Securities and Futures Commission v. Lam Fai Man (Formerly Known As Lin Huiwen)

HCMA 465/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO 465 OF 2015

(ON APPEAL FROM ESS NO 4564 & 4565 OF 2015)

_______________________

________________________

J U D G M E N T
________________________

Introduction

1.This is an appeal by the appellant against his conviction on two summonses issued by the Securities and Futures Commission (the SFC) after trial before Mr Jason Wan Siu-ming, a Magistrate sitting at Eastern Magistracy (the Magistrate).  He originally appealed against his sentence on the two summonses but that has now been abandoned.

2.At the material time, the appellant was a substantial shareholder of Victory Group Limited (Victory), a listed corporation on the Stock Exchange of Hong Kong Limited (the SEHK).  According to s 311(3) of the Securities and Futures Ordinance, Cap 571 (the SFO) the appellant held a notifiable interest of more than 5% of the issued shares of Victory at the material time. 

3.The offences for which the appellant was convicted concerned his failure to disclose to Victory his sale on 24 May 2013 and his acquisition on 6 June 2013 of a quantity of shares of Victory, contrary to ss 310(1)(a), 313(1)(c), 324(1)(a), 325(1)(a) and 328(a) of the SFO.  He was fined $6,000 on each summons and ordered to pay the investigation costs incurred by the SFC in the sum of $7,240.

Relevant statutory provisions

4.The long title of the SFO sets out the purposes of the legislation which includes the regulation of the securities and futures market and the protection of investors. 

5.Part XV of the SFO provides an extensive regime for the disclosure of interests in securities of substantial shareholders, directors and chief executives of listed corporations in order to provide investors with current and complete information on a timely basis to enable them to make informed investment decisions.  The overall objective of Part XV is to enhance transparency for investors as to who owns or controls listed corporations and who has short positions in the shares of the listed corporations.

6.A substantial shareholder who has more than 5% of voting shares in a listed corporation is under a duty of disclosure and required to give notice to the SEHK and the listed corporation concerned when he acquires an interest in or ceases to be interested in, or the short position which he has, or ceases to have in, the voting shares of the listed corporation. 

7.A director and chief executive of a listed corporation must disclose by notice to the SEHK and the listed corporation concerned his interests, and short positions in any shares in, and his interests in any debentures of, the listed corporation or any of its associated corporations. 

8.A person who fails to make a disclosure in accordance with the regime under Part XV without reasonable excuse commits a criminal offence: ss 328 and 351. 

9.In the present case, the offence concerns the appellant, a substantial shareholder, failing to disclose to Victory, a listed corporation, his acquisition and sale of shares in Victory.  The relevant offence provisions are as follows. 

10.Section 310(l)(a) provides that “where a person acquires an interest in, or ceases to be interested in, voting shares in a listed corporation … then in the circumstances specified in s 313(1), he comes under a duty of disclosure”.

11.The circumstance as specified in s 313(1) relevant to the present case is s 313(1)(c) which consists of two parts:

(i) “the person had a notifiable interest immediately before the relevant time, and has a notifiable interest immediately after the relevant time”; and

(ii) “the percentage levels of his interest immediately before and immediately after the relevant time are not the same.”

12.A “notifiable interest” is defined in s 311(3) as an interest which, when expressed as a percentage of the number of issued shares of the listed corporation, exceeds the “notifiable percentage level” which is defined in s 315(1)(a) as 5%. 

13.The “percentage level” referred to in s 313(l)(c) is defined in s 314(1) as a reference to the percentage figure after it had been rounded down to the next whole number (if the figure is not a whole number).

14.Once it is established, by reference to ss 310(1)(a) and 313(1)(c), that the person is under a duty of disclosure, he is obliged under s 324(l)(a) to “give notification to the listed corporation concerned and to the relevant exchange company of ... the interest which he has, or ceases to have, in the listed corporation.” 

15.Under s 325(1)(a), the person is required to give that notification within 3 business days after the date on which the relevant event occurred if the person concerned “knows” of its occurrence or, alternatively pursuant to s 325(1)(b), within 3 business days after the day on which the occurrence of the relevant event “comes to his knowledge”. 

16.There is a requirement under s 321 that a substantial shareholder who acquires or disposes of interests in shares in a listed corporation through an agent must ensure that he is notified by his agent of any change of interest immediately after its occurrence.  This ties in with s 325 that a substantial shareholder knows of the occurrence when there is any change of interest.  So far as material s 321 reads:

“Where a person authorises another person (the agent) –

(a) to acquire or dispose of, on his behalf, interests in voting shares in a listed corporation;

…

he shall secure that the agent notifies him immediately of acquisitions or disposals of interests,… effected by the agent, which will or may give rise to any duty of disclosure or any duty to give notification under any provision of this Division or Division 3 or 4 with respect to his interests…in those shares.”

