HCA 2206/2000
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 2206 OF 2000
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BETWEEN
| SILVER STONE DEVELOPMENT LIMIGED | 1st Plaintiff |
| LUI YUE YUN, GARY | 2nd Plaintiff |
| and | |
| LAU KWONG CHING, JAMES | 1st Defendant |
| KWOK WAI TAK, EDWARD | 2nd Defendant |
| CARRIER STOCK INVESTMENT COMPANY LIMITED | 3rd Defendant |
| | HO PUN TSUN, PETER | 4th Defendant |
| | SZETO JOSEPH | 5th Defendant |
| | ASIA GLORY HOLDINGS LIMITED | 6th Defendant |
| | and | |
| | KWOK WAI TAK, EDWARD | 1st Third Party |
| | ASIA GLORY HOLDINGS LIMITED | 2nd Third Party |
| | HO PUI TSUN, PETER | 3rd Third Party |
| | SZETO JOSEPH | 4th Third Party |
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Before: Deputy High Court Judge Carlson in Court
Dates of Hearing: 13, 16-17, 20-22 and 27-28 March 2006
Date of Judgment (Handed Down): 1 June 2006
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J U D G M E N T
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The parties and the individuals concerned in the action
1. In order to understand the factual background and the allegations that are being made by the Plaintiffs’ against the various Defendants, it is helpful to start by providing a Who’s Who of the parties and other individuals whose evidence must play a decisive part in the outcome of this action.
2. The 1st Plaintiff (“Silver Stone”) is a BVI company that is wholly-owned by the 2nd Plaintiff, Mr Lui, who is also its sole director.
3. It is perhaps more helpful to take the Defendants’ out of numerical order and in the order of their appearance in the account of the evidence that I will need to provide. The 4th Defendant, Mr Ho, who has not appeared and is not represented, was an old and trusted friend of the 2nd Plaintiff. They had been friends since their undergraduate days at university in Toronto. Both have an engineering background. The 2nd Defendant, Mr Kwok, is represented by counsel and solicitors but he has decided to absent himself from the trial and has therefore not given evidence, although he has filed a witness statement which I must therefore ignore. The 1st Defendant was, until the first day of the trial, represented by the same counsel and solicitors as the 2nd Defendant and the 2nd Defendant’s company, the 6th Defendant. His witness statement has been prepared by those solicitors. On the first day of the trial, he dispensed with their services and has conducted the case in person and adopted that witness statement as part of his evidence in the trial. The 5th Defendant who had previously been represented by solicitors dispensed with their services sometime before the trial started and he too has conducted his defence in person and has also decided not to give evidence. Finally, there is the 3rd Defendant which is a stockbroker, its dealing director being Miss Ida Ho. It is represented by counsel and solicitors.
The connections between the parties
4. The case is concerned with an allegation of the unlawful practice of “stock borrowing”. The 4th and 5th Defendants were senior executives of CIL Holdings Limited (“CIL”), a publicly-listed company on the Hong Kong Stock Exchange. It is a property investment and development company. The 1st Defendant had for many years served in the Hong Kong Police, as had the 5th Defendant. He knew both the 4th and 5th Defendants and they invited him to become an executive director of CIL given his good reputation as a man of integrity. He is a putonghua speaker and has some connections on the Mainland and was therefore considered by the other two as a good man to have with them who they could make use of as and when required. The 2nd Defendant is obviously an experienced businessman with Mainland connections which, as will become clear presently, he wished to put to good use and expand his investments with Mainland companies. The 6th Defendant is a BVI “shell” company owned by the 2nd Defendant which he was to use to acquire shares on his behalf, more of which presently. The 3rd Defendant and Miss Ida Ho in particular was well-known to the 2nd Defendant. He had employed the 3rd Defendant as a stockbroker in the past. Miss Ho was on friendly terms with the 2nd Defendant and prepared to trust him. She was also on good terms with the 2nd Defendant’s sister Ingrid, although she has played no part in the events that give rise to the action. I mention her merely to underline, Miss Ho’s personal connection with the 2nd Defendant and the fact that they had a good and long standing relationship.
The events that give rise to the action
5. The 2nd Plaintiff’s main commercial activity is operating Pacific Marble and Granite (HK) Limited a company of which he is principal shareholder and director which, as its name suggests, supplies and installs high quality marble and granite for good grade residential and commercial buildings on the Mainland and in Hong Kong. Through the 4th Defendant he met the 5th Defendant who was then general manager of the well-known Japanese building contractor Kumagai Gumi. In about 1996, the 4th and 5th Defendants acquired control of CIL whose principal activity was in interior contracting relating to substantial building projects. Through his connection with the 4th and 5th Defendants, the 2nd Plaintiff was to obtain contracts for the supply of marble on building projects in Shanghai and in Hong Kong. The 2nd Plaintiff and the 4th Defendant also invested together and would socialise with each other. Given all of this, the 2nd Plaintiff says that he came to trust the 4th Defendant implicitly as a man of good judgment and integrity.
6. In late 1996, CIL wished to raise more capital which it decided to do by issuing new shares. This was done by a private placement of new shares and the 4th Defendant invited his friend, the 2nd Plaintiff to apply for a 5% shareholding by purchasing 22,776,000 shares at $0.58 per share. He acquired these shares on 11 March 1997 at a cost of $13,210,080 which he paid for out of his own funds. The shares were taken up by Silver Stone [the 1st Plaintiff] which he had purchased off the shelf shortly beforehand. Under the terms of the placement, Silver Stone was prohibited from selling the shares for an initial period of six months, that is to say not before 11 September 1997. This in itself would amount to an unlawful market manipulation as the only purpose for such a prohibition would be to maintain the share price of CIL by keeping off the market a substantial quantity of its shares which might otherwise result in a downward selling pressure and consequently reduce the share price.
7. Almost certainly connected to the issue of new shares in CIL was the introduction by the 2nd Defendant, to the 4th and 5th Defendants of a Mainland property development company which I shall refer to by the acronym CRED into which CIL was to invest, such investment being partly funded by the injection of its shares into the Mainland company.
8. Whilst these discussions were going on, the 4th Defendant approached the 2nd Plaintiff and advised him that he should not view his shareholding in CIL as a long-term investment and that he should sell his shares as soon as he was able to on the expiry of the prohibition on sale. He offered to arrange the sale on his behalf, to which the 2nd Plaintiff, who had complete confidence in the 4th Defendant, agreed.
9. On 1 August 1997 whilst he was attending to the affairs of Pacific Granite and Marble Company in Shanghai, his secretary telephoned him to say that the 4th Defendant had sent, by fax, to the Hong Kong office a document which he wanted the 2nd Plaintiff to sign and return to him. He asked her to fax it to him at Shanghai. This document, which has received considerable attention in the course of trial, was in Deed form a Power of Attorney purporting to authorise the 1st Defendant to, amongst other things, sell Silver Stone’s CIL shares at the best price reasonably obtainable. The Power of Attorney was delegable and would subsist until 28 February 1998. Two matters in particular call for attention arising out of this document. Firstly whether, for a variety of reasons, it was a valid appointment of the 1st Defendant either as a Deed, which is what it purported to be or, more informally, as an appointment in writing. Secondly, and perhaps more fundamentally for the 1st Defendant, whether it was actually put to use in the eventual sale of Silver Stone’s shares in CIL. At this stage, it is sufficient to observe that neither the 2nd Plaintiff, who signed for Silver Stone nor the 1st Defendant, as the donee of the Power of Attorney, read it with any degree of care. [See Core Bundle, pages 7 and 8]. Both say that they trusted the 4th Defendant implicitly in this matter.
10. The next significant matter was that on a date just before 20 August 1997, the 4th Defendant asked the 2nd Plaintiff to provide a letter to the stockbrokers [the 3rd Defendant] instructing them to split the shares of CIL in one of the two share certificates which evidenced Silver Stone’s shareholding into two lots, one of 7.5 million and the other of 2.5 million. The letter dated 20 August is at Core Bundle, page 15.
