Securities and Futures Commission v. C.L. Management Services Ltd and Another

HCMA 382/2014
HCMA 288/2015
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO 382 OF 2014

(ON APPEAL FROM ESS 30673-30676/2013 & ESS 39231-39232/2013)

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J U D G M E N T

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1.C.L. Management Services Limited(“A1”) is a company registered in Hong Kong and Madam Au Suet Ming Clarea(“A2”) is the sole shareholder and director of A1.

2.A1 was convicted of holding itself out to 3 Wells Group Holdings Limited (“3 Wells”), UK Fur Limited (“UK Fur”) and New Bonus Holdings Limited (“New Bonus”) as carrying on a business in advising on corporate finance, contrary to s 114(1)(a) and 114(8) of the Securities and Futures Ordinance, Cap 571(“the Ordinance”); whilst being acquitted of those summons which alleged that A1, without reasonable excuse, has carried on a business in a regulated activity, namely, advising on corporate finance without licence.

3.A2 was convicted of “being an officer of A1, has aided, abetted, counselled, procured or induced A1 in committing the above offences under s 114 of the Ordinance, or these offences were committed with the consent or connivance of A2 or was attributable to her recklessness”, contrary to s 390 of the same Ordinance.

4.A1 and A2 now appeal their convictions.

The prosecution case

5.The prosecution called 4 witnesses: Mr Clement Cheuk, PW1, (“Cheuk”) wasthe Chairman, and Ms Phoebe Lee, PW2, (“Lee”)was the Chief Financial Officer of 3 Wells.  Mr Pat Wong, PW3, (“P Wong”) the Chairman of UK Fur and Mr Wong Kam Fai, PW4, (“KF Wong”), the Chairman of New Bonus gave evidence relating to UK Fur and New Bonus respectively.

3 Wells

6.The prosecution case is that between July 2011 and January 2012, A1 carried on a business in advising on corporate finance for 3 Wells with a view to assisting the latter to be listed on the Growth Enterprise Market (“GEM”) Board of the Stock Exchange of Hong Kong Limited (“SEHK”).  A2 procured the signing of a “Professional Financial Consultation Services Agreement” with 3 Wells around July or August 2011 (“3 Wells Agreement”), Exhibit P12. Afterwards, A1 assigned and authorise a team of her staff headed by Michael Ang (“Michael”) to have meetings with senior officers of 3 Wells both in Hong Kong office as well as factory located in Mainland with a view to assessing their capability of being listed on the GEM Board.  A2 and Michael, representing A1, also assisted 3 Wells to line up a professional team consisting of the right professionals, including lawyers, accountants and sponsors to substantially handle the listing matters.

7.Two payments in the sum of HK$150,000.00 each to A1 on 31 August 2011[1] and 14 May 2012[2] were paid by 3 Wells pursuant to the agreement.

8.Around September or October 2012, Michael told Cheuk that there were problems of “internal audit”, it was suggested that the 3 Wells Agreement with A1 be terminated.  Michael drafted a letter backdated to 31 May 2012 to that effect.  Cheuk said that the agreement was terminated upon A1’s promise that a full refund of HK$300,000.00 would be made by A1 to 3 Wells.  However, no refund was ever made by A1.

9.It is the prosecution case that what A1 has done amounted to carrying on a business in “advising on corporate finance”, or alternatively holding itself out to 3 Wells as doing so.[3] Moreover, A2, in her capacity as an officer of A1, did aid, abet, counsel, procure or induce the commission of the offence under s 114 by A1 or the offence was committed by A1 with her consent or connivance or was attributable to her recklessness.[4]

UK Fur and New Bonus

10.Similar written “Professional Financial Consultation Services Agreement” had been signed between A1 and UK Fur (“UK Fur Agreement”) as well as between A1 and New Bonus (“New Bonus Agreement”).  UK Fur has paid a total sum of HK$600,000.00 to A1 in four instalments between 20 October 2010 and 30 June 2011, and New Bonus paid a sum of HK$170,000.00 was paid to A1 by New Bonus on 3 January 2011.  Pursuant to the UK Fur Agreement, upon submission of UK Fur’s listing application to SEHK, A1 was granted 14,400,000 option shares at the exercise price of HK$0.26 per share on 1 August 2012 which was accepted by A2 on 2 August 2012.[5]

Defence case

11.A2 elected to give evidence herself but called no defence witness.  She testified to the effect that she was not aware of the actual content stated in all the written agreements that she had signed and had no intention at all to carry on or hold herself out to the respective clients as carrying on a business in advising on corporate finance.  The three written agreements in question[6] were all prepared by Michael upon her instruction but she has not read through them before signing.