17.The particulars of the notification in order to perform the duty of disclosure are provided for in s 326.

18.Offences for non-compliance with notification requirements are contained in s 328 which so far as material reads:

“A person-

(a) who, without reasonable excuse, fails to perform, within the period specified in section 325(1)(a) or (b), (2)(a) or (b) or (3)(a) or (b) (as the case may be), a duty of disclosure arising under Division 2 in accordance with the provisions of this Part applicable to that duty;

...

(d) who, without reasonable excuse, fails to comply with section 321 to secure the giving of notification to him by the agent,

commits an offence and is liable-

(i) on conviction on indictment to a fine at level 6 and to imprisonment for 2 years; or

(ii) on summary conviction to a fine at level 3 and to imprisonment for 6 months.”

19.The significance of s 321 will become apparent later in the discussion to follow but at this stage it should be noted that the duty of disclosure and notification remains with the person who owes the duty and he is to ensure that the agent notifies him immediately of any acquisition or disposal of interests in order to perform the duty as required by the relevant provisions.  The importance of this provision is underscored by s 328(d) which makes it an offence for a substantial shareholder not to secure the giving of notification to him by the agent as required.

20.In short, the duty of disclosure and notification under Part XV is a personal duty of the person on whom the duty is imposed.  In the case of substantial shareholdings, s 310(1) imposes a duty of disclosure on the person who acquired or changed his interest in shares in a listed corporation and s 324(1) provides that the person under the duty of disclosure “shall give notification” to the listed corporation and to the SEHK of the acquisition or change of interest.  A person who fails to perform the duty of disclosure and notification imposed on him is liable to criminal prosecution.  The offence expressly provides for the defence of reasonable excuse.

The prosecution case

21.The appellant held a securities trading account at KGI Asia Ltd (KGI), where the account executive for the account was Mak Yin Bun (Mak).  He was the only witness called to testify before the Magistrate and he was referred to as PW1 at trial.

22.On 24 May 2013, the appellant sold 3,008,000 shares of Victory through his account at KGI.  The instructions for the sale were given by the appellant to Mak who afterwards reported to him that the orders had been executed.  The monthly statement of the KGI account for May 2013 was sent to the appellant on or around 1 June 2013.

23.The appellant had a notifiable interest of 200,000,000 shares in Victory which represented 23.28% of Victory’s total issued shares immediately before the sale, and a notifiable interest of 196,992,000 shares in Victory which represented 22.93% of Victory’s total issued shares immediately after the sale.

24.The appellant was under a duty to disclose the sale to both the SEHK and Victory within 3 business days.  On 27 May 2013, within the specified time, the appellant notified the SEHK of the decrease in his shareholding in Victory as a result of the sale.  However, he failed to notify Victory of it within the specified time.

25.On 6 June 2013, the appellant acquired 2,592,000 shares of Victory through his account at KGI.  On that day, the appellant had telephoned Mak and instructed him to make the acquisition which Mak confirmed with him after the orders had been executed.  The monthly statement of the KGI account for June 2013 was sent to the appellant on or around 1 July 2013.

26.On 7 June 2013, within the specified period, the appellant notified the SEHK of the increase in his shareholding in Victory as a result of the acquisition. However, he failed to notify Victory of it within the specified time.

The defence case

27.Although the appellant did not give or call evidence at trial, his defence was that he had a reasonable excuse as he had instructed Mak to make all necessary disclosures in accordance with the law.

The Magistrate’s findings

28.There was no dispute that the appellant was aware of the sale and acquisition of the Victory shares and that he failed to notify Victory of the two transactions within 3 business days of them taking place.  There was also no dispute that the appellant gave some form of instruction to Mak to file the necessary disclosures on his behalf.

29.The issue in dispute in the present appeal is whether the Magistrate erred in finding that the appellant’s delegation of duty of disclosure to Mak in the circumstances of the case did not amount to a reasonable excuse.

30.On this issue, the Magistrate first held that the appellant had satisfied the evidential burden to raise a reasonable excuse.  However, after considering all the evidence, the Magistrate found that the excuse relied upon by the appellant was not reasonable. 

31.The Magistrate reasoned the issue as follows.  First, he determined that the excuse relied upon was the appellant’s instruction to Mak “to do whatever he thinks necessary according to the law”.  Secondly, he found that what the appellant did was “way below a reasonable person would have done to comply with the duty of disclosure by applying objective community standards”, because:

“16. … As a shareholder who is holding substantial amount of shares in a listed company, the duty of disclosure is clear and simple. There is nothing complicated in the duty that a lay man would have difficulty to understand. If the defendant does not understand that duty, he should seek legal advice to make sure he knows what the duties are.

