Emperor Futures Ltd and Another v. La Belle Fashions Ltd and Another
Read the full judgment text of CACV 1476/2001 on BabelCite. This Court of Appeal judgment was delivered on 10 December 2002.
1. This is an appeal from a judgment of Deputy High Court Judge Poon given on 25 May 2001. There were two actions. In the first action, both the plaintiffs were given judgment against the 1st defendant, La Belle Fashions Limited ("La Belle"), for the sum of $3,018,952.73; it was also held that the 2nd defendant was indebted to both the plaintiffs for that sum but was entitled to offset a sum of $1,765,196.98 which was part of a sum which is recorded in the judgment as being held by the 1st and 2
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CACV001476/2001 CACV 1476/2001 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 1476 OF 2001 (ON APPEAL FROM HCA NOS. 12310 & 12312 OF 1997) ____________________ HCA 12310/1997
____________________ HCA 12312/1997
____________________ Coram: Hon Rogers VP, Le Pichon and Yuen JJA in Court Date of Hearing: 25-26 June and 25 October 2002 Date of Handing Down of Judgment: 10 December 2002 ____________________ J U D G M E N T ____________________ Hon Rogers VP: 1.This is an appeal from a judgment of Deputy High Court Judge Poon given on 25 May 2001. There were two actions. In the first action, both the plaintiffs were given judgment against the 1st defendant, La Belle Fashions Limited ("La Belle"), for the sum of $3,018,952.73; it was also held that the 2nd defendant was indebted to both the plaintiffs for that sum but was entitled to offset a sum of $1,765,196.98 which was part of a sum which is recorded in the judgment as being held by the 1st and 2nd plaintiffs. In the second action judgment was given against the 1st defendant Hubbard Company Limited ("Hubbard") for the sum of $1,194,948.55, it was held that the 2nd defendant was indebted to both the plaintiffs for that sum but was entitled to offset an amount of $698,785.41 which was the remainder of the amount said to be held by both plaintiffs. The counterclaims made by the defendants were dismissed. At the conclusion of the hearing of the appeal in June, this court said that it would give its decision in writing which we now do. Subsequently, this court invited the parties to make written submissions as to the effect on the 2nd plaintiff's claim of the fact that it was a money lender and to request a further hearing if they so wished. Written submissions were provided prior to a further hearing which took place on 25 October 2002. Background 2.The 1st plaintiff, Emperor Futures Limited, ("Futures") is a broker which trades in futures on the Hong Kong Futures Exchange. The 2nd plaintiff is a licensed money lender and is a company which is very closely associated with the 1st plaintiff. 3.Prior to the events which are the subject of these actions, the 2nd defendant in each action, Amy Ng Siu My ("Ms Ng"), had traded with the plaintiffs for some time. She first started trading on her own account in March 1996. In November 1996, an account was opened in the name of Moon Sky International Co. Ltd which was apparently one of her companies. At the end of May and beginning of June 1997, trading ceased in respect of both Amy Ng's personal account and the Moon Sky account. In late May of that year accounts were opened in the name of the 1st defendant in the first action, La Belle, and on 2 June 1997 accounts were opened in the name of the 1st defendant in the second action namely Hubbard. It was apparently the defendants' intention that La Belle would trade by purchasing futures and Hubbard would trade by selling futures. The account opening forms 4.In order to open trading accounts for La Belle and Hubbard various documents were executed both by Ms Ng in her own name and on behalf of the two companies. In total there appear to have been at least 8 documents in respect of La Belle and Hubbard. The plaintiffs' managing director, Ms Vanessa Fan, said in evidence that when the plaintiffs set up their operations they copied the forms from the Standard Chartered Bank. She went on to say that the forms had been revised and updated several times. It is not clear as to whether each and every form had been copied from the Standard Chartered Bank but it is a fair inference from the context in which Ms Fan gave that evidence that the general scheme of the way in which the accounts were operated was copied from the Standard Chartered Bank. It is pertinent to point out at this stage there is a significant difference between a bank and a money lender. 5.The first form was an agreement between the 1st plaintiff and the 1st defendant. That in respect of La Belle was signed on 29 May 1997. It is headed "Client Agreement". It is the basic agreement which governs the relationship between the 1st plaintiff and La Belle. Under clause 2 of the Client Agreement, La Belle agreed to provide and maintain margin and such guarantees and other security as the 1st plaintiff might require. It was specifically provided that the 1st plaintiff's margin requirements might exceed any requirements of any exchange. It has to be assumed that in practice this meant the Hong Kong Futures Exchange Limited. Under clause 3 of the Client Agreement, it was provided that the dealings between the 1st plaintiff and La Belle would be subject not only to the agreement and any "procedures and policies" which the 1st plaintiff may have but also to the constitution, rules, regulations, customs, usages, rulings and interpretations of the exchange or market where the transactions were executed and that it would also be subject to all applicable laws, rules and regulations. It was further provided that if there were any inconsistency between any of those provisions and the agreement, the constitution, rules, regulations and applicable laws would prevail. 6.There was then a risk disclosure statement which was executed on behalf of La Belle. This needs little comment, save an aside observation that it may be questionable as to how effective a document such as this really is to bring home the risks involved in futures and margin trading. 7.The 1st defendant executed an agreement with the 2nd plaintiff which was termed "The General Loan and Security Agreement". There was a recital at the beginning of the agreement that La Belle had opened one or more accounts with what were termed "associated companies" of the 2nd plaintiff. The General Loan and Security Agreement referred to the 2nd plaintiff granting credit facilities to La Belle for the purpose of trading and settlement of accounts which the 2nd plaintiff might approve. Under the terms of the agreement, La Belle bound itself to pay the 2nd plaintiff on demand all monies that were owing from time to time. There was no limit in the agreement as to any amount of the credit facilities which the 2nd plaintiff would provide. The interest stipulated in clause (2) of the agreement was that which would be stipulated by the 2nd plaintiff, seemingly at its absolute discretion and in default of such stipulation 3% above the best lending rate of the Hong Kong and Shanghai Banking Corporation Limited ("HSBC"). 