12.She stressed that she was only helping the client companies through the assistance of Michael to line up a team of suitable professionals and participate in the liaison work for the listing matters only.  Her participation after the signing of the agreements was no more than attending the first introductory meeting with the professionals.  She had no knowledge subsequently as to what Michael and his team did in relation to the clients.

13.The defence submitted that the prosecution was required to prove mens rea for all the summonses against A1 and that the prosecution has failed to do so.  Further, what A2 said in her evidence could amount to a reasonable excuse and the statutory defence had been made out factually.  It was submitted by the defence that as the commission of offences by A1 could not be proved, A2 should not be liable for all the “attributable” offences under s 390 of the Ordinance.

Grounds of appeal

14.The grounds are renumbered as follows:

(1)   The magistrate erred in finding that A1 held itself out as carrying on a business in:

(i)   refusing to place weight on the evidence that A1 was merely providing service of lining up professionals;

(ii)   rejecting the evidence of PW3 relating to his understanding of the scope of services provided by A2 on perverse grounds;

(iii)   wrongly drawing inference from the fact that Michael had agreed with 3 Wells to discharge either party’s obligation under the agreement; and

(iv)   wrongly interpreting the contents of the agreements by placing too much weight on selective parts whilst disregarding the oral agreement as well as the context of the entirely of the agreement.

(2)   The magistrate erred in finding that A2 was liable under s 390 of the Ordinance:

(i)   when A1 should not have been convicted in the first place; and

(ii)   in finding A2 had knowledge or was being reckless when the evidence shows that A2 might just be negligent.

(3)   The magistrate failed to differentiate between the agreement with 3 Wells on the one hand, and UK Fur and New Bonus on the other, in that in the case of 3 Wells, there was extrinsic evidence to the written agreement whilst there was none in respect of the other two;

(4)   The magistrate failed to give sufficient weight to A2’s good character, but relied on irrelevant matters to find that she had a high propensity to commit the offence; and

(5)   The magistrate erred in convicting A1 of the holding out offence, when s 114(1)(b) of the Ordinance connotes “a representation intentionally made and which was intended to be relied upon”, and there is no evidence to such effect.

Respondent’s reply

15.In respect of Ground (5), the respondent submitted that on a proper construction of s 114(1)(b) the presumption of mens rea is displaced and the 4^th or 3^rd alternative set out in Hin Lin Yee/Kulemesin[7] applies, instead of the 2^nd alternative as favoured by the magistrate.  It is submitted that the reading of too much mental element into the section, as the appellant contends, defeats the purpose of effective prevention of regulated activities being undertaken by unlicensed persons and renders prosecution unworkable and cumbersome.  The only defence available is one of “reasonable excuse”.

16.In respect of Ground (1) and (3), it was submitted that the agreement was obviously important and its contents, taken as a whole, indicates that A1 was undertaking to provide the services stipulated in Clause 2 in tandem with other professionals that it would introduce to the clients.  The magistrate has fully analysed all the evidence and was entitled to take the view she did, in placing different weight on different parts of a witness’ evidence.  An Appellate Court would be slow to interfere with the findings of credibility.

17.In respect of Ground (2) and (4), the respondent submitted that A2 being the shareholder and director of A1, was its alter ego, and the “holding out” offences was committed by A2 on behalf of A1.  There was ample evidence to convict A2 of s 390 offences, and the magistrate was fully aware of the previous good character of A2, and was entitled to decide what weight she should give to that in the context of the present case.

Discussion

Whether the s 114(1)(b) offences against A1 are strict liability offences?

18.S 114 provides:

“(1) Subject to subsections (2), (5) and (6), no person shall –

(a) carry on a business in a regulated activity; or

(b) hold himself out as carrying on a business in a regulated activity.