17. In the present case, there is no evidence to show that the defendant has made any effort to find out what the duties are. There is no evidence to show that he had taken any step to make sure PW1 knew about the duties. There is no evidence to show that he did actually tell PW1 what the duties are. Simply instructing an agent, be it a professional one, to do whatever that is necessary in the agent’s mind, is definitely not a reasonable excuse. If the defendant had exercised reasonable diligence, he would first of all make sure PW1 knew what the duties of disclosure are and then make sure PW1 had complied with the duties. The defendant failed to do both and I do not find what he did was a reasonable excuse.

18. That is not to say that delegating the duty of disclosure is not permissible.  If the defendant did give clear instructions to PW1 to notify Victory and later on checked if such instructions had been complied with, if it turned out PW1 failed to make the necessary disclosure, I would have no difficulty to find that the defendant has a reasonable excuse.  However, based on the facts of this case, what the defendant did was way below the standard of reasonableness.”

Reasonable excuse

32.When addressing the defence of “reasonable excuse” it is of paramount importance to bear in mind the legislative context of the defence, and the fact that it only arises for consideration after the prosecution has established the elements of the offence beyond reasonable doubt.  Although, there remains the onus on the prosecution to disprove, beyond reasonable doubt, the existence of any reasonable excuse.

33.The defence of reasonable excuse in the context of the present offence provisions recognises that to render the failure to perform the duty of disclosure, a breach of the law might in a given case be too drastic and therefore an exception is provided to allow regard to be had to the wide range of circumstances that may constitute a reasonable excuse.

34.A reasonable excuse includes any excuse which would be accepted by a reasonable person to justify the non-compliance of a legal obligation.  It will depend on the circumstances of the case and the purpose of the provision to which the defence of “reasonable excuse” is an exception. 

35.The general approach taken by courts when considering the defence of reasonable excuse is to first examine and identify the excuse that has been advanced by the defendant for contravening the law; secondly assess whether the excuse was genuine; and thirdly assess if the excuse was reasonable.  In carrying out this exercise, the defendant’s belief or state of mind is a relevant factor and may afford some assistance to the court, but the final answer will always come from an objective assessment of the particular facts of each case.  Such an assessment requires a consideration of not merely the defendant’s belief and state of mind but the application of community standards in order for the court to determine whether the defendant’s conduct is acceptable to the community: Mark and Others v Henshaw (1995) 155 ALR 118, 120 applied in HKSAR v Adams Secuforce (International) Ltd [2008] 1 HKLRD 207, 211. 

36.When considering community standards, it will be necessary to take into account not only the circumstances of the offence but also the purpose of the provision to which the defence of reasonable excuse applies.  

37.The High Court of Australia considered “reasonable excuse” in Taikato v R (1996) 139 ALR 386.  In that case, the appellant had been convicted of possessing in a public place a thing capable of discharging an irritant liquid.  The relevant legislation laid down that it was an offence to possess in a public place “any irritant matter in liquid, powder, gas or chemical form …” but afforded a defence to a defendant that “if the person satisfies the Court that he or she had a reasonable excuse for possessing it or possessed it for a lawful purpose”: s 545E of the Crimes Act 1900 (NSW).  The appellant claimed she carried the canister containing irritant liquid because of fear of being attacked and therefore had a reasonable excuse and a defence to the charge. 

38.The High Court by a majority upheld the conviction against the appellant.  In their joint judgment Brennan CJ, Toohey, McHugh and Gummow JJ, after noting that the term “reasonable excuse” has been used in many statutes and is the subject of many reported decisions, said at 393:

“But decisions on other statutes provide no guidance because what is a reasonable excuse depends not only on the circumstances of the individual case but also on the purpose of the provision to which the defence of “reasonable excuse” is an exception. One purpose of s 545E is to protect the public from the use of certain dangerous weapons which are analogous to, but not as dangerous as, guns. It strikes at the person who goes into a public place armed with such a weapon. To achieve this purpose it uses language which arguably catches some pharmaceutical and domestic items that are most unlikely to be used to cause harm to members of the public, even when they are carried in a public place. Without a defence of reasonable excuse or lawful purpose the reach of the section would be intolerable in a free society. But, having regard to the width of the language of s 545E(1), and its evident purpose, determining what constitutes a “reasonable excuse” is not easy.”

