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Dbs Bank (Hong Kong) Ltd v Sit Pan Jit

Judgment Cited authorities 15 Cited in Precedent Map Related
Vincent
Judgment Date10 June 2016
Year2016
Judgement NumberCACV91/2015
Subject MatterCivil Appeal
CourtCourt of Appeal (Hong Kong)
CACV91/2015 DBS BANK (HONG KONG) LTD v. SIT PAN JIT

CACV 91/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 91 OF 2015

(ON APPEAL FROM HCA 382 OF 2009)

_______________

BETWEEN
DBS BANK (HONG KONG) LIMITED Plaintiff
(Respondent)
and
SIT PAN JIT Defendant
(Appellant)

_______________

Before: Hon Cheung JA, Hon Chu JA, and Hon Poon JA in Court
Date of Hearing: 17 & 18 March 2016
Date of Judgment: 10 June 2016

_______________

JUDGMENT

_______________

Hon Poon JA (giving the Judgment of the Court) :

1. This is the appeal against the judgment and order of Deputy High Court Judge Marlene Ng dated 2 April 2015, whereby she entered judgment for the plaintiff, DBS Bank (Hong Kong) Limited against Mr Sit Pang Jit, a former client, in the sum of US$3,429,724.27 with interest and costs; and dismissed Sit’s counterclaim.

2. The background may be summarized as follows.

A. Background

A1. Sit – a wealthy businessman and seasoned investor

3. Sit was a very successful and wealthy businessman. According to Sit’s personal profile kept by DBS, as at April 2004, the estimated annual sales volume of Sit’s businesses was US$100 million and the estimated annual net income was US$6 million. Sit’s case was that in 2004 he had about HK$100 million in cash and his and his family’s net worth was about HK$ 1billion.

4. Sit was a seasoned investor, too. The Judge recounted his investment history in some details,[1] which we need not repeat here. For present purposes, we just need to highlight a few points.

5. Sit began his investments in the stock market in 1993. He employed Dicky Tak-lap Kong (“Kong”) as his personal assistant in that regard. When the stock market crashed in 1994, Sit left and terminated Kong’s employment.

6. In 1999, when the stock market recovered Sit went right back in through the accounts he opened with Overseas Trust Bank and DBS. Significantly, the Judge rejected Sit’s evidence that he was then only interested in “principal protected” investments or that he all along adopted a conservative/prudent approach to investments. On the contrary, she found that Sit was quite prepared to take risks in the stock market for potential returns and that he only left the stock market upon market downturn following the burst of the dot-com bubble in about 2001.

7. The Judge went on to say:[2]

“ Plainly, Sit was a bullish investor in buoyant markets with a matching risk appetite as evidence by his dabbling in short-term equities trading and willingness to take risks of principal loss and stock market crash for profit gains. But his realization that the stock market could crash, which in turn could result in loss of principal by a substantial percentage, did not deter him from re-entering the financial market with some gusto in the heady period in 2004-2008 before the downfall of Lehman Brothers.”

8. Sit’s re-entry into the financial market took place when he opened a private banking account with DBS (“Sit’s Account”) on 20 April 2004.

A2. Trading in ELNs via Sit’s Account

9. Kong, by then a DBS’s relationship manger, served Sit and handled trades for Sit’s Account at all material times.

10. Between February 2007 and January 2008, Sit utilized facilities granted by DBS to purchase investment products including 69 equity-linked notes (“ELNs”). The ELNs were mortgaged/pledged to DBS as securities.

11. Very briefly, an ELN is a structured product with the final payout based on the return of the underlying equity (single stock or basket of stocks). A “basket” ELN pays an attractive coupon provided the price of the equity stocks does not fall dramatically during its life. The investor will benefit if the referenced basket of equity stocks stays above a pre-designed threshold level. But if one of them falls below the pre-designed threshold level, the investor will receive reduced coupon or be exposed up to 100% loss of principal.

12. What gave rise to the present disputes were 10 ELNs that Sit purchased between February 2007 and January 2008 (“the 1st ELN” to 10th ELN” respectively).

13. The 1st ELN was a target accrual range note. Its performance was linked to the performance of a basket of six Japanese equity stocks with a guaranteed first coupon of 16% and a cap of 18% on the maximum coupon. The investor needed to earn a further 2% coupon to reach the cap before the note structure would terminate early. If the note was not terminated early, and one/more of the equity stocks fell considerably, the investor would be exposed to the possibility of loss of principal on the investment.