8.Coupled with the General Loan and Security Agreement was a Letter of Authority signed by La Belle which was addressed to both plaintiffs. It gave authority to the 2nd plaintiff, at its absolute discretion, to deposit or transfer payments to La Belle's account with the 1st plaintiff, to draw on La Belle's accounts with the 1st plaintiff in such manner that the 1st plaintiff should not be in any way accountable as to how the proceeds might be applied; it also authorised the 2nd plaintiff to obtain accounts and other statements from the 1st plaintiff and to liquidate La Belle's accounts with the 1st plaintiff and to dispose of or realise any securities or assets in those accounts. 9.Ms Ng signed two guarantees, one in favour of the 1st plaintiff and one in favour of the 2nd plaintiff. Both guarantees covered the liabilities of the 1st defendant and were unlimited in amount. The rate of interest that would be charged under the guarantee to the 1st defendant was stated to be 2% per month from demand or discontinuance of the guarantee until discharge of the principal debt. In respect of the guarantee to the 2nd plaintiff, the interest was to be the same as the principal debtor was required to pay. 10.The 2nd plaintiff and 1st defendant also executed a document entitled Margin Loan Facility. This was signed on behalf of La Belle. Ms Ng also signed it and was named as the guarantor. It is noted that the facility referred to was defined as being
The interest was specified as being 3% over the best lending rate of the HSBC or such rate as may be agreed between the 2nd plaintiff and 1st defendant. 11.Finally, there was a Memorandum executed by the 2nd plaintiff and acknowledged by La Belle. It was expressed to be a memorandum made pursuant to the Money Lenders Ordinance, Cap. 163. Indeed, the different paragraphs of clause 2 follow precisely the requirements of section 18(2) of that Ordinance. Importantly for the purposes of this case, clause 2(d) reads:
12.It is, perhaps, pertinent to note that in the witness statement of Wilson Lee, who will feature below, this document was produced as part of the previous document with a cover sheet entitled Margin Loan Facility, when in fact it was a different document. 13.Similar documents were signed in respect of Hubbard. It might be noted that the corresponding exhibit in Mr Lee's witness statement in the Hubbard action does refer to "Margin Loan Facility Letter and Memorandum". The way in which the accounts were operated 14.Those who deal in futures are required to provide margin. Under rule 617(a) of the rules and regulations of the Hong Kong Futures Exchange which were in force at the relevant time, brokers were not permitted to trade for a client unless they had adequate collateral to cover the client's expected trading liabilities and any minimum margin requirements. The rules further required the brokers continuously to monitor their clients' ability to meet margin calls. Indeed they were required to notify the Chief Executive of the Exchange if clients failed to meet two successive margin calls. Margin money was required to be deposited by the broker into a segregated bank account. 15.The purpose of linking the two accounts, namely the futures account held by the 1st plaintiff and the finance account held by the 2nd plaintiff, was that margin requirements for trades by the relevant client, namely La Belle and Hubbard, would be provided from the finance account and paid directly to the futures account. In this way margin calls could be satisfied automatically and there would be much lower chance of a client's trading account having to be closed because of sudden variations in the market levels. There was, however, a corresponding danger that margin calls would be met from the finance account without the client appreciating the extent of the losses. Furthermore, if at the same time as meeting the margin call, the 2nd plaintiff were to exercise its discretion to extend credit beyond the original limit, the client may quickly become heavily indebted without, perhaps appreciating it and without the safeguard of its losses being capped by its positions being closed. 16.One feature of the arrangements which is not evident from the documentation signed and provided on the opening of the accounts is that in the event that a futures account held by the 1st plaintiff showed a profit, that profit would be transferred into the finance account as a credit. The plaintiffs' practice was, apparently, to effect that at the end of every trading week or prior to a public holiday. The events giving rise to this action 17.As recorded by the judge at page 7 of the judgment, at the close of business on 9 October 1997 the various accounts stood as follows:
18.In the early hours of 10 October 1997, Mr Eric Lai Hing Wah, a clerk who was employed in the settlement department, was engaged in the process of transferring excess funds from the various accounts of the 1st plaintiff to corresponding accounts held by the 2nd plaintiff. The entries in the accounts show that the balance in favour of Hubbard in the futures account held by the 1st plaintiff was transferred to the La Belle finance account held by the 2nd plaintiff. This created a credit in the La Belle finance account with the 2nd plaintiff of $1,075,675.60. It, however, left outstanding the debit balance in Hubbard's finance account with the 2nd plaintiff. The only evidence at the trial was that this transfer had been made by mistake. Mr Lai gave evidence to that effect. He said that he was not aware of it at the time he made the mistake although, as the judge recorded, he said that he was made aware of it by a colleague later. It is clear from the transcript of his evidence that he was made aware of it soon after 10 October although he could not name the exact date when he had been informed. The other evidence in relation to this transfer was all to the same effect that it must have been a mistake by Mr Lai. Mr Wilson Lee, who was the account executive with whom Ms Ng dealt, said that he became aware of the mistake on about 14 or 15 October because he had made a "margin" call on Hubbard on about that date. Ms Ng had queried the need for that in view of what she regarded as Hubbard's healthy position. He said that he then made inquiries and when he telephoned Ms Ng again she then instructed him that the transfer could be allowed to stand. 