39.They also went on to explain the difficulty that a court encounters when determining whether the circumstances raised amount to a reasonable excuse at 395:

“However, the reality is that when legislatures enact defences such as “reasonable excuse” they effectively give, and intend to give, to the courts the power to determine the content of such defences. Defences in this form are categories of indeterminate reference that have no content until a court makes it decision. They effectively require the courts to prescribe the relevant rule of conduct after the fact of its occurrence. That being so, the courts must give effect to the will of parliament and give effect to their own ideas of what is a “reasonable excuse” in cases coming within s 545E even when it requires the courts to make judgments that are probably better left to the representatives of the people in parliament to make. …”

40.In the present case, the defence of reasonable excuse should be considered in light of the purpose of the offence provisions to which the defence of “reasonable excuse” is an exception.  In this respect, regard should be had to the object of the SFO and the duty of disclosure that it instils in corporate insiders.  It is clear from the long title of the SFO that a significant purpose of the statute is the “protection of investors” and the disclosure provisions seek to serve that purpose “through transparency by making available to the market as a whole information about the acquisition and cessation of interests in listed shares at certain levels of holdings”: SFC v Liu Su Ke [2010] 2 HKLRD 673, at §39 per Lunn J (as he then was). 

41.Lunn J went on to emphasise the importance of the disclosure provisions at §75:

“It is apparent from the long title of the Ordinance that one of the purposes and objectives in regulating activities in the securities market is, and is stated, to be the ‘protection of investors’. Clearly, the requirement of a disclosure of interests in shares, on acquisition or cessation of that interest, is the better to inform the market and is for the protection of investors. Importantly, the ingredients of the offence alleged against the appellant require proof by the prosecution of knowledge in the appellant of the occurrence of the relevant event. It is only with that knowledge, that culpability is imposed in consequence of a failure to make disclosure of a notifiable interest.”

42.It is suggested by Mr Adrian Bell, SC, with Ms Tanie Toh, for the appellant, that after notification to the SEHK, the information about the sale and the acquisition of the Victory shares by the appellant had become public knowledge so there would not have been any prejudice to investors.  He argues that this goes to excuse the failure by the appellant to notify Victory.  

43.Mr Peter Duncan, SC, with Mr Derek CL Chan, for the SFC, argues that such a proposition is inconsistent with the purpose of the disclosure provisions and must be rejected.  It is an express statutory requirement that simultaneous notifications be given to the listed corporation and the SEHK or, if not practicable, one immediately after the other.  He submits it is important to notify the listed corporation in addition to the SEHK to ensure full protection of investors.  He points out that a listed corporation itself has statutory obligations to keep investors informed through measures such as keeping a register of interests in shares and publishing details of major shareholders and their interests in the corporation when issuing, amongst other things, interim and annual reports.  Investors in turn rely on the information published by the listed corporation and it is therefore important for the purpose of investor protection for the listed corporation’s own records of interests in shares to be current and accurate.  

44.In any event, the point made by Mr Bell, may be a matter more appropriately raised as mitigation when sentencing upon conviction.  

45.I fully endorse these submissions of Mr Duncan in relation to the importance for the securities market to be fully and accurately informed on a timely basis of matters that the legislature has prescribed warrants disclosure.  The securities market would fall into disrepute if there was not strict adherence to the disclosure requirements under the SFO, for the information warranting disclosure is of vital importance to investors and regulators alike. 

46.Accordingly, the purposes and objectives of the disclosure provisions under the SFO need to be considered when determining whether an excuse is reasonable and therefore an exception to the offence provision to which it applies.  

Discussion on reasonable excuse

47.It is submitted on behalf of the appellant that the Magistrate had not correctly identified his excuse which he had misquoted in his findings. 

48.The evidence that Mak is said to have given is that he was instructed by the appellant to do whatever “he thinks” necessary according to the law.  In other words, his evidence was that the appellant had instructed him to make the necessary disclosures in accordance with the law.  It is submitted that as a result of the misunderstanding of the evidence, the Magistrate wrongfully found that what the appellant did was not a reasonable excuse because he did not exercise reasonable diligence to ensure that Mak knew what the duties were and for him to find out about those duties.  It is further submitted that the Magistrate paid no regard to the fact that the appellant was relying on a professional to find out what those duties were and upon finding out what they were to make the necessary disclosure in accordance with the law. 

49.The assertion that the Magistrate incorrectly identified Mak’s evidence is not right.  The Magistrate found that according to the evidence of Mak, “what the defendant did was to instruct him to do whatever he thinks necessary according to the law.”