11. By now the hand of the 2nd Defendant began to show in a more overt way. The share certificates and the letter of 20 August were passed to the 2nd Defendant who at no time was a director of CIL, by almost certainly, the 4th Defendant. The 2nd Defendant then arranged for these to be delivered to Miss Ida Ho of the 3rd Defendant. Unsurprisingly, given the way that a stock broking account needs to be operated, Miss Ho told the 2nd Defendant that her firm could not effect any transaction on behalf of Silver Stone unless the company opened an account with the 3rd Defendant and endorsed the share certificates on the back so that they could be registered in the name of any buyer of the shares. As a result, back came the share certificates through the 2nd Defendant to the 4th Defendant together with a set of the 3rd Defendant’s account opening forms so that the 2nd Plaintiff could endorse the certificates on behalf of the 1st Plaintiff and sign the account opening forms with the 3rd Defendant.
12. This was done in early September 1997 by which time the prohibition on sale of the shares was shortly to expire. The 4th Defendant saw the 2nd Plaintiff at his office in Hong Kong and got him to endorse the share certificates on behalf of the 1st Plaintiff and he also signed the account opening forms designated for cash transactions as opposed to margin trading [Core Bundle 10-11]. These also came with a Directors Resolution [Core Bundle 16], the 1st Plaintiff’s Certificate of Incorporation [Core Bundle 13], its Memorandum and Articles of Association [Core Bundle 20-45] and the 2nd Plaintiff’s copy Hong Kong Identity Card [14]; all of these documents also being necessary in order that the account with the 3rd Defendant could be opened and operated. These documents together with the endorsed share certificates [Core Bundle 3-6] were despatched to the 3rd Defendant.
13. This having been done the account with the 3rd Defendant was established on the terms set out in the account opening forms. Certain basic obligations need to be referred to at this stage. The 3rd Defendant accepted custody of the 1st Plaintiff’s share certificates and was retained as the 1st Plaintiff stockbroker. Mr Barlow, for the Plaintiffs has referred to a number of basic provisions of the account opening forms. Firstly, that the only authorised signatory on behalf of the 1st Plaintiff, for the account to be operated, was the 2nd Plaintiff. Only he could give instructions. The 1st Plaintiff’s telephone number and business address in Hong Kong appear on the documents [see Core Bundle 9] with the result that the 2nd Plaintiff was easily contactable by the 3rd Defendant for that purpose. Secondly, the 3rd Defendant agreed with its clients that all transactions that it undertook would be in accordance with the relevant provisions of the Rules of the Stock Exchange and the Laws of Hong Kong which would then have included the, now repealed, Securities Ordinance, Cap. 333. And lastly, under Clause 11 of the Agreement, the 3rd Defendant was bound :
“… not without [the 1st Plaintiff’s] prior written consent deposit any one of our securities … or lend or otherwise part with possession of any such securities for any purpose [Clause 10, see Core Bundle, page 11].”
These were, of course, all part of the 3rd defendant’s own standard terms of contract with its clients and so no point can or has been taken on its behalf that these terms did not regulate the agreement between it and the 1st Plaintiff. The original of the form was kept by the 3rd Defendant it having made discovery of these documents in its list of documents.
14. The 2nd Plaintiff, trusting in the 4th Defendant, says that he was led to believe by him that the shares had not been disposed of because the price was not right and that the share certificates were in the safe custody of the 3rd Defendant. Nobody has suggested otherwise to him in cross-examination.
Stock borrowing?
15. Central to the Plaintiffs’ case is that, unknown the 2nd Plaintiff, from early 1997 after the 1st Plaintiff’s account had been established with the 3rd Defendant, the 4th and 5th Defendants together with the 2nd Defendant, through his company the 6th Defendant, unlawfully “borrowed” the 1st Plaintiff’s shares in CIL. I must now recount the mechanics of how this was achieved and in this regard, after the 4th Defendant had persuaded the 2nd Plaintiff to part with the 1st Plaintiff’s share certificates, sign the Power of Attorney and open the 1st Plaintiff’s account with the 3rd Defendant, it was the 2nd Defendant who was the prime mover having regard to his close relationship with Miss Ida Ho at the 3rd Defendant. The constant theme of her evidence is that whenever she carried out the instructions that he purported to give her on behalf of the 1st Plaintiff, which on any view of the matter were not in accordance with the agreement between the 1st Plaintiff and the 3rd Defendant, she did so because he had assured her that he had the 1st Plaintiff’s authority to do so and that, in due course, he would be able to present her with that authority to regularise the position. It seems to me inconceivable that an arm’s length relationship between the 2nd Defendant and a stockbroker, in the position of the 3rd Defendant, would have resulted in anything other than a refusal to act unless and until specific authorisation in writing had been forthcoming from the 1st Plaintiff’s authorised signatory, in this case the 2nd Plaintiff.
16. There was of course the Power of Attorney but that was never used and it was not because, despite all the trouble that the 4th Defendant had gone to in order to get the 2nd Plaintiff to sign it as a matter of urgency, it was on its face seriously defective. I will need to return to this further in due course, but for present purposes all I need to draw attention to is the fact that although it had been signed on behalf of Sliver Stone, it was a company called La Seewin Limited which purported to appoint the 1st Defendant as its attorney. This glaring error had not been noticed by either signatory. La Seewin Limited was another shareholder in CIL and no doubt that company also had prepared Powers of Attorney on its behalf and that is why, what is almost certainly, a typing error came about. Nevertheless, as a Power of Attorney for Sliver Stone it was not worth the paper it had been prepared on because, despite all her trust in the 2nd Defendant, I cannot imagine that Miss Ho would have accepted such a document from the 2nd Defendant as his authority to act on behalf of the 1st Plaintiff. And this is why Mr Barlow, quite rightly in my judgment, surmises that it was never used. In such circumstances, the relationship between the 1st Plaintiff and the 3rd Defendant was solely regulated on the basis of the account opening forms under which the share certificates were deposited into the safe custody of the 3rd Defendant.
17. The 2nd Plaintiff’s evidence is that once he had opened the 1st Plaintiff’s account with the 3rd Defendant, he had sole control of that account into which he had deposited CIL’s share certificates. So far as he was concerned the Power of Attorney had now been superseded by the agreement/account opening forms with the 3rd Defendant.
18. The reality was quite contrary to his expectations. At this juncture the crucial witness becomes Miss Ida Ho. Only she has been able to give a first hand account of what happened. Mr Kwok who gave her instructions has decided not to give evidence and so I have no explanation from him as to why he gave her these instructions and on what basis he considered that he was authorised to do so.
19. Having received the documents from CIL, which I have already referred to, and which went with the account opening forms, Miss Ho accepted the 2nd Defendant’s instruction to sell, as she puts it at paragraph 15 of her witness statement [Bundle B/73] :
“… around 10,000,000 shares without disturbing the market price significantly.”
On 11 September, she sold 8,804,000 CIL shares in six lots at prices ranging from $1.00 to $0.95 which was at a very healthy profit on the placement purchase price of $0.58.
20. This very significant disposal of CIL shares was transacted by Miss Ho purely on the 2nd Defendant’s say so, that he was authorised to act on the 1st Plaintiff’s behalf. As Mr Barlow has correctly observed, it would have been perfectly straightforward for Miss Ho to have taken the precaution of telephoning the office number of Silver Stone, which she had available on the account opening form and asked to speak to the 2nd Plaintiff, the named sole authorised signatory. She did not do this, which is why this litigation is now taking place. She had allowed herself to become convinced by the 2nd Defendant that he had the authority to give the instruction to sell and that in due course he would made good that authority in writing.
21. What Miss Ho did was contrary to the penal requirements of the Securities Ordinance [Exhibit P7], the Securities and Futures Commission’s Guidelines for registered dealers [Exhibit P8] and the 3rd Defendant’s own internal procedures [Exhibit P9]. When these matters were put to her in cross-examination she could provide no justification for what she had done.
22. The proceeds of sale of the shares amounted to $8,465,101.04. The documents’ evidencing the sale show that the sale was made on the 3rd Defendant’s client account no. 290079-029(U) held by the 1st Plaintiff. What should have happened is that, under sections 75 and 84 of the Securities Ordinance, the 3rd Defendant was required to issue a contract note for the 1st Plaintiff and send that to the 1st Plaintiff, and upon settlement of the trade place the proceeds of sale into its trust account for the 1st Plaintiff. Although a contract note was issued for the 1st Plaintiff, Miss Ho accepts that she did not send it to her client as she should have done. Whilst Miss Ho has sought to justify what she did on the basis that all brokers do not comply with section 75 of the Securities Ordinance, the fact is that this section is viewed with the utmost seriousness by the regulatory authorities because its purpose is to prevent brokers from switching trades, thereby protecting the client and it also protects brokers because it provides proof if a client seeks to deny liability for a transaction.
