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Denis M.p.c. Ho And Another v Chan Kam Tim And Another

Judgment Cited authorities 16 Cited in Precedent Map Related
Vincent
Judgment Date17 December 1998
Year1998
Citation[1999] 2 HKLRD 1
Judgement NumberHCCW36/1998
Subject MatterCompanies Winding-up Proceedings
CourtHigh Court (Hong Kong)
HCCW000036/1998 DENIS M.P.C. HO AND ANOTHER v. CHAN KAM TIM AND ANOTHER

HCCW 36/1998
HCCW 37/1998

HEADNOTES

1. A broker is the agent of his client and owes the client fiduciary duties including the duty to account. Where the intention of a client and his broker is that the client's property is entrusted to the broker for any special purpose, such as the acquisition of certain securities, that property belongs to the client, and is regarded as covered by a trust.

2. When securities are acquired but have not been delivered to the client, the broker is obliged at all times to get into his possession and retain an equivalent quantity of those securities to satisfy his client's proprietary interest (Solloway v McLaughlin [1938] AC 247 applied)

3. Section 84 Securities Ordinance is consistent with the requirement that money paid by a client to a broker should be held under a trust. Section 84(3) does not mean that during the period of 4 bank trading days referred to in s.84, the broker can for its own purposes freely make use of its client's money. The period referred to in s.84(3) is merely a grace period within which the broker would not be at risk of criminal sanction if it fails to deposit the money into the trust account.

4. The fact that a broker was treated under the Central Clearing and Settlement System Rules as a principal did not mean that he was no longer an agent for the client. A person does not lose his capacity as an agent vis-a-vis his principal just because he has to contract with a third party as principal. Although he is a principal in relation to the third party, he remains an agent in relation to his principal (Teheran-Europe Co Ltd v S.T. Belton (Tractors) Ltd [1967] 2 QB 53, 60 applied).

5. In considering whether there is sufficient certainty of subject-matter for the creation of trust, one must have regard to what the subject-matter is. Segregation is not necessary for intangible things such as fungible shares ranking pari passu, so long as one knows the quantity of the shares which are to form the subject-matter of the trust (Re London Wine [1986] PCC 121 and Re Goldcorp [1995] 1 AC 74 distinguished, Hunter v Moss [1993] 1 WLR 934, [1994] 1 WLR 452 and Re Harvard Securities [1997] 2 BCLC 369 considered).

HCCW 36/98
HCCW 37/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) ACTIONS NO. 36 AND 37 OF 1998

---------------------------

IN THE MATTER of the Companies Ordinance Cap. 32

and

IN THE MATTER of C.A. PACIFIC FINANCE LIMITED (in Liquidation)

and

IN THE MATTER of C.A. PACIFIC SECURITIES LIMITED (in Liquidation)

BETWEEN:
DENIS M.P.C. HO and JAN G.W. BLAAUW JOINT LIQUIDATORS Applicants
AND
CHAN KAM TIM 1st Representative
Respondent
and
TSUI YUET LING 2nd Representative
Respondent

Coram: The Hon Madam Justice Yuen in Court

Dates of Hearing: 12-13, 16, 18-20 November 1998

Date of Delivery of Decision: 17 December 1998

--------------

DECISION

--------------

Yuen, J.:

1. This is an application by the Joint Liquidators of C.A. Pacific Finance Ltd (in liquidation) and C.A. Pacific Securities Ltd (in liquidation) for the determination of certain questions which have arisen in the course of the liquidations. The facts which have led to the present application are as follows.

Business of the companies

2. Both CA Pacific Securities Ltd and CA Pacific Finance Ltd were members of the C.A. Pacific Group.

3. C.A. Pacific Securities Ltd ("CAPS") carried on business in Hong Kong as a broker or dealer in securities. It was registered as a securities dealer under the Securities Ordinance, cap.333 and as such, was regulated by the Securities and Futures Commission ("SFC"). It was a member of the Hong Kong Stock Exchange and was a Broker Participant in the Central Clearing and Settlement System ("CCASS") operated by the Hong Kong Securities Clearing Co. Ltd ("HKSCC").

4. C.A. Pacific Finance Ltd. ("CAPF") carried on business in Hong Kong as a finance company. It was registered as a money lender under the Money Lenders Ordinance, cap.163. As it was not a registered securities dealer, it was not regulated by the SFC. As part of its operations, CAPF provided margin facilities to clients of CAPS.