50.The appellant’s case is based on the evidence of Mak that when he first met the appellant in August 2008, he assured him that KGI was a well organised company and that he need not worry; that he was a licensed stockbroker with nearly 20 years experience working for a large reputable brokerage firm with an in-house legal department; and that the appellant trusted him and was relying on him to make whatever notifications that were necessary to comply with the law.

51.The appellant’s argument is that from the objective facts, Mak is an experienced professional broker and had the resources to find out what the disclosure duties were from his in-house legal department and therefore it was reasonable for the appellant to have relied on Mak and expect him to find out what those duties were and, upon finding out, to make the necessary disclosure in accordance with the law. It is submitted that it was this reliance together with Mak’s carelessness or negligence that led to the disclosure being made only to the SEHK, that being the appellant’s excuse for contravening the offences under the SFO. 

52.Mr Bell relies on the case of Rowland v Revenue and Customs Commissioners [2006] STC (SCD) 536 to support this argument.  In the circumstances of that case it was held that in the context of the relevant tax provision, it did not preclude reliance on a third-party from being a reasonable excuse for late payment of tax.  The circumstances were such that the court concluded that it was reasonable for the taxpayer, who did not have the necessary knowledge to appreciate that there was a default, to rely on her accountants, and it was that reliance that led to the underpayment and accordingly she had a reasonable excuse. 

53.I note that other tax cases were presented to the Magistrate by the prosecution which appear to give a contrary view.  Making a comparison with other cases as to what is a reasonable excuse is as stated in Taikato of no guidance because what is a reasonable excuse depends not only on the circumstances of the individual case but also on the purpose of the provision to which the defence is an exception.

54.I will briefly mention the other tax cases and the issues that they addressed, but with the observation in Taikato that I have just mentioned in mind. 

55.In the case of Chan Chun Chuen v Commissioner of Inland Revenue [2012] 2 HKLRD 379 the appellant had an arrangement with a solicitors firm to forward to him all mail from the Commissioner of Inland Revenue but he claimed the letters got lost in transmission.  The Commissioner had a discretion to extend time to lodge objections to a tax assessment if he was satisfied that the person objecting to the assessment had, amongst other things, a reasonable excuse which prevented him from giving a notice of objection within the time period.  He refused to grant an extension of time.  The appellant appealed against the Commissioner’s refusal which was dismissed by the Court of Appeal where Lam J (as he then was) said at 395:

“… putting aside absence from Hong Kong and sickness (which are not relied upon by Mr Chan) the proviso refers to the taxpayer being prevented from giving notice of objection in time by reason of ‘other reasonable cause’. Speaking for my part, the mere lack of actual knowledge of Mr Chan per se would not be a reasonable cause if he did not exercise due diligence in ensuring the effectiveness of the arrangement he had with KLY [the solicitors firm] for transmission of letters to him.”

56.In another case of Avon Lee Lodge v The Commissioners for Her Majesty’s Revenue & Customs [2014] UKFTT 463 an annual return was filed late but it was contended by the taxpayer that it had a reasonable excuse due to electronic and human errors.  The Tax Tribunal said:

“19. When a person appeals against a penalty they are required to have a reasonable excuse. There is no definition in law of reasonable excuse, which is a matter to be considered in the light of all the circumstances of a particular case. A reasonable excuse is normally an unexpected or unusual event either unforeseeable or beyond a person’s control which prevents him from complying with an obligation. The reasonable excuse must also exist throughout the entire period of default.

20. The Appellant’s agent appears to have made a genuine mistake, but at law that is not a reasonable excuse.  It is necessary to consider the actions of the Appellant from the perspective of a prudent taxpayer exercising reasonable foresight and due diligence and having proper regard for their responsibilities provided by legislation.”

57.In the final case of The Executors of the Estate of Mr Simon Verdegaal v The Commissioners for Her Majesty’s Revenue & Customs [2015] UKFTT 0041 the Tax Tribunal affirmed the distinction between a simple task where the agent is only acting as a functionary and a complicated task that requires professional skill and ability at §80:

“If a taxpayer claims that his accountant has been negligent, for example, by failing to meet a deadline for filing a return or undertaking some or other administrative task, then the negligence of the accountant will not usually provide a defence to a penalty because the accountant is simply acting as the taxpayer’s agent or functionary in filing the document that needs to be filed by a particular deadline. In other words, he is acting as an agent or functionary for his principal; but not as an independent professional adviser. However, in a situation where a professional adviser is not retained simply to act as a functionary, but is retained to give professional advice based upon the best of his skill and professional ability, he is not then a functionary or agent for his principal. He is a professional person acting under a retainer to give professional advice upon an identified issue. He is bound to provide that advice to the best of his professional skill and ability, whilst taking reasonable care in and about preparing and giving that advice. In other words, he is acting as a true professional, rather than as an agent or functionary.”