14. The 2nd to 10th ELNs were callable bull notes. Each of these notes had a maturity of two years and its performance was linked to a basket of three locally listed equity stocks. They were structured in a similar way. The investor would earn an attractive coupon if all stocks in the basket stayed above a pre‑designed threshold level. The ELN would redeem early at par if all stocks in the basket were above an agreed trigger threshold. If at final maturity all stocks were above an agreed knock-in threshold, the investor would receive par, otherwise he would receive shares of the worst performing stock. In short, the callable bull notes would pay an attractive contingent coupon and subject the investor to risk of reduced coupon and principal loss based on the performance of the underlying stocks measured by the relative difference between the price of each stock on the trade date and its current price.

A3. Collapse of the market in 2008

15. Lehman Brothers collapsed in October 2008, which triggered a financial tsunami worldwide. Sit, like many other investors, was engulfed when the mark-to-market value of his investments dropped significantly resulting in material depreciation of the securities held by DBS.

16. Between October and December 2008, DBS demanded Sit to settle the outstanding indebtedness in the Account but to no avail.

B. Proceedings below

B1. DBS’s claim

17. On 13 February 2008, DBS commenced the action below to sue Sit for recovery of US$3,429,724.27, being the outstanding indebtedness in the Account with interest and costs. Their claim was simple and straightforward. It was based on a written contract constituted by the following banking documents signed by Sit in the course of his dealings with DBS :

(a) “Account Opening Form – Individual Account” dated 20 April 2004 (“Account Opening Form”);

(b) Facilities letter dated 28 April 2004;

(c) “Charge on Cash Deposit(s) to Secure Liabilities of the Deposit(s)” dated 3 May 2004;

(d) “Mortgage over Stocks, Shares and Other Securities to Secure Liabilities of the Depositor” dated 3 May 2004;

(e) “General Commercial Agreement” dated 3 May 2004;

(f) Facilities letter dated 27 July 2004;

(g) Facilities letter dated 26 May 2006 with “Terms and Conditions Governing Banking Facilities and Services” attached;

(h) Facilities letter dated 18 June 2007 with the T&C attached;

(i) “ISDA Master Agreement for DBS Bank (Hong Kong) Limited” dated 3 March 2008; and

(j) the pre-July 2007 the DBS Private Banking Account Master Agreement as varied from time to time, which variation included amendments in July 2007.

(collectively referred to as the “Banking Documents”).

18. It was DBS’s case they granted credit facilities to Sit pursuant to the terms as contained in the Banking Documents. And Sit was contractually bound to settle the outstanding indebtedness in the Sit’s Account.

B2. Sit’s defence and counterclaim

19. Sit raised a host of defence.

20. Sit first alleged that Kong made oral representations to him in April 2004 that :

(a) DBS would give Sit credit facilities for investment purpose;

(b) return from investments made by DBS for Sit would be more than the interest earned from cash deposits;

(c) Kong would be personally responsible for looking after Sit’s investments; and

(d) when Sit expressed he wanted investments that were “principal protected” “in the sense that at worst he would not be able to earn interest or yield from his investment only, but that he would not lose his entire principal sum for such investment”, Kong said DBS would not take up risky investments for him as they would be mortgaged to DBS as securities (“1st Representations”).

21. It was said that what governed the parties’ relationship was an oral contract with terms as contained in the 1st Representations, and not the Banking Documents.

22. Sit raised another five heads of Representations. The 2nd to 5th Representations are immaterial for this appeal because Sit no longer relied on them. On the 6th Representations, Sit alleged that Kong represented to him that :

(a) investing in notes, including ELNs, being merely interest-generating products, was safe, conservative and traditional (and this was reinforced by his use of phrases such as “insurance line” or “protection”);

(b) investing in ELNs was less risky than investing in products in the nature of mutual funds; and

(c) the ELNs were “structured” or tailor-made by Kong for Sit.

23. Further, the 6th Representations were false and (as DBS knew or ought to have known) made without reasonable grounds in support in that (1) the true nature, mechanism and risks of investing in ELNs were not adequately stated, (2) mutual funds were less risky as compared with ELNs, (3) the ELNs were not “structured” or tailor-made by Kong for Sit, and (4) the ELNs were intended to be investment products for professional investors in general and were not designed for Sit.

24. Sit claimed he was induced by the 1st to 6th Representations to deposit about HK$90 million with DBS and to use the investment services of DBS as proposed by Kong to purchase investment products, including the 1st to 10th ELNs. Sit claimed that the...

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