But Ka Chon v Interactive Brokers Llc

CourtCourt of Appeal (Hong Kong)
Judgment Date02 August 2019
Neutral Citation[2019] HKCA 873
Citation[2019] 4 HKLRD 85
Subject MatterCivil Appeal
Judgement NumberCACV611/2018

CACV 611/2018

[2019] HKCA 873







IN THE MATTER of an application to set aside a Statutory Demand under Rule 47 of the Bankruptcy Rules (Chapter 6A)


BUT KA CHON Applicant

Before: Hon Kwan VP, Cheung JA, Chu JA in Court

Date of Hearing: 23 July 2019

Date of Judgment: 2 August 2019




Hon Kwan VP:

1. This is an appeal by the applicant But Ka Chon against the decision of Deputy High Court Judge Yee handed down on 4 December 2018. By the decision, the judge dismissed Mr But’s application to set aside the statutory demand issued by Interactive Brokers LLC (“IB”) against him on 23 November 2016 for a debt of $79,334,912.39.

2. After the dismissal of Mr But’s application, IB presented a bankruptcy petition against him on 21 December 2018 (HCB 7426/2018). Upon the joint application of Mr But and IB by way of consent summons, Deputy High Court Judge Leung made an order on 6 March 2019 that all further proceedings in the bankruptcy of Mr But be stayed pending the determination of this appeal.


3. The relevant background matters may first be stated as follows.

4. IB is an online broker-dealer providing a platform for online trading in, among other things, currency futures. Mr But was and is an experienced trader, and had dealt in securities and the like, including futures, as an individual investor since 1994. His records with the Hong Kong Monetary Authority showed that he has been a licensed professional in various areas including dealing in securities under the Securities and Futures Ordinance, Cap 571.

5. In July 2012, he visited the website of IB and entered into a customer agreement dated 18 July 2012 (“the Customer Agreement”), by which he opened an online portfolio margin account (“the Account”) with IB. He was then invited by IB to attend its Hong Kong office for IB to verify his personal data including his identity and income proof. He did so on 31 July 2012 and signed a document known as “Acknowledgment by Customers” (“the Acknowledgment”).

6. After opening the Account, Mr But traded in Euro/Swiss Franc (“CHF”) futures. He opened his RFH5 positions, ie March 2015 futures traded under the symbol “RHF5” on the Chicago Mercantile Exchange (“CME”) on margin through IB. Those positions were established with a view to a profit from the relationship between the Euro and CHF and were long positions, meaning that he purchased them to open the positions. With those positions, he would profit if the Euro increased in value compared to CHF and suffer loss if CHF increased in value compared to the Euro.

7. On 15 January 2015 at around 17:20 hours Hong Kong time, the Account had, inter alia, 440 long position RHF5 and the Account had an equity or net liquidation value of approximately $19,930,000. At around 17:30 hours, the Swiss National Bank unexpectedly cancelled its 2011 policy which placed a ceiling of 1.2000 CHF per Euro after the Eurozone debt crisis saw investors rush to CHF assets. The unpegging of the CHF/Euro exchange rate (“the Unpeg Event”) resulted in a record high for CHF against the Euro in the cash market. After the Unpeg Event, the net liquidation value of the Account was at negative $83,480,610.18. Due to the volatility of the market, CME halted trading of RFH5 contracts and took other emergency measures a few times. At 18:22 hours, IB sent an email to Mr But[1] informing him that the equity in the Account was insufficient to satisfy Maintenance Margin[2]. At 19:47 hours, IB informed him by email there had been a substantial move in CHF assets due to the Unpeg Event and liquidation had been disabled. Mr But did not deposit any funds into the Account to resolve the margin deficit.

8. On 16 January 2015, IB sent an email to notify Mr But that the margin deficit rose to $92,078,384.27 and that IB would attempt to liquidate positions in the Account. By a subsequent email from IB the same day, he was informed that the available capital in the Account was negative $73,888,802.50. IB started liquidating Mr But’s Hong Kong stocks in the Account.

9. On 21 January 2015, with the permission of CME pursuant to its rules, IB started liquidation of the RFH5 positions held by Mr But and those of its other margin clients by transferring the positions to an affiliate of IB.

