ADMIS HONG KONG LTD v. JEREMY WATSON AND OTHERS

HCMP 2191/2022

[2023] HKCFI 564

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2191 OF 2022

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BETWEEN

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DECISION

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Introduction

1.  Before me is an application made by Admis Hong Kong Limited pursuant to section 62 of the Trustee Ordinance, Cap 29, by an ex parte originating summons filed on 28 December 2022. It seeks, first, a declaration that money belonging to 39 clients named as the 1^st to 39^th respondents are held by the applicant as trustee and, second, an order that the client money be paid into court.

2.  The total amount is in the sum of US$85,771.21 and HK$17,807.10.

Factual background

3.  The applicant is a futures broker serving individual and corporate investors in Hong Kong. It is licensed by the Securities and Futures Commission to carry on Type 2 regulated activity of “dealing in futures contracts” and Type 5 regulated activity of “advising on futures contracts”.

4.  In about April 2022, the management of the applicant decided to cease business. From May to July 2022, an exercise was undertaken to contact clients with a view to returning their assets to them. 11 clients were successfully contacted and funds were returned.

5.  But there have remained 39 clients whom the applicant was not able to contact during that exercise. The applicant’s efforts included multiple telephone calls made and emails sent during the three months and one letter sent by registered post to the clients’ addresses on record.

6.  The content of the written notice to the clients was as follows:

“Important Announcement: Cessation of Business, Termination of Client Agreement and Asset Disposal

Dear Valued Customer,

ADMIS Hong Kong Limited (hereinafter referred to as "the company") has insisted on providing high-quality futures trading services to customers in the Asia-Pacific region since its establishment. After careful consideration, the company has made the difficult decision to cease business.

Subject to comply with all regulatory responsibilities applicable to our company and no unexpected circumstances, our company will cease business on July 31, 2022, except for the disposal of the remaining assets of our customers due to special circumstances.

In this connection, customers should contact our customer service department to withdraw all account funds no later by July 30,2022. The termination of customer agreements will be carried out in accordance with the relevant terms contained therein, and the relevant accounts will also be closed with the termination of the agreement.

If the customer fails to contact the company to withdraw all account funds on or before July 30, 2022, the company intends to apply to the High Court of Hong Kong in accordance with Section 62 of the Trustee Ordinance (Cap. 29) after the date of cessation of business …” (original emphasis)

7.  In the meantime, there was a change of management in the applicant.

8.  In September 2022, the new management decided that the applicant should continue its operation. However, no action was taken to inform the clients of that decision.

9.  Notwithstanding that change in position, the applicant took out the present application in late December 2022 to pay the unclaimed cash of the 39 respondents into court. In the affirmation in support, the following reason was given for the application:

“Due to recent change of top management and retirement of the Director of Admis, the new management wishes to deal with and resolve all existing legacy issues including the unclaimed funds that have been received years ago and have not been able to be returned to the clients, and is therefore making the present application to pay the unclaimed cash into Court accordingly.”

Legal principles

10.  This is an application made under section 62 of the Trustee Ordinance. I shall adopt the approach which I set out in Re K&R International Ltd [2021] 2 HKLRD 47, [2021] HKCFI 561, paras 39 to 55.

11.  I note at the outset that this is not a case where an application is made to pay client funds into court upon the liquidation of the applicant or the cessation of its business, which is what happened in Re K&R and Re Goldin Equities Ltd[2022] HKCFI 740, another case cited by Ms Michelle Cheung, counsel appearing for the applicant at today’s hearing.

12.  However, the two-stage process referred to in Re K&R should still apply although the court should approach the issue of discretion with specific references to the reasons given as to why the applicant wants a payment in order.

Discussion

13.  As for the first stage, I am satisfied that the applicant holds the client money on trust for the respective clients. This is plain from a reading of clause 7.5 of the standard form client agreement used by the applicant.

14.  As for the second stage, I am not satisfied that on the evidence before me, this is a proper case for the court to exercise its discretion to allow the applicant to pay in the client money which is so far unclaimed.

15.  First, the applicant submits that the accounts which hold the unclaimed money were opened under the former management from a long time ago and the most recent active account was in 2018.

16.  I do not think that is entirely correct on the evidence. The evidence shows that about one-fourth of the accounts are “Last Active” over the past five years (ie from February 2018). In fact, there is one account which is recorded to be “Last Active” on 26 February 2021, which was only two years ago. The account is recorded to have been opened only two months before that in December 2020.

17.  About half of the accounts have activity last recorded in the past ten years.

18.  Overall speaking, I do not think it can be said that these accounts have all remained inactive for a very long time.