. . .

(8) A person who, without reasonable excuse, contravenes subsection (1) commits an offence . . . ”

19.The appellants submitted that s 114(1)(b) connotes:

(1) there is an act of holding out or a representation with a likely effect of inducing people to rely on it; and

(2) there must be “an intent to induce”, that is, an intention that the people to whom the representation was made be so induced.

20.Ribeiro PJ, in Hin Lin Yee, reiterated that in deciding whether a statutory offence is a strict liability offence, has to first ask whether the presumption of mens rea has been displaced “expressly or by necessary implication”, and “if so, by what?  By what, if any mental requirement is the supplanted requirement of mens rea to be replaced?”

21.In deciding which of the five alternatives impliedly reflects the legislative intent, the court may take into account the following factors, amongst others: statutory language; subject matter and purpose of the legislation; penalties; the existence of an express statutory defence.  It is clear that there is no mention of common words of criminal intention like “knowingly”, “intentionally” or “recklessly” in s 114(1), whilst such words exist in other sections of the Ordinance such as s 107 and s 390.  On the other hand, mandatory language by use of the word “shall” appear in s 114(1). Undisputedly, the nature of the offence created by s 114(1)(b) is “regulatory”, it concerns listing matters and aims at protecting investors.

22.S 114 of the Ordinance is drafted very similarly to the part of the Road Traffic Ordinance which the Court of Final Appeal examined in HKSAR v Ho Loy, FACC 7/2015.  Applying the rationale there, the actus rea of a s 114(1)(b) offence is the act of the “holding out”, and the offence is only constituted by the act committed “without reasonable excuse”, the statutory defence expressly provided for in s 114(8).  Similarly, “as a matter of statutory construction, it is plain that the offence, being a regulatory offence, is one in respect of which the presumption of mens rea has been displaced and is intended to be subject only to the statutory defence expressly provided for (per Fok PJ).  An accused can raise the issue of “reasonable excuse” by way of defence on an evidential burden.  When the evidential burden is discharged, it is for the prosecution to prove beyond reasonable doubt that no reasonable excuse exists.

23.Importing additional mental element into the section, as the appellants contended, is adding unnecessary gloss to the interpretation of the section, when the statutory construction is plain and obvious.  The example given by the appellants’ senior counsel as to an actor playing the role of an unlicensed individual “holding out” as being permitted to conduct a regulated activity being caught under the section is totally unrealistic.  Common sense dictates that such a scenario will unlikely attract any prosecution in the first place.

24.Can A1 make out the defence of “reasonable excuse”?  It was submitted by the appellants that Michael, being an agent of A2, might have gone on a frolic of his own outside the scope of instructions of A2, thus those conduct could not be attributable to A1, and so reasonable excuse was made out in the circumstances.

25.Although Michael did not give evidence in the trial below, after careful consideration of the evidence, the magistrate found that A2 was the directing mind of A1, and Michael performed his role under A2’s delegation.  She concluded that A2 was in the know throughout and A1 failed to avail itself of the defence of “reasonable excuse”, thus the “holding out” of A1 was committed by A2 on its behalf.  From that, the magistrate also found that the “holding out” by A1 were done with A2’s knowledge and consent.  I do not think the findings of the magistrate can be faulted.

26.I shall now turn to deal with the rest of the grounds relating to the evidence together.

Did the magistrate err in finding that the services provided by A1 to 3 Wells were not only restricted to the lining up of professionals?

27.The starting point must be the 3 Wells Agreement (P12).  It is termed “Professional Financial Consultation Services Agreement”, with A1 as “an exclusive financial advisor” to 3 Wells in relation to listing in Hong Kong. For ease of reference, I shall list out the relevant parts of the Agreement for consideration.

“2. Scope of Services

. . . The responsibilities of Party B in relation to this listing include:

(1) to provide professional financial advices in relation to arrange of the application for the listing on the Hong Kong Stock Exchange and to assist in resolving the relevant important issues;

. . .

(3) to assist and guide Party A on the formulation of a restructuring plan, and a timely tracking and monitoring program for the intended listing, and on the implementation thereof;

. . .