58.The Tribunal in that case accepted that the executors had been negligently advised by the professional accountants to hold back the submission of tax returns but nevertheless went on to hold at §83:

“We accept that the executors were advised that it was better to wait, and submit accurate returns, but reliance on that professional advice does not provide them with a reasonable excuse. Whether or not to file a tax return by the due date is not a difficult technical issue. It is a matter of administration and timing. The deadlines are clear. The information is easily and publically available …”

59.The Tribunal adopted the statement of principle that the failings of a professional agent cannot ordinarily be considered objectively reasonable as an excuse because:

“If that was the position, then professional agents would be able to ignore deadlines for filing or undertaking other tasks safe in the knowledge that their clients could not be penalised because the clients would simply point to the failings of their various professional agents.”

60.As I have noted, what constitutes a reasonable excuse in a given case will depend on all the relevant circumstances of the case and the purpose of the provision to which the defence of reasonable excuse relates.  There may be situations where the person who bears the duty of disclosure has delegated or assigned the task to another person who has failed to perform the duty as required in circumstances where a court may consider that it constitutes a reasonable excuse.  I cannot eliminate that possibility because of the infinite variety of circumstances that may arise.  But such circumstances will have to be clear and compelling to displace the countervailing importance of disclosure of information under the SFO when considering whether the excuse is reasonable according to community standards. 

61.I am of the view that merely delegating or assigning the task of disclosure to another person without more will not constitute a reasonable excuse under these provisions.  There may be circumstances where it could be argued that there is a reasonable excuse for the failure to perform the duty of disclosure, such as the substantial shareholder’s personal situation due to illness or the like, or where he took reasonable care and steps or carried out due diligence to avoid the failure, but in my view they would have to be exceptional. 

Appellant’s case

62.Mr Bell submits that the appellant, in addition to relying on Mak, took reasonable steps to confirm with him that the disclosure had been done.  He says that from the evidence, the appellant had reminded Mak every time before he dealt in the shares to make the necessary disclosure in accordance with the law and that he had followed up with him to confirm that the disclosure had been made after each transaction. He argues that as a consequence the Magistrate had wrongly identified the excuse and incorrectly analysed whether or not a reasonable person applying community standards would have found the appellant’s excuse to have been reasonable.  He also complains that the Magistrate did not analyse as to whether or not a reasonable person would have found Mak’s carelessness or negligence, which he submits is part and parcel to the appellant’s excuse, for not reporting to Victory to have been a reasonable excuse.

63.In summary, the appellant’s case is that the excuse he relied upon was reasonable and he was acting with reasonable excuse when disclosures were not made to Victory for the following four reasons advanced on behalf of the appellant which I will address in turn.

Reliance on a “professional”

64.The first reason is that the purpose of resorting to a professional for assistance is that one normally expects to be able to rely upon such person, particularly where the person seeking assistance does not possess the relevant knowledge personally.  It is pointed out that the appellant in this instance is from Mainland China and was not particularly familiar with the stock market in Hong Kong. Accordingly, upon the assurance of Mak, the appellant placed reliance on him because he was a professional licensed stockbroker working in a large international brokerage firm with an in-house legal department.

65.I should first point out that whilst the appellant had come from Mainland China, he was the holder of a Hong Kong identity card and traded in shares through Mak since August 2008.  He was also a substantial shareholder in Victory and had been an executive director of the company from 15 August 2012 to 29 April 2013.  On 17 August 2012, he signed a Declaration and Undertaking with regard to Directors.  It would appear that he would have been familiar with local conditions and requirements. 

66.There was nothing unclear or complicated about the disclosure requirements imposed by law on a holder of a substantial quantity of voting shares in a publicly listed corporation.  Unfamiliarity or ignorance of the law is not an excuse.  See Ostrowski v Palmer (2004) 218 CLR 493 at §§2, 84 and 85; Dickinson v DPP [1989] Crim LR 741 at 742.

67.As pointed out by Mr Duncan, the appellant was ignorant of what the law was in relation to this matter and relied on Mak to know and comply with the law but ignorance of the law is no defence.  He submits that the appellant knew all the facts that constituted the offence, including the fact that Mak did not notify Victory of the sale and acquisition of the shares.  He notes that Mak, and it would seem the appellant, may well have been under the misunderstanding that the appellant’s duty of disclosure and notification in accordance with the law had been satisfied, but he argues correctly in my view that would have been a mistake of law which would not amount to a reasonable excuse.