5. As at January 1998, CAPS had some 11,000 clients, of which some 8,000 were also clients of CAPF, although not all CAPF clients traded on margin facilities. Indeed, a number of CAPF clients claim to be unaware that they had entered into contractual relations with that company at all.

Petitions for winding-up

6. In the late afternoon of 19 January 1998, a company within the C.A. Pacific Group presented a petition to wind-up CAPF on the basis of its inability to pay an inter-company loan. On 20 January 1998, the SFC presented a petition to wind-up CAPS on the grounds that it was insolvent and that it was just and equitable and in the public interest for it to be wound-up.

7. On the same day, Mr. Jan G.W. Blaauw and Mr. Denis M.P.C. Ho were appointed provisional liquidators of CAPS. On 21 January 1998, the same two persons were appointed provisional liquidators of CAPF as well.

8. It is not necessary for present purposes to recount the history of the petitions. Both companies were eventually wound-up unopposed on 4 June 1998. The Official Receiver applied for a regulating order, and the provisional liquidators were appointed liquidators for both companies.

The Title Question

9. On 18 June 1998, the Liquidators applied for directions concerning the question whether the clients of CAPS had any interest in the securities they had instructed CAPS to acquire and which were held by or to the order of CAPS.

10. That question had arisen because CAPS had purchased securities on the Stock Exchange through CCASS, a computerised book-entry settlement system where unnumbered share certificates are "immobilised" and deposited with a central securities depositary.

11. Put simply, the question is whether CAPS' clients have any proprietary interest in the securities they have instructed CAPS to acquire, when the share certificates are in a central pool and have not been earmarked.

12. The question of title has now been confined and refined as a preliminary issue by agreement of the parties, and can be summarised as follows:-

"whether, on the basis of the contractual arrangements, the regulatory framework and the arrangements for the custody of securities set out in the evidence,

(i) clients who have paid for securities from their own resources and upon whose instructions CAPS purchased securities on the Hong Kong Stock Exchange settled through CCASS may have

(a) acquired;

(b) thereafter retained whilst subject to the arrangements for the custody of securities in CCASS;

(c) subsequently upon removal from CCASS acquired or re-acquired;

a proprietary interest in securities so purchased;

(ii) if so, what is the nature and basis of such proprietary interest."

Representative Respondents

13. Due to the large number of clients involved, directions were given for the appointment of two representatives.

14. The 1st representative respondent Mr. Chan represents those clients whose recovery in the winding-up would be maximised if it was determined that clients of CAPS had, in principle, proprietary claims to securities acquired and held by the company, and to cash held by the company. In Mr Chan's case, this is because there was no shortfall in scrip of Techtronic Industries Ltd, the shares he acquired through CAPS. So as far as securities were concerned, he would be able to achieve 100% recovery.

15. The 2nd representative respondent Miss Tsui represents those clients whose recovery in the winding-up would be maximised if it was found that clients of CAPS did not have any proprietary interest in the securities, even though they had paid for them in full out of their own resources. The Liquidators have informed the Court that Miss Tsui would only be able to achieve 2% recovery on a proprietary basis, as opposed to 60% recovery on the basis that all the securities held by CAPS or to its order were held as part of CAPS' general assets.

16. In any event, for the purposes of these proceedings, Mr Chan's and Miss Tsui's particular circumstances do not matter. The issues of principle to be decided are of general application.

17. I should add that although both Mr Chan and Miss Tsui were clients of CAPF, the Court has been asked to determine the issues at this hearing on the basis that they had both paid for securities in full out of their own resources. In this Decision, I have used the term "clients" to describe all such persons who had instructed CAPS to purchase securities and who had paid for them in full out of their own resources.

Issues

18. It may be helpful to consider the issues in this way:-

(I) Prior to the introduction of CCASS, did a client acquire a proprietary interest in securities he had instructed his broker to purchase for him?

(II) If the client did have a proprietary interest, what is the effect of the introduction of CCASS and the broker's acquisition of the securities under this system?

(I) Prior to the introduction of CCASS

Relationship between Broker and Client

19. It is clear that at common law, as recognized by the courts of Hong Kong, a broker is his client's agent. Although the broker/agent is not a trustee in the strict sense of the word (Re Strachan ex p Cooke (1876) 4 Ch D 123, 128), he owes fiduciary duties to his client/principal.

20. One such fiduciary duty is to account for the principal's property, whether it be money or securities, if it comes to the agent's hands, so that the agent holds the money or securities in trust for the principal.

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