23. If matters were not bad enough by that stage, they were to worsen because, according to Miss Ho, on the following day, the 12th September, the 2nd Defendant instructed her to switch this transaction out of the 1st Plaintiff’s account into the name of his own company, the 6th Defendant. It is difficult to accept that she would have taken such a serious step without express written authority from the 1st Plaintiff through the 2nd Plaintiff but this is precisely what she did on the basis of the 2nd Defendant’s word that he had authority to give such an instruction.
24. This has all been recorded in the 3rd Defendant’s documentation. Miss Ho accepts that she switched the trade from the 1st Plaintiff to the 6th Defendant. The contract note 3021967 [Core Bundle 25] evidences this. She also changed the name of the 3rd Defendant’s account for the 1st Plaintiff’s account no. 290079-029(U) to the 6th Defendant and appears to have backdated the contract note to the previous day. Because she had not sent the copy contract note to the 1st Plaintiff (no. S021921), the 2nd Plaintiff was simply unaware of what was going on with his company’s (in reality his) shares. Miss Ho accepts that she carried out these procedures.
25. When processes such as these are gone through other consequential procedures need to be implemented. This is all done under the scriptless trading regime. The appropriate credits with CCASS were switched to reflect the 6th Defendant’s ownership of the shares rather than the 1st Plaintiff the real and lawful owner.
26. The effect of all of this was that the 6th Defendant became the registered owner of the 1st Plaintiff’s shares. The 6th Defendant now had standing to its credit all of the 1st Plaintiff’s 20 million shares in CIL. On 15 September, the 3rd Defendant issued a cheque to the 6th defendant in the sum of $8,465,101.04, being the proceeds of sale of the 1st Plaintiff’s 8,804,000 shares and on 3 October it transferred the 1st Plaintiff’s remaining 11,196,000 shares to another stockbroker, KG Investments Securities (HK) Limited on the 2nd Defendant’s instructions. These two transactions being evidenced at Core Bundle 27-29 and in Miss Ho’s witness statement — Bundle B, page 76, paras. 26-27 and at Core Bundle 30-31 and again at para. 27 of Miss Ho’s witness statement. All of this being done on the 2nd Defendant’s verbal assurance that he had the 1st Plaintiff’s authority to give them instructions.
27. By 3 October the 1st Plaintiff’s shares had either gone, as to 11,196,000 of them to KG Investments (supra) who had probably disposed of them by November 1997 and the remainder, represented by the proceeds of sale of nearly $8.5 million, had been paid to the 6th Defendant.
28. For reasons which are not clear, because the 2nd and 4th Defendants have decided not to give evidence, and they would almost certainly know why, a Margin Trading Account had been opened with KG Investments for the 1st Plaintiff but that account was never activated and there is no question that the remaining CIL shares did go into the 1st Plaintiff’s account with that stockbroker.
29. In April 1998, the 2nd Plaintiff who was short of funds due to the Asian economic crisis independently sold his remaining 2.776 million CIL shares, but it was not until late 1998 that the 2nd Plaintiff really came to know what had happened to the bulk of his CIL holdings. The 4th Defendant had been avoiding him and not returning telephone calls. He then instructed solicitors who, after some difficulty, made contact with Miss Ho and a lunch meeting was arranged with her and with a Mr Nie, the 2nd Plaintiff's solicitor to find out what had happened to the CIL shares. As a result of that meeting, a clear picture emerged of what the 2nd Defendant had been doing and as to Miss Ho’s, and through her, the 3rd Defendant’s complicity by following the 2nd Defendant’s unauthorized instructions.
30. What followed, which is not at all in dispute, can be taken more shortly. The Plaintiffs’ solicitors then wrote to the 1st, 2nd and 4th Defendants demanding explanations. In January 1999, the 2nd Plaintiff and the 4th Defendant met. When confronted with the facts the 4th Defendant blamed the 2nd Defendant, who he said had cheated him. Given their longstanding friendship, the 4th Defendant promised to compensate the 2nd Plaintiff himself. He agreed to enter into a Deed of Settlement, negotiated by solicitors, under which he would pay the 2nd Plaintiff $12 million being the approximate purchase price of 20,000,000 CIL shares under the private placement. This Deed is dated 7 January 1999 and is in the Core Bundle, pages 83-88. Under the Deed, it was agreed that the 1st Plaintiff would forbear from suing the 1st Defendant provided the 4th Defendant paid the sum of $12 million by eight post-dated cheques of $1.5 million each [Core Bundle 94-100] and also provide a guarantor for the payment of the $12 million. The 4th Defendant was able to secure the 5th Defendant to provide such a guarantee [Core Bundle 89-92] by which the 5th Defendant guaranteed the 4th Defendant’s obligations under the Deed. The first two of the 4th Defendant’s cheques were honoured but thereafter he defaulted on his obligation save for some part payments. He has paid $3,792,000 but, since September 1999, no further payments have been made by him.
31. The Plaintiffs’ solicitors then pressed the 4th Defendant to comply with his obligations under the Deed of Settlement and then informed the 5th Defendant that having regard to the 4th Defendant’s default he was now at risk on his guarantee. On 16 November 1999, the 5th Defendant sent a letter stating that he considered himself merely a mediator in the matter and referred them to the 2nd Defendant to whom he had passed on the solicitors’ letter, he being, according to the 5th Defendant, the principal party.
32. On 3 January 2000, a formal demand was made of the 5th Defendant on his guarantee for payment within 14 days. No payment has been forthcoming. All the Defendants were then sent letters before action.
33. The first Power of Attorney, to which I have already referred, not having been shown to Miss Ho and playing no part in the sale of the 1st Plaintiff’s shares as had been contemplated when it was executed, now needs to be further considered in relation to a second Power of Attorney which is in the Core Bundle at pages 17 and 18. This second Power of Attorney is dated 10 September 1997, under which the 1st Defendant purports to delegate his powers under the first Power of Attorney to Asia Glory [the 6th Defendant]. This second power was pressed into service by the 2nd Defendant following a meeting that he had with Ida Ho and her father, the principal of the 3rd Defendant. Miss Ho’s evidence is that she had to resort to threatening going to the police before she was able to get the 2nd Defendant to produce his promised letter of authorisation from the 1st Plaintiff. When it came it was this second Power of Attorney. This document is of prime importance to the 3rd Defendant’s defence in the action. Without it producing some form of sanction for the 3rd Defendant’s conduct, be it as a valid Power of Attorney or a more informal but valid appointment of the 2nd Defendant to act for the 1st Plaintiff, the 3rd Defendant’s defence must be dead in the water.
34. I will need to consider its effect presently. Mr Barlow says that it must, on the evidence, be a forgery in the sense that it tells a lie about itself. It purports to have been dated 10 September 1997 when it simply could not have been dated on that day. I will leave over Mr Barlow’s analysis until I consider the rival contentions on the effect of this document in due course.
The claims and their quantum
35. This matter is made slightly more complicated than one might expect from the factual background that I have just provided. This is so because the basis of each Defendant’s liability and the quantum of damages created by the differing bases needs to be separately considered.
36. The primary claim against all the Defendants, save for the 5th Defendant, is in conversion of the Plaintiffs’ 20,000,000 shares in CIL. The 3rd Defendant faces two alternative claims. The first is for breach of contract with the 1st Plaintiff only, based on the account opening forms, for parting with the 1st Plaintiff’s CIL shares without authority and for the consequent losses flowing from that breach, together with a further limb based on the 3rd Defendant’s alleged liability to account to the 1st Plaintiff for its money had and received, which are the proceeds of sale of 8,804,000 of the 1st Plaintiff’s CIL shares. The 4th Defendant faces an additional claim for fraudulent misrepresentation and/or for the sum of $5,208,000, being the amount outstanding under the Deed of Settlement to which I have already made reference. Finally, the 5th Defendant’s liability is said to arise only under his guarantee of the 4th Defendant’s obligations under the Deed of Settlement also in the amount of $5,208,000.