19.Corroboration of the fact that it was known shortly after the event that Mr Lai had made a mistake could also be gleaned from hearsay evidence. Ms Fan said that a few days after the event she had been informed by Mr Lee that there had been a mistake with the accounts but that it had been settled. Ms Ng's evidence corroborated Mr Lee's evidence insofar as she said that Mr Lee had telephoned her seeking funds and that the mistake had been discovered after she had pointed out that Hubbard's account with the 2nd plaintiff should have been in credit. 20.The major dispute was as to whether Ms Ng had requested the mistake to be rectified by the reversal of the transfer. It was Ms Ng's case that she had wanted the Hubbard account to be credited so that she could balance the net positions by making sales on the Hubbard's futures account with the 1st plaintiff. Ms Ng's evidence in this respect was strenuously denied by Mr Lee. He said that Ms Ng had wanted to keep the La Belle positions. One thing is clear: two payments were made into Hubbard's finance account with the 2nd plaintiff, one of $300,000 on 16 October and the other of $550,000 on 22 October. The pay-in slip in respect of the 1st payment appears to show a change in the account number which was to be credited which was identified as 4728. The "2" could well originally have been "1". Ms Ng said in evidence, that she had originally written 1 but had changed it to 2. Ms Ng also gave instructions on 23 October to sell the 20,000 Hong Kong Bank shares in her own personal account 2454. The sale of Ms Ng's securities apparently realised $3.8 million but had to be set off against the debit balance in her finance account. The ultimate credit in her finance account was $2,465,394.43 as at 23 October 1997. 21.On 23 October 1997, the stock market fell very considerably. As a result Mr Lee said that he had advised Ms Ng on 24 October to close her 21 futures positions. He said that she refused to do so and that she had been on her way to Shanghai. 22.After further falls in the market on 27 and 28 October 1997, as the judge recorded, when trading resumed in the afternoon of 28 October Mr Lee consulted Ms Fan and then closed La Belle's futures positions. The judge found that the debit balance in the La Belle finance account as at 29 October was $3,003,705.9 and interest of $8,046.17 with interest continuing to run. It was Mr Lee's evidence that Ms Ng took the news of the sale of the futures calmly. She asked at what points the futures position had been closed and asked that statements of accounts should be sent to a friend of hers. History of these proceedings 23.The history of these proceedings is, in my view, important because to a certain extent it throws light on the issues in this case. The writs in these actions were issued on 17 November 1997. Apart from the fact that the writ in each action was issued in the name of Emperor Securities Limited as 1st plaintiff and later had to be changed to the present 1st plaintiff, it is to be noted that although the 2nd plaintiff is a registered money lender, the provisions of Order 83A rules 2(2) and 3 were honoured in their non-observance. 24.Furthermore, although the amounts claimed were the balances of the finance account, in other words the monies advanced by the 2nd plaintiff as the finance company, the amounts were somehow claimed by both plaintiffs without any explanation as to how that could be. Indeed, paragraph 2 of each of the statements of claim, even in its amended form, pleaded "... the 1st plaintiff and the 2nd plaintiff granted to the 1st defendant margin loan facilities to finance part of the acquisition price of the securities ...". Although, as part of the re-amendment of the statement of claim in April 2000, it was pleaded in paragraph 2(2) that the loan facility was granted by the 2nd plaintiff, the pleading still maintained that the amounts claimed were owed to both plaintiffs. It might be observed at this stage that this confusion of the identities of the plaintiffs and their roles seems to have persisted even up until the hearing of this appeal. After this was pointed out at the hearing on 25 October, it was conceded by Mr Yu, on behalf of the plaintiffs, that the 1st plaintiff had no claim to any monies whether as pleaded or otherwise. 25.Since the proceedings in the La Belle and Hubbard actions appear to have taken an almost identical course, reference will be made to the La Belle action unless there is any distinction to be drawn between the two. In relation to the statements of claim it might be noted at this stage that the amount due was originally calculated on the basis of interest being charged at 3% above best lending rate quoted by HSBC for the period up to 28 October 1997 and at 8% above the best lending rate of HSBC thereafter. 26.For reasons which will become apparent it is pertinent to note that on 20 December 1997 there was a change of solicitors acting on behalf of the plaintiffs. A defence and counterclaim was filed on 19 January 1998. This date might have some significance as regards matters relevant in these proceedings since it was less than three months from the date on which La Belle's futures positions were closed. In the defences and counterclaims of both actions specific pleading was made as to the wrongful transfer of the monies held in the Hubbard futures account to the La Belle finance account which had been made in the early hours of 10 October 1997. It is unnecessary to consider the precise effect which it is said that that transaction was said to have in relation to the respective claims. 27.The replies and defences to counterclaim were served on 2 February 1998. The pleading in respect of the wrongful transfer comes in more detail in the Hubbard case. It was said that on 15 October Mr Lee advised Ms Ng of the transfer of funds and that Ms Ng did not then or subsequently direct the plaintiff to reverse the transfer. It is also pleaded that Ms Ng ratified and acquiesced in the transfer by her conduct in making further deposits into the Hubbard finance account. 28.There then followed summonses to amend the statements of claim and the replies and defences to counterclaim. These included not only amending the names of the parties but more importantly significant parts of the replies. There were similar affidavits filed on 30 March 1998 by Frank Niam Lee who was a partner of the plaintiffs' then solicitors. I set out below paragraphs 3 and 4 of the affidavit in the La Belle action:
29.The amended replies were eventually filed on 1 May 1998. It is sufficient for the purposes of this case to recite the additional paragraphs which were inserted into the replies; that in the La Belle case was as follows:
30.The first round of witness statements on behalf of the plaintiffs were filed on 21 April 1999. For these purposes it is important to consider the statements made by Mr Lee. Referring to the statement in the La Belle action at paragraph 13.1, he said that:
He then exhibited a number of pages of copies of accounts of La Belle, Ms Ng, Moon Sky International and Hubbard which he said demonstrated transfers between the various accounts. Although he said in the statement that those transfers had been made on instructions of Ms Ng, these were documents which were brought into the case for the specific purpose of showing the interchangeability of funds between the accounts. 31.In paragraph 20 of his statement, Mr Lee referred to the deficit in La Belle's finance account on 9 October 1997 being in excess of the credit limit. He then said:
32.In paragraph 21.1, Mr Lee again said that the transfer had been deliberate and in paragraph 21.2 he said:
33.In paragraph 21.4, Mr Lee said that after Ms Ng had checked her own records she agreed to and approved the transfer, and he then went on, in subsequent paragraphs, to explain that Ms Ng had never claimed that the transfer was unauthorised or should not have been made or made a request to reverse the transfer or notified the plaintiffs within seven days that there had been an error as she was required to under the contracts. In paragraph 21.6, it was said that "Had Ms Ng questioned the transfer, she could have insisted on our (the plaintiffs) applying the original credit balance in the trading account of Hubbard ... to settle Hubbard's loan account deficit, in which case she would not have needed to pay into Hubbard's loan account." 34.It can thus be seen that, apart from the unparticularised reference to Ms Ng agreeing to and approving the transfer, what was relied upon by Mr Lee was reflected in the amended reply and defence to counterclaim, namely, that Ms Ng had led the plaintiffs to believe that the accounts of all companies were intended to be treated as belonging to a single entity. Furthermore, no allegation was made in the amended reply and defence to counterclaim that there had been any specific approval or instructions from Ms Ng sanctioning the transfer which had been made. It hardly needs to be repeated that this pleading came as a result of the application supported by the solicitor's affidavit explaining how he had taken specific instructions on the matter. 35.Amongst the other statements which had been filed in the first round of witness statements on behalf of the plaintiffs was a statement by Ms Fan. That statement makes reference to Mr Lee's statement in terms which indicated that Ms Fan had read Mr Lee's statement. 36.The fundamental change in the plaintiffs' case came with the filing of the re-amended reply and defence to counterclaim on 23 October 1999. For the first time, the plaintiffs there pleaded specific instructions by Ms Ng "authorizing or ratifying" the transfer of the funds from Hubbard's futures account to La Belle's finance account on 10 October 1997. 37.The second round of the plaintiffs' witness statements was filed on 18 January 2000. In paragraph 21 of his second witness statement, Mr Lee acknowledged that part of the content of his first witness statement, particularly the matters referred to above, were untrue. He put forward the following explanation:
38.At the trial it emerged that Mr Lee had a degree from a Canadian university. It would perhaps be surprising, therefore, if he had any difficulty in communicating in English, either orally or in writing. Ms Fan, in her oral evidence, acknowledged that she had been the managing director and therefore responsible for the litigation. Her explanation was that following the severe fall in the market in October 1997 the plaintiffs had been involved in a considerable amount of litigation and that she had not paid specific attention to the details of the plaintiffs' cases until it became clear that it would be necessary to go to court. 39.Leave was granted to make a major re-amendment of the statement of claim on 12 April 2000. That amendment included abandoning the claim to interest at 8% above best lending rate of HSBC with corresponding reduction in the amount said to be owing as at the date of writ. There was no affidavit supporting the application for amendment. The only indication on the court file is that the judge who made the order permitting the amendment recorded the plaintiffs' solicitor as saying the amendments were made on counsel's advice. The trial 40.Evidence was given at trial by amongst others Ms Fan, Mr Lee and Mr Lai on behalf of the plaintiffs and Ms Ng on behalf of the defendants. The judge summarized the evidence of each of the witnesses individually, apparently in the order in which the evidence had been given, and thereafter he sought to summarise his conclusions thereon. At page 37 of the judgment, he commenced dealing with the question of the transfer of the funds on 10 October 1997 and the failure to reverse it. His starting point was the fact that he accepted Mr Lai's evidence that the transfer had been a mistake made by him in the early hours of 10 October. That, as has already been indicated, is a conclusion to which the judge could scarcely have failed to have arrived. The judge then went on to say:
The judge then went on in the next sentence to say:
The judge then went on to reject Ms Ng's evidence. At page 39 of the judgment, he then set out his findings of fact which were:
41.The judge's reference to difficulty in accepting Mr Lee's explanation referred back to what had been said at page 19 of the judgment that Mr Lee had said that he had not read the statement carefully and that he had had difficulty in communicating with the solicitor who only spoke English despite the fact that Mr Lee had a Canadian university degree. 42.In my view, it was not sufficient for the judge not to deal with Mr Lee's evidence, specifically the change in his evidence, merely because of Mr Lai's evidence. Mr Lai's evidence only went to the mistake and as to how the entry had been made. Mr Lee's first statement, and his explanation there as to how the transfer had been made, was directed to showing that the transfer of funds had been a transfer which had been made in the ordinary course of handling the Hubbard and La Belle accounts. The first witness statement was no mere slip of the pen. It was directed to supporting the pleading in paragraph 4 of the amended reply and defence to counterclaim. The inclusion of the two new paragraphs in the amended reply and defence to counterclaim, following the application to amend in March 1998, again had been no accident. As has already been noted, the solicitor in charge of the case at that stage went to the trouble of filing an affidavit to explain how he had taken the case over and had taken proper instructions which necessitated the inclusion of those paragraphs in the pleading. More than that, there had been included, as exhibits to Mr Lee's statement, copies of statements of account showing transfers between various different