Tiffit Securities (Hong Kong) Ltd (in Compulsory Liquidation) v. Fong Shik Yee and Another

HCA 2382/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2382 OF 2006

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BETWEEN

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Before: Hon Reyes J in Chambers

Date of Hearing: 18 September 2009

Date of Judgment: 30 September 2009

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J U D G M E N T

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I. INTRODUCTION

1.Tiffit was in the business of dealing and advising on securities. Mr Kwok and Ms Fong, husband and wife, were the directors and shareholders of Tiffit.

2.Ms Fong was the Account Executive for a majority of Tiffit’s clients. But she traded in securities using Tiffit’s clients’ accounts and monies without proper authorisation. She also diverted monies which ought to have been credited into clients’ accounts. Between October 2005 and July 2006 some $19.5 million of diverted monies were deposited into Mr Kwok’s account. During the same period, some $12.5 million of securities were purchased without clients’ authority using client monies deposited into Mr Kwok’s account.

3.Tiffit having encountered financial difficulties, Ms Fong absconded from Hong Kong on 17 July 2006.

4.On 18 July 2006 the SFC issued a Restriction Notice in relation to Tiffit. This prohibited Tiffit from carrying on any further trading without the SFC’s permission. On 24 July 2006 Administrators were appointed for Tiffit. On 25 August 2006 the SFC obtained a Mareva against the assets of Mr Kwok and Ms Fong.

5.On 2 May 2007 Tiffit was wound up on the SFC’s Petition. The Administrators became Tiffit’s Liquidators. On 18 October 2007 Tiffit, acting through its Liquidators, obtained a worldwide Mareva against the assets of Mr Kwok and Ms Fong.

6.On Tiffit’s winding-up, there was a shortfall between the securities which Tiffit ought to have been holding on behalf of clients and the securities which Tiffit actually held. Using share prices as at the date of Tiffit’s winding up, the shortfall amounted to $82,809,978.63.

7.On 29 August 2007 Mr Kwok pleaded guilty to a charge under the Organised and Serious Crimes Ordinance (Cap.455) of dealing with property (the $19.5 million mentioned above) known or believed to represent the proceeds of an indictable offence. District Court Judge Browne sentenced Kwok to 40 months’ imprisonment.

8.By the present proceedings, the Liquidators apply for final judgment against Mr Kwok in the amount of the shortfall. The Liquidators say that, by Mr Kwok’s plea of guilty in the District Court, Mr Kwok has in effect admitted the Liquidators’ claim against him. The Liquidators have previously obtained an interlocutory judgment on liability against Ms Fong with damages to be assessed.

9.Mr Kwok in turn applies for the discharge of the Mareva which the Liquidators have imposed on his assets.

II. DISCUSSION

A. Liquidators’ Application for Summary Judgment

10.It is the Liquidators’ case that, as director, Mr Kwok owed fiduciary obligations to Tiffit. Such obligations included the duty to act at all times in Tiffit’s best interests and not to put oneself in a position where one’s personal interests conflicted with those of Tiffit.

11.The Liquidators say that, as Mr Kwok has admitted both in his Defence and in the criminal proceedings in the District Court, Mr Kwok must have known that at least $19.5 million of Tiffits’ clients’ monies were being wrongly routed through his personal account. The Liquidators argue from this that (especially given that Mr Kwok was Ms Fong’s husband and Mr Kwok knew that monies were being wrongly diverted through his account) Mr Kwok must have known that Ms Fong was misappropriating clients’ monies on a massive scale, certainly to an extent greater than the $19.5 million routed through Mr Kwok’s account.

12.Mr Kwok would have known (the Liquidators submit) that Ms Fong was acting in breach of the fiduciary obligations which she owed not just to Tiffit, but also to the clients who entrusted monies and securities to her as their Account Executive. By not doing anything to prevent his wife from so conducting herself, but instead by allowing her to use his own bank account for the purpose of parking misappropriated monies, Mr Kwok (the Liquidators contend) dishonestly assisted his wife in wrongdoing.