How their liability is said to arise
37. Mr Barlow, who has provided me with a most comprehensive and helpful note of his final speech has set out how the amounts of the claim against each Defendant is arrived at in section 3 from pages 18-20.
38. He begins with the case against the 3rd Defendant relying on an alternative claim based on breach of contract. At the start of the trial, I refused him leave to amend, late, his pleading to specifically allege a case in contract. Undaunted by that refusal he presses on, submitting that the facts have been sufficiently pleaded and that provided he can prove those facts, he is still not precluded by that refusal from getting home on a breach of contract. He relies on the fact that the deposit or bailment, to put it in a perhaps more legalistic way, of the share certificates stems from the contract with the 3rd Defendant’s as evidenced by the account opening forms. This factual basis appears in the current pleaded case as well as from voluntary particulars which Mr Barlow has provided. He relies on the case of In re Vandervell’s Trust (No. 2) (1974) 1 Ch. 269, 321G-322B where Denning MR remarked that :
“It is sufficient for the pleader to state the material facts. He need not state the legal result. If, for convenience, he does so, he is not bound, or limited to, what he has stated. He can present, in argument, any legal consequence of which the facts permit.”
Much the same was said by Lawton LJ at 324D-H :
“As to the pleading point, it is pertinent to bear in mind what, under the Rules of the Supreme Court, should be put into pleadings. Ord. 18, r. 7, provides as follows :
‘Subject to the provisions of this rule, and rules 7A, 10, 11 and 12’ (none of which are relevant in this case), ‘every pleading must contain, and contain only, a statement in a summary form of the material facts on which the party pleading relies for his claim or defence, as the case may be, … and the statement must be as brief as the nature of the case admits.’
It follows, so it seems to me, that the question for decision in this case is whether the material facts have been set out in the pleadings, not whether Mr Mills made submissions before this court as to legal consequences which had not been set out. Much the same kind of point was taken before this court in Lever Brothers Ltd v Bell [1931] 1 K.B. 557. When dealing with it Scrutton L.J. said, at pp. 582-583 :
‘In my opinion the practice of the courts has been to consider and deal with the legal result of pleaded facts, though the particular legal result alleged is not stated in the pleadings, except in cases where to ascertain the validity of the legal result claimed would require the investigation of new and disputed facts which have not been investigated at the trial.’”
39. Mr Barlow also seeks support from the case of Tai Seng Bank Ltd v Wong Hoi-wai (1968) HKLR 145, a decision of the Full Court where Huggins J (as he then was) drew attention to section 9(g) of the Supreme Court Ordinance [now S. 16 High Court Ordinance], which requires the court to :
“… grant all such remedies whatsoever as any of the parties … may appear to be entitled to … so that, as far as possible, all matters so in controversy between the said parties respectively may be completely and finally determined, and all multiplicity of legal proceedings … avoided.”
Huggins J then went onto observe at the foot of page 147 et seq that :
“The court will not however grant relief unless it is supported by the facts alleged in the pleading of the claimant and is not inconsistent with that relief which is expressively asked for …”
40. Mr Keith Yeung for the 3rd Defendant takes the sharpest objection to the Plaintiffs’ seeking to pursue a case in contract where I have already refused an application to amend the amended statement of claim to specifically plead such a cause of action.
41. He refers to Leung Kin Fook v Eastern Worldwide Co. Ltd (No. 2) (1997) 1 HKC 524. In that case, the Plaintiffs had sued for the loss of a barge which had been chartered to the Defendant. The statement of claim pleaded the contractual arrangements for the charter. Nevertheless, damages were claimed on the basis of bailment only which obviated the need for the Plaintiff to aver and prove how the loss of the barge occurred, what were the contractual duties that were owed to the Defendant and, how it was in breach of those duties. A subsequent application was made to amend the statement of claim to plead breach of both contractual and tortious duties. The judge refused leave to amend holding that the proposed amendments pleaded new causes of action which were now time barred and because they did not substantially arise from the same facts of the original cause of action, he felt unable to exercise his powers under O. 20 r. 5(5) of the Rules of the Supreme Court to allow the amendments notwithstanding the expiry of the limitation period. The Court of Appeal reversed the judge on the basis that although it was proposed to allege new causes of action, this all arose out of the same factual background and the same contractual arrangements were being relied on. In such circumstances, the judge could have and should have exercised his powers under O.20 r.5(5) to allow the amendments.
42. The real point, so far as this case is concerned, is that the application to amend was one made before the trial. In this case it was made on the first day of the trial. Lateness sounding in the discretion, I refused leave to amend (see my ruling in this regard). This being so Leung’s case can only provide limited assistance as to whether notwithstanding, my refusal to amend, Mr Barlow is still be able to come home on any breach of contract as he may be able to prove.
43. Mr Yeung submits that by only pleading a case in conversion and in quasi-contract, for money had and received, the Plaintiffs have avoided having to plead the terms of the contract (express or implied), the nature of the contractual duties of the 3rd Defendant, the alleged breaches and how and when they arose.
44. To support the importance of all of this, Mr Yeung draws attention to O.18 r.12 of the Rules of High Court , the note to which (18/12/3) says that :
“The pleading should state the date of the alleged agreement, the name of all parties to it, and whether it was made orally or in writing, in the former case stating by whom it was made and in the letter case identifying the document, and in all cases setting out the relevant terms relied on …”
Bullen & Leake 13th Edition is to the same effect, see pages 269-270. The importance of precise pleading of a cause of action based on a breach of contract is well illustrated in these passages and so for this reason, I propose to set them out in full.
“The material terms of the agreement which are relied on in the instant case should be set out. If the precise words are of special significance, they should be set out verbatim. But it is in general sufficient to state the effect of any document or the purport of any conversation as briefly as possible, without setting out the whole document or conversation, and the precise words should not be stated unless they are themselves material (see R.S.C., Ord. 18, r. 7(2) and see Bristow v. Wright (1781) 2 Doug. K.B. 665, per Lord Mansfield C.J.). Any condition precedent, the performance or occurrence of which is intended to be contested, should be distinctly specified in his pleading by the plaintiff or defendant (as the case may be), and, subject thereto, a plea of the performance or occurrence of all conditions precedent necessary for the case of the plaintiff or defendant shall be implied in his pleading (see Ord. 18, r. 7(4) and Jefferson v. Paskell [1916] 1 K.B. 57 p. 74).
After the terms of the agreement have been clearly stated the plaintiff must show whether his claim is founded under or by virtue of the terms of the agreement or whether it is founded upon a breach of the agreement. In the latter event, the plaintiff must state how it is alleged that the defendant has failed to fulfil or to comply with or has broken the relevant terms of the agreement and in what particulars. If a plaintiff has sustained any special damage, this must be expressly claimed with all requisite particulars (see Hayward v. Pullinger and Partners Ltd. [1950] 1 All E.R. 581, and Anglo-Cyprian Trade Agencies Ltd. v. Paphos Wine Industries Ltd. [1951] 1 All E.R. 873).”
45. The question then becomes this: how do these pleading requirements sit with what appears in the judgments in re Vandervell’s Trust supra and the other cases referred to by Mr Barlow which are to the same effect? The answer becomes clear from a closer reading of these cases where the factual issues had been pleaded in a much more detailed way so that the judge could, from those pleaded facts, come to the unpleaded legal consequence that the Plaintiff, in these cases, was contending for. In this case, the pleading is very much based on a case in conversion. I have already declined to allow the amendments due to the lateness of the application as a result of which the 3rd Defendant has not been troubled to consequentially amend its defence. Having refused the amendment it really would be very curious indeed for me to allow Mr Barlow to come in by a side door, as it were, and press for a result on an additional cause of action. That would be an unfair course to take from the 3rd Defendant’s point of view and where, contrary to Mr Barlow’s submission, I am disposed to hold that on the basis of what is presently pleaded in the amended statement of claim is not sufficient to allow me to award the Plaintiff’s damages for breach of contract should they prove the currently pleaded factual basis. In my judgment, Mr Barlow would have had to obtain leave to re-mend, as he had applied for, which application I have already declined. In such circumstances, I do not propose to entertain any claim based on breach of contract and I will, therefore, proceed soley on the Plaintiffs’ cases as presently pleaded.
