Zhi Charles v. The Stock Exchange of Hong Kong Ltd and Others

HCA 1618/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1618 OF 2016

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D E C I S I O N

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1.I have before me an application by summons dated 20 June 2016 by the plaintiff for interlocutory injunction. The action was begun by writ two days before the summons, that is, on 18 June 2016. The writ names 16 defendants, who may be divided into three categories. The first is the 1^st defendant who is The Stock Exchange of Hong Kong Limited. The second category is the 2^nd to 9^th defendants who are listed companies in Hong Kong. The third category is the 10^th to 16^th defendants who are firms of accountants who are the auditors of the 2^nd to 9^th defendants.

2.The injunctions that are sought by the plaintiff by the summons are in terms:

“1. The 1^st Defendant be restrained from allowing the shares of 2^nd to 9^th Defendant trade on the Stock Exchange of Hong Kong until their Audit Reports are restated to reflect the ab initio disqualification of their expert, Herman Tso.

2. The 2^nd to 9^th Defendants be restrained from using the reports or opinions of Herman Tso, or any secondary opinions on Herman Tso’s reports, for any purposes.

3.  The 10^th to 16^th Defendants be restrained from using the reports or opinions of Herman Tso, or any secondary opinions on Herman Tso’s reports, for any audit purposes.”

3.The ground for the application is that, as set out in the plaintiff’s affirmation dated 20 June 2016, numerous technical reports and valuation reports on mining assets have been authored and signed off by one Herman Tso for listed companies in Hong Kong.  It is said that the reports related to very substantial or major acquisitions, or audit purposes of the listed companies in question.  However, the plaintiff says, Herman Tso, who has held himself out as a mining expert, has been disqualified from membership of the Australian Institute of Minerals and Metallurgy on 12 April 2016, which was announced publicly on 6 June 2016 on the basis that Mr Tso’s alleged qualifications had not been substantiated. 

4.The disqualification has been dated back to the beginning with the Institute stating that Mr Tso should be regarded as never having been a member.  On that basis, the plaintiff alleges that the shares of the listed companies in question must be suspended from trading and that they, as well as their auditors, must be restrained from relying on or using, in any way, any of Herman Tso’s reports or opinions, particularly in relation to the audit of their financial statements. 

5.The application first went before Deputy Judge Seagroatt on 24 June, who decided to recuse himself because of a possible connection with the 12^th defendant. His Lordship also referred the matter to me because I had on 20 June 2016, by consent, made an order under Section 27 of the High Court Ordinance against the plaintiff here, Mr Charles Zhi, in another set of proceedings, HCMP 443/2015, restraining him from bringing any fresh claims against Siberian Mining Group Company Ltd, who was the plaintiff in HCMP 443/2015 and the 2^nd defendant in the present action.

6.Both the plaintiff and the 1^st defendant have written to the court subsequently agreeing for the matter to be dealt with with some urgency. I have accommodated the parties by fixing the application before me today. 

7.In his letter sent to the court on 27 June 2016 (misdated 17 June), however, the plaintiff indicated that he wished to withdraw his application for injunction, except as against the 10^th defendant who is the auditors of the 2^nd defendant.  But at the hearing this morning, the plaintiff retracted from that position and asked for an adjournment of the hearing of the summons instead.  I saw no grounds for the adjournment sought and refused it accordingly, whereupon the plaintiff stated that he would withdraw his application for interlocutory injunction. 

8.In any event, I have serious doubt whether the plaintiff has any cause of action as against the 1^st defendant.  Section 21 of the Securities and Futures Ordinance, Cap 571 of the Laws of Hong Kong, enacts the Stock Exchange’s statutory duty to ensure an orderly, informed and fair market for the trading of futures and securities.  But there is grave doubt whether this can afford a private law cause of action on the part of someone like the plaintiff who, in the words of Deputy Judge Seagroatt, seems to be conducting “a roving commission” to ensure that publicly listed companies and their regulatory body, the Stock Exchange, take heed of the development concerning the qualifications of Herman Tso.  In addition, section 22 of that Ordinance confers immunity from civil liability on the Stock Exchange. 

9.As against the companies who are the 2^nd to 9^th defendants, the plaintiff is not a shareholder, excepting the 2^nd defendant whose auditor is the 10^th defendant. 

10.As against the auditors, who are the 10^th to 16^th defendants, it seems to me no cause of action has been shown as existing on the part of the plaintiff.  Even if he is a shareholder of the listed companies in question, there is generally no cause of action for an injunction by a shareholder against the auditors to dictate to them how to do their job.

11.Having regard, moreover, to the nature of the orders sought, there is no doubt in my mind that refusing them will involve the least risk of injustice when the matter arises for determination in future.

12.As regards the 7^th defendant, specific evidence has been filed to the effect that it had only instructed Herman Tso on one occasion which resulted in a report dated 9 February 2011, but no shares or other financial instruments have ever been issued on the basis of that report because the relevant transactions failed to materialise.  This is relevant also to the 14^th defendant who is the 7^th defendant’s auditors.

13.It also seems to me that there is no evidence of any immediate harm which has to be prevented by the injunction of the court sought by the plaintiff.  The public release of the Australian Institute that I have referred to is accessible to the public.  The attention of investors and traders in shares can be drawn, if necessary, to the relevant information. That does not require an injunction of the court in terms sought by the plaintiff. 

14.It may be that the matters raised by the plaintiff may, as Deputy Judge Seagroattsaid, be the proper subject of internal investigation by the companies and consideration by the Stock Exchange, but that, in my view, does not justify a blanket injunction in the sweeping terms sought now. 

15.Further, Herman Tso’s reports were done, in many cases, quite some time ago, for example, in the case of the 2^nd defendant and the 7^th defendant.  News about his disqualification only emerged recently: see the media release by the Australian Institute on 6 June 2016.  There is, it seems to me, no justification for making a sweeping order as sought by the plaintiff in these circumstances. 

16.For these reasons, as against all the defendants who have appeared, the plaintiff’s summons will be dismissed.  As against the 3^rd, 8^th and 16^th defendants who have so far not appeared, I give leave for the plaintiff to withdraw the summons.

(Submissions on costs)

17.For all the defendants against whom the summons has been dismissed, I will order costs to be paid by the plaintiff on an indemnity basis.  For the other defendants, costs are to be paid by the plaintiff on a party and party basis. 

The plaintiff appeared in person

Mr Victor Dawes SC, instructed by Linklaters, for the 1^st defendant

Ms Roberta Chan, of Baker & McKenzie, for the 2^nd defendant

The 3^rd defendant was not represented and did not appear

Mr Desmond Liaw, of Reed Smith Richards Butler, for the 4^th defendant

Mr Charles Allen, of Sidley Austin, for the 5^th defendant

Ms Bonita Chan, of K & L Gates, for the 6^th defendant

Mr Isaac Chan, instructed by Michael Li & Co, for the 7^th defendant

The 8^th defendant was not represented and did not appear

Mr Yeung Wai-chung, of Tso Au Yim & Yeung, for the 9^th defendant

Mr Max Wong, instructed by C K Chan & Co, for the 10^th defendant

The 11^th defendant was not represented and did not appear (the director of the 11^th defendant Mr Yip Kai Yin was present)

Mr David Smyth, of Smyth & Co, for the 12^th defendant

Mr Richard Leung, instructed by Mayer Brown JSM, for the 13^th defendant

Mr CSK Sharrock, of Kennedys, for the 14^th defendant

Mr Alvin Sin, of O’Melveny & Myers, for the 15^th defendant

The 16^th defendant was not represented and did not appear