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Bonds & Sons International Ltd v Citibank, N.a.

Judgment Cited authorities 12 Cited in Precedent Map Related
Vincent
Judgment Date30 July 2018
Neutral Citation[2018] HKCFI 1737
Year2018
Judgement NumberHCCL29/2013
Subject MatterCommercial Action
CourtCourt of First Instance (Hong Kong)
HCCL28D/2008 SHINE GRACE INVESTMENT LTD v. CITIBANK, N.A. AND ANOTHER

HCCL 28/2008

[2018] HKCFI 1737

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 28 OF 2008

____________

BETWEEN
SHINE GRACE INVESTMENT LTD Plaintiff
and
CITIBANK, N.A. 1st Defendant
HAILEY AMY SEEN KWAN MAK 2nd Defendant

____________

HCCL 28/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 28 OF 2013

____________

BETWEEN
SHINNING INTERNATIONAL HOLDINGS LIMITED Plaintiff
and
CITIBANK, N.A. Defendant

____________

HCCL 29/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 29 OF 2013

____________

BETWEEN
BONDS & SONS INTERNATIONAL LIMITED Plaintiff
and
CITIBANK, N.A. Defendant

____________

(Heard together)

Before: Hon Ng J in Court
Dates of Hearing: 13–17, 20–23, 28–29 November and 11–12 December 2017
Date of Judgment: 30 July 2018

________________

J U D G M E N T

________________


Table of Contents

A. Introduction
B. Mrs Chan
C. Factual and expert witnesses
D. Shin Grace Account with Citibank — contractual framework
E. Basic elements of Citibank’s ACs
F. Shine Grace’s case in the main action
G. Citibank’s and Ms Mak’s defence in the main action
H. Duty to advise
I. Breach of duty
- (Un)Suitability of the Disputed ACs
- MTM calculations, risks of MTM losses due to implied volatility and MTM losses where spot price was above AFP
J. Misrepresentation
K. Causation
L. Conclusion on liability
M. Guarantor actions
- Shinning Action
- BSI Action
N. Citibank’s counterclaim against Shine Grace
O. Disposition and costs order nisi

A. Introduction

1. The main action HCCL 28/2008 (“Main Action”) is concerned with 9 Equity Accumulator Contracts (“Disputed ACs”) entered into by the Plaintiff (“Shine Grace”) via Mrs Anita Chan Lai Ling (“Mrs Chan”) with the 1st Defendant (“Citibank”) on 15 and 16 October 2007. Since 20 November 2007, Citibank has issued margin call notices under the Disputed ACs demanding Shine Grace to deposit additional margin security. From 21 November 2007 onwards, Shine Grace has, by various letters to Citibank, disclaimed the Disputed ACs and asserted that they were invalid and unenforceable. Citibank’s repeated margin calls were not met.

2. The stocks which underlay the Disputed ACs were 4 Hong Kong listed shares vizChina Petroleum & Chemical (“Sinopec”), Petrochina Company Limited (“Petrochina”), China Shenhua Energy Company (“Shenhua”) and China Life Insurance Company (“China Life”).

3. The Disputed ACs resulted in heavy financial losses for Shine Grace. Out of the 9 Disputed ACs, 2 were “knocked out”[1] on the same day ie 15 October 2007 and 1 was “knocked out” on 1 November 2007. The remaining 6 open Disputed ACs were closed out and unwound by Citibank on 22 January 2008. The total unwinding costs of the open positions on those 6 Disputed ACs exceeded HK$427 million, while the losses suffered from the sale of the shares accumulated under all the Disputed ACs were around HK$51 million, making a total of HK$478 million.

4. In order to understand the background against which these losses were incurred, the best way is to plot the movement of the Hang Seng Index (“Index”) and the share prices of the 4 stocks underlying the Disputed ACs at the material times:

(1) On 15 October 2007,

i. The Index closed at 29,540.

ii. Sinopec closed at HK$12.96.

iii. Petrochina closed at HK$18.78.

iv. Shenhua closed at HK$54.10.

v. China Life closed at HK$50.60.

(2) On 16 October 2007,

i. The Index closed at 28,954.

ii. Sinopec closed at HK$12.24.

iii. Petrochina closed at HK$18.38.

iv. Shenhua closed at HK$52.35.

v. China Life closed at HK$50.30.

(3) On 30 October 2007,

i. The Index closed at its peak of 31,638.

ii. Sinopec closed at HK$11.92.

iii. Petrochina closed at HK$19.76.

iv. Shenhua closed at HK$51.15.

v. China Life closed at HK$51.95.

(4) On 20 November 2007,

i. The Index closed at 27,771.

ii. Sinopec closed at HK$10.90.

iii. Petrochina closed at HK$14.84.

iv. Shenhua closed at HK$43.35.

v. China Life closed at HK$43.45.