(6) to assist Party A in the engagement of various listing‑related intermediaries in relation to the intended listing, such as accountants, lawyers and listing managers . . . The selection of the aforesaid institutions shall be confirmed by Party A, and the payment of costs to each of the intermediaries shall be made by Party A.

(7) to assist Party A in performing the required due diligence in respect of the listing project and to coordinate with other intermediaries.

. . .

4. Responsibilities and Obligations of Party B

(1) Party B shall select competent professionals for discharging the tasks in order to undertake the advisory services commissioned by Party A;

. . .

(5) Party B shall work out a concrete schedule of the listing process for Party A, and shall perform its work according to the schedule. In special cases, both parties shall otherwise negotiate;

(6) In the course of recommending listing institutions such as sponsors and underwriters to Party A, Party B should fully inform such institutions of the state of affairs of Party A in order to facilitate smooth listing process and enhance efficiency,

. . .

12. Entirety of Agreement

This agreement shall constitute the entire and only agreement entered into by both Party A and Party B in respect of the subject matters covered herein, and shall supersede and repeal any related drafts, contracts, commitments, representations, warranties and arrangements made or developed in any form prior to the execution of this Agreement (whether or not in writing).”

28.It is clear that Clause 2 relates to the “scope of services” provided by A1 whilst Clause 4 relates to the “responsibilities.” It does not matter what nomenclature is used to describe the nature of the services to be provided contractually by A1.  Clause 2 spells out the scope, which certainly is not restricted to the mere lining up of professionals; that is only one aspect of the services agreed to be provided.  Moreover, it is against common sense to expect a payment of HK$600,000.00 to A1 just for the lining up of professionals, especially when it is stipulated in the contract that 3 Wells would have to bear further costs to each of the intermediaries.

29.PW3 testified that during the oral discussion between him for UK Fur and A2, he did not expect A1 to do more than provide introductory services.  However, the magistrate was of the view that the need for a subsequent confirmation letter to vary the role of A1 from being a “financial advisor” to “financial consultant” with the services stipulated in the original agreement varied to a completely different list of service led her to come to the conclusion that PW3 was economic with the truth in his evidence concerning what he understood as to the scope of services provided by A1 before the first agreement was signed.  The magistrate did not reject that part of PW3’s evidence solely on the fact that he had been a good friend to A2 for more than 20 years.

30.A2 gave evidence to the effect that she was not aware of what Michael and his team were doing all along.  She told the court that she asked Michael to find an agreement in the template.  She claimed to have only a glance on the payment clause and it was only whilst she was giving evidence in chief that she had a chance to read the terms of the agreement in detail.  The magistrate took into account that A2 “was educated and has been working in the profession of securities and futures for a long time”, and that “she is an educated lady and understands English” and she rejected A2’s evidence.  These are all matters that the magistrate was entitled to take into account when assessing A2’s credibility.  The magistrate was merely setting out her thinking process, and she never relied on the said facts to find that A2 had a high propensity to commit the offence.  Quite the contrary, she did remind herself that A2 has a clear record and is regarded as having a lower propensity to crime and higher degree of credibility.  The appellants have unfairly taken the magistrate’s reasoning process out of context.

31.The submission relating to pre‑agreement oral agreements can be disposed of shortly.  The answer is in Clause 12, which specifically provides that this Agreement is the “only and entire” agreement and supersedes all preceding oral representations.

32.There is no merit in any of the grounds advanced against A1’s conviction.

S 390 offences against A2

33.The magistrate found that A2 is the directing mind and will of A1, in the sense that it was she who was in actual control of the operation of the company.  Although she had delegated her duties for 3 Wells to Michael, having rejected her evidence, there is no evidence to show that A2 might just be negligence.  The basis of A1’s conviction was that A2 was all along in the know.  A conviction of A1 under such basis would necessarily result in A2’s conviction under s 390.

34.The appeal against conviction by A1 and A2 is dismissed.

Mr Selwyn Yu, SC leading Miss Po Wing kay, Counsel for the respondent

Mr Clive Grossman, SC leading Mr Bernard Mak, Counsel and Mr Ernest Ng, Counsel, instructed by Cheung Tong & Rosa for the 1st appellant & 2nd appellant