19.  Second, the exercise to contact clients was conducted in May to July 2022. It will be recalled that during that period, Hong Kong was in the midst of the fifth wave of the COVID pandemic. Furthermore, border restrictions between Hong Kong and mainland China were in place then (which have only been relaxed very recently). According to the list of clients, about two-thirds of the clients are based in mainland China. The rest have addresses in Hong Kong save that there are a couple of clients with overseas addresses.

20.  The evidence does not reveal that since the exercise from May to July 2022, the applicant has taken any further step to give further notice to the clients. Ms Cheung confirms at the hearing that that is indeed the case.

21.  Given the pandemic situation in 2022, I consider that there is a real likelihood that some of the clients, especially those based in mainland China, might have had difficulty in responding to the applicant’s notices or might not have treated the notices as a matter of priority.

22.  As the burden in this application is on the applicant to demonstrate that it has exhausted all reasonable means to return the client money, the court would expect the applicant to take further steps after July 2022 to follow up with the clients. The travelling restrictions between Hong Kong and mainland China have been lifted recently. There is a likelihood that if the applicant takes further steps to notify the clients now, some of them may make an effort to take back their cash.

23.  I should also point out that according to the call log, one mainland China client did attempt to transfer his money to a mainland account but the transfer was held pending due to fund flow restriction. There was no further response from this client.

24.  In sum, I consider that there are further steps which the applicant can reasonably take to return the client assets, particularly given the recent change in the COVID situation.

25.  Third, in any event, in an application of this kind, I take it as a starting point that the applicant, as the broker and service provider to its clients, has the primary responsibility to look after the client assets, including returning them to the clients in a responsible manner if it wishes to put an end to the relationships. This must remain to be the case even though these relationships were established when the former management was in charge. Furthermore, in the present case, the responsibility assumes more prominence as the applicant is going to continue to remain in operation.

26.  As the applicant’s operation will continue, it is really for it or its new management to provide a proper justification why the applicant should stop keeping the client funds in custody when it is in a position to do so. (This is to be contrasted with cases of liquidation or cessation of businesses.)

27.  In the reason given in the affirmation, the new management of the applicant has regarded the unclaimed client funds as “legacy issues”.

28.  There is no elaboration in the affirmation on what these “legacy issues” are.

29.  In her submissions, Ms Cheung says that there are three aspects to this. First, the retention of unclaimed client money would have an impact on how the applicant complies with the SFC rules. Second, by retaining these accounts, the applicant will have difficulty in complying with the Foreign Account Tax Compliance Act in the US. Third, with these unclaimed funds, the applicant will have difficulty in changing the nature or model of its business which is what the new management intends to do.

30.  If these are the reasons which the applicant says justify the payment in application, they ought to have been set out in the supporting affirmation in the first place. They were not for unknown reasons. I am not prepared to take into account factual matters raised by way of counsel’s submissions. In any event, these three grounds are not straightforward matters. On their face, one does not readily conclude that they provide proper justification for a payment in order.

31.  I have already explained above that not all the accounts are as “dated” as the applicant suggests them to be. It is for the applicant to adduce proper evidence to show why it is impracticable or unduly burdensome to continue to safekeep the funds so far unclaimed. On the materials presently before me, the applicant has not done so.

32.  Fourth, if further steps are taken by the applicant now when the fifth wave of the COVID pandemic seems to be receding, there may well be clients who will come forward to claim their money. From the perspective of these clients, if a payment in order is made today, it seems unfair to subject them to the inconvenience and trouble of having to come to court to make a payment out application. This is particularly so when one considers that the applicant is still around continuing its operation.

33.  Fifth, to allow a payment in is effectively shifting the administrative burden of safekeeping these assets from the applicant to the court. At this stage, given that there may well be clients who will come forward to claim their money, it is doubtful that it is a proper and fair use of the court’s resources.

34.  Sixth, according to the evidence, it is the applicant’s understanding that among the 39 clients, 2 corporate clients had been dissolved. And the applicant came to know that information through verbal confirmation from the previous salesperson who was in charge of the clients.

35.  No company search has been conducted by the applicant to ascertain the status of these two corporate clients. I do not know why that is not done. In any event, property of dissolved companies may vest in the government as bona vacantia under the relevant provisions of the Companies Ordinance, Cap 622. If that is the case, the applicant should deal with money belonging to the dissolved clients accordingly, instead of applying for a payment in order.

36.  Having considered all the relevant factors, I would decline to exercise my discretion to allow the applicant to pay in the money so far unclaimed into court.

37.  Lastly, I would just say that it seems unsatisfactory that after the applicant’s change of mind in September 2022, it has made no attempt at all to retract what it said in the notices sent in May 2022 about its cessation of business. I think it is only proper for the applicant to update the clients of its latest position.

Order

38.  I dismiss the originating summons.

Ms Michelle Cheung, instructed by Liu & Co, for the applicant