10. Mr But sent an email to IB on the same day complaining of improper handling of its liquidation policy to the Account, thereby causing the huge loss of his portfolio. IB responded by letter on 18 February 2015 stating that his complaint was not factually or legally justified in that he had misstated its liquidation policy and ignored the nature of the market event that caused his losses. The letter ended with the statement that if Mr But was dissatisfied with IB’s response, he “may escalate [his] complaint to the Financial Dispute Resolution Centre or to the Hong Kong Securities and Futures Commission.”

11. On 23 November 2016, IB issued a statutory demand to Mr But for $79,334,912.39, being the deficit in the Account and interest at margin interests rates. It was served on him on 12 December 2016.

12. On 16 December 2016, Mr But’s solicitors wrote to IB’s solicitors disputing the debt in the statutory demand and stating that they “further note clause 33 of the [Customer Agreement] contains a Mandatory Arbitration Clause on any and all disputes between the parties arising out of the Customer Agreement. As per the said clause, we are further instructed to initiate arbitration between the parties on the said disputes.” IB’s solicitors were requested to withdraw the statutory demand and revert as to whether they had instructions “to accept service of our client’s Notice of Arbitration”.

13. IB’s solicitors replied by letter dated 22 December 2016 stating there were no grounds for a bona fide dispute to be resolved by arbitration and that if a dispute did exist such that it should be referred to arbitration, the arbitration must occur in one of the five specified forums. IB’s solicitors attached the rules of arbitration of all five forums for the reference of Mr But’s solicitors.

14. On 13 January 2017, Mr But took out his application to set aside the statutory demand. It was heard by the judge a year later on 13 February 2018. He directed the parties to file further submissions in April 2018 after his attention was drawn to a judgment handed down by Harris J in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“the Lasmos case”) on 2 March 2018.

The decision below

15. Two broad grounds were relied on to set aside the statutory demand.

16. First, Mr But alleged that IB made misrepresentations relating to its risk management policies or obligations on its webpage. He had relied on such misrepresentations to enter into the Customer Agreement and they turned out to be false. Had the risk management policies been put into practice, the alleged debt would not have been incurred. Hence, the alleged debt is disputed on substantial grounds and he has a cross-claim for the net liquidation value in the Account, thereby meeting the requirements of rules 48(5)(a) and (b) of the Bankruptcy Rules, Cap 6A[3].

17. Second, Mr But relied on the arbitration clause in clause 33B of the Customer Agreement[4]. The parties’ dispute should be arbitrated and the arbitration clause provides a ground for the court to exercise its residual discretion to set aside the statutory demand pursuant to rule 48(5)(d) of the Bankruptcy Rules, by which the court is empowered to do so upon being “satisfied, on other grounds, that the demand ought to be set aside.” The circumstances which normally will be required before a court can set aside a demand under rule 48(5)(d) are circumstances which would make it unjust for the demand to give rise to those consequences in a particular case[5].

18. On the misrepresentation claim, the judge took the view it is “thoroughly bad and has no merit”. Mr But failed to show that he has a bona fide defence by way of misrepresentation with credible and cogent evidence to the claim of IB in respect of the debt, and his cross-claim based on the same complaint is “equally illusory.” He held that Mr But is unable to meet the thresholds in rules 48(5)(a) and (b)[6].

19. For the arbitration issue[7], the judge noted that the decision of Harris J in the Lasmos case made a substantial departure from previous authorities at first instance in Hong Kong (Hollmet AG & Anr v Meridian Success Metal Supplies Ltd [1997] HKLRD 828, Rogers J; Re Sky Datamann (Hong Kong) Ltd, HCCW 487/2001, 29 January 2002, Yuen J; Re Jade Union Investment Ltd, HCCW 400/2003, 5 March 2004, Barma J; Re Southern Materials Holding (HK) Co Ltd, HCCW 281/2007, 13 February 2008, Kwan J; and Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759, Harris J) and followed the approach of the English Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589.

20. By the new approach in Lasmos, which was set out in §31 of that case, it was held that a petition to wind up a company on insolvency grounds should “generally be dismissed” when these three requirements are met:

“(1) if a company disputes the debt relied on by the petitioner;

(2) the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and

(3) the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process...

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    ...Cap 32H, demonstrating this; the petition should generally be dismissed.” 55. In But Ka Chon v Interactive Brokers LLC [2019] HKCA 873; [2019] 4 HKLRD 85, a broker served a statutory demand on a client in respect of the deficit in the client’s trading account. The client complained that the......
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