68.There is a strict regime in place for disclosure on shareholders with a substantial interest in shares of a publicly listed corporation which would be seriously undermined if it is not fully and effectively complied with and enforced.  From the evidence, it would appear that the appellant was aware that disclosure was required but he left it up to Mak to do it.  The legal obligation of disclosure under Part XV is on the substantial shareholder, and to delegate to or rely on another to comply with that obligation, puts the substantial shareholder at peril if for some reason it is not done. In the present case, Mak’s negligence meant that the appellant did not fulfil his statutory obligation.  

69.According to s 325(1) the duty of disclosure and notification only arises if the substantial shareholder knows or comes to know of the relevant change in his notifiable interest.  It is envisaged under s 321 that a substantial shareholder may authorise an agent to acquire or dispose of his interests on his behalf, if he did not know or come to know of any change of interest effected by his agent he would not be guilty of a non-disclosure offence under s 328(a).  However, s 321 at the same time operates to bolster the disclosure and notification duties of a substantial shareholder by imposing a duty on him to secure his agent’s notification to him of any changes in his notifiable interest, in circumstances where he had authorised the agent to deal with his interests.  Clearly the purpose of the section is to ensure that the substantial shareholder is put in a position for him to comply with the duty of disclosure and notification imposed upon him personally.  It reinforces the obligation on the substantial shareholder to perform the duty of disclosure by making sure that he is aware of any change of interest, whether effected by him or his agent.

70.If the substantial shareholder is not in contravention of his duty of disclosure and notification because he was not aware of his agent’s act in changing his notifiable interest, he may be guilty of an offence under s 328(d) for his failure to secure his agent’s notification to him of the relevant change.  Once the substantial shareholder is aware of the change, it is incumbent on him to ensure that his duty of disclosure and notification is satisfied. 

Professional’s experience and resources

71.The second reason is that it was reasonable for the appellant to rely on Mak because of his professional experience and the resources available to him as a member of an international brokerage firm. 

72.Whilst it may have been reasonable for the appellant to rely on him, that alone does not provide a reasonable excuse.  As I have said the legal obligation is on the appellant to ensure that the duty of disclosure and notification is properly performed.  It then may become a question of what did the appellant do to make sure that the duty was fully and properly performed.  In addressing whether the excuse was reasonable it may be helpful to examine what steps or measures did the appellant employ to ensure that the duty was performed when relying on another to do it.

73.I must say it is difficult to understand how Mak, or anyone else in the securities industry for that matter, would only know to give notification to the SEHK and not to the listed corporation, because the obligation for notification to both entities is contained in the same section, s 324(1)(a).

Professional’s negligence

74.The third reason is that a person relying on a professional cannot be principally or vicariously liable for the negligence of the professional. 

75.The legal obligation is on the appellant and in the context of the purpose of the offence and the conduct that it seeks to ensure is done, means that any delegation of that legal obligation to another will not, on its own, provide an excuse that is reasonable according to community standards.

Professional’s fault

76.The fourth reason is that a reasonable person would expect the professional to take reasonable care in preparing and completing what he has been instructed to do. Mak’s failure to ensure what was required to fulfil the necessary disclosure requirements led to the commission of these offences.

77.A person who delegates to another the legal obligation for disclosure as required under the SFO runs the risk that any failure to comply with such legal obligation will make him liable to criminal prosecution for the contravention. The imposition of a criminal sanction highlights the importance of the duty that a substantial shareholder is required by law to perform.

Substantial shareholder’s responsibility

78.I agree with the submissions of Mr Duncan that it is very important in the context of the statutory duty of disclosure and notification that the responsibility of its performance falls squarely on and remains with the appellant even if he delegates the task of performing the duty to another.  He cannot delegate the responsibility of it for that remains with him. 

79.If a person relies on an agent to perform a statutory duty imposed on him then he bears the consequences if his agent fails to perform that duty as required by law.  Under the SFO, there is a strict requirement for disclosure of information relating to a person’s interest in a listed corporation and that disclosure takes place within a specified period.  The importance of information of this type in the securities market cannot be underestimated and that is why a criminal sanction is imposed to ensure full and proper disclosure of such information.

80.In the circumstances, the reliance on a professional to perform the duty of disclosure for a substantial shareholder will not ordinarily provide a reasonable excuse if the professional fails to perform the duty out of carelessness or negligence.  The obligation is on the substantial shareholder if relying on another to ensure that it is done and that it is done properly in accordance with legal requirements. 

Conclusion

81.What is a reasonable excuse will primarily depend on the statutory and factual context in which it is proffered for contravening the offence in question, and whether the excuse is acceptable according to community standards bearing in mind the purpose of the offence provision.  The defendant’s belief or state of mind is a factor to be taken into account but the paramount consideration is whether the excuse is acceptable to the community. 