accounts operated by Ms Ng. 43.Mr Lee's first witness statement was therefore directed not just to explaining how the entry came to be made but, more importantly, to substantiating the plaintiffs' case that they had prior and standing authority to make the transfer. This was a crucial part of the plaintiffs' case since without authority to make the transfer their action, at least in respect of Hubbard, would fail. By approaching his decision on the basis that he did not have to resolve Mr Lee's change in evidence, the judge failed to note that Mr Lee's original evidence was given in support of the plaintiffs' then pleaded case of authority. On the face of the matter it is difficult to see how an analysis of this aspect of Mr Lee's evidence could lead to the conclusion that Mr Lee was a credible witness in relation to the justification for the plaintiffs' retaining the transfer to the La Belle finance account. Indeed the judge in effect said that he was not satisfied that Mr Lee's evidence was credible. The judge failed to note that Mr Lee's original evidence had been given in support of a rather more complicated case on behalf of the plaintiffs that the transfer had been made with authority when, if Mr Lee's subsequent evidence was correct, all that would have been said was that Ms Ng had subsequently approved the transfer. Equally importantly, although Mr Lai's evidence contradicted Mr Lee's first version, it did not in any way support Mr Lee's later allegation of specific authorisation from Ms Ng. 44.Sight must also not be lost of the fact that the defences and counterclaims were filed within 3 months of the events in question. Those put in issue the plaintiffs' authority to make the transfer in question. Shortly thereafter, as already noted, the plaintiffs' solicitor made enquiries which resulted in the amended replies and defences to counterclaims. Had it been pleaded that Ms Ng had given express instructions not to reverse the transfer, proper investigations could no doubt still have been made to see what telephone conversation recordings still existed in early 1998. This court was informed that the plaintiffs had a policy of keeping recordings for 3 months. 45.In my view, in the state of the evidence as it appears and in the circumstances of what the judge said about Mr Lee's evidence, I do not consider that any reliance could be placed on Mr Lee's assertion in oral evidence that Ms Ng had given specific instructions not to reverse the transfer without the question of Mr Lee's credibility in this respect being resolved. Other pieces of evidence, e.g. as to why amounts were deposited into Hubbard's finance account, also depended upon the resolution of conflicting evidence between Mr Lee and Miss Ng. On that basis there was no credible evidence to support the plaintiffs' case that Ms Ng had given specific instructions not to reverse the transfer of the money which had been made into La Belle's finance account. In those circumstances, the plaintiffs would have to be taken to have failed to have shown an authorisation as to the transfer with the consequences that must follow. 46.Before leaving this part of the case, reference also has to be made to Ms Fan's evidence. As already noted, it was apparent that in October 1997 Ms Fan was aware that a mistake had been made in effecting the transfer but she said that the matter had been resolved with the client. In view of her position in the company, it is therefore surprising that the original matters were raised in the replies and defences to counterclaim and in the amended defences to counterclaim. Ms Fan's own evidence that she did not pay attention to the case until it became clear that the action would be tried in court needed to be viewed with some care. In this respect it is noted that at the commencement of the trial the judge indicated that he and Ms Fan had been "classmates" at law school at university. He said that he did not think that anything would turn on it but he mentioned it to counsel for their consideration. The plaintiffs' counsel raised no objection, but the defendants' counsel raised objection on the basis that there was a question of credibility. Rather surprisingly, the judge appears to have overruled that summarily. Whereas there is no question of impropriety on the part of the judge, and indeed this point was not even mentioned in the course of argument in this court, I would observe that if a judge finds it necessary to raise a question of acquaintance with one of the parties, it is a counsel of prudence not to take any further part in the case if objection is raised by one of the parties. It is as much a matter of perception as it is a question of danger of a wrong assessment of the witness being likely. 47.Turning to the evidence of Ms Ng, it is unnecessary to say more about it than that the judge was highly critical. Parts of her evidence conflicted with her witness statements. It is well understandable that the judge did not accept those parts of her evidence which were directed to showing that she had wanted to carry out transactions at the relevant time which would have put her and the other defendants in a much better financial position. Wishful thinking in respect of past events can often lead to faulty memory. There were criticisms, however, of her evidence which appeared to be somewhat harsh. For example, Ms Ng said that she could not read English. The judge referred to two occasions in her evidence where she attempted to answer counsel's questions without waiting for a translation. This court was directed to the relevant passages in the transcript. For my part, I would content myself by saying that these were passages where it seemed not altogether surprising that a witness might understand the point of a question being put orally, given the sequence of the questions earlier and the use of particular expressions. The fact that Ms Ng did so does not mean that she could read English, at least to any great extent. Neither do I consider that the judge's criticism that Ms Ng never contacted Ms Fan to complain about the way in which the accounts had been handled, is cogent. It appears that Ms Ng had in fact only one meeting with Ms Fan and that not at the plaintiffs' office but in the Shangri-La Hotel. Whilst I would not disturb the judge's finding that he did not believe Ms Ng's evidence, the fact that her evidence is not believed does not take the matter any further. 48.In conclusion, therefore, on the basis that the plaintiffs have failed to prove that the transfer from the Hubbard securities account to the La Belle finance account had been authorised or ratified, the action against Hubbard must fail. Furthermore, since it was the plaintiffs' practice to transfer credit balances from the futures accounts to the finance accounts at least once a week the matter should be approached on the basis that the 2nd plaintiff should have credited the monies received from Hubbard's futures account to Hubbard's finance account at least to the extent of the amount that the finance account was in debit. The question of the balance amount, which was over and above that required to pay off the amount due in the finance account will be considered below. The Banking Ordinance 49.On the court's inquiry at the commencement of the hearing of the appeal, Mr Chan, on behalf of the defendants, indicated that, despite the fact that the matter had not been dealt with in his written skeleton arguments, he would take the point raised in the notice of appeal based on the Banking Ordinance. The point had been argued below, but had not been dealt with in the judgment. 50.Under section 11(1) of the Banking Ordinance, Cap. 155:
Banking business is defined in section 2 as meaning the business of either or both of the following:
The period specified in the First Schedule is three months. 51.Deposit is defined in the Banking Ordinance as follows:
52.Under section 12(1) of the Banking Ordinance:
There is no question of the 2nd plaintiff being an authorized institution within the meaning of the Banking Ordinance. 53.The question which arises in this case is whether the operation of the finance accounts by the 2nd plaintiff contravenes the Banking Ordinance. The manner in which the plaintiffs' accounts were operated has been partially set out above but clearly emerges from Ms Fan's evidence. 54.Ms Fan gave evidence as to the opening of the accounts as follows. At page 71 of the transcript she is recorded as saying:
55.Later at page 81 she was asked how the accounts operated and she said:
56.Finally, it might be noted that the Plaintiffs were well aware of the Banking Ordinance. At page 175 of the transcript the following interchange is recorded:
It thus emerges quite clearly that the way in which the 2nd plaintiff operated the accounts included taking deposits which would be repayable to the client on demand. It is true, as was pointed out by Mr Yu in the course of argument, that under the General Loan and Security Agreements there is no provision for the making of any loan of money by Hubbard or La Belle to the 2nd plaintiff, nevertheless the finance accounts operated by the 2nd plaintiff were clearly intended to be the place in which money would be deposited when the futures accounts operated by the 1st plaintiff showed a credit. It need hardly be said that presumably the object of a client when trading would be to make a profit. 57.In my view, there has been a breach of section 11(1) and section 12(1) of the Banking Ordinance. It is, of course, evident that a payment which discharges a debt does not constitute a deposit within the meaning of the Banking Ordinance. Neither does a payment which is referable to the provision of property or service constitute a deposit. In this case, however, it is clear that payments were made even in situations where the relevant finance account was in credit. Those payments would have been made primarily from the futures accounts and could not be said to be referable either to property or to services. They were simply deposits made into the relevant finance account. They would have been repayable on demand and were made in the ordinary course of the plaintiffs' business. Our attention was drawn to sections 12(6) and 12(8). These, however, relate to offences and are, therefore, immaterial for the purposes of this case. What is material is whether there has been a breach of section 12(1), not whether there has been an offence committed still less whether the presumption of section 12(8) is applicable. 58.This court's attention was also drawn to section 129 of the Ordinance which reads:
This section apparently replaced section 41B of the previous Banking Ordinance. Section 41B was added in 1983 to that Ordinance that read:
It may be that the alteration of the wording of the section of the Ordinance which permitted contracts to be held enforceable was altered as a result of difficulties in a bank showing that it had exercised all due diligence. A similar provision in the Deposit-taking Companies Ordinance, Cap. 328 had caused difficulties on the part of the deposit-taking company: see Whitehall Finance Limited v Win and Fair Securities Co. Limited [1985] 1 HKC 68. Whether or not the effect of that decision of the Court of Appeal prompted the change in the wording of the Ordinance when the Banking Bill was introduced in 1986 to replace the then existing Banking Ordinance and Deposit-taking Companies Ordinance is a matter of conjecture. However, it is clear that the wording of the section relates to contraventions of the Banking Ordinance on the entering into of any contract. In the present case, the contravention of the Banking Ordinance by taking deposits is not something which is spelt out or referred to in the documentation: it arises from the manner in which the accounts were operated. Section 129(1) therefore has no application to the breaches of the Banking Ordinance in this case. 59.Sufficient instances were drawn to our attention of deposits into the finance accounts of the 2nd plaintiff. The question then arises as to whether this operation of the accounts renders them illegal such that the 2nd plaintiff is debarred from bringing any action in respect of any amount outstanding. In this respect this court's attention has been drawn to the case of St John Shipping Corporation v Joseph Rank Limited [1957] 1 QB 267 at 288 where Devlin J said:
Applying those principles to this case I have difficulty with regard to the operation of the 2nd plaintiff's finance accounts. Clearly they were intended to be the recipients of deposits from time to time. Clearly also the plaintiffs were well aware of the Banking Ordinance. In the passage cited from Ms Fan's evidence it is made clear that no interest was paid in order to avoid a breach of the Banking Ordinance. However, no consideration appears to have been given to the question of the taking of deposits. 60.Having given this matter careful consideration, I consider that the court should not give the plaintiffs any assistance insofar as they have operated the accounts of the 2nd plaintiff illegally but this should not debar the 2nd plaintiff from recovering in respect of loans which had been lawfully made. In this respect, however, the transaction whereby the La Belle finance account was credited with the balance of the Hubbard futures account leaving a substantial credit balance in the La Belle finance account was, in my view, illegal. This, therefore, is another reason why the plaintiffs' transfer of the Hubbard money should be looked at on the basis that the plaintiffs cannot take the benefit of that deposit into the La Belle finance account. For that reason, too, the credit for that amount must be given to the Hubbard finance account and not to the La Belle finance account. Money Lenders Ordinance, Cap 163 61.The importance of the omission to observe the provisions of Order 83A of the Rules of the High Court becomes significant once it is appreciated that only the 2nd plaintiff can make any claim in these cases. The 2nd plaintiff is a money lender and there are various difficulties which arise because of the law relating to money lenders. 62.Section 18 of the Money Lenders Ordinance requires the provision of a note or memorandum which sets out the details of the transaction. The document must contain a number of specific relevant details and it must be signed by the borrower. Section 18 reads as follows:
63.Of particular significance in the present cases are the following:
64.Section 20 of the Ordinance deals with the question of the provision of a copy of that note or memorandum to a surety. Section 20 reads as follows:
It will be noted that in contrast to section 18(3), section 20(4) is absolute in its terms to the extent that a court has no discretion to enforce the security if the provisions are contravened. 65.Finally, reference has to be made to section 22 of the Ordinance which reads as follows:
66.The first matter which would be convenient to consider is that in relation to the surety. The point taken on behalf of the 2nd defendant is that no copies of the memoranda were given to her as distinct from the copies of the memoranda which were given to Hubbard and Le Belle respectively. In this respect it can be noted that the memoranda were signed by the respective companies at their foot under the words "acknowledged by the Borrower". There is no dispute that the relevant company's signature was placed thereon by the 2nd defendant. Nevertheless that signature is a composite signature of the company and not the signature of the 2nd defendant: see Kwok Wing v Maytex Trading Co. [1977] HKLR 149. 67.On behalf of the 2nd plaintiff, Mr Yu took two points. In the first place, it was said that although only one copy of each memorandum was provided that was sufficient because the person controlling the operations of Hubbard and La Belle was the 2nd defendant and one copy sufficed for both the company and the 2nd defendant. That, in my view, cannot be correct. The provisions of section 18 and section 20 are clear. Technical they may be, as, indeed, it may be said that other provisions of the Money Lenders Ordinance are technical. Nevertheless, those provisions and in particular the provision of section 20 including the words "(if a different person from the borrower)" make it quite clear that each of the borrower and the surety must be given their own copy of the note or memorandum. 68.Then it was said that section 20(4) was applicable because copies of the note or memorandum were provided with the discovery and the court bundles as part of the conduct of this case. It was said that the default no longer continued and therefore the surety could be enforced. Again, in my view, that is a misconstruction of the Ordinance. Section 20(1) is clear in its terms that the copy of the note or memorandum must be provided within 7 days of the making of the agreement to give surety. In contrast, section 20(2) which requires the provision of a statement after a request has been made, contains no time limit for providing the statement. When the section is read as a whole it is clear that the failure to provide the copy of the note or memorandum within 7 days is a breach. It is not a continuing default. It is a default which occurs at the conclusion of the seventh day. There is therefore no question of the default ceasing: if the copy of the note is not provided within 7 days the breach has occurred and a copy of the note could never be provided as required within subsection (1) namely within 7 days of its making. In contrast, section 20(2) simply requires the furnishing of a statement. Any failure to provide such a statement can be rectified at any stage because there is no time limit. 69.The conclusion to which I am therefore driven is that because there was only one copy of the note or memorandum, and it has not been argued that was provided to the 2nd defendant and not to the company, the surety is not enforceable against the 2nd defendant and the court has no discretion to enforce the surety. 70.In contrast, in relation to the matters which are relevant under section 18 and section 22, the court does have a discretion. Under section 18(2) two matters are particularly relevant. In the first place, section 18(2)(d) requires that the amount of the principal of the loan must be stated in words and figures. As already noted above, in the memoranda the amount is given as HK$1,000,000.00 (HK$1 million only). It only needs to be said that, in each case the 2nd plaintiff has brought proceedings for a great deal more than that amount for it to be seen that that provision has not been complied with. 71.As noted above, the rate of interest has been given as "3% over the best lending rate quoted by the Hong Kong and Shanghai Banking Corporation Limited or at such rate as from time to time is agreed between the Borrower and the Money Lender." That does not comply with section 18(2)(i). That sub-subsection requires the rate of interest to be expressed as a rate per cent per annum. The importance of that is that the borrower should know exactly how much will be due and calculations can be made as to payments to be made in the future by instalments or otherwise to pay off the loan. There has clearly been a breach of the Ordinance in this respect. 72.It is said that there has been a breach of the Ordinance under section 22(1)(b) in that the loans are repayable on demand. It is said that if the loan is repayable on demand that excludes repayment by instalments. For my part, I would not consider there has been a breach of the requirement of the Ordinance in this respect because the agreement itself does not preclude the repayment of the loan by instalments. 73.However, under section 22(1)(c), the interest may not be increased by reason of any default in the payment of sums due. In this respect it is pertinent to note not only the fact that the rate of interest charged by the 2nd plaintiff was arbitrarily increased for the period from 29 October 1997 to 8% above the HSBC best lending rate, but the claim initially made by the plaintiffs included that increased interest rate and indeed the capital amount claimed was calculated on the basis of that increased interest rate. As noted above, when the amendment was made to abandon that part of the claim, no explanation was provided other than that the amendment was on the advice of counsel. Ms Fan's second witness statement also deals with the initial claim and the abandonment of the claim to the increased interest rate.