46. Even if he fails to get home in contract, Mr Barlow is still left with the same measure of damages, the measure in conversion and contract being the same in these circumstances. For the tort of conversion, the measure is the value of the chattels, being the 1st Plaintiff’s two share certificates at the date of the conversion. In this regard the Privy Council’s decision in BBMB Finance (Hong Kong) Ltd v Eda Holdings Ltd [1990] 2 HKLR 74 is relevant. The opinion of the Board given by Lord Templeman is sufficiently reproduced in the headnote to the report. In that case shares deposited as security for a loan were sold by the Appellant for $5.75 a share but the purchaser’s cheque in payment of the shares was never presented. Replacement shares were purchased by the Appellant for $2.4 per share. The trial judge assessed damages at $5.75 per share less the $2.40 per share value of the replacement shares. The judge was upheld by the Court of Appeal and on appeal to the Privy Council, the Appellants contended that the Respondent had suffered no loss since they had received the shares that they were entitled to. The Privy Council held that :
“1. The general rule is that a plaintiff whose property is irreversibly converted has vested in him a right to damages for conversion measured by the value of the property at the date of the conversion. (Solloway v. McLaughlin [1938] AC 247 followed, Brandeis Goldschmidt of Company Ltd. v. Western Transport Ltd. [1981] 1 QB 864 and Williams v. Peel River Land and Mineral Co. Ltd (1886) 55 LT 689 distinguished.)
2. The failure by the appellant to collect the sale price of the converted goods could not mitigate or reduce the damages recoverable, nor alter the measure of damages.
3. The sale of the shares constituted an irreversible conversion by the appellant. The respondent lost the value of the property at the date of the conversion and thereupon became entitled to damages for conversion equal to the market price at the time that the conversion occurred.”
47. Applying that reasoning to the facts of this case, Mr Barlow submits that the damages to be awarded under this head should be the value of the 1st Plaintiff’s shares on 11 and 12 September 1997 (the date of their sale]. He suggests that as the time of conversion on 12 September cannot be determined on the evidence, the average net price per share sold on 11 September should be applied, this being $0.9615 per share. This sum multiplied by 20,000,000 shares comes to $19.23 million which would also have the effect of subsuming the Plaintiffs’ other claim for money had and received. His calculations appear at Annexe B to his written closing submission.
48. As against the 4th Defendant, the 1st Plaintiff’s claim is for conversion [amended statement of claim, paras. 1B to 5] or alternatively, for fraudulent misrepresentation [amended statement of claim, paras. 17A to 17D] the measure of damages being the same as for conversion with the same result in money terms as that against the 3rd Defendant, less the amount that he has already paid the Plaintiffs’ under the Deed of Settlement.
49. As against the 5th Defendant, the 1st Plaintiff’s claim comes from the guarantee which amounts to $5.208 million plus interest. Annexe C provides the calculation.
50. In respect of interest on the claims which have also been calculated in the annexe’s Mr Barlow is asking for prime rate plus 1% which he supports by references to Hong Kong Civil Procedure 2006, Vol. 1, paras. 6/L/10 and 11, page 74 and the Court of Appeal decision in Komala Decof & Co. v Pertamina (1984) HKLR 219. The reasoning being that interest should be paid to a Plaintiff as compensation for being kept out of his money which the Defendant ought to have paid him when liability arose.
Some points on the law relating to conversion
51. As this is the principal basis for most of the Defendants alleged liability, I need to say something, albeit briefly, about the salient aspects of the tort which, if the facts favour the Plaintiffs, will establish liability against them.
52. Given the fact that in 1977, England and Wales codified its law which resulted in changes to the law on conversion and the abolition of the torts of detinue and trover, the law in that jurisdiction now differs somewhat from the position in Hong Kong which remains based on the old common law. This being so, Mr Barlow has sought to assist me by referring to the text on “Tort Law and Practice in Hong Kong (2005)”. I gratefully adopted in full his summary at pages 25 and 26 of his written submission :
“(a) ‘The tort of conversion is committed when the defendant interferes with the possessory title of the claimant and also causes harm or injury to the claimant’s right or title”: para. 6.24;
(b) ‘In Moorgate Mercantile Co. v Finch (and Read) [1962] 1 QB 701, C.A. Danckwerts, L.J. stated that :
‘a conversion is an act of willful interference, without lawful justification, with any chattel in a manner inconsistent with the right of another, whereby that other is deprived of the use and possession of it. Two elements are combined in such interference : (1) a dealing with the chattel in a manner inconsistent with the right of the person entitled to it, and (2) an intention in so doing to deny that person’s right or to assert a right which is in fact inconsistent with such right.’
It is an intentional act that includes unlawful taking away, receipt, disposal, sale, purchase, consumption or appropriation of another person’s property. The defendant must have wrongfully appropriated another person’s goods for his own use or for a third party’s use, or unlawfully deprived the owner permanently of the use or possession of them or a substantial or indefinite period, or destroyed them or changed their quality.’: para. 6.25;
(c) share certificates are capable of being the subject matter of a conversion, e.g. BBMB Finance (Hong Kong) Ltd v Eda Holdings Ltd [1990] 2 HKLRD 74: para. 6.27;
(d) not all conversions will necessarily result in loss or damage to the claimant but liability for the tortfeasor in strict e.g. R.H. Willis & Son v. British Car Auctions Ltd [1978] 1 W.L.R. 438 (C.A.): paras. 6.32 and 6.36;
(e) wrongful dispossession of the claimant’s title to the chattel constitutes conversion e.g. Tyrone Crystal Ltd v European Asian Bank & Anor [1985] 2 HKC 762 per Mantell, J.; and Yien Yieh Commercial Bank Ltd v Kwai Chung Cold Storage Co Ltd [1988] 2 HKLR 569 (C.A.)—where the Defendant was lawfully in possession of the goods but prima facie liable in conversion for its unauthorised parting with possession (but was saved by an exemption clause); para. 6.33;
(f) ‘Conversion by transfer or wrongful parting. This is transfer of some part of the right over the property. A person is liable for conversion where he delivers, by way of sale or by way of gift, another person’s goods without authority to a third party or he deals with the goods inconsistent with the right of the person so entitled. In such a case the defendant must deliver the goods, and even a constructive delivery, for example by way of endorsement of a document of title, transfer on books of a warehouseman, or a purported sale by a person who is non-owner of goods which are already in possession of the potential buyer will give rise to a cause of action for conversion.’: para. 6.37; and
(g) ‘Conversion by destruction or misuse. If a person deliberately destroys another’s goods without authority he is liable in conversion, e.g. spinning cotton into yarn, or grinding corn into flour or processing raw goods without authority of the persons to whom the goods belong may constitute conversion.’: para. 6.38.”
53. In applying these principles to the evidence before me, Mr Barlow says this :
“Thus, on the above principles, the unauthorised surrender to a third party of share certificates, by a baillee (who, otherwise, is lawfully in possession of those share certificates,) for the purpose of their destruction and replacement with closes in action which the baillee intends to appropriate to another party— clearly constitutes conversion. As in the BBMB Finance case, the tortfeasor does not escape his strict liability by a retrospective re-interpretation of the consequences of the act of conversion. The submission for D3 that ‘The only different would be a different share certificate — from CCASS’ is not only factually incorrect but it is misdirected (just like BBMB’s purchase of ‘replacement shares’).”
