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Jane Moir

Clients of CA Pacific Securities and Forluxe Securities are finally getting their shares back - or a proportion of them - almost three years after the brokerages collapsed.

However, a small group of Forluxe investors will remain empty-handed after a High Court ruling which will enter the history books as the first of its kind in the SAR.

The collapse of the brokerages during the Asian financial crisis left liquidators with no choice but to seek court assistance on how to allocate the shares amid hefty shortfalls.

CA Pacific was HK$500 million short when it went under in January 1998.

When Forluxe collapsed a few months later, liquidators were faced with claims to the value of HK$64 million worth of shares - with only HK$16 million on hand.

Just 250 lines of stock were fully available to CA Pacific clients and these will be handed back.

However, for the rest of the shares, Madam Justice Maria Yuen Ka-ning has given cash clients priority - leaving the remnants to be distributed proportionately between the margin clients. She based the ruling on the clients' different contractual positions.

Cash clients were 'the victims of a greater misfortune' because their shares were transferred for the benefit of CA Pacific's margin finance arm when they had never signed any authorisation to that effect.

On the other hand, margin clients' contracts authorised such transfers.

They effectively consented to CA Pacific Finance pledging their shares to enable the finance arm to secure loans.

It was only in the last few trading days that CA Pacific Securities was forced to draw on cash clients' shares in a bid to meet settlement obligations.

The judge noted: 'There is therefore nothing in logic, case law or practicalities that detracts from the fair and just solution of giving priority to the cash clients in each line of stock.'

However, their allocation will be minus liquidation and legal fees, which could be substantial.

Clients also may be forced to relinquish part of their windfall to the Securities and Futures Commission if they received compensation from the regulator.

The SFC will be entitled to take a percentage of the shares recovered, depending on the loss suffered by the investor and the size of payout received from the SFC.

However, in the case of Forluxe, the allocation of shares has been marred by shoddy record-keeping.

This has made it impossible to distinguish between cash and margin clients.

Moreover, as distinct from CA Pacific - where the shortfall was largely due to the sale and retention of shares by CA Pacific's lenders - the share deficiency was partly attributable to the Mui family.

Forluxe chairman James Mui Kwong-nok and his brother Gordon Mui Kwong-yin disposed of clients' shares to satisfy their own financial commitments.

Although judgment has been obtained against them for HK$39 million, it is unclear whether liquidators have received the sum.

The judge was thus forced to consider all Forluxe clients identically. However, rather than merge all the shares into one pool, she classified them into five categories.

Where the available shares equal or exceed claims, clients will recover everything.

In the case of claims exceeding the available shares - about HK$19 million worth - clients will share the stock rateably.

A minority will receive nothing, there being claims but no shares. However, they will be able to claim proceeds of the surplus of shares in the other categories.

Clients can expect to receive their shares in the first quarter next year, according to Forluxe liquidator Nick Hill of Nelson Wheeler Corporate Advisory Services.

'The judge's rulings are very fair and provide a clear basis for distributing the shares that remain,' Mr Hill said. A few logistical matters were outstanding, but effectively the share saga was over.



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