(5) On 22 January 2008,

i. The Index closed at 21,757.

ii. Sinopec closed at HK$7.65.

iii. Petrochina closed at HK$9.62.

iv. Shenhua closed at HK$38.50.

v. China Life closed at HK$27.60.

5. After the 6 open Disputed ACs were closed out and unwounded, there was still a substantial shortfall which Citibank demanded from Shine Grace. Shine Grace did not meet the demand. Citibank then turned to Shine Grace’s two guarantors viz Shinning International Holdings Limited (“Shinning”) and Bonds & Sons International Limited (“BSI”) and transferred funds from their accounts with it ie HK$25,609,002.71 and HK$39,109,301.58 respectively to satisfy the outstanding liability.

6. In the Main Action, Shine Grace alleges what is commonly known as mis‑selling of the Disputed ACs by Citibank. A summary of its complaints against Citibank and the 2nd Defendant (“Ms Mak”) (collectively “Defendants”) can be found in Section F below. Ms Mak was at all material times the relationship manager of Shine Grace and Mrs Chan.

7. In the prayer for relief, Shine Grace seeks inter alia a declaration that (i) it has not contracted with Citibank in respect of the Disputed ACs, (ii) the Disputed ACs are unenforceable, (iii) all notices, including margin call notices in respect of the Disputed ACs are invalid and of no legal effect. Shine Grace also seeks an order for the return of all securities and monies held by Citibank for or otherwise due to it as well as damages. Shine Grace further seeks damages or restitutionary relief against Ms Mak.

8. Each of Shinning and BSI had provided two limited guarantees (“Shinning Guarantees[2]” and “BSI Guarantees[3]”) in support of Shine Grace’s dealings with Citibank. These guarantees were the subject of the proceedings in HCCL 28/2013 (“Shinning Action”) and HCCL 29/2013 (“BSI Action”) (collectively, “Guarantor Actions”) commenced by Shinning and BSI against Citibank.

9. In the Guarantor Actions, Shinning and BSI challenge the appropriation of HK$25,609,002.71 and HK$39,109,301.58 from their respective Citibank accounts on 25 January 2008 to satisfy Shine Grace’s liability under the Disputed ACs. The basis of their challenge is that Shine Grace had not contracted with Citibank in respect of the Disputed ACs, alternatively, the Disputed ACs were void and/or unenforceable and thus Shine Grace had no liability under them. Citibank therefore had no right to call on the guarantees and appropriate funds from their respective accounts. They seek inter alia an Order that the funds appropriated by Citibank be re‑credited to their accounts with interest.

10. An additional issue raised in the BSI Action is that BSI claims it had already terminated the BSI Guarantees by written notice on 26 July 2007. As far as the 2004 Guarantee is concerned, BSI claims it was terminated on 27 October 2007, upon the expiry of the 3‑month notice period pursuant to clause 3 thereof. As far as the 2006 Guarantee is concerned, BSI claims it was terminated as of 26 July 2007. Upon their termination, BSI ceased to have any further liability under the BSI Guarantees. BSI therefore also seeks a declaration that the two guarantees were terminated on the aforesaid dates.

B. Mrs Chan

11. While Shine Grace was the contracting party of the Disputed ACs and the Plaintiff in the Main Action, the person at the heart of this case was Mrs Chan. She was a director of Shine Grace from 2 January 2003 until she passed away on 17 October 2007. There is no dispute that prior to her death, Shine Grace was solely beneficially owned, controlled and operated by her. There is also no dispute that all of Shine Grace’s investment decisions were made by Mrs Chan and all its investment orders, including the Disputed ACs, were placed by her on behalf of Shine Grace. For these reasons, and for the sake of simplicity, a reference to Mrs Chan in what follows is intended to include a reference to Shine Grace and vice versa, unless the context expressly or impliedly indicates otherwise.

12. After Mrs Chan’s death, the only other director of Shine Grace, her brother, resigned with effect from 3 November 2007 while on 2 November 2007, Mrs Chan’s 4 children (Anson, Johnson, Lily and Zandra) were appointed directors of Shine Grace.

13. By way of background, Mrs Chan was the sole beneficial owner of the so‑called Lady Secret Group of companies. Shine Grace was a company within the Lady Secret Group. So was Shinning.

14. Mrs Chan was also the Chairman and Chief Executive of the Bonds Group, the holding company of which was Bonds & Sons Holdings Ltd (“B & S Holdings”). BSI was wholly‑owned by B & S Holdings and hence a company within the Bonds Group. While the core business of the Bonds Group was in property investment, management, leasing and development, BSI itself also engaged in the trading of securities, including derivative instruments, from time to time. In December 2003, the Bonds Chan Family Unit Trust (“Trust”) was established and all the shares of B & S Holdings were owned by the Trust. Mrs Chan had 44.45% beneficial...

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