The Defences
(i) The 1st Defendant
54. Although there has been much cross-examination of this Defendant as to his signature of both Powers of Attorney, the case against him falls to be disposed of shortly. For all his long service in the police force and for all his fine traditional qualities of integrity and the earned respect of others, he must come out of this rather sordid saga looking extremely foolish. This he puts down to his complete trust of the 4th Defendant. I have formed the opinion that the 1st Defendant is basically a rather simple man, certainly too simple for the world of finance and commerce which is perhaps more fitted for the younger generation of individual in Hong Kong who is better educated, more sophisticated and therefore better suited to this kind of occupation. Frankly, it beggars belief that somebody like the 1st Defendant should be able to find himself on the Board of a publicly-listed company when clearly he lacks the necessary knowledge and expertise for such a position. He is clearly not fitted for such responsibility. The investing public is entitled to expect more of directors of public companies particularly where glossy annual reports and prospectuses can be drafted to provide a misleading description of the experience and suitability of prospective or current directors. In this Defendant’s case, the CIL annual report has produced such a result. What this Defendant was prepared to do was to sign two important legal documents which purportedly empowered him to sell, either personally or by delegation, millions of dollars worth of another person’s shareholding and this he did without taking a moment to read the document with any degree of care. This, in the circumstances, demonstrates a level of recklessness which amply demonstrates his lack fitness to hold the office of director of a public company. Nevertheless, in the event this grossly cavalier approach has not been causative of the loss of the 1st and 2nd Plaintiffs shareholding because the evidence has amply demonstrated that neither Power of Attorney played any part in the sale by the 3rd Defendant of the Plaintiffs’ CIL shares. This being the case, I do not propose to consider the validity or otherwise, in one form or another, of the two Powers of Attorney at this stage. This is more conveniently done when I consider the case of the 2nd, 3rd and 6th Defendants.
55. As Mr Barlow, I think, now has to accept, as the evidence has developed in the course of the trial the fact that these two Powers of Attorney were never deployed in the sale of the shares means that the case against the 1st Defendant must fail. The only way that this action could have been brought to a successful conclusion against the 1st Defendant would have been by showing that the Powers of Attorney formed part of the chain of causation, if I can express it in this way, that resulted in the 3rd Defendant selling, on the 2nd Defendant’s instructions, the CIL shares. This simply did not happen and accordingly the action against the 1st Defendant must stand dismissed. If ever there was an unmeritorious victory by a successful defendant it must be this one. The 1st Defendant has succeeded despite his incompetent best efforts to the contrary. This being so this becomes one of those fairly rare cases where costs need not and should not follow the event. The correct order is to say that there will be no order as to costs between the Plaintiffs and this Defendant. The order for costs will be an order nisi, in the usual way, where I am handing down this judgment.
The 4th and 5th Defendants
56. These two defendants can be conveniently paired although the basis of their potential liability differs. In terms of moral culpability, if I were to decide in the Plaintiffs’ favour, the 5th Defendant, of all the Defendants in this matter, is the least blameworthy. Of all of them, he must emerge with his reputation largely in tact.
57. By way of general comment, I need to underline the fact that four of the six defendants have elected not to call evidence including these two. The effect of that decision is that I have nothing from them on oath to explain or contradict the evidence of the Plaintiffs. I must try this matter on the whole of the evidence as it bears on the various issues which I need to decide. Whilst, of course, the Plaintiffs carry the burden of proving their case, for practical purposes once they have crossed the evidential threshold of proof on the preponderance of probability that would be sufficient to secure judgment provided the evidence demonstrates that the various elements of the case against this group of defendants is shown to be present. What they do not have to trouble themselves with is the usual evidential contest which is joined when both sides call evidence and when the Plaintiffs would need to show that his or its evidence is to be preferred to the opponent’s evidence.
58. As against the 4th Defendant, it seems to me overwhelmingly the case that he can have no defence to this action. I am satisfied that it was he who, once he had started his collaboration with the 2nd Defendant, duped the 2nd Plaintiff into parting with his CIL share certificates on the, as it turned out to be, false basis that he would arrange for the sale of his shares once the prohibition on sale had lapsed and that the sale would be at the best price reasonably obtainable. When the sale came, on 11/12 September 1997, it yielded a very handsome profit but for the fact that this profit went elsewhere in the direction of the 2nd Defendant and his company, the 6th Defendant. I am completely satisfied that the 4th Defendant had decided with the 2nd Defendant to “borrow”, the 1st Plaintiff’s CIL shares. For reasons that I cannot determine but which, as a matter of law, I am not required to determine that “borrowing” went wrong and became a permanent deprivation of the proceeds of the shares sold by the 3rd Defendant on the 2nd Defendant’s instructions and of the remaining share certificate which found its way to the other stockbroker KG Investment Asia Limited. All the elements of conversion are present of which the Defendant played a fulsome part with, at the very least, the participation of the 2nd Defendant whose case I will turn to shortly. As a result of the 4th Defendant’s fraudulent misrepresentation and/or conversion, the facts support both of these pleaded cases, the 1st Plaintiff has been deprived of the proceeds of sale of its CIL shares on 11 and/or 12 September which should have gone to it but for the activities of the 4th Defendant. As to quantum the value of shares is fairly taken by Mr Barlow as the average net price per share sold on 11 September 1997 at $0.9615 per share which amounts to $19,230,000.
59. This therefore must be the true basis of the 4th Defendant’s liability to the 1st Plaintiff. There is a parallel claim by the 2nd Plaintiff based on the Deed of Settlement which takes into account the payment of $3,792,000. It seems to me that credit must also be given by the 1st Plaintiff in respect of its claim against the 4th Defendant. It cannot be right that these payments should only be recognized on the claim based on the Deed of Settlement but not on the 1st Plantiff’s claim for fraudulent misrepresentation and conversion. Accordingly, the gross damages of $19,230,000 must be reduced by this amount which will give a net judgment of $15,438,000. This sum must attract interest which I propose to consider at the end of the judgment.
60. As to this parallel claim on the Deed of Settlement by the 1st and 2nd Plaintiffs, which so far as the 4th defendant is concerned is of little comfort to him given that he must now face the consequences of the much larger judgment obtained against him by the 1st plaintiff. Nevertheless, the usefulness of such a judgment is that it brings into view another potential payer of a judgment, being the 5th Defendant who guaranteed the 4th Defendant’s performance under the Deed.
61. Having regard to the terms of the Deed, I am satisfied that the 4th Defendant is in breach of his obligations under it and must therefore suffer the consequences of that to the extent of $5,208,000. In the event that he pays this or any lesser amount, this must go to reduce his liability to that extent against the larger judgment obtained against him by the 1st Plaintiff. To hold otherwise would bring about a duplication of liability and a windfall in favour of the Plaintiffs’. This, therefore, is the effect of these two judgments against the 4th Defendant by the Plaintiffs.
62. I now turn to the case based on the guarantee provided by the 5th Defendant. He has addressed a brief and persuasive submission, the effect of which is that he must be discharged from his obligations under the guarantee based on the fact that crucial misrepresentations were made to him by both the 2nd Plaintiff and the 4th Defendant in order to persuade him to provide the guarantee.
63. The point that the 5th Defendant wishes to make is that the 4th Defendant agreed to enter into the Deed only after the 2nd Plaintiff (an old friend of his) had agreed to omit all references to the 4th defendant’s wrongdoing in the Deed and to place the blame on the 1st Defendant but, as part of the settlement notwithstanding having placed the blame on the 1st Defendant, the 2nd Plaintiff agreed not to sue the 1st Defendant. What the 5th Defendant submits is that he was persuaded to enter into this guarantee on a quite untrue basis for the creation of the Deed which he was being asked to guarantee and that both the 2nd Plaintiff and the 4th Defendant knew this to be the case because, if anything, it was not the 1st Defendant but the 2nd Defendant who was blameworthy. Had the facts been accurately recited he would not have entered into the guarantee.
64. As I have previously observed of all the Defendants, it is the 5th Defendant who emerges from this matter with, at least, some credit. It is not suggested that he is guilty of conversion of the CIL shares and he was prepared, at one stage, to assist the Plaintiffs by providing a guarantee which albeit he now seeks to resile from.
65. For my part, what he has so clearly put forward in his written submission cannot assist him on this guarantee. These are the obligations that he signed up to and it is these obligations that he is now being called to account for. Mr Barlow I think his right when he suggests that the 5th Defendant’s position on the guarantee is so clear as to ordinarily justify the entry of summary judgment under Order 14, as a fortiori it would be against the 4th Defendant as the primary debtor under the Deed. Accordingly, there must be judgment against the 5th Defendant in the sum of $5,208,000 in favour of the 1st and 2nd Plaintiff together with interest thereon which will be addressed presently and costs which will also be an order nisi.