82.From the evidence presented before the Magistrate which he accepted the following findings can be made. 

(1) At the material time the appellant was a substantial shareholder in Victory, who held a notifiable interest under the SFO of more than 5% of the voting shares in the company. 

(2) Mak is a stockbroker with over 20 years experience and a senior member of a large international brokerage firm with an in-house legal department. 

(3) In August 2008, the appellant traded in stocks through Mak and at the time Mak assured him that he was knowledgeable in and familiar with the necessary legal requirements in relation to share transactions.

(4) Upon the appellant’s resignation as a director of Victory in April 2013, Mak reminded him that his shareholding was above 5% and that any purchase or sale of shares would require disclosure.

(5) The appellant told Mak that if there were any purchase or sale of Victory shares he would need to disclose it in accordance with the law. 

(6) The appellant was required under Part XV of the SFO to notify the SEHK and Victory of the sale and purchase of the shares. 

(7) Each time Mak handled share transactions for the appellant, the appellant would ask him to make the necessary disclosures. 

(8) The appellant on 24 May 2013 and on 6 June 2013 sold and purchased respectively a quantity of shares in Victory. 

(9) The appellant relied on Mak to handle all the necessary disclosure and notification requirements according to law in relation to the two transactions. 

(10) Mak knew he had to notify the SEHK of the two transactions but did not know that he had to notify Victory of them. 

(11) Mak notified the SEHK but did not notify Victory of the two transactions as required under the SFO.

(12) If Mak had known he had to notify Victory, he would have done so.

(13) The failure to notify Victory was as a result of Mak’s misunderstanding of what the law required. 

(14) On the occasions Mak had notified the SEHK of the two transactions, he told the appellant that the necessary disclosure had been made. 

(15) The appellant was from Mainland China, although he held a Hong Kong identity card.  It was claimed that the appellant was not particularly familiar with the Hong Kong stock market, but he had been trading in shares through Mak since August 2008 and from 15 August 2012 to 29 April 2013 he was an executive director of Victory and a substantial shareholder.  On 17 August 2012, the appellant signed a Declaration and Undertaking with regard to Directors.

(16) The appellant made no inquiry or sought to inform himself about the duty of disclosure and notification as a substantial shareholder under the SFO.

83.I agree with the Magistrate’s conclusions that:

(1) It is incumbent on a substantial shareholder of a listed corporation to know and understand the duty of disclosure and notification imposed on him under the SFO.  Ignorance of the law is neither a defence nor an excuse. 

(2) The obligations of disclosure of interests under the SFO are clear and uncomplicated and are well known and regularly publicised by the regulators.  There is a concomitant obligation on a person who comes under the disclosure provisions of the SFO to know and understand the duties that he is required to perform. 

(3) There is no evidence to show that the appellant made any effort to know and understand the nature and requirements of the duties imposed upon him under the SFO as a substantial shareholder, nor did he take any steps to make sure that Mak knew and understood the nature and requirements of the duties. 

(4) The appellant did not exercise due diligence in ensuring that Mak knew the nature and requirements of the duties of disclosure and that Mak had complied with such duties. 

(5) Simply instructing an agent to do whatever that is necessary in the agent’s mind is not a reasonable excuse.

84.I would add that if a person has a duty of disclosure and notification under Part XV, it behoves him and no one else to know and understand the legal obligations imposed on him and to ensure there is compliance with those legal obligations. If the task of the duty is delegated to another by the person who owes the duty, he must make sure that it is strictly complied with for he bears the ultimate responsibility and liability for any failure to perform the duty as prescribed by law.

85.The disclosure provisions under the SFO demand strict compliance by a substantial shareholder and if his agent fails to comply with a legal obligation for disclosure then on that basis alone there is no reasonable excuse for contravening the law.  An obligation in law to make full and timely disclosure is not excused merely because the person bearing the legal obligation relied on another person to do it.  It may be bad luck but it is not a reasonable excuse (in the factual and statutory context of this case).

86.In light of the foregoing, I agree with the Magistrate’s reasoning and find he was correct in convicting the appellant of the two summonses.  Accordingly, I dismiss the appeals against conviction.

87.I make an order nisi that the appellant pay the costs of the SFC, to be taxed if not agreed.  Any submissions the parties wish to make in that respect to be made within 14 days, failing which the order is to be made absolute.

Mr Peter Duncan, SC, and Mr Derek C.L. Chan, counsel for the Securities and Futures Commission

Mr Adrian Bell, SC, and Ms Tanie Toh, instructed by Ho Tse Wai, Philip Li & Partners, for the appellant