74.Despite the fact that this witness statement was dated 18 January 2000 no attempt was made to re-amend the statements of claim to abandon the claim to the higher interest rate until 31 March 2000. 75.Mr Yu, on behalf of the plaintiffs, has sought to avoid the effect of what appeared to be clear contraventions of the Ordinance by seeking the court's discretion. To that end the plaintiffs sought leave to make further amendments to the statements of claim. The amendments sought also to rectify the omission to comply with Order 83A of the Rules of the High Court. In view of the fact that the documents still made claims on behalf of the 1st plaintiff and it was conceded at the hearing that those could not be sustained, this court could not give leave for the making of the amendments. It might also be noted that the drafts presented to this court did not show the earlier versions with the dates of amendment. This would be particularly important in this case. 76.It would be impossible for this court to deal with the matter of discretion simply on the basis of an amended pleading by one party. If the plaintiffs were to be given leave to amend their pleadings the defendants would likewise have to be given leave to amend their pleadings and since the matter is a matter of the discretion of the court based upon considerations as to whether it would be inequitable to prevent the plaintiffs' recovery, there will no doubt be considerable evidence which would be relevant. Consideration would have to be given to whether it would be right for the court to exercise its discretion, in the light of the fact that the operation of the various accounts by the plaintiffs was against a background of the rules as to margins of the Hong Kong Futures Exchange. 77.I have grave misgivings as to whether the plaintiffs should now be permitted to amend their pleadings. The omission to comply with Order 83A has meant that the court was not alerted to the fact that the 2nd plaintiff was a money lender. Although a careful scrutiny of the documents filed in court would reveal that, this matter did not come to the fore until after the conclusion of the hearings in June of this year. The real importance of this being highlighted by the fact that the 1st plaintiff had no real claim. Furthermore, the history of the original claim including the higher interest and its abandonment and the reasons for the abandonment may well be relevant to the exercise of the court's discretion to permit an amendment. The 2nd plaintiff would also have to explain why it did not commence the action in a proper way given its status as a registered Money Lender. Conclusion 78.As already noted, it is conceded that the 1st plaintiff can have no claim because all sums whether they were margin or advances were advanced by the 2nd plaintiff. Indeed, the accounts so show the matter.
79.The claim against the 2nd defendant under the guarantee must fail. The action against the 1st defendant can only succeed if leave to amend be given and the 2nd plaintiff establishes that the court's discretion should be exercised in its favour and then there would still remain a question as to whether the claim should be limited to the amount shown on the memorandum or some other amount. The appeal will therefore be allowed, the judgment in the court below set aside and the matter remitted to the Court of First Instance to consider any application for amendment which might be sought by the 2nd plaintiff. In default of any application to amend the statement of claim being made within 28 days, the action should stand dismissed without any further order.
80.In the Hubbard action, because any transfer from Hubbard's futures account should have been to Hubbard's finance account, the amount owing on Hubbard's finance account should be treated as being extinguished. Over and above that, payments of $300,000 and $550,000 have been made into the Hubbard finance account. Due credit must be given in respect of those. In the circumstances, the 1st plaintiff should reimburse Hubbard in the sum of $207,299.32, being the excess that was not required to pay off the amount owing to the 2nd plaintiff. However, since this amount has in fact been transferred to the 2nd plaintiff, the 2nd plaintiff has become liable to reimburse that amount. In addition, the 2nd plaintiff should reimburse the sum of $850,000. Hubbard is entitled to interest on the amounts owing at judgment rate from 19 January 1998. 81.There should be an order nisi that the defendants are entitled to their costs here and below. Hon Le Pichon JA: 82.I have had the advantage of reading in draft the judgments of the Vice-President and Yuen JA and agree with both judgments. Hon Yuen JA: 83.I agree with the judgment of the Vice-President. I would only add that a submission had been made on behalf of the defendants that an agreement for a loan repayable on demand is in breach of s.22(1)(b) Money Lenders Ordinance, which stipulates that an agreement directly or indirectly prohibiting the repayment of the loan by instalments shall be illegal. 84.The Loan Agreements provided that the defendants would have to repay on demand "all monies now and from time to time hereafter owing", but there was no agreement for instalments payable from time to time. The loans were repayable "on demand, and in any event no later than the Final Maturity Date". 85.It cannot be the case that s22(1)(b) requires that all loans by money-lenders must be loans repayable by agreed instalments from time to time. Although the Ordinance does contain a number of provisions which would apply only where the loan is so repayable (e.g. the requirements in s19(1)(d) and s20(1)(c)(ii) and 20(2)(c) that information be given of the amount and due date of "various amounts comprised in the total sum"), in my view one would expect the draftsman to use much clearer language if it were the legislative intention that only loans of that nature would be legal. If the defendants were right as to the effect of s.22(1)(b), it would render illegal bridging loans where repayment by instalments from time to time would be impractical and nonsensical. 86.In my view, s.22(1)(b) provides no more than that part repayment of the loan must not be prohibited in the agreement. Whether the loan is repayable by agreed instalments from time to time, on demand or on the expiry of a term, the borrower should be free to repay such part of it as he wishes, so as to reduce his indebtedness, so that he would not become "locked" into the loan. This view is consistent with the rationale behind s.21, which entitles the borrower to make early payment of the whole amount outstanding so as to discharge his indebtedness. Hon Rogers VP: 87.The appeals will therefore be allowed and there will be orders as proposed in paragraphs 79 to 81 inclusive.
Representation: Mr Denis Gordon Yu, instructed by Messrs Fred Kan & Co., for the Plaintiffs/Respondents Mr Kenneth C L Chan and Mr Raymond W N Tsui, instructed by Messrs Hau, Lau, Li & Yeung, for the Defendants/Appellants Remarks: Appeal to the Court of Final Appeal by the 2nd Plaintiff. Appeal allowed. Please refer to the appeal judgment of FACV000006/2003. |
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