13.It follows (the Liquidators conclude) that Mr Kwok has a duty to account to Tiffit for the amount of the shortfall in securities as at the date when Tiffit was wound up.

14.By way of defence, Mr Kwok does not seem to me to be disputing his personal liability to account, as much as the quantum for which he must account.

15.First, Mr Kwok stresses that he only pleaded guilty to (and was only convicted on) a charge of dealing with $19.5 million. What the Liquidators are seeking from Mr Kwok is $82.8 million, significantly more than $19.5 million. In those circumstances, Mr Kwok suggests that he cannot be held liable to account for more than $19.5 million.

16.I am unable to accept that argument.

17.It is true that Mr Kwok only pleaded to handling $19.5 million. But Mr Kwok plainly knew that his wife was misappropriating clients’ monies and passing some such monies through his bank account. That is the inevitable inference to be drawn from Mr Kwok’s plea of guilty in the District Court. Yet despite his knowledge and although he was a Tiffit director, Mr Kwok did nothing to stop his wife. Instead he assisted her by making his bank account available for her wrongdoing.

18.In such circumstances, the civil law holds Mr Kwok liable to account for the full amount which has been misappropriated from Tiffit, not just the $19.5 million diverted through his account. A director cannot shut his eyes to wrongdoing by other directors and then deny liability for the full consequences of the wrongdoing of those other directors.

19.Second, Mr Kwok argues that the shortfall in securities should be calculated by reference to the prices of shares on 18 July 2006 (that is, the original date of Tiffit’s default). If that date is used for valuation purposes, the shortfall would be around $50 million, rather than $82.8 million.

20.Mr Kwok submits that 18 July 2006 is the correct date because this was the date which appears in an Order of Barma J dated 9 January 2008. In that Order, Barma J directed that claims against Tiffit by the Investor Compensation Company Ltd (ICC) were to be valued by the Liquidators on the basis of a “Subrogation Percentage”. According to the Order, the latter percentage was:-

“the quotient (expressed as a percentage) of the compensation paid by the ICC to the client (including costs claimed by and paid to the client) divided by the loss sustained by the client (including costs claimed by and paid to the client), calculated using the closing prices on 18 July 2006”.

21.The ICC administers an Investor Compensation Fund (ICF). Out of the ICF, the ICC compensated certain Tiffit clients for losses suffered on their accounts. As a result, the ICC became subrogated to those clients’ claims against Tiffit.

22.The question before Barma J was the extent to which the ICC became subrogated in relation to a given client’s claim. Barma J held that the degree of subrogation depended on the extent to which a particular client had been compensated by the ICC for that client’s loss.

23.Such quantum of compensation hinged on Rule 7(3) of the Securities and Futures (Investor Compensation – Claims) Rules (Cap.571T). Rule 7(3) provides that compensation shall be determined by reference to the market value of specified securities “as at the date of the [relevant company’s] default”. Following Rule 7(3), Barma J directed that the ICC be treated as having been subrogated by reference to the compensation paid to, and the loss sustained by, a given client “calculated using the closing prices [of securities] on 18 July 2006”.

24.Barma J’s Order has nothing to do with the correct date upon which claims by Tiffit clients in relation to shortfalls in their individual accounts should be valued. Barma J was simply constrained by Rule 7(3) to order that the ICC’s subrogation percentages in respect of individual clients be calculated by reference to the date of Tiffit’s default.

25.In contrast, by an Order of 15 June 2007, Kwan J expressly directed that, for the purposes of assessing the net claims (that is the shortfall) of any Tiffit client, securities should be valued by reference to closing share prices as at 2 May 2007 (when Tiffit was wound up). In Reasons supporting her Order, Kwan J noted that she was adopting the “proprietary basis” in accordance with her decision in Re Chark Fung Securities Co. Ltd.HCCW No.362 of 1998, 1 December 2005 (paras. 9 to 15).

26.I am bound by the valuation method directed in Kwan J’s Order. The loss caused to a given client as a result of Tiffit’s default must by that Order be valued as at 2 May 2007. The aggregate of those individual clients’ losses would be the damage caused to Tiffit as a result of the misappropriations by Ms Fong in which Mr Kwok assisted. In other words, by Kwan J’s Order, Tiffit must account to individual clients for the shortfall in their individual cases using share values as at 2 May 2007. I do not see why Ms Fong or Mr Kwok should be held accountable to Tiffit for the aggregate loss arising from such individual cases by reference to some other date.