The 2nd and 6th Defendants
66. Mr Szeto, who appears for the 2nd Defendant, has made a series of bold submissions in circumstances where his client has decided not to give evidence. He has invited me to draw a number of inferences based on evidence which comes from other witnesses who have given evidence and from documents which are in evidence.
67. I have no difficulty in concluding on the evidence that this Defendant was the lynch-pin between CIL and its directors, the 4th and 5th Defendants, and the Mainland China partners which were to bring about the CRED collaboration. I also have no difficulty in concluding that what he did with the 1st Plaintiff’s shares related to the required injection of shares and capital which CIL was expected to make into the CRED investment. This fact merely serves to establish the background and the reasons why he did what he did with the 1st Plaintiff’s CIL shares which are the subject matter of the action. Mr Szeto has sought to persuade me, from all the surrounding circumstances, that the 2nd Plaintiff knew of this proposed collaboration. For my part, I am quite unable to come to such a conclusion. The evidence is simply not there for me to make such a finding. This in itself is not fatal to the central argument that Mr Szeto seeks to develop which is that, as a matter of law, there is no basis for the 2nd Defendant to be guilty of conversion.
68. He has postulated a number of bases for the dismissal of the case. The starting point is that, on any view, the 2nd Plaintiff wished the shares to be sold. This after all is why he was prepared to appoint the 1st Defendant as his attorney to arrange for the sale of his shares. This being so he was content for the shares and the essential share certificates to go through the hands of stockbrokers or other individuals who would ultimately process the sale of those shares, which in the event, is precisely what happened.
69. Mr Szeto submits that the Plaintiffs’ real complaint is that having disposed of the shares the 1st Plaintiff did not receive the proceeds of sale. This he submits is not conversion but the tort of detinue. He cites in support of this submission Clerk & Lindsell, 19th Edition, para. 17-08 and from the Canadian case of Toronto DominionBank v Carotenuto, 154 DLR (4th) 627. The text in Clerk & Lindsell is in these terms :
“Wrongfully for these purposes means without the actual permission of the owner. Where the owner intends to transfer dominion to the Defendant or otherwise to sanction the Defendant’s action, there is no conversion and this remains so even though the Defendant or some party is guilty of fraud. Thus it is submitted that obtaining by deception is not conversion; the victim’s proper course is an action in deceit.”
In such circumstances , the 1st Plaintiff must fail, says Mr Szeto, because the shares represented by the share certificates were advisedly handed over by the 2nd Plaintiff for the purpose of the intended sale. The fact that he never got the proceeds is not conversion but something else which the 2nd Defendant is not sued for.
70. This submission, attractive as it appears at first blush, cannot survive the analysis put forward by Mr Barlow which comes form the citations from TortLaw and Practice in Hong Kong, supra [para. 52 above]. What this Defendant did was “to steal” the 1st Plaintiff’s shares by causing them to be sold through the 3rd Defendant and then directing that the 1st Plaintiff’s account with the 3rd Defendant be transferred to that of the 6th Defendant and then having the proceeds of sale paid to the 6th Defendant. This was one continuous transaction, a course of conduct, which amounts to a classic case of conversion. I have no doubt that this part of Mr Szeto’s submission must fail.
71. Nevertheless, he has also put forward another basis in law as to why the action against the 2nd Defendant cannot succeed. In this regard, dates are of importance to his submission. The date of conversion is taken by the Plaintiffs to be the 11th and 12th September 1997. What Mr Szeto submits is that in Hong Kong a Plaintiff has a cause of action in conversion only if at the time of the act of conversion, the Plaintiff was in actual possession of the subject matter of the alleged conversion, being in this case the share certificate. He submits that it is not sufficient that the Plaintiff should have a right to immediate possession but he needs to show that he was in actual possession at the moment of conversion. Mr Szeto submits therefore that this is, if anything, detinue rather than conversion.
72. This argument is based, he says, on an analysis of the historical background of the tort of conversion and other related torts. For my part, I derive no assistance from such an analysis nor from the effects of the changes brought about in England by the enactment of the Torts(Interference with Goods) Act 1977. It seems to me that the 1st Plaintiff’s right, as owner of the share certificates, is what has been violated by their misuse by the 2nd Defendant, together with the consequences of that misuse, in the sense that he has pocketed the proceeds of sale through the conduit of his company, the 6th Defendant and had the remaining certificate transferred to KG Investments. It strikes me that this amounts to the plainest case of conversion.
73. Nevertheless, even if Mr Szeto’s analysis is correct that at the moment of conversion it is necessary for the Plaintiff to be in actual possession then I would have thought that the 1st Plaintiff’s possession must have continued, albeit, through the hands of whoever had the shares, be it the 2nd or 3rd Defendants as its agent. For all these reasons therefore Mr Szeto’s suggested analysis on this basis must also fail.
74. Finally, if all else fails, Mr Szeto submits that even if it is only necessary for the 1st Plaintiff to show that it had an immediate right of possession in order to bring an action for conversion then, on the evidence, such a right cannot and has not been made out.
75. It is at this stage that the 2nd Defendant says that the first Power of Attorney has a decisive part to play in the outcome of the action. It was an irrevocable power of attorney which would only expire on 28 February 1998. Possession of the two share certificates was surrendered in July 1997. Recognising the fragility of any argument that the first Power of Attorney can be a valid one, either as a Deed or under Cap. 31, the document is still to be considered a valid appointment in writing under common law. For reasons which I propose to explore more fully when I come to the case of the 3rd Defendant, I am satisfied that this first Power of Attorney was not valid as a Deed and that, in any event, even if it can be said to amount to an appointment in writing for the 1st Defendant to act as the 1st Plaintiff’s agent, any such appointment must have been revoked or superseded, whichever expression one prefers to use, once the account opening forms were signed and presented to the 3rd Defendant after which everything between the 1st Plaintiff and the 3rd Defendant was regulated on the basis of those forms. Once this is clearly understood, any role played by the 2nd Defendant needs to be shown to have been authorised by the 1st Plaintiff through the 2nd Plaintiff.
76. Once the account was established between the 1st Plaintiff and the 3rd Defendant, the 2nd Defendant had no locus, if he ever had any, which as I propose to demonstrate shortly he did not, to give any instructions to the 3rd Defendant on the 1st Plaintiff’s behalf. What he did was to, in effect, treat the share certificate and the 1st Plaintiff’s account with the 3rd Defendant as his own, which he was able to do because Miss Ho, of the 3rd Defendant, was gullible and foolish enough to allow him to do so.
77. All of this being the case, the 2nd Defendant is guilty of conversion of the 1st Plaintiff’s shares and the proceeds of those shares as well as the remaining share certificate which he directed should be transferred to the 6th Defendant’s account with KG Investments. In effecting this conversion, the 6th Defendant must be equally culpable as the entity which the 2nd Defendant was able to use to bring about his wrongdoing.
78. In respect of quantum, the 2nd and 6th Defendants’ liability is the same as that of the 4th Defendant in the sum of $15,438,000. This amount is less than the gross loss of $19,230,000 which is what the award would have been but for the payments of $3,792,000 made by the 4th Defendant under the Deed of Settlement. This lesser sum represents the 1st Plaintiff’s outstanding loss which it is entitled to recover from these Defendants as it would be entitled to recover from the 3rd Defendant, should it prove its case against this Defendant as well. The matter is not before me but, I can conveniently draw attention to it now, which is that the 4th Defendant may be entitled to claim a contribution from the other Defendants against whom the 1st Plaintiff can prove a claim in conversion. Although this is not a matter that I need to consider; should he wish to, the 4th Defendant may be able to bring proceedings against those Defendants who have also being found to be culpable in conversion, for any contribution in respect of the payment by him of $3,792,000 which he has paid and which has served to reduce the award of damages against the other Defendants by this amount. I say that he may be able to, rather than putting it more definitively, because this might raise a number of issues which I have not considered, which may present him with difficulties which I have not had to consider and upon which I have not had the assistance of argument.
79. Having found these two Defendants liable in conversion, the 1st Plaintiff must also have an order nisi for its costs to be paid by them.
