Securities and Futures Commission v. Mo Shau Wah and Others

HCA 353/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 353 OF 2013

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JUDGMENT

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1.The 1^st defendant in this action applied by summons dated 1 August 2017 for leave to appeal from my judgment in the action handed down on 25 July 2017. Other than the 1^st defendant only China Pacific Securities Limited (“CPSL”) appeared on the application. CPSL is not a party to the main action but had also appeared on and opposed the application of the 1^st defendant below which was the subject of my judgment. However, the Securities and Futures Commission (“SFC”), which was also represented at the hearing below, did not appear on the application for leave to appeal.

2.The background facts and circumstances are fully set out in my judgment handed down on 25 July 2017 and I will not repeat them here.  I will only deal with matters subsequent to the hearing below and then only to the extent that I consider them relevant.

3.The 1^st defendant seeks leave to appeal in respect of what in the bundle for the hearing before me is described as the 1^st defendant’s draft Re-Amended Summons dated 12 June 2017.  I observe that I gave leave to amend the summons in accordance with the draft at the hearing below on 20 June 2017 (paragraph 32 of my judgment) and therefore it should no longer be referred to as a “draft”. 

4.The requirement to obtain leave to appeal is contained in section 14 AA of the High Court Ordinance (Cap. 4).  Leave may be granted where:

(a)  the appeal has a reasonable prospect of success; or

(b)   there is some other reason in the interests of justice why the appeal should be heard.

5.This action involves an unusual factual scenario and counsel for both the 1st defendant and CPSL have confirmed that they have not been able to identify a previous decision which dealt with the same issues.  This absence of precedent may of itself justify the grant of leave to appeal under the second limb of the section but first I will consider whether the appeal has a reasonable prospect of success.

6.The substantive remedy sought by the 1^st defendant is an order that some HK$3 million worth of securities standing to the credit of an account number C090018 in the name of the 1^st defendant held with CPSL be sold and the proceeds be paid over to the control of the 1^st defendant’s solicitors so that they may be utilized to fund the 1^st defendant’s defence of criminal proceedings to which she is subject.

7.The said securities are the subject of an injunction first obtained by the plaintiff, the SFC, ex parte on 26 February 2013 and later continued as varied by the Honourable Mr Justice Poon on 1 March 2013, whereby each of the 1^st and 2^nd defendants were restrained from removing from Hong Kong or in any way disposing of or dealing with any assets whether within or outside Hong Kong to the value of HK$156,471,705.  The said securities are specifically listed in Schedule 3 to the injunction order as amongst the known assets of the 1^st defendant.

8.On an application made by consent between the SFC and the 1^st defendant, the injunction order was further varied by the order of the Honourable Madam Justice Au-Yeung dated 9 May 2017 to provide additionally as follows:

“ 14B. Notwithstanding paragraph 14, the 1^st defendant be allowed to withdraw HK$100,000 per week as legal costs for the 1^st defendant from the 9^th of May 2017 onward until the total withdrawal by the 1^st defendant under this paragraph reaches HK$4,205,000 or until the completion of trial of HCCC 12 of 2017, whichever is the sooner.”

9.It is the case of the 1^st defendant that while Her Ladyship’s order refers only to the amount, first weekly and then in total, that the 1st defendant may spend on legal costs related to her defence of the criminal proceedings, the order nevertheless required that CPSL liquidate and pay over the proceeds of the said securities amounting to some HK$3 million.

10.Counsel for the 1^st defendant says it does not matter that the order does not identify the securities held by CPSL as the source of the HK$100,000 per week or that it does not provide for the “withdrawal” of more than HK$100,000 per week.  He submitted that the relief claimed by the application below, both the order sought by paragraph 1 of the summons that CPSL desist from obstructing and impeding, as well paragraphs 2 and 3 requiring that the said securities be liquidated and paid over to the 1st defendant's solicitors, are the inevitable necessary requirements to implement the already varied injunction order of the Honourable Madam Justice Au-Yeung dated 9 May 2017.

11.As between the SFC as plaintiff and the 1^st defendant the only matter in dispute was where and how the proceeds of the said securities once liquidated were to be held pending their use in accordance with the terms of the injunction order.  In particular, the SFC raised no substantial objection to the proceeds of sale of the said securities being used to meet the 1^st defendant’s legal costs.  Understandably, the lack of opposition by the plaintiff is a matter to which the 1st defendant attaches great weight.

12.However, counsel for CPSL submitted that though not a party to the main action it nevertheless has an ‘interest’ in the said securities sufficient to give it both standing and a good basis to oppose the application of the 1^st defendant to liquidate and pay over their proceeds.

13.It is not disputed that CPSL's position is very different to that of a disinterested third party such as a bank which happens to maintain an account in the name of a defendant who is the subject of an injunction.  As explained in my judgment, the action concerns the exercise by the SFC of statutory powers as regards the affairs of CPSL, it being alleged in the proceedings that the 1^st and 2^nd defendants, both of whom, importantly, were employees of CPSL at the relevant time, committed a number of contraventions of the Securities and Futures Ordinance (“SFO”) and by doing so defrauded various people, including customers or clients of CPSL and also, potentially, CPSL itself.  In particular, the SFC seeks a declaration that the defendants (all of them) are persons within the terms of section 213(2)(b) of the SFO and pursuant thereto may be ordered by the court to restore a person a party to any transaction to the position they would otherwise have been in but for the defendants’ actions.

14.In the Statement of Claim filed by the SFC on 6 April 2017 the relief claimed includes the following:

“ Pursuant to section 213(2)(b) of the SFO [Securities and Futures Ordinance], an order requiring the 1^st, 2^nd, 3^rd, 4^th and 5^th defendants to take such steps as the court may direct, including payment of such sums as the court thinks fit or the transfer of any monies or securities to (i) the CPS Shareholders and CPSL Directors and/or (ii) the Trustees and/or (iii) CPSL for the purpose of restoring the CPS Shareholders, CPS Directors and/or CPSL to the position they were in before the 1^st and 2^nd defendants misappropriation of the Client Securities together with any ancillary orders or directions to affect restoration.” [underlining added]

15.Section 213(2)(b) of the SFO reads as follows:

“ 213 Injunctions and other orders

…

(2) The orders specified for the purposes of subsection (1) are–

…

(b)  where a person has been, or it appears that a person has been, is or may become, involved in any of the matters referred to in subsection (1)(a)(i) to (v), whether knowingly or otherwise, an order requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into;”

16.Paragraph 49 (2) of the Statement of Claim further expressly pleads:

“ further or alternatively, CPSL has borne the affected clients’ loss (or part thereof). As a result, CPSL has suffered loss of HK$160,785,224.” [underlining added]

17.Counsel for CPSL, noting that it is expressly named as a party in respect of whom a restorative order is sought and also the plea by the SFC of substantial loss suffered on its part, submitted that as a potential beneficiary of the SFC’s action (and thereby indirectly the injunction order) it has sufficient of an interest and a good basis to appear on and oppose the 1^st defendant’s present application, and can do so quite separately from the SFC as plaintiff. He says that it does not matter that presently it is not a party to the action.

18.Secondly, counsel for CPSL argued that the court should also have regard to the potential for it to bring a claim against the 1st defendant in its own right.  As I observed in my judgment, CPSL is:

(a)   the former employer of the 1^st defendant, a relationship that clearly gives rise to various duties and responsibilities on the part of the 1st defendant towards CPSL around which a claim might be framed;

(b)   the owner of the business in which the 1^st defendant is alleged to have committed serious acts of fraud, as a result of which she (and others) apparently derived substantial financial benefits; and

(c)   the holder of the assets sought to be liquidated, transferred and drawn upon to pay the 1st defendant's legal costs of defending criminal proceedings relating to the very same alleged fraudulent acts.

19.Counsel for CPSL further noted that the origins of the said securities are undetermined and it may turn out that they are proceeds of the alleged fraudulent acts on the part of the 1st defendant (and certainly so far the 1st defendant has not put forward any positive case to the contrary).

20.In my judgment below I concluded that I was entitled to and should have regard to the possibility that CPSL has the basis for its own direct claim against the 1st defendant, both in damages and/or of a proprietary nature, including potentially a proprietary claim in relation to the said securities.

21.As I also noted in my judgment, at the time of the hearing below the court had no information before it other than that contained in the Statement of Claim regarding the steps apparently taken by what the pleading describes as "the CPSL Shareholders, the CPSL Directors, the Trustees and/or CPSL" to restore all of the third party customers and clients of CPSL to the position they would have been in but for the alleged fraudulent acts.  In particular, there was no clear evidence of which party or parties ended up bearing the loss for which the customers and clients were compensated.

22.However, shortly prior to the hearing of the 1^st defendant's application for leave to appeal, following a request of the SFC pursuant to order 24 rule 10 RHC, the 1^st defendant obtained and produced on affirmation two of the documents referred to in the Statement of Claim.  These include a copy of Deed of Undertaking between seven individuals (but notably not CPSL itself), all of them directors and/or shareholders of CPSL, by which those named undertook to the SFC to make available both money and securities to make good the alleged misappropriation of CPSL’s assets by the 1^st and 2^nd defendants.

23.With the agreement of counsel for the parties, I allowed the late filing of the affirmation of the 1^st defendant’s solicitor producing the documents referred to above (documents which CPSL already in its possession) but only for the purposes of the application for leave (not any appeal).  In addition, I further allowed (again only for the purposes of the application for leave) CPSL to file an affirmation producing copies of its audited accounts and financial statements for the year ended 31 December 2012 and the period from 1 January 2013 to 30 April 2013, copies of which counsel for CPSL handed up at the hearing.

24.Counsel for the 1^st defendant sought to rely on the Deed of Undertaking to show that the loss resulting from the alleged fraudulent activities had not been borne by CPSL but by its directors and shareholders.  Therefore, he submitted that CPSL had suffered no loss for which it needed to or could claim to be compensated, whether through in the action brought by the SFC or by way of its own action against the 1^st defendant.  He submitted that as a result it did not have any interest in the said securities and therefore no standing and basis to oppose the 1^st defendant’s present application.

25.Counsel for the 1^st defendant therefore submitted that I fell into error in my judgment when I had regard to the principles set out in the judgment of Deputy High Court Judge B Chu (as she then was) in Hong Kong Life Insurance Limited v Fung Siu Cheung Michael and others HCA 1164/2012, 21 February 2014.  In that decision Her Ladyship considered the question of whether monies the subject of an injunction, in particular an injunction obtained in support of a proprietary claim, should be released to a defendant to allow them to meet the costs of defending themselves adequately in related criminal proceedings and set out the principles to be applied whether the claim was of a Proprietary or Non-Propriety nature, in particular the evidence which a defendant should produce to justify drawing on the funds.

26.Counsel for the 1^st defendant contrasted the circumstances in Hong Kong Life Insurance Limited v Fung Siu Cheung Michael and others HCA 1164/2012, where the plaintiff was opposing the defendant's application on the grounds that allowing access to the funds would reduce the amount available to satisfy any judgment the plaintiff' might later obtain, with those of the present case and submitted that CPSL could not rely on:

(a)   an action brought by the SFC to which it is not a party (even if the Statement of Claim includes a plea that it has suffered loss and the prayer a provision pursuant to which the SFC could seek that it be compensated); and

(b)   the mere possibility that it may have a basis for its own claim, whether in damages or of a proprietary nature, when it had not yet brought forward such a claim, especially when the evidence cast doubt on whether it had suffered any claimable loss.

27.Counsel therefore submitted that the principles set out by Her Ladyship are not engaged and my observations (applying those principles) on the apparent inadequacy of the 1st defendant's evidence as to her means not a proper matter to be considered on the 1st defendant's application.  He submitted that in the absence of substantive opposition by the SFC, the plaintiff in the action, the court should only be concerned with the already existing order by which the 1^st defendant was entitled to access and expend funds of up to HK$100,000 a week on the legal costs of defending the criminal proceedings brought against her.  The 1st defendant's solicitors having agreed that the proceeds once received by them would be held and only disbursed in accordance with the order, he submitted that the court's role was merely to implement the decision already made

28.However, counsel for CPSL denied that the Deed of Undertaking was of any assistance to the 1^st defendant pointing out that it was silent on the position and responsibilities of CPSL itself (as it is) and also not consistent with the express plea of 'loss' by the SFC.  He took the court to the audited reports and financial statements of CPSL handed up at the hearing which indeed show the loss pleaded by the SFC recorded as a liability.  Relying on this evidence, counsel submitted that whatever may have been agreed between the directors and/or shareholders of CPSL by way of the Deed of Undertaking, the court should proceed on the basis that the ultimate ‘loss’ fell on CPSL and therefore that it has a potential claim against the 1st defendant.

29.As regards the complaint of counsel for the 1st defendant that CPSL has not yet brought forward a claim in its own right, counsel for CPSL indicated to the court at the hearing that CPSL is in the final stages of formulating and preparing its own claim against the 1^st defendant.  He indicated that he expects that the claim will be filed imminently.  But, in any event, he submitted that the court is entitled to have regard to the claim as already brought by the SFC, which he said is self-evidently in part for the benefit of CPSL, in advance of CPSL making its own claim.  Accordingly, he submitted that the court was entitled to and correct when it had regard to and applied the principles set out in Her Ladyship’s decision in Hong Kong Life Insurance Limited v Fung Siu Cheung Michael and others HCA 1164/2012, 21 February 2014 and (applying those principles) to conclude as set out in my judgment that the 1st defendant's evidence of her available means was inadequate to justify her application.

30.In the normal course, the court will not wish to be faced with a multitude of third parties seeking to intervene in actions in circumstances where the plaintiff in the action is not pursuing the same issue.  This could result in a myriad of satellite litigation.  A non party seeking to intervene must have an 'interest' sufficient to justify it doing so, something acknowledged by CPSL's counsel. Another example of such a situation is contained in the standard form of mareva injunction which provides that the holder of an asset the subject of an injunction may assert a claim of set off as against the defendant in whose name an asset is held.

31.There was no disagreement between counsel regarding the threshold for the grant of leave to appeal under the first limb of section 14AA.  In my judgment I found that the claimed interest of CPSL is sufficiently made out such that it has standing and a good basis for opposition but I agree that this is reasonably arguable.  Therefore, I am satisfied that I should grant leave in respect of paragraph 2 and 3 of the summons.  Also, as I said at the outset of this judgment, I have regard to the unusual factual scenario of the case and that there appears to be no previous authority dealing with the same issue.  I believe that practitioners as a whole would benefit from the guidance of the Court of Appeal and therefore if required would also have given leave on the second limb of the section.

32.However, I take a different view of the 1st defendant's application for leave to appeal in relation to paragraph 1 of the summons.  For the reasons I set out in my judgment, I do not consider that the terms of the varied injunction order required that CPSL act as instructed by the terms of the 1^st defendant solicitors letter of 19 May 2017 and therefore it cannot be said that (by not acting as instructed) they were “obstructing and/or impeding” the carrying out of the order.  I view the case for appeal of the 1^st defendant as regards paragraph 1 as no more than fanciful and accordingly decline to grant leave. 

33.Finally, I would observe that the draft notice of appeal annexed to the 1st defendant's application would appear to require further consideration by counsel before filing.  Currently it seeks only the setting aside of my judgment below and does not indicate the precise relief sought as a consequence which is a necessary requirement in accordance with order 59 rule 3(2) RHC.

34.Though the 1st defendant has only in part succeeded with its application for leave to appeal I order that the costs of the application be costs in the cause of the appeal.

Mr George Chu, instructed by Damien Shea & Co, for the 1^st defendant

Mr Bernard Mak, instructed by Y T Chan & Co, for China Pacific Securities Limited