27.Mr Kwok argues that the stock market (as evidenced by the Hang Seng Index) improved between June 2006 and May 2007. In that case, he submits that it would be unfair for him to be held liable for the increased value of misappropriated securities between the time when Tiffit defaulted and the time when it was wound up.

28.I am unable to accept this argument.

29.Assume that the stock market improved as Mr Kwok maintains. Since securities had been misappropriated, it was not possible for relevant clients to sell their securities and take advantage of the rise in share prices. The unavailability of the securities was due to the acts of Ms Fong assisted by Mr Kwok. Consequently, I am unable to see any unfairness in Mr Kwok being held liable for the loss directly arising from the non-availability of securities between June 2006 and May 2007.

30.Third, Mr Kwok vaguely suggests that, “for all he knows,” Tiffit has not suffered the loss claimed. He speculates that Tiffit would by now have liquidated any assets frozen by the Marevas which the Liquidators obtained against him and Ms Fong. Any amounts so realised ought to have reduced Tiffit’s loss.

31.These suggestions of Mr Kwok are too vague to amount to an arguable defence. In applications for a summary form of judgment, a defendant must condescend to particulars of his defence. It is not enough to say that something may be the case without providing any concrete basis for so suggesting.

32.As far as liquidating frozen assets are concerned, Marevas remain in place pending the obtaining of a judgment and the bringing of enforcement proceedings against the frozen assets on the basis of such judgment. A Mareva does not by itself entitle a person who has obtained the injunction to liquidate or otherwise realise frozen assets.

33.For the foregoing reasons, both on liability and quantum, I do not think that there is an arguable defence on Mr Kwok’s part against the Liquidator’s claim. There will be final judgment accordingly.

B. Mr Kwok’s Application to Discharge Mareva

34.Mr Kwok argues that much time has elapsed since the SFC and the Liquidators obtained their respective Marevas. Mr Kwok says that the SFC Mareva was “replaced” by the Tiffit Mareva. He submits that both injunctions would have by now long since “achieved their purpose” and so should be discharged.

35.The SFC and Tiffit Marevas are 2 different injunctions. The SFC imposed its Mareva in order to freeze Mr Kwok’s assets pending an investigation in Tiffit’s affairs. The Liquidators obtained their injunction in order to secure Tiffit in respect of its claims against Mr Kwok.

36.As noted above, the Liquidators’ injunction only froze assets pending the obtaining of a judgment. Judgment having now been obtained by the Liquidators against Mr Kwok, where a frozen asset is liquidated and realises some value, Mr Kwok will be given credit for that value. The judgment against him will be decreased by the value recovered.

37.Consequently, I am unable to see any basis for discharging the Mareva injunction against Mr Kwok by the Liquidators. The injunction has not yet fully achieved its purpose. Nor do I see any unnecessary delay in the manner in which, having obtained an injunction, the Liquidators have proceeded with the present action against Ms Fong and Mr Kwok.

38.It follows that Mr Kwok’s application must be dismissed.

III. CONCLUSION

39.Mr Kwok’s application is dismissed.

40.There will be final judgment for Tiffit against Mr Kwok in the principal amount of $82,809,978.63.

41.Interest will accrue on that principal amount from the date of the Amended Statement of Claim (9 October 2007) until date of judgment at 1% over HK$ prime. Thereafter, interest will accrue on the principal amount at the judgment rate until payment. The principal amount claimed was not expressly pleaded by the Liquidators until 9 October 2007. For that reason, I believe interest should only run from such date.

42.There will be an Order Nisi that Mr Kwok pay Tiffit’s costs of this action (including the costs of Tiffit’s application for final judgment and Mr Kwok’s application for discharge). Such costs are to be taxed, if not previously agreed.

Ms J Lau of Messrs JSM, for the Plaintiff

2^nd Defendant in person