. It is difficult to see how, in the case of a margin loan, this can be fully complied with. But again it is difficult to see how this failure really had any measurable effect on the parties. Once the account documents were sent out, the borrower would know exactly what his position was, at the end of each month. He would also know what the position was after each transaction, on receipt of the note relating to it. 107.The dates of the making of the agreement and the making of the loan are also not set out. Again, no particular consequences seem to flow from this. The same applies to the absence of any declaration as to the place of negotiation and completion of the agreement for the loan. 108.As I have indicated above, the rate of interest is a floating rate which is contrary to the policy of the Ordinance. But notice was given of the changes and on my finding, the letter of 18 May purporting to come from Mr Chan was not a forgery. He must have known about the increase to prime plus 6%. By extension he would also have known about the later increases and the reduction back to prime plus 12%. I have disbelieved his evidence that he never saw any of the documents sent to him; but if he did not see some of them because he told his staff that he did not want to be bothered with them, his ignorance was wilful, and his own fault. 109.I accept that Mr Chan is a successful businessman with some previous experience of securities trading. He is not unsophisticated, for all his attempts to present himself as such; and he was driven by the desire for profit. There is nothing to indicate that CEF intentionally omitted particulars or set out to practise any dubious or uncommercial behaviour. The breaches of subsection (2) may be explained by negligence as easily as by any deliberate attempt to avoid the statutory requirements. 110.I do not see that Mr Chan was prejudiced by the non-compliance with section 18. He was in no worse position than any other borrower on a margin trading account; he knew what his position was from time to time, from the documents sent to him. If he failed to take notice of them or look at them I cannot see that that is the fault of CEF or CES. 111.If I am wrong in my finding that section 22(1)(a) was complied with, there is in any event no prejudice to Mr Chan arising from that, because, as may be seen from the schedule to the Statement of Claim, what was charged was simple interest only. The provision for compound interest is severable. 112.If I am wrong in my finding that section 22(1)(c) was complied with, again it seems to me that no prejudice arose, because there is insufficient evidence to prove that any interest was charged on account of default. 113.I can see no reason why Mr Chan, who on my finding took out a margin loan, should not pay back that loan with interest at the notified rates. I think it would be inequitable to hold the agreement unenforceable as to principal or interest. Mitigation 114.Clause 2 of the memorandum of securities deposit gives CEF the power, in the event of default, to
115.There is little evidence as to how the shares came to be liquidated. Mr Mak does not know; he was not the officer concerned. There is a list of dealings in Triplenic shares which were under the control of Mr So (page 348 of the document bundle) and these are not in dispute. Almost all the entries from 15 May 1998 onwards are for sales of shares held by different companies. The sales of Mr Chan’s shares commenced on 5 August when they were worth about $1 per share, and continued until 3 September 1998, when they were worth about 60 cents. Sales of shares owed by other companies continued until 21 October 1998 when they were selling for about 17 cents. Then all sales stopped until 9 March 1999 when sales of Mr Chan’s shares recommenced. They continued until 1 May. In this period the shares were sold for about ten cents per share. 116.It is argued for Mr Chan that by August 1998 it was obvious that the market was falling. If CEF had acted reasonably, it would have sold all the shares by the end of October 1998. The indebtedness would have been reduced by about $1.3 million. As pleaded, the failure to mitigate relates to the fact that CEF did not sell all the shares at once, but stopped selling at the end of August and re-started the following March. 117.Mr So’s averments are wider. He says that CEF should have insisted that Mr Chan strictly adhere to the margin ratio requirements either by paying or selling off shares so as to keep the ratio below 70%. He further says that shares should have been sold off between 29 May 1998 and 31 July 1998, as well as between September 1998 and the end of February 1999. 118.In fact the closing price, as shown on the statements of account, dropped from $3.10 at 30 September 1997 to $1.18 by 31 May 1998. The greatest falls were in late 1997. By August or even by May 1998 most of the damage was done. 119.The question of failure by an investment company to mitigate its loss in respect of the debt owed to it on a margin account was addressed in Strong Offer Investment Ltd v Nyeu Ting Chuang (above). In that case, as here, the agreement conferred a right to the plaintiff to liquidate the margin accounts. The court accepted submissions made on behalf of the plaintiff that in liquidating the margin accounts where the claim was for repayment of a debt, rather than damages, it was under no duty to mitigate its losses. Woo VP in his judgment followed an earlier judgment of the Court of Appeal in Richardson Greenshields of Canada v Chou Tai Chuan, Cecilia, Civil Appeal No. 130/1990 where Bokhary J (as he then was), stated at para. 52:
120.I do not see, therefore, that CEF is to be regarded as at fault in having decided to commence liquidation in August 1998. Once that decision was made CEF was required to sell at current market prices and there is no evidence that it did not do so. 121.It is contended for Mr Chan that once the decision was made to liquidate, the liquidation must be conducted with due diligence. CEF liquidated a number of blocks of shares in the first period, and a further number in the second period. If it had liquidated all of them in and following August 1998 the loss would not have been so great. 122.Mr Shieh argues that this is wrong, because when a decision is made to liquidate an item of security, that item must be liquidated with due diligence. Here CES made various different decisions at different times, in respect of different items of security, as it was entitled to. I am not sure that this argument is correct, because although the shares had been bought in different lots, and thereafter added to, particularly by the rights issue, and subtracted from, by the time Mr Chan defaulted there was one homogeneous mass of Triplenic shares. It would have been possible, no doubt, to sell them all at once. 123.What steps CEF took to sell the shares are not clear. Mr Mak said that he was not the officer who decided to sell in August 1998, or decided to cease to sell at the beginning of September 1998, or indeed the officer who decided to sell again in March 1999. All we know is how and in what lots the shares were sold in the two periods. That would depend on who wanted them and at what price. If all the shares were offered, they would not necessarily all be sold to the same buyer or at the same price; the broker would have to wait for offers. 124.In any event the onus of proof on the issue of mitigation is on the defendant and hindsight is to be avoided in reviewing the relevant circumstances. The CEF was not under any obligation to do anything other than in the ordinary course of business. See Strong Offer at paragraph 46. It seems to me impossible to infer with any certainty, from the list of sales, that CEF did not act other than in the ordinary course of business. Presumably if these shares were pledged by other persons who had had accounts opened for them by Mr So, they were also sold for purposes of liquidation of accounts. There might have been considerations of fairness as between different account holders. It does not necessarily follow from the fact that transactions ceased in September 1998 when the shares were worth about 60 cents, and resumed later when they had dropped to 10 cents, that CEF did not follow the ordinary course of business. 125.I conclude that failure on the part of CEF to mitigate its losses, if indeed there was a duty to mitigate, is not proved. Conclusion 126.In the result the plaintiffs are entitled to judgment against Mr Chan, but their claim against Mr So fails. 127.The plaintiffs’ primary claim is for judgment in their favour for $6,356,03.58 and interest on $4,355,395.21 at the agreed interest rate from 11 May 1999 to the date of payment. The agreed rate is pleaded as the prime rate as from time to time quoted by the Hong Kong and Shanghai Banking Corporation plus 12% which is the rate in force at 11 May 1999. 128.Some comment has been made on the differences between the figures on the schedule to the Statement of Claim, the final figures shown on the monthly statements, and the figure assigned by CEF to Poseidon. I do not think I need have any particular regard to these differences, although they are unexplained, because the claim is for the lower total sum, by about $300,000. 129.There will be judgment in favour of the plaintiffs against the 1st defendant, Mr Chan, for $6,356,03.58 and interest on $4,355,395.21 at the prime rate as from time to time quoted by the Hong Kong and Shanghai Banking Corporation plus 12% from 11 May 1999 to the date of payment, with costs (nisi) to be taxed if not agreed. 130.The plaintiffs’ claim against the 2nd defendant, Mr So, is dismissed, with costs (nisi) to the 2nd defendant against the plaintiffs to be taxed if not agreed.
Mr Paul Shieh SC and Mr Jin Pao, instructed by Messrs Cheng, Yeung & Co., for the Plaintiff Miss Gekko Lan, instructed by Messrs Benson Li & Co., for the 1st Defendant Mr Albert Yau, instructed by Messrs David Lo & Partners, for the 2nd Defendant |
Cases cited in this judgment
Further hearings and rulings under HCA 18300/1999