The 3rd Defendant
80. Mr Keith Yeung, for this Defendant, has addressed me at some length on the question of whether the 2nd Defendant was clothed with sufficient authority on behalf of the 1st Plaintiff to give the instructions that he gave Miss Ho in respect of the 1st Plaintiff’s CIL shares. This defence was put on two bases, one coming from the first Power of Attorney and everything that followed it and the other, wisely abandoned at the start of the trial, that the 2nd Defendant had ostensible authority to act in the way that he did.
81. Mr Yeung has analysed the issues in this way :
“a. D1’s authority :
i. whether the 1st Power of Attorney was valid as a deed of power of attorney under the Powers of Attorney Ordinance;
(1) if yes, what were D1’s powers thereunder;
(2) if not, whether the 1st Power of Attorney :
(a) otherwise amounted to a valid appointment in writing;
(b) or otherwise evidenced P1 appointment of D1 as its agent;
(c) and if so what were D1’s powers;
b. D2’s authority :
i. whether the 2nd Power of Attorney was a genuine document;
ii. if yes, whether it was valid as a deed of power of attorney under the Powers of Attorney Ordinance;
iii. if yes, what were D2/D6’s powers thereunder;
iv. if not, whether the 2nd Power of Attorney :
(1) otherwise amounted to a valid appointment in writing;
(2) or otherwise evidenced D1’s appointment of D6 as its agent;
(3) and if so what were D2/D6’s powers thereunder.”
82. He accepts, as he must, that the first Power of Attorney cannot be a valid power under the Powers of Attorney Ordinance, as it cannot pass muster under the requirements of section 2 of this Ordinance. This being so he is left with submitting that the first Power of Attorney is a valid appointment in writing or otherwise evidences the 1st Defendant’s appointment to deal with the shares.
83. For my part, I satisfied that this route to providing the 2nd Defendant with authority to act in the way he did cannot be available to him as soon as the 3rd Defendant insisted on the 1st Plaintiff opening an account with it which regulated its relationship with the 1st Plaintiff under which the 2nd Plaintiff was the 1st Plaintiff’s only authorised signatory. Once one understands that this account and its terms formed the basis of the contractual arrangements between it and the 1st Plaintiff then the first Power of Attorney or any lesser variations of it, such as an appointment in writing of an agent, can have no application. I have already indicated my view in considering the case of the 2nd and 6th Defendants’ liability, that the account opening forms put an end to the Power of Attorney. These forms superseded this power of attorney and anything that followed it such as the purported delegation of those powers by the creation of the second Power of Attorney. This being so, once the first Power of Attorney went, then any more informal appointment in writing of an agent must of necessity also have gone. One then needs to look elsewhere for a basis for the 2nd Defendant’s authority to give the 3rd Defendant the right to act as it did in deposing of the 1st Plaintiff’s shares by sale and by transfer of the remaining unsold shares as represented by the share certificate to the 6th Defendant’s account with KG Investment.
84. As no other basis is suggested on the 3rd Defendant’s behalf, I am completely satisfied that the 3rd defendant’s dealing with the share certificate in the way that I have already considered must have been without authority and in breach of the terms of the account opening forms. The 2nd Plaintiff certainly gave no such authority and the 2nd Defendant had no authority to give these instructions on the 1st Plaintiff’s behalf. This being so, everything which the 3rd Defendant did was completely unauthorised amounting to a conversion of the 1st Plaintiff’s shares represented by the payment of the proceeds of sale of the first tranche of shares to the 6th Defendant and as to the remaining shares represented by the share certificate into the 6th Defendant’s account with KG Investments.
85. This in my judgment is the true basis of the 3rd Defendant’s liability to the 1st Plaintiff. In the event that I am wrong about that I am also satisfied that, even if the account opening forms did not supersede the first Power of Attorney then, that power of attorney could not provide in a less formal sense a valid appointment in writing for the 1st Defendant to act as the 1st Plaintiff’s agent to sell the shares which he then purported to delegate by the second Power of Attorney.
86. With respect to Mr Yeung’s attempt to carve out of the evidence such a valid appointment which the 2nd Defendant consistently failed to produce to Miss Ho until threatened with the police, the fact is that Miss Ho in acting as she did broke many of the most fundamental rules of the Securities and Futures Commission which regulate the conduct of stockbrokers in such circumstances for which she was suspended. Whilst those disciplinary proceedings and the penalty that was imposed do not provide an answer as to whether the 3rd Defendant is liable to the 1st Plaintiff in this action, the Security and Futures Commission’s enquiry covered the same ground that I am required to go over.
87. In respect of Mr Yeung’s attempt to persuade me that the 2nd Defendant was the 1st Plaintiff’s validly appointed agent, Mr Barlow has met these submissions head on in paragraph 10 of his closing note. I uphold those submissions for the reasons given by Mr Barlow. It would have been a veritable travesty of justice if the 2nd Defendant had somehow been able to present himself as a validly appointed agent of the 1st Plaintiff when he had acted in such a high-handed, clandestine and dishonest manner.
88. Whilst, I have held that the agency argument is simply not available to the 2nd and therefore not to the 3rd Defendant, the fact is that had I been put to it I would have held that at no time could the 2nd Defendant say that he was the 1st Plaintiff’s agent.
89. This being the case, the 3rd Defendant is also guilty of conversion for which it must pay damages in the amount of $15,438,000 as well as for the lesser sum of $8,465,101.04 as money had and received in respect of the proceeds of sale of the 8,804,000 shares. This lesser amount is subsumed into the larger award of damages for conversion. The 1st Plaintiff will also have its costs nisi against the 3rd Defendant.
Interest
90. Two issues arise. Firstly, the rate of interest and secondly, the period during which interest is to be awarded. As to the rate, I am satisfied that this must be viewed as essentially a commercial case although liability is tortious. This being so the rate ought to be at 1% about prime rate to compensate the Plaintiffs for being kept out of their money.
91. As to the period, Mr Barlow submits that this should be from the date when repayment should have been due until the last day of the trial. In my judgment, there has been inordinate delay, which Mr Barlow has not really been able to explain. I have a discretion as to the period during which interest should run and it seems to me that the appropriate period should be one of three years, which in my view, would have been the appropriate length of time that it should have taken to bring this matter to a conclusion. Accordingly, interest will have to be recalculated on this basis on the judgment amount of $15,438,000 as against the 2nd, 3rd, 4th and 6th Defendants and on $5,208,000 against the 5th Defendant. Thereafter interest will be at the judgment rate from the date of judgment until payment.
Summary of Judgments
92. (i) Against the 1st Defendant, the action will be dismissed.
(ii) Against the 2nd Defendant and 6th Defendant, judgment for the 1st Plaintiff in the sum of $15,438,000 and in the amount of $8,465,101.04 which is subsumed into the greater amount.
(iii) Against the 3rd Defendant, judgment for the 1st Plaintiff as in the cases of the 2nd and 6th Defendant.
(iv) Against the 4th Defendant, judgment in favour of the 1st Plaintiff in the sum of $15,438,000 and in the sum of $5,208,000 which will be subsumed into the greater amount.
(v) Against the 5th Defendant in favour of the 1st Plaintiff in the sum of $5,208,000.
(vi) Against the 5th Defendant in the 2nd Plaintiff’s favour in the sum of $5,208,000 payment of which to the 1st Plaintiff will have the effect of discharging the judgment in favour of the 2nd Plaintiff.
(vii) Interest on these amounts in the manner set out in paras 89 and 90 above.
(viii) There will be orders nisi as to costs as follows. There will be no order for costs as between the 1st Plaintiff and the 1st Defendant and the successful Plaintiffs will have their costs of the action against the 2nd, 3rd, 4th, 5th and 6th Defendants respectively to be taxed on a party and party basis.
| (Ian Carlson)
Deputy High Court Judge |
Barrie Barlow, instructed by Messrs Jesse H Y Kwok & Co., for the 1st and 2nd Plaintiffs
The 1st Defendant, in person, present
Patrick Szeto, instructed by Messrs Tung, Ng, Tse & Heung, for the 2nd Defendant and 1st Third Party
Keith Yeung, instructed by Messrs Richards Butler, for the 3rd Defendant
The 4th Defendant and 3rd Third Party, in person, absent
The 5th Defendant and 4th Third Party, in person, present
The 6th Defendant and 2nd Third Party, in person, absent
2nd Defendant appeal dismissed: see CACV251/